INS-48-09-00002-A Conduct, Trustworthiness and Competence of Insurance Producers, Especially Relating to Compensation Arrangements with Insurers

2/10/10 N.Y. St. Reg. INS-48-09-00002-A

NEW YORK STATE REGISTER

VOLUME XXXII, ISSUE 6

February 10, 2010

RULE MAKING ACTIVITIES

INSURANCE DEPARTMENT

NOTICE OF ADOPTION

 

I.D No. INS-48-09-00002-A

Filing No. 45

Filing Date. Jan. 27, 2010

Effective Date. Jan. 01, 2011

Conduct, Trustworthiness and Competence of Insurance Producers, Especially Relating to Compensation Arrangements with Insurers

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:

Action taken:

Addition of Part 30 to Title 11 NYCRR.

Statutory authority:

Insurance Law, sections 201 and 301; and art. 21

Subject:

Conduct, trustworthiness and competence of insurance producers, especially relating to compensation arrangements with insurers.

Purpose:

To require insurance producers to make certain disclosures about their role in the insurance transaction to insurance customers.

Text of final rule:

A new Part 30 is added to read as follows:

§ 30.1 Purposes.

The purposes of this Part are:

(a) to implement the New York Insurance Law by regulating the acts and practices of insurers and insurance producers with respect to transparency of compensation paid to insurance producers and their role in insurance transactions in this State; and

(b) to protect the interests of the public by establishing minimum disclosure requirements relating to the role of insurance producers and the compensation paid to insurance producers.

§ 30.2 Definitions.

For purposes of this Part:

(a) Compensation means anything of value, including money, credits, loans, interest on premium, forgiveness of principal or interest, trips, prizes, or gifts, whether paid as commission or otherwise. Compensation does not mean tangible goods with the insurer name, logo or other advertisement and having an aggregate value of less than $100 per year per insurer.

(b) Purchaser means the person or entity to be charged under an insurance contract or a group policyholder and may include the named insured, policyholder, owner of a life insurance policy or annuity contract, principal under a bond, or other person to be charged, including an applicant for insurance, bond or annuity; but does not include a certificate holder or member under a group or blanket insurance contract unless the insurance producer has direct sales or solicitation contact with the certificate holder or member, and the certificate holder or member pays all of the premium.

(c) Insurer means any person or entity doing an insurance business in this State.

(d) Insurance contract means an insurance policy, surety bond, contract of guarantee, or annuity contract.

(e) Insurance producer or producer means any insurance producer as defined by Insurance Law section 2101(k).

§ 30.3 Disclosure of producer compensation, ownership interests and role in the insurance transaction.

(a) Except as provided in section 30.5 of this Part, an insurance producer selling an insurance contract shall disclose the following information to the purchaser orally or in a prominent writing at or prior to the time of application for the insurance contract:

(1) a description of the role of the insurance producer in the sale;

(2) whether the insurance producer will receive compensation from the selling insurer or other third party based in whole or in part on the insurance contract the producer sells;

(3) that the compensation paid to the insurance producer may vary depending on a number of factors, including (if applicable) the insurance contract and the insurer that the purchaser selects, the volume of business the producer provides to the insurer or the profitability of the insurance contracts that the producer provides to the insurer; and

(4) that the purchaser may obtain information about the compensation expected to be received by the producer based in whole or in part on the sale, and the compensation expected to be received based in whole or in part on any alternative quotes presented by the producer, by requesting such information from the producer.

(b) If the purchaser requests more information about the producer's compensation prior to the issuance of the insurance contract, the producer shall disclose the following information to the purchaser in a prominent writing at or prior to the issuance of the insurance contract, except that if time is of the essence to issue the insurance contract, then within five business days:

(1) a description of the nature, amount and source of any compensation to be received by the producer or any parent, subsidiary or affiliate based in whole or in part on the sale;

(2) a description of any alternative quotes presented by the producer, including the coverage, premium and compensation that the insurance producer or any parent, subsidiary or affiliate would have received based in whole or in part on the sale of any such alternative coverage;

(3) a description of any material ownership interest the insurance producer or any parent, subsidiary or affiliate has in the insurer issuing the insurance contract or any parent, subsidiary or affiliate;

(4) a description of any material ownership interest the insurer issuing the insurance contract or any parent, subsidiary or affiliates has in the insurance producer or any parent, subsidiary or affiliate; and

(5) a statement whether the insurance producer is prohibited by law from altering the amount of compensation received from the insurer based in whole or in part on the sale.

(c) If the purchaser requests more information about the producer's compensation after issuance of the insurance contract but less than thirty days after issuance, then the insurance producer shall disclose to the purchaser in a prominent writing the information required by subsection 30.3(b) of this Part within five business days.

(d) If the nature, amount or value of any compensation to be disclosed by the insurance producer is not known at the time of the disclosure required by subdivision 30.3 (b) or (c) of this section, then the insurance producer shall include in the disclosure:

(1) a description of the circumstances that may determine the receipt and amount or value of such compensation, and

(2) a reasonable estimate of the amount or value, which may be stated as a range of amounts or values.

(e) If the disclosure required by subdivision (a) of this section is provided orally, then the insurance producer shall also disclose the information required by subdivision (a) of this section to the purchaser in a prominent writing no later than the issuance of the insurance contract.

(f) An insurance producer shall not make statements to a purchaser contradicting the disclosures required by this section or any other misleading or knowingly inaccurate statements about the role of the insurance producer in the sale or compensation.

§ 30.4 Retention of disclosure.

The insurance producer shall retain a copy of any written disclosure provided to the purchaser pursuant to section 30.3 of this Part for not less than three years after the disclosure is given, unless the insurance producer has a written agreement with the insurer that the insurer shall retain such a copy.

§ 30.5 Exceptions.

This Part shall not apply:

(a) to the placement of reinsurance;

(b) to the placement of insurance with a captive insurance company pursuant to Article 70 of the Insurance Law;

(c) to an insurance producer that has no direct sales or solicitation contact with the purchaser, which may include wholesale brokers or managing general agents;

(d) to a sale of insurance by a person who is not required to be licensed as an insurance producer under Insurance Law section 2102(a)(1) for the purposes of that sale; or

(e) to renewals, except that if the purchaser requests more information about the producer's compensation less than 30 days prior to a renewal or less than 30 days after a renewal, the insurance producer shall disclose to the purchaser in a prominent writing the information required by subsection 30.3(b) of this Part within five business days.

§ 30.6 Obligations of an authorized insurer.

The amount of any compensation that an authorized insurer or its agent pays to an insurance producer shall be maintained by the insurer in accordance with Part 243 of this Title (Regulation 152).

§ 30.7 Conformity with other laws.

Nothing in this Part shall be construed in a manner inconsistent with, or in violation of, Insurance Law sections 2119, 2324, 4224, or other provisions of the Insurance Law and regulations promulgated thereunder.

Final rule as compared with last published rule:

Nonsubstantive changes were made in sections 30.2, 30.3, 30.4 and 30.5.

Text of rule and any required statements and analyses may be obtained from:

Andrew Mais, NYS Insurance Department, 25 Beaver Street, New York, NY 10004, [phone], email: [e-mail]

Summary of Revised Regulatory Impact Statement

1. Statutory authority: The Superintendent's authority for the promulgation of this Part derives from Insurance Law Sections 201 and 301, and Article 21 of the Insurance Law.

Insurance Law Sections 201 and 301 authorize the Superintendent to effectuate any power accorded to the Superintendent by the Insurance Law, and to prescribe regulations interpreting the Insurance Law. Section 201 says that the "superintendent shall possess the rights, powers, and duties, in connection with the business of insurance in this state, expressed or reasonably implied by this chapter or any other applicable law of this state."

Article 21 establishes the requirements, including standards of competency and trustworthiness, for obtaining and renewing certain licenses, including agents (Section 2103), brokers (Section 2104), adjusters (Section 2108), consultants (Section 2107), and intermediaries (Section 2106). It also provides for the investigation and disciplining of the licensees (Sections 2110 and 2127). Provided that the regulation is not inconsistent with some specific statutory provision, the Superintendent may broadly interpret, clarify and implement legislative policy and effectuate any powers that the Insurance Law reasonably implies.

In order to protect all insurance customers, the proposed regulation exercises the Superintendent's broad authority under Section 201, by requiring Article 21 licensees to disclose the potential conflict that arises due to the differences in the amount of compensation an insurer pays to its producers.

2. Legislative objectives: The Legislature vested in the Superintendent the authority to regulate the conduct, trustworthiness, and competence of insurance producers (insurance agents, insurance brokers and excess line brokers, reinsurance intermediaries, and limited lines licensees) to protect all insurance customers, whether for personal or commercial insurance.

3. Needs and benefits: Insurers compensate insurance producers for their role in placing and selling insurance by paying compensation, including commissions and other items or benefits of monetary value. Compensation arrangements typically differ from insurer to insurer, with some insurers paying not only commissions by the policy, but also by the total volume generated by a producer or the profitability of the insurance contracts the producer provides to the insurer. Individual consumers and commercial interests typically rely on insurance producers to assist them with obtaining information about available insurance policies and evaluating those policies to determine which are best suited to the customer's needs.

There is nothing inherently improper about an incentive-based compensation arrangement between an insurer and the producer, but due to the differences in each insurer's compensation arrangement, a potential conflict of interest may arise when an insurance policy that would earn the producer the greatest compensation for its sale is not the most appropriate insurance for the customer in terms of coverage, service or price. This may create an incentive for the producer to recommend that policy to the customer. This could arise not only with respect to policies offered by competing insurers, but even with respect to different policies offered by one insurer, where the nature and extent of the compensation may vary depending upon the particular policy form or type of policy.

Indeed, the New York State Attorney General and the New York State Insurance Department commenced a joint investigation in 2004 that uncovered instances of criminal bid rigging by a large insurance broker and several large insurers, as well as steering schemes involving a number of major insurers and other insurance producers. The investigation culminated in settlements between 2005 and 2006 under which producers and insurers paid more than $1 billion to recompense customers for harm resulting from bid rigging and steering.

The issue also goes beyond the large brokers and insurance companies investigated by the Attorney General and the Department. Consumer representatives have told the Department repeatedly that insurance purchasers (particularly individual consumers of personal lines products like auto, homeowners and life) do not understand the role of the insurance producer in the insurance transaction. Consumer representatives also pointed out that consumers often do not understand that producers receive incentive-based compensation that may affect the recommendations the producers make, and therefore rarely ask for such information. The Department believes that the marketplace will function better for purchasers, producers and insurers if purchasers have access to information about producer compensation arrangements.

The proposed regulation is intended to provide a means to address the potential conflict that arises due to the differences in the amount of compensation an insurer pays to its producers in the least invasive manner possible - by requiring that insurance producers make certain disclosures about their role in the insurance transaction and compensation arrangements with insurers to insurance customers. Specifically, the regulation would require an insurance producer to disclose the role of the producer in the transaction, that the producer will receive compensation from the insurer based upon the sale of the policy, that the compensation paid by insurers may vary, and that the purchaser may obtain from the producer, upon request, information about the compensation the producer expects to receive from the sale of the policy. The regulation also requires that upon the customer's request, the producer disclose the amount of compensation for the policy selected and any alternative quotes presented. The required disclosures would minimize the potential conflicts that arise from producer compensation because it allows insurance customers to request information about the compensation for the insurance policy and alternative policies quoted.

Empowering customers with this information makes it more difficult for an insurance producer to succumb to an incentive to place the policy with the insurer paying the greatest compensation, or one type of policy with an insurer over another with the same insurer, rather than offering the best policy in terms of price, coverage or service. Overall, all insurance consumers in the state, whether personal or commercial, are likely to benefit from the regulation because transparency and a better understanding of the role of the insurance producer is likely to lead to better-informed selection among available insurance options.

4. Costs: The amendments will not impose any compliance costs on local governments. The Insurance Department does not anticipate any added cost to the Department associated with the regulation. Enforcement of the regulation will be integrated into the Department's ongoing efforts to address consumer complaints, license insurance producers and insurers and licensee compliance with the trustworthiness standards set forth in the Insurance Law.

Insurance producers, many of whom are small businesses, may incur additional costs of compliance, but they should be minimal. The cost to producers will be associated primarily with developing and providing a brief initial disclosure to purchasers either orally or in writing. Once developed, this initial disclosure likely will be a short boilerplate statement a few sentences long. There will also be some cost to producers and insurers to maintain the records as required under the regulation, but these can be maintained electronically or otherwise, thereby reducing maintenance costs. The only additional recordkeeping required by the regulation is maintaining the disclosures for each purchaser, and the producer can even arrange for the insurer to maintain that information. Producers are not required to keep any additional information that they do not already maintain in the ordinary course of business. The regulation does not regulate the amount, nature or amount of compensation; it simply requires disclosure of compensation practices.

Producers will also have to spend a small amount of time gathering the compensation information they have on hand and presenting it to the purchaser when requested. The regulation, however, does not require the producer to collect or maintain any more information than the producer already has on hand in the ordinary course of business. The regulation will require insurers to maintain records relating to the payment of compensation to producers, but will not dictate the manner in which those records are kept, thereby reducing any potential compliance cost.

5. Local government mandates: This regulation does not impose any program, service, duty or responsibility upon a city, town or village, or school or fire district.

6. Paperwork: The Department has designed the proposed regulation to minimize the paperwork required to the extent possible. The producer must make the disclosure required prior to the sale of an insurance policy either in writing or orally. If the producer makes the disclosure orally, the producer must either prepare a certification stating that the producer made the oral disclosure or make a recording of the disclosure. If the producer elects to provide oral disclosure, the producer must follow up with a written disclosure statement (which could be boilerplate) prior to issuance of the insurance policy. An insurance producer who chooses to satisfy the initial disclosure requirement with a written disclosure may prepare a boilerplate form to use with each disclosure. Also, to the extent that the insurance producer is required to disclose additional information about its compensation, the producer is only required to provide information that it has at that time, or to make a reasonable estimate. There would also be some time and cost associated with preparing a more detailed, substantive disclosure statement when a purchaser requests it. That time and cost would depend on the number of consumers who make such requests.

There will also be some cost to producers and insurers to maintain the records as required under the regulation, but these can be maintained electronically or otherwise, thereby reducing maintenance costs. The regulation, however, does not require the producer to collect or maintain any more information than the producer already has on hand in the ordinary course of business. The regulation will require insurers to maintain records relating to the payment of compensation to producers but will not dictate the manner in which those records are kept thereby reducing any potential compliance cost.

7. Duplication: The proposed regulation will not duplicate any existing state or federal law or regulation.

8. Alternatives: Insurance producers generally receive compensation from insurers or other producers by one of two types of methods. The first is a flat percentage commission based on premium volume, paid at the time of sale. There may be different flat rates paid for new and renewal business. The second is a contingent commission, which may be paid in addition to flat percentage commissions, and which typically is based on profit, volume, retention, and/or business growth. Contingent commissions are not payable on a per policy basis, but are allocated based on the performance of the entire portfolio of business placed with a particular insurer. The contingent commission schedule is known to producers at the beginning of a given period of time (usually one year), but contingent commissions actually earned are calculated some period after business is placed and loss experience is observed. The amount of compensation paid may also vary from producer to producer, depending upon the relationship between the producer and the insurer or other producer, though the compensation paid usually will not change the actual premium to the consumer.

Defenders of incentive-based producer compensation argue that competition in the marketplace can address any conflicts because consumers can comparison shop among producers. Producers that do not offer insurance providing the best combination of coverage, service and price will lose business to those that do. However, consumer representatives emphasized in discussions with the Department that consumers who purchase insurance through an insurance producer may not comparison shop for the most favorable coverage, service and price because they are often encouraged to rely on the producer to comparison shop the market for them.

From 2005 to 2007, the Attorney General and the Superintendent entered into enforcement settlement agreements and regulatory stipulations concerning allegations of improper steering in response to incentive-based compensation with a number of major brokers and insurers. The allegations underlying the settlements and stipulations included undisclosed conflicts of interest and improper steering by small, medium and large producers. The investigation also made it clear that insurers pay contingent commissions and other types of incentive-based compensation in order to influence producers' recommendations to their clients. The agreements and stipulations prohibited the receipt of contingent commissions by certain insurance brokers; prohibited the payment of contingent compensation by certain insurers for certain lines of insurance; provided a mechanism for expansion of the prohibition of contingent compensation to additional lines of insurance; and required substantial improvements in the disclosure of all producer compensation by certain large producers.

In response to the New York investigation, the National Association of Insurance Commissioners in 2004 amended its Producer Licensing Model Act to include requirements that brokers (but not agents) disclose compensation to purchasers. The Department also circulated a draft disclosure regulation in 2007. The work done on that draft and the comments received have been incorporated into the current draft.

In July 2008, the Department in cooperation with the Attorney General's Office held public hearings in Buffalo, Albany and New York City and conducted extensive outreach to consumer groups, industry and other stakeholders for more than a year. The Department has publicly exposed two informal draft regulations (in January 2009 and July 2009) and sought comment on each. The Department has also held six "working group" meetings with stakeholders in various lines of insurance and dozens of other formal and informal meetings and phone calls with consumer and industry representatives. Through this process, the Department has considered a number of different courses of action including (1) banning or limiting certain types of producer compensation; (2) full disclosure of all producer compensation for every insurance transaction; (3) requiring disclosure only for producers who are paid directly by the purchaser and by the insurer; (4) requiring disclosure of producer compensation only upon the request of the purchaser; (5) requiring that producers disclose only their role in the transaction and the source of their compensation with no disclosure of the compensation amount; and (6) taking no regulatory action and/or promoting voluntary disclosure of compensation by producers.

After this exhaustive process, the Department has determined that the regulation is the best way to ensure that consumers better understand the role that insurance producers play in the insurance transaction, the compensation they receive and any potential conflicts of interest that may arise, while imposing as little cost as necessary on the producers and insurers.

A summary of the input provided to the Department in response to: (1) the July 2008 public hearings; (2) the January 2009 informal draft regulation; and (3) the July 2009 informal draft regulation were included in the regulatory impact statement for the proposed regulation, available online at www.ins.state.ny.us.

A summary Assessment of Public Comments is included as part of the adoption package. A full review of the input provided to the Department in response to publication of the proposed rule in the State Register on December 2, 2009, focusing primarily on comments that had not been previously submitted by the same party, and which had not already been considered by the Department, is available online at www.ins.state.ny.us.

9. Federal standards: There are no applicable federal standards.

10. Compliance schedule: The regulation will be effective January 1, 2011, thereby enabling affected parties with an adequate period to prepare.

Revised Regulatory Flexibility Analysis

1. Effect of the regulation: The regulation will not affect any local governments. This regulation will affect regulated insurers, most of which do not come within the definition of "small business" found in Section 102(8) of the State Administrative Procedure Act, because none is independently owned and operated, and employs less than one hundred individuals. The regulation would also affect insurance producers, the vast majority of which are small businesses because they are independently owned and operated, and employ one hundred or less individuals. There are over 200,000 licensed insurance producers in New York, resident and non-resident, that will be affected by the regulation. The Department has no record of the exact number of small businesses included in that group. The Department has designed the regulation to place the least burden possible on insurance producers, as discussed below.

2. Compliance requirements: The regulation requires an insurance producer to provide an oral or written disclosure describing the role of the producer in the transaction, that the producer will receive compensation from the insurer based upon the sale of the policy, that the compensation paid by insurers may vary, and that the purchaser may obtain from the producer upon request information about the compensation the producer expects to receive from the sale of the policy and for any alternative quotes that the insurer producer obtained for the customer. The regulation also requires a written disclosure where the customer specifically asks for more information about the producer's expected compensation for the policy recommended and alternative quotes. The regulation requires the producer to retain a copy of all written disclosures for a period of three years after the disclosure is given, unless the insurance producer agrees in writing with the insurer that the insurer shall retain such information.

3. Professional services: The regulation would not require an insurance producer to use professional services.

4. Compliance costs: The regulation will not impose any compliance costs on local governments. Insurance producers, many of whom are small businesses, may incur additional costs of compliance, but they should be minimal. The cost to producers will be associated primarily with developing and providing a brief initial disclosure to purchasers either orally or in writing. Once developed, this initial disclosure likely will be a short boilerplate statement a few sentences long. There will also be some cost to producers and insurers to maintain the records as required under the regulation, but these can be maintained electronically or otherwise, thereby reducing maintenance costs. In the alternative, the insurance producer may agree with the insurer in writing that the insurer shall retain necessary records. The regulation does not regulate the amount, nature or amount of compensation; it simply requires disclosure of compensation practices.

5. Economic and technological feasibility: Local governments will not incur an economic or technological impact as a result of this regulation. Small businesses will not have to purchase any new technology to comply with the regulation. An insurance producer may choose whether to comply with the regulation by providing disclosure in writing or orally.

6. Minimizing adverse impact: The regulation applies to the insurance market throughout New York State. The same requirements will apply to all insurance producers and so do not impose any adverse or disparate impact on small businesses. Further, the Department has designed the regulation to place the least burden possible on insurance producers by allowing insurance producers to decide whether to provide mandatory disclosures prior to sale either orally or in writing. An insurance producer who chooses to satisfy the initial disclosure requirement with a written disclosure may prepare a "boilerplate" form to use with each disclosure. Finally, to the extent that the insurance producer is required to disclose additional information about its compensation, the producer is only required to provide information that the producer has at that time, or to make a reasonable estimate.

7. Small business and local government participation: In July 2008, the New York State Insurance Department, in tandem with the Attorney General's Office, held public hearings in Buffalo, Albany, and New York City and conducted extensive outreach to consumer groups, industry and other stakeholders for more than a year. The Department publicly exposed two informal draft regulations (in January 2009 and July 2009) and sought public comment on each. The Department has also held six "working group" meetings with stakeholders in various lines of insurance and dozens of other formal and informal meetings and phone calls with consumer and industry representatives. By its extensive outreach, the Department facilitated comments from all interested parties, including small businesses and local governments and their representatives such as the Independent Insurance Agents and Brokers of New York and Professional Insurance Agents, which represent many small businesses, and the Public Risk and Insurance Management Society, which represents risk managers employed by local governments.

Revised Rural Area Flexibility Analysis

1. Types and estimated number of rural areas: This regulation applies to producers and regulated insurers doing business or resident in every county in the state, including those that are, or contain, rural areas, as defined under Section 102(13) of the State Administrative Procedure Act. There are over 200,000 licensed insurance producers in New York, resident and non-resident, that will be affected by the regulation. The Department has no record of the exact number of insurance producers that do business in rural areas.

2. Reporting, recordkeeping and other compliance requirements and professional services: The proposed regulation requires an insurance producer to provide an oral or written disclosure describing the role of the producer in the transaction, that the producer will receive compensation from the insurer based upon the sale of the policy, that the compensation paid by insurers may vary, and that the purchaser may obtain from the producer upon request information about the compensation the producer expects to receive from the sale of the policy and for any alternative quotes that the insurer producer obtained for the customer. The regulation also requires a written disclosure where the customer specifically asks for more information about the producer's expected compensation for the policy recommended and alternative quotes. The regulation requires the producer to retain a copy of all written disclosures for a period of three years after the disclosure is given, unless the insurance producer agrees in writing with the insurer that the insurer shall retain such information.

3. Costs: Regulated insurers and insurance producers, including those located in rural areas, may incur additional costs of compliance, but they should be minimal. The cost to producers will be associated primarily with developing and providing a brief initial disclosure to purchasers either orally or in writing. Once developed, this initial disclosure likely will be a short boilerplate statement a few sentences long. There will also be some cost to producers and insurers to maintain the records as required under the regulation, but these can be maintained electronically or otherwise, thereby reducing maintenance costs. The regulation does not regulate the amount, nature or amount of compensation; it simply requires disclosure of compensation practices.

Producers will also have to spend a small amount of time gathering and presenting additional information about their compensation when a consumer requests such information. The regulation, however, does not require the producer to collect or maintain any more information than the producer already has on hand in the ordinary course of business. The regulation will require insurers to maintain records relating to the payment of compensation to producers but will not dictate the manner in which those records are kept thereby reducing any potential compliance cost.

4. Minimizing adverse impact: The Department has designed the regulation to place the least burden possible on insurance producers by allowing insurance producers to decide whether to provide mandatory disclosures prior to sale either orally or in writing. An insurance producer who chooses to satisfy the initial disclosure requirement with a written disclosure may prepare a "boilerplate" form to use with each disclosure. To the extent that the insurance producer is required to disclose additional information about its compensation, the producer is only required to provide information that the producer has at that time, or to make a reasonable estimate. There may be some cost to producers and insurers to maintain the records as required under the regulation, but these can be maintained electronically or otherwise, thereby reducing maintenance costs. In the alternative, the insurance producer may agree with the insurer in writing that the insurer shall retain necessary records.

5. Rural area participation: In July 2008, the New York State Insurance Department, in tandem with the Attorney General's Office, held public hearings in Buffalo, Albany and New York City and conducted extensive outreach to consumer groups, industry and other stakeholders for more than a year. The Department publicly exposed two informal draft regulations (in January 2009 and July 2009) and sought public comment on each. The Department has also held six "working group" meetings with stakeholders in various lines of insurance and dozens of other formal and informal meetings and phone calls with consumer and industry representatives. By its extensive outreach, the Department endeavored to facilitate comments from all interested parties, including parties in rural areas.

Revised Job Impact Statement

The proposed regulation is not likely to have a substantial adverse impact on job or employment opportunities in New York. The proposed regulation requires an insurance producer to provide an oral or written disclosure describing the role of the producer in the transaction, that the producer will receive compensation from the insurer based upon the sale of the policy, that the compensation paid by insurers may vary, and that the purchaser may obtain from the producer upon request information about the compensation the producer expects to receive from the sale of the policy and for any alternative quotes that the insurer producer obtained for the customer. The regulation requires a written disclosure where the customer specifically asks for more information about the producer's expected compensation for the policy recommended and alternative quotes. The regulation requires the producer to retain a copy of all written disclosures for a period of three years after the disclosure is given, unless the insurance producer agrees in writing with the insurer that the insurer shall retain such information.

The Department has designed the regulation to place the least burden possible on insurance producers. An insurance producer who chooses to satisfy the initial disclosure requirement with a written disclosure may prepare a "boilerplate" form to use with each disclosure. To the extent that the insurance producer is required to disclose additional information about its compensation, the producer is only required to provide information that the producer has at that time, or to make a reasonable estimate.

Further, the regulation may have a positive effect on jobs of businesses that purchase insurance. It would provide a business with the information its needs to assess the recommendations that insurance producers make and avoid situations where producers could potentially steer them to less advantageous (in terms of price or coverage or service) insurance policies. Overall, all insurance consumers in the state, whether personal or commercial, are likely to benefit from the regulation because transparency and a better understanding of the role of the insurance producer is likely to lead to better-informed selection among available insurance options.

A number of life insurance industry groups representing producers and insurers have argued that the regulation's disclosure requirements will make it more difficult to attract, train and retain new life insurance agents, because more inexperienced agents will encounter difficulty overcoming consumer questions about producer compensation to make sales. The Department has sought to address these concerns by moving to a two-step disclosure process that simply requires the agent to describe his or her role in the transaction, followed by more specific compensation-related information only upon request from the consumer. Anything less than this initial "role disclosure" undermines the important consumer protection goals of transparency for all insurance purchasers. Accordingly, the Department is of the view that the regulation will not result in any significant negative impact on jobs or economic opportunities in New York State.

Assessment of Public Comment

Insurance producers generally receive compensation from insurers or other producers by one of two types of methods. The first is a flat percentage commission based on premium volume, paid at the time of sale. There may be different flat rates paid for new and renewal business. The second is a contingent commission, which may be paid in addition to flat percentage commissions, and which typically is based on profit, volume, retention, and/or business growth. Contingent commissions are not payable on a per policy basis, but are allocated based on the performance of the entire portfolio of business placed with a particular insurer. The contingent commission schedule is known to producers at the beginning of a given period of time (usually one year), but contingent commissions actually earned are calculated some period after business is placed and loss experience is observed. The amount of compensation paid may also vary from producer to producer, depending upon the relationship between the producer and the insurer or other producer, though the compensation paid usually will not change the actual premium to the consumer.

Defenders of incentive-based producer compensation argue that competition in the marketplace can address any conflicts because consumers can comparison shop among producers. Producers that do not offer insurance providing the best combination of coverage, service and price will lose business to those that do. However, consumer representatives emphasized in discussions with the New York State Insurance Department that consumers who purchase insurance through an insurance producer may not comparison shop for the most favorable coverage, service and price because they are often encouraged to rely on the producer to comparison shop the market for them.

From 2005 to 2007, the Attorney General and the Superintendent entered into enforcement settlement agreements and regulatory stipulations concerning allegations of improper steering in response to incentive-based compensation with a number of major brokers and insurers. In response to the New York investigation, the National Association of Insurance Commissioners in 2004 amended its Producer Licensing Model Act to include requirements that brokers (but not agents) disclose compensation to purchasers. The New York Insurance Department also circulated a draft disclosure regulation in 2007. The work done on that draft and the comments received have been incorporated into the current draft.

In July 2008, the New York State Insurance Department, in tandem with the Attorney General's Office, held public hearings in Buffalo, Albany and New York City and conducted extensive outreach to consumer groups, industry and other stakeholders for more than a year. The Department has publicly exposed two informal draft regulations (in January 2009 and July 2009) and sought comment on each. The Department has also held six "working group" meetings with stakeholders in various lines of insurance and dozens of other formal and informal meetings and phone calls with consumer and industry representatives. Through this process, the Department has considered a number of different courses of action including (1) banning or limiting certain types of producer compensation; (2) full disclosure of all producer compensation for every insurance transaction; (3) requiring disclosure only for producers who are paid directly by the purchaser and by the insurer; (4) requiring disclosure of producer compensation only upon the request of the purchaser; (5) requiring that producers disclose only their role in the transaction and the source of their compensation with no disclosure of the compensation amount; and (6) taking no regulatory action and/or promoting voluntary disclosure of compensation by producers.

After this exhaustive process, the Department has determined that this final draft regulation hereby adopted is the best way to ensure that consumers better understand the role that insurance producers play in the insurance transaction, the compensation those producers receive, and any potential conflicts of interest that may arise as a result, while imposing as little cost as necessary on the producers and insurers. On November 12, 2009, the Department received approval from the Governor's Office of Regulatory Reform to proceed with a proposed regulation. The proposed rule was published in the State Register on December 2, 2009, and the 45-day public comment period expired on January 16, 2010.

A summary of the input provided to the Department in response to: (1) the July 2008 public hearings; (2) the January 2009 informal draft regulation; and (3) the July 2009 informal draft regulation were included in the regulatory impact statement for the proposed regulation, available online at www.ins.state.ny.us.

In response to publication of the proposed regulation in the December 2, 2009 State Register, the Department received more than 2,200 comments. Many of the comments were from parties that had commented previously and were similar or identical in nature to their previous comments. A summary of the input provided to the Department in response to publication of the proposed rule in the State Register on December 2, 2009, focusing primarily on comments that had not been previously submitted by the same party, and which had not already been considered by the Department, is available online at www.ins.state.ny.us.