Producer Compensation Transparency: Compliance with Regulation 194

1. Producer Compensation Transparency: Compliance with Regulation 194 Presented by Assistant Deputy Superintendent and Counsel Paul A. Zuckerman Northeastern NY Chapter National Association of Health Underwriters Albany, New York February 10, 2011

2. Circular Letter 22 (1998) Department had concerns regarding allegations of “undisclosed compensation . . . paid to brokers by insurers as additional compensation for the placing of business without such information being furnished to the insureds.” The Circular Letter also advised insurers and producers that “the undisclosed receipt of additional compensation is sufficient to create the perception that brokers are conflicted in their loyalties and that such conduct may constitute a violation of Section 2110 as a dishonest or untrustworthy practice.” Circular Letter 22 (1998) recommended that producers voluntarily disclose compensation to insureds. Promulgation of Regulation 194:History

3. Early ’00s--NAIC model regulation provided for broker disclosure of compensation Early to Mid “00s-- NY draft regulation 2004-2005 --NY Attorney General and Insurance Department conducted joint investigation of large insurance brokers 3 major brokers paid a total of almost $1 billion and agreed to disclose compensation and, in some cases, give up contingent commissions. In addition, several large insurers agreed to large fines and to discontinue contingent commissions. Promulgation of Regulation 194:History

4. 2008– Department revived and revised draft regulation and began outreach on producers’ compensation with producers, insurers, trade groups, and consumer groups. 2009– Several different drafts of what was now known as proposed Regulation 194. 2010- Regulation 194 was promulgated on January 25, 2010 2011- Regulation 194 took effect on January 1, 2011. Promulgation of Regulation 194:History

5. New York Insurance Law recognizes legal distinctions between agents and brokers. Under Insurance Law § 2101(a), agents act as “agent for the insurer” and represent the insurer in the insurance transaction. Under Insurance Law § 2101(b), independent agents represent more than one insurer. Under Insurance Law § 2101(c), brokers act “on behalf of” the insured in the insurance transaction. Agents and brokers often do not properly explain whom they represent in the transaction, and may even be unaware of their role. Promulgation of Regulation 194:Legal Framework

6. Regulation 194 applies to: All kinds of direct insurance, including: Property/casualty Life insurance Accident and health Surety bonds Annuities Individual insurance Group or blanket insurance Regulation 194:Applicability

7. But Regulation 194 does not apply to: Reinsurance Insurance from a captive insurer Renewals, unless the purchaser requests more information about compensation less than 30 days prior to renewal or less than 30 days after renewal Modifications or amendments to existing policy Regulation 194:Applicability

8. All licensed insurance producers must disclose pursuant to Regulation 194 Insurance agents – both captive agents and independent agents Insurance brokers, including excess line brokers Limited lines licensees (travel insurance agents, wireless products, self storage, rental vehicles, etc.) Exceptions to disclosure: Reinsurance (by agents, brokers or reinsurance intermediaries) Producer with no direct sales or solicitation contact with a purchaser (e.g.,: wholesale broker or managing general agents) Sale by person not required to be licensed as a producer for purposes of that sale Title insurance, since title agents are not licensed Regulation 194:Who must disclose?

9. Licensed producer need not disclose if: The producer is acting as salaried employee The producer’s activities do not require a license The producer does not receive compensation based in whole or in part on sale of insurance, i.e., a producer who is an insurer’s in-office employee who is compensated based on the number of applications taken by phone, rather than based on whether the producer made a sale, would not receive compensation based in whole or in part on the sale of insurance. Similarly, producers who are compensated based on payments made by phone, or obtaining customer feedback surveys, would also not receive the sort of compensation that needs to be disclosed. Regulation 194: Who must disclose?

10. Business Entity rule A business entity (corporation, partnership, etc) that sells insurance through its employees or sublicensees is the producer “selling an insurance contract.” The business entity need not disclose the compensation that it pays to its individual employees (whether licensed or not) or sublicensees. The sublicensee or licensed employee need not make a separate disclosure, provided that he or she does not receive any compensation not included in the business entity’s disclosure. Regulation 194: Business Entity Disclosure

11. Purchaser the person to be charged under insurance contract or group policyholder including: Named insured Policyholder Owner of a life insurance policy or annuity contract Principal under a surety bond Other person to be charged A certificate holder under a group or blanket policy but only if: the Producer has direct sales contact with the certificate holder and the Certificate holder pays all of the premium. Regulation 194: Who must receive?

12. Regulation 194 requires two disclosures 1. Role and Compensation Disclosure Always required 2. Amount of Compensation Disclosure Only upon request by insured Regulation 194:Two disclosures

13. All producers must provide clients with notice explaining: The producer’s role in transaction Whether the producer will receive compensation from an insurer or other person based on the sale That compensation will vary depending on the product or insurer selected That the purchaser can receive information about the compensation expected to be received by asking for more information. Regulation 194:Role and Compensation Disclosure

14. The Role and Compensation disclosure must be: In ORAL or PROMINENT WRITING Provided at or prior to time of application If ORAL, then PROMINENT WRITING no later than issuance of insurance contract Regulation 194:Role and Compensation Disclosure

15. In a 6/2/10 opinion, the Department’s Office of General Counsel found that the following statement adequately described producer’s role in transaction “[The Producer] is an insurance producer licensed by the State of New York. Insurance producers are authorized by their license to confer with insurance purchasers about the benefits, terms and conditions of insurance contracts; to offer advice concerning the substantive benefits of particular insurance contracts; to sell insurance; and to obtain insurance for purchasers. The role of the producer in any particular transaction typically involves one or more of these activities.” Compensation will be paid to the producer, based on the insurance contract the producer sells. Depending on the insurer(s) and insurance contract(s) the purchaser selects, compensation will be paid by the insurer(s) selling the insurance contract or by another third party. Such compensation may vary depending on a number of factors, including the insurance contract(s) and the insurer(s) the purchaser selects. In some cases, other factors such as the volume of business a producer provides to an insurer or the profitability of insurance contracts a producer provides to an insurer also may affect compensation. The insurance purchaser may obtain information about compensation expected to be received by the producer based in whole or in part on the sale of insurance to the purchaser, and (if applicable) compensation expected to be received based in whole or in part on any alternative quotes presented to the purchaser by the producer, by requesting such information from the producer. Regulation 194: Sample Role and Compensation Disclosure Language

16. Upon request by a purchaser, the producer must provide the purchaser with: A description of the nature, amount and source of any compensation to be received by Producer or Producer’s parent, subsidiary or affiliate from the Insurer or other third party, where the compensation is based in whole or in part on insurance sale. 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 Insurer’s name, logo or other advertisement and having aggregate value of less than $100 per year per Insurer. Compensation does not include amounts that a purchaser pays pursuant to an Insurance Law § 2119 agreement Regulation 194:Amount of Compensation Disclosure

17. The Amount of Compensation disclosure notice must also provide: A description of alternative quotes presented by the producer, including coverage, premium and compensation that the producer or producer’s parent, subsidiary or affiliate would have received based in whole or in part on sale of the alternative coverage A description of any material ownership interest that the producer or the producer’s parent, subsidiary or affiliate has in an insurer or insurer’s parent, subsidiary or affiliate; A description of any material ownership interest the insurer or insurer’s parent, subsidiary or affiliate has in the producer or producer’s parent, subsidiary or affiliate; and A statement about whether the producer is prohibited by law from altering the amount of compensation received from the insurer based in whole or in part on the sale (No rebating allowed). Regulation 194:Amount of Compensation Disclosure

18. The Amount of Compensation Disclosure must be: In PROMINENT WRITING Provided at or prior to issuance of insurance Exception: if “time is of the essence”, then within 5 business days of issuance of insurance. On renewals, if timely asked, disclosure must be provided within 5 business days. Regulation 194:Amount of Compensation Disclosure

19. The amount of known compensation may be described as total dollar amount expected to be received based in whole or part on the sale, or stated as a percentage of one year of premium. For life insurance, annuities, long-term care and disability, a producer may disclose the known compensation as a percentage of the total premium paid over the expected duration of the policy or contract but must state: expected duration used (taking account of appropriate mortality and termination rates for that type of policy); that most compensation is paid in the first year if such is the case, or in first five years if such is the case. Currently, only insurer has sufficient information to provide adequate estimate of expected life of policy An example: “I expect to receive from the insurer 8% of the total premium you pay on this policy if you keep the policy in place for 13 years, which is the expected average duration of this type of policy. Most of that compensation will be paid in the first year. Regulation 194:Guidance on Known Compensation

20. If the nature, amount or value of compensation to be disclosed by the producer is not known at the time of disclosure, then the producer shall include: A description of circumstances that may determine receipt and amount or value of compensation A reasonable estimate of amount or value, which may be stated as range of amounts or values. That the compensation is “not known at the time of disclosure” when contingent upon some future occurrence, such as meeting sales volume, profitability or retention targets. The producer is not required to disclose detailed compensation structures but must describe circumstances that may determine the receipt and amount or value of any unknown compensation. An example: “I may also be eligible for additional compensation depending upon a number of factors including premium and policy volume, losses and profitability.” Regulation 194:Guidance on Unknown Compensation

21. A producer may estimate unknown compensation as a reasonable range of percentages of premium based on past sales of similar policies. A Producer may provide a reasonable range of dollar amounts of compensation received from past sales of similar policies. If the prior year sales data is not available, a producer may use the estimate provided by the insurer based on the average amount of compensation paid to producers by the insurer for similar policies in prior years. For life, annuities, long-term care, and disability, the producer may provide an estimate of an additional range of percentages of premium paid over average duration of policy or contract A producer who works exclusively for one insurer (or group of insurers) may estimate the unknown compensation by stating all the compensation received in a given year as a percentage or range of percentages of the producer’s total yearly compensation. Regulation 194:Guidance on Unknown Compensation

22. The required disclosures may be incorporated into other written materials provided to the purchaser as long as disclosure is prominent. The disclosure may be provided by insurer, for example, on the application form No particular format is required; a producer may use a boilerplate form. Disclosures may be combined into one document provided to the purchaser at or prior to time of application. The producer may disclose other truthful and not misleading information, including that the producer is prohibited by law from rebating commission or other compensation, or otherwise providing an inducement to the insured or potential insured in order to make the sale. Using an application form to merely solicit multiple quotes does not trigger disclosure requirements. Regulation 194:General Comments

23. The producer must maintain copies of written disclosures provided to the purchaser for not less than 3 years, unless the producer has a written agreement with the insurer and the insurer retains the disclosures. The amount of compensation that an insurer or its agent pays to a producer must be maintained by the insurer in accordance with Regulation 152, i.e., “The Recordkeeping Regulation.” The insurer may delegate its recordkeeping obligations to its agent, provided that agent maintains the records in accordance with Regulation 152. Regulation 194:Recordkeeping Requirements

24. Department’s website: www.ins.state.ny.us Text of Regulation 194 http://www.ins.state.ny.us/r_finala/2010/rf194txt.pdf Circular Letter No. 18 (November 5, 2010) http://www.ins.state.ny.us/circltr/2010/cl2010_18.htm OGC opinions FAQ Regulation 194:Resources

25. Assistant Deputy Superintendent and Counsel Paul A. Zuckerman 212-480-5286 Pzuckerm@ins.state.ny.us Department Contacts