Do You Know How and How Much Your Insurance Agent or Broker Gets Paid?

I don't.  Most people don't.  Except perhaps that like most people, I've surmised that my agent makes a commission or percentage of the premiums I pay for the policies he procured for me and my business.  I only know for certain that I've never written a check directly to my insurance agent.

A quick Google search brought this videographic enlightenment. 



Some more digging uncovered this compensation disclosure of a Utah agency group, setting forth the four main types of insurance agent and broker compensation:

1. Regular Commissions -- averaging 12.5% of total premiums on all business the agent produces for insurers.  Life insurance commissions are usually much higher on the first-year premium. 
   
   
2. Contingent Commissions -- tied to the loss and claim payment results realized by the insurers the producer represents on the total business it places with those insurers during the prior year.
   
   
3. Policy Fees -- the producer negotiates and charges the insured, including for services provided other than policy placement, such as risk management, engineering, or premium financing.
   
   
4. Interest and Countersignature Income -- In instances where customers pay for insurance policies through the agency (instead of by direct payment to the insurer which issued the policy), the agency may receive a modest amount of income from interest accruing on amounts held for payment to insurers. In addition, the agency charges interest on past-due receivables from these agency-bill customers. In increasingly rare instances, state law requires a resident agent to receive a commission for countersigning a policy issued by an agent from another state.

Notice that contingent or sometimes called bonus commissions relate directly to losses and claims the agent's or broker's customers submit and are paid for each year.  It is this type of compensation that sometimes causes agents and brokers to advocate for the denial of their customers' claims. 

Enter the New York State Insurance Department, which earlier this year promulgated Regulation 194 (11 NYCRR Part 30), the stated purposes of which 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.

Set to take effect on January 1, 2011, the new regulation will require an insurance producer who is subject to the New York Insurance Law and sells an insurance contract to 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.

If the purchaser requests more information about the producer's compensation before 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.

Sound like a lot?  It does to New York's agents and brokers, which yesterday commenced a CPLR Article 78 special proceeding in the names of two of their trade organizations -- the Independent Insurance Agents & Brokers of New York and the Council of Insurance Brokers of Greater New York -- to prevent the Insurance Department from implementing Regulation 194. IIABNY and CIBGNY have asked the court to annul parts or all of the regulation, arguing that:

• the Insurance Department does not have authority under New York law to mandate compensation disclosure;
• the regulation “represents an impermissible attempt to rewrite the Insurance Law on a subject as to which the Legislature has already specifically legislated”;
• parts of the regulation “impose massive and unwarranted costs of compliance on brokers so as to constitute an arbitrary exercise of regulatory power”; and
• the regulation violates producers’ rights to due process and equal protection under the U.S. and New York State Constitutions.

According to IIABNY's press release, IIABNY called on insurance agents and brokers in 2004 to voluntarily disclose to their clients the existence and nature of all their compensation.  I like my agent very much but have never received any disclosure -- oral or written -- of the compensation his agency derives from my business.  What could have been voluntary the Insurance Department now seeks to make mandatory.  Coverage Counsel will follow the Article 78 proceeding and report its outcome.