When the New York Insurance Department submitted its proposed Producer Compensation Transparency Regulation to the Governor’s Office of Regulatory Reform (GORR) for review last week, the heat turned up in several quarters. The proposed regulation requires insurance producers to underline to consumers their right to request an accounting of the compensation paid to producers for the sale or service of insurance. After approval by GORR, the proposed regulation will be published in the New York Register, followed by a 45-day formal public comment period. After reviewing any comments received, the Department may adopt, revise or withdraw the proposed regulation.

In essence, the proposed regulation would require producers to disclose certain information in writing prior to binding coverage. Oral disclosures would be permitted in cases where time does not allow for preparation of a written disclosure. If the insured requests, the producer would have to disclose descriptions of the nature, amount and source of compensation details of alternative quotes, including coverage, premium and the compensation the producer would have received; descriptions of any material ownership interest of the producer in the insurer and vice versa; and an explanation that the law prohibits producers from reducing their commission to reduce the premium.

The newly proposed regulations will test a number of different propositions either directly and implicitly. (1) First, it will test the strength of the producer associations ability to mount a real effort to defend the livelihood of its members. Many of the points which the major trade associations lobby affect agents but not nearly as directly as this will in their everyday business. This will be a test of the lobby and probably commends itself toward a unified effort among the different association. (2) It will test rebating laws; the Insurance Advocate has long apposed rebating in many forms even as recently as our series on Stealth rebates in the life insurance business. The temptations here are many when the nature of the compensation is disclosed at the point of sale; enough said. It will test as well, the determination of the Governor’s office and legislators to enforce new levels of transparency in the financial services sectors, starting with agent-client transactions. Another test will be implicit, that is, is this system of compensation via commission something for which the public has a long term appetite. We think this is a test that will be easily pasted, but nonetheless, it will arise. There will be a great test of agents and brokers salesmanship, that is, the ability to convey the worth of the process at the point of sale as the bill is calculated and put over to the client. Agents are generally good salesman but have never had to be unsubtle about their own compensation and processes. Policy shopping will be tested effectively since the value independent agents and brokers bring to the table is the business of policy shopping, long thought to be of great advantage to the agent. Here this question and the extent to which compensation is related to producers’ relationships with certain insurers may come into question. Ultimately, too, it will be another test of the resiliency of independent insurance agents. While we are optimistic about this there will be quite a test.

Reactions were swift from producer associations whose members’ livelihoods may be directly and possibly adversely affected.

Both representatives of the IIABNY and PIANY met with administration officials to discuss the most recent disclosure regulation draft. “PIANY appreciates the occasion to reflect on the updated draft regulation, and provide or final thoughts regarding this most recent draft,” said PIANY President D. Scott Liebert, CIC. “The New York State Insurance Department has taken our comments on earlier drafts into consideration, and we appreciate that they have been incorporated into the final draft.” The meeting was attended by PIANY President D. Scott Liebert, CIC; President-elect Kevin Ryan, CIC; Legislative Representative Allison Lee; and Director of Government & Industry Affairs Mathew F. Guilbault, Esq. According to PIANY, changes already secured through its advocacy and incorporated into the final draft include:

• Deletion of offensive language purporting an inherent “conflict of interest” on the part of independent producers;

• Addition of a warning to consumers that producers cannot rebate their compensation;

• A two –step disclosure process that incorporates a “boilerplate” up-front disclosure more suited to the buyer’s

• Provision for oral disclosure in some cases;

• The adoption of a “de minimis” standard to eliminate the need to disclose advertising products less than $100 cumulatively per insurer.

• An expanded option for oral disclosure which expands the opportunity for the producer to comply with the initial disclosure orally;

• A limitation on the amount of time a producer must maintain records, which states that a purchaser can request information up to three years after the placement of the original policy.

• A more realistic scope of alternative quote information required to be retained. The new draft removes “detailed” from the mandate of providing descriptions of alternative quotes and also deletes the term “considered,” so that if the purchaser requests more information about alternative quotes, you will now be required to provide a description of any alternative quotes actually “obtained.”

• Elimination of the penalty section of the regulation. This new draft strikes the penalty portion of the regulation, eliminating any reference to Unfair Trade Practices contained in the prior draft.

IIABNY representatives told the Paterson administration officials that they have “significant concerns” with the proposed rule. Meeting with members of Gov. David A. Paterson’s staff were Mark J. Hagan, President of Perry & Carroll, Inc. in Elmira and past chair of the board of IIABNY, joined by IIABNY Senior Vice- President Kathy Weinheimer and legislative representatives Michael Barrett and Jill Muratori. The meeting was described by IIABNY as “positive” and a “good discussion.” It was one of a series of meetings about the rule the governor’s staff is holding with insurance industry groups during these weeks following the draft submission. According to IIABNY’s Situation Room, “While IIABNY, working with other industry groups and the Insurance Department, has been able to make meaningful changes to improve the rule; we still have significant concerns about certain aspects of it. We expect to follow up with the governor’s staff and others as the process of readying the rule for publication unfolds.”

Diane Fowler, PIANY Executive Director, offered a summary: “From the outset, PIA has held that additional regulation about compensation disclosure is unnecessary. When it became apparent that this regulation is inevitable, we worked closely with the Insurance Department to ensure that the final draft is both beneficial to consumers, and feasible for agents. In this context, we are pleased that the information required to be disclosed in the final product is not dissimilar to what agents currently provide to their clients.”

This stress test will prove to have transparencies all its own, from the Associations’ effectiveness to the honesty and salesmanship of producers and the public’s appetite for the current compensation framework.