Rebates Nondiscrimination and Compensation Alaska Division of Insurance

Rebates, Nondiscrimination and Compensation Alaska Division of Insurance Public Meeting November 13, 2008

Purpose of Meeting n n Review of Alaska’s rebating and discrimination laws. Review division’s enforcement of these laws. We will not be making decisions on specific rebating or discrimination questions at this meeting. Receive input from participants as to what, if any, changes should be made to Alaska’s rebating and discrimination laws.

What is Rebating? Paying, allowing, giving or offering to pay, allow or give anything of value to an applicant or insured as an inducement to insurance. Two Key Phrases: Inducement ¨ Anything of value ¨

History n n Every state has anti-rebating laws. Rebating was a common practice in the late 19 th and early 20 th centuries. Rebating primarily involved discounting life insurance premium 50% or more. Discount was not offered to all consumers.

History n n n Late 19 th and early 20 th centuries saw the rise of urban industrial society and the decline of agrarian-based communities. Families became more dependent on wages When the breadwinner died, their families did not have the same support system available as in the agrarian communities.

History n n Changing society structure lead to growth in life insurance industry. Expansion resulted from: ¨ High pressure sales ¨ Deceptive policies ¨ High agent commissions

History n n High commissions provided agents with funds they could rebate to reluctant consumers to get them to purchase insurance from the agent’s company. Inequality and discrimination since rebates were not given to all consumers.

Anti-Rebate Statutes n n n MA passed the first anti-rebate statute in 1887. 21 more by 1895. 30 companies agreed to discontinue practice. Practice did not cease in the continuing competitive market and depression of the 1890 s and high commissions and rebates continued. Alaska’s anti-rebate law was adopted in 1966 based on an NAIC model and has remained essentially unchanged.

Anti-Rebate Statutes n Primary Reasons for Prohibiting Rebating Protect smaller insurers and insurance agencies that could be driven out of business by larger insurers and agencies that can afford to offer smaller premiums or commissions (prevents monopolization). ¨ Protect policyholders that do not have the leverage to negotiate lower commissions or premiums such as individuals and small employers. ¨ Help ensure that policyholders of similar risk are treated fairly. ¨ Forces insurance agencies and insurers to compete on services and benefits. ¨

Rate Regulation n 1909 KS enacted the first rate regulatory law including anti-rebate language. n Same goals as anti-rebate laws. ¨ Protect companies from insolvencies ¨ Prevent unfair discrimination between applicants ¨ Protect consumers from exorbitant rates

Unfair Discrimination n Unfair discrimination is prohibited under Alaska law. Discrimination is unequal treatment of similarly situated consumers. Include commission as part of the rate regulation scheme so that all pay appropriate share of company and agent costs of selling a policy. ¨ ¨ Standard structure Any rebates would be based on legitimate differences in expenses

Do We Still Need Anti-Rebate Laws? n Public policy reasons to support these laws Rebates may lead consumers to buy new or replacement life policies year after year impacting solvency of insurer. ¨ Rebates may result in consumers going to other states to make large insurance purchases making regulatory oversight difficult. ¨ Unrestricted rebating keeps prices hidden and unavailable for monitoring discrimination. ¨ Rebating may jeopardize the livelihood of smaller producers, opening the door to concentration of business and monopolistic practices. ¨

Do We Still Need Anti-Rebate Laws? Public policy reasons to support these laws (cont. ) Rebating may de-emphasize producer advice and service to the detriment of consumers. o Insurers may experience adverse selection and increased costs. o Rebates will result in increased policy lapses. o Rebates will result in unfair discrimination among policyholders, particularly those with little or no economic leverage. o Rebates will render ineffective some cost disclosure requirements which are considered a fundamental life insurer consumer protection device. o

Do We Still Need Anti-Rebate Laws? Public policy reasons to support these laws (cont. ) Rebates will result in a diminishment of the life insurance business as a source of investment capital for the nation as consumers replace policies to obtain rebates. ¨ Rebates will result in new contestable periods for insureds replacing their coverage resulting in lack of coverage for many. ¨ Rebates will result in undue consumer emphasis on price over quality of product. ¨ Even well-intentioned deregulation will result in unanticipated negative consequences for the general public such as sharp business practices by producers. ¨

Do We Still Need Anti-Rebate Laws? n Public policy reasons to repeal these laws Many policyholders see no objection to rebating and prefer the free market with its resulting price competition. o Although originally enacted to prevent monopolization, they are seen as anticompetitive today. o Rebating is difficult to detect and impossible to prove. o Rebating laws should no longer be used to justify the outdated goal of preserving the agency system by keeping up the compensation level. o Concern for insurer solvency is no longer an adequate basis as other solvency regulatory tools now exist. o

Life and Annuity Discrimination AS 21. 36. 090 (a) A person may not make or permit unfair discrimination between individuals of the same class and equal expectation of life in the rates charged for a contract of life insurance or of life annuity or in the dividends or other benefits payable thereon or in any other of the terms and conditions of the contract.

Health Discrimination AS 21. 36. 090 (b) A person may not make or permit unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees, or rates charged for a policy or contract of health insurance or in the benefits payable, or in any of the terms or conditions of the contract, or in any other manner whatever.

Health Discrimination (cont. ) AS 21. 54. 100 a) A health care insurer that offers, issues for delivery, delivers, or renews a health care insurance plan in the group market may not establish rules for eligibility, including continued eligibility and waiting periods under the plan, for an individual or dependent of an individual based on [health status; medical condition, including physical and mental illnesses; claims experience; receipt of health care; medical history; genetic information; evidence of insurability, including conditions arising from acts of domestic violence; or disability].

Health Discrimination (cont. ) AS 21. 54. 100 (b) A health care insurer may not require an individual, as a condition of enrollment or continued enrollment under a health care insurance plan offered in the group market, to pay a premium, contribution, or policy fee greater than a premium, contribution, or policy fee for a similarly situated individual already enrolled in the plan on the basis of a health status factor for the individual or a dependent of the individual.

Life, Annuity, Health Anti-Rebating Statute AS 21. 36. 100 Except as otherwise expressly provided by law, a person may not knowingly permit or offer to make or make a contract of life insurance, life annuity or health insurance, or agreement under the contract other than as plainly expressed in the contract, or pay, allow, give or offer to pay, allow, or give, directly or indirectly, as inducement to the insurance, or annuity, a rebate of premiums payable on the contract, or a special favor or advantage in the dividends or other benefits, or paid employment or contract for services of any kind, or any valuable consideration or inducement whatever not specified in the contract; or

Life, Annuity, Health Anti-Rebating Statute (cont. ) directly or indirectly give, sell, purchase or offer to agree to give, sell, purchase, or allow as inducement to the insurance or annuity or in connection therewith, whether or not to be specified in the policy or contract, an agreement of any form or nature promising returns, profits, stocks, bonds, or other securities, or interest present or contingent in the contract or as measured by the contract, of an insurance company or other corporation, association, or partnership, or dividends or profits accrued or to accrue under the contract; or offer, promise, or give anything of value that is not specified in the contract.

Life, Annuity, Health Exceptions to Discrimination and Rebate Statutes Nothing in AS 21. 36. 090 and 21. 36. 100 may be construed as including within the definition of discrimination or rebates any of the following practices: (1) in the case of a contract of life insurance or life annuity, paying bonuses to policyholders or otherwise abating their premiums in whole or in part out of surplus accumulated from nonparticipating insurance, if the bonuses, or abatement of premiums are fair and equitable to policyholders and for the best interests of the insurer; Examples: universal life paying premium with cash values, bonus interest

Life, Annuity, Health Exceptions to Discrimination and Rebate Statutes (cont. ) (2) in the case of life insurance policies issued on the industrial debit, preauthorized check, bank draft, or similar plans, making allowance to policyholders who have continuously for a specified period made premium payments directly to an office of the insurer or by preauthorized check, bank draft, or similar plan, in an amount that fairly represents the saving in collection expense; Example: Industrial debit life of which little or no business is written anymore

Life, Annuity, Health Exceptions to Discrimination and Rebate Statutes (cont. ) (3) readjustment of the rate of premium for a group insurance policy based on the loss or expense experience thereunder, at the end of the first or a subsequent policy year of insurance thereunder, which may be made retroactive only for that policy year; Example: large group experience rated plans-reducing current premiums based on prior year loss experience

Life, Annuity, Health Exceptions to Discrimination and Rebate Statutes (cont. ) (4) issuance of life or health insurance policies or annuity contracts at rates less than the usual rates of premiums for the policies or contracts, or modification of premium or rate based on amount of insurance; but the issuance or modification shall not result in reduction in premium or rate in excess of savings in administration and issuance expenses reasonably attributable to the policies or contracts. Examples: Lower premium for larger policy amounts (economy of scale), savings under payroll deduction plans, auto-pay plan savings

Life and Health Rebating Inquiries n n n Negotiated commissions, reducing premium by reducing commission. Reduction in premium or other incentive for participation in wellness programs. Drawings/gifts. Free or reduced cost administrative services (ex: FSA administration, HR/employee benefit consulting). Health discount cards at no cost. NOTE: The Division is considering legislation to specifically allow rewards or incentives for wellness programs consistent with federal HIPAA nondiscrimination laws.

P&C Anti-Rebate Laws n AS 21. 36. 120(a) ¨ Who: n n n property, casualty or surety insurer Employee or representative of the insurer Agent or solicitor ¨ What: n n May not pay, allow, give May not offer to pay, allow or give ¨ How: n Directly or indirectly ¨ When: n n As an inducement to insurance Or after insurance has been effected

P&C Anti-Rebate Laws n AS 21. 36. 120(a) ¨ What: If not specified in the policy n Rebate n Discount n Abatement n Credit n Reduction of the premium n Special favor or advantage in the dividends or other benefits n Any valuable consideration or inducement

P&C Anti-Rebate Laws n AS 21. 36. 120(b) ¨ Who: n n Insured Employee of the insured ¨ What: n May not knowingly receive or accept ¨ How: n Directly or indirectly

P&C Anti-Rebate Laws n AS 21. 36. 120(b) ¨ What: n Rebate n Discount n Abatement n Credit n Reduction of premium n Special favor or advantage n Valuable consideration n inducement

P&C Unfair Discrimination Law n AS 21. 36. 120(c) ¨ Who: n An insurer ¨ What: n May not make or permit unfair discrimination ¨ In the premium or rates charged for insurance ¨ In the dividends or other benefits payable ¨ In any other terms and conditions of the insurance ¨ How: n Between insureds or property having like insuring or risk characteristics

P&C Unfair Discrimination Laws n AS 21. 36. 090(c) ¨ Who: n A person ¨ What: n May not make or permit arbitrary or unfair discrimination ¨ In the premium or rates charged for a policy or contract of property, casualty, surety, marine, wet marine or transportation insurance ¨ In the dividends or other benefits payable on the insurance ¨ In the selection of it ¨ In any other terms and conditions of the insurance ¨ How: n Between insureds or property having like insuring or risk characteristics

P&C Anti-Rebate Laws n AS 21. 36. 120(d) ¨ Payment of commission or compensation under AS 21. 27 is not prohibited ¨ Allowing or returning to participating policyholders, members or subscribers n Lawful dividends n Savings n Unabsorbed premium deposits is not prohibited

Property/Casualty Rebating Inquiries n Can one insurer have different commission levels for the same product? Yes, if n All commission levels are available to all producers; and n Each producer selects a specific commission level and uses it for all of his/her customers ¨ No, if n Some commission levels are only available to some producers; or n Each producer selects a specific commission level on a customer by customer basis ¨

Property/Casualty Rebating Inquiries n Can an insurer offer airline miles in exchange for obtaining an insurance quote? n Does an endorsement by an entity (Better Business Bureau) of an insurance product, or the agency selling the product, in return for which the producer would return to them a small percentage of collected commission violate the antirebate laws?

Property/Casualty Rebating Inquiries n n n Can a producer cap his/her commission and return the excess to the client or use the excess and apply it to future years commission costs? Can an automobile windshield repair shop waive a customer’s deductible? Can an insurer waive an insured’s deductible if the insured uses a preferred repair shop?

Property/Casualty Rebating Inquiries n Can an insurer offer a discount for purchasing insurance via an 800 number or via the internet? n Policy language stating that each insured may receive from time to time as offered by the insurer promotional offers including gift cards, coupons, gift certificates, items of merchandise and similar promotional items. In no case shall those offers exceed a value of $25. 00.

Producer Compensation Options n Title 21, Chapter 27 provides authority, in specific circumstances for a producer to compensate a person, directly or indirectly involved with an insurance sale. n Allowances to permit this to occur are contingent on several factors.

Statutory Allowances 1) Sharing commission or compensation with another licensee. 2) Paying a referral fee to an unlicensed person. 3) Sharing a commission or compensation with an unlicensed person: a) Agency/Firm that is not licensed b) General Agent or MGA that oversees the producer’s activities 4) A producer offsetting or reimbursing a fee to a client (insured).

AS 21. 27. 370. Sharing Compensation Identifies conditions in which compensation may be paid to licensed and unlicensed persons. Licensed Persons A licensee must be licensed for the kind and class of insurance for which the person is authorized to transact.

Sharing Compensation (cont. ) Unlicensed Persons Referrals A licensee may compensate an unlicensed person that refers a customer or potential customer to a licensee if the person does not discuss specific terms and conditions of a policy, does not give opinions or advice regarding insurance (AS 21. 27. 370) AND the referral is ¨ On a one time basis; ¨ Nominal fee; ¨ Fixed in amount; ¨ Does not depend on whether the customer or potential customer purchased insurance; and ¨ Not contingent on the volume of insurance transacted.

Sharing Compensation (cont. ) Unlicensed Persons A licensee may share a commission or compensation with a business entity (firm) as long as the firm does not sell, solicit, or negotiate insurance and the payment does not violate our rebating laws. A licensee may share an override commission with a general agent for business produced by persons the general agent supervises and the general agent has no involvement in the sale, solicitation, or negotiation of insurance.

AS 21. 27. 560 Appointment of Producers as Broker Contracts AS 21. 27. 560 allows a client to appoint a broker through an executed contract. The contract must specifically set out the duties, functions, powers, authority, and producer’s compensation. Under an executed broker contract executed under AS 21. 27. 560, a producer may offset or reimburse a client (insured) all or part of the commission earned (disclosure required).

Compensation Options for Brokers Operating Under a Contract n Fee that requires the producer to offset or reimburse the client for the full amount of the commission earned (AS 21. 27. 560(c)(1)). n Combination of fee paid by the client and commission paid by the insurer for which coverage has been earned that may offset or reimburse a client for all or part of the commission earned by the producer that is fully disclosed (AS 21. 27. 560(c)(2)). n Commission paid by the insurer (AS 21. 27. 560(c)(3)).

Permissible Compensation Options Under a Broker Contract With full disclosure, n n n A Producer may collect a fee, commission or a combination fee and commission under an executed contract with the insured. The fee the Producer receives may offset or reimburse client (insured) for the full amount of commission earned. The combination of the commission and fee the Producer receives may offset or reimburse client (insured) for all or part of the of a commission earned if the amount of the commission is disclosed to the client.

Limitations of a Broker Contract n Does not apply to renewal of existing coverage placed by the producer or to a premium deposit for the purchase of insurance. n The Producer can not assign the executed contract in whole or in part.

Is it a Rebate? n An exception to the prohibition of rebating for producers acting as a broker is contained in AS 21. 36. 120. The provision in AS 21. 27. 560 clarifies the role of a producer acting as a broker and provides the mechanism for a broker to reimburse or offset the commission amount charged.

Examples of Producer Inquiries n n May a producer pay referral fees to unlicensed persons based on percentage of leads which results in insurance sales? May a producer offset or reimburse a client? What is considered “nominal”? May a general agent receive an override commission if the GA does not transact insurance?

Examples of Producer Inquiries n n May a producer offer a gift card of certain value to any customer that refers a potential customer to the producer? Can a producer limit participants for a drawing to win a valuable gift to only those persons who receive a quote or insurance information from the producer? For any gift, monetary incentive, gift card or prize given away, is there a maximum value for that award? May a producer make a charitable contribution to a nonprofit agency in the client’s name?

Factors Considered by Division Referral Issues n n n What is “nominal”? How often is the referral made? Is the referral fee tied to the volume of business generated? Is the referral fee is fixed fee? Is the compensation calculated on the volume of business transacted?

Factors Considered by Division Drawings n n n Who may participate? Is the purchase of insurance required to qualify for the drawing? Is the person required to participate in any type of sales pitch? Is the individual required to provide any personal information? What is the prize? Can the participants be limited due to age? Other types of marketing inducements.

Enforcement n Through Rate Regulation ¨ Disapprove P&C rate filings that propose to allow a producer to reduce his/her commission to lower the cost of a policy. ¨ Evaluate rates/rules for potential unfairly discriminatory impacts.

Enforcement n Responding to questions about different scenarios n Bulletins on fees ¨ Bulletin B 99 -03 ¨ Bulletin B 04 -14

Enforcement n Review proposed or executed contracts to ensure statutory compliance. n Conducted agency examinations respective to compensation arrangements. n Investigate complaints on producer activities involving referrals.

Examples of Division Responses to Rebating Questions The Division has determined that the following are violations of the rebating and/or non-discrimination laws: Negotiating commissions with clients outside of a broker agreement. 2. A gift, service, or anything of value used as an inducement to listen to a sales pitch or to obtain information would could lead to a quote. 3. Paying a portion of a client’s premium. 1.

Examples of Responses to Rebating Inquiries The Division has determined that the following are not violations of the non-discrimination and rebating laws: 1. 2. 3. 4. 5. Drawings that are available to any person in the general public and not tied to insurance. “Not tied to insurance” requires not asking a person whether they are interested in an agent contacting them about insurance or asking for personal information related to insurance and not just the drawing. Offering different commission levels to licensees as long as the insurer allows the licensees to select any available level, the level selected by the licensee is specified in their agreement, the rates charged by the insurer reflect the commission level paid, and the licensee uses the selected commission level for all clients. Giving away non-valuable items such as pens, calendars, mugs, etc. A producer acting as a broker and under an executed contract may accept either a fee, commission, or combination of both with respect to an insurance transaction. A producer may reimburse or off-set a fee to a client for all or part of a commission earned as long as full disclosure has occurred.

Again, we will not be making decisions on specific rebating or discrimination questions at this meeting

Discussion Questions n When does a particular activity become a “valuable consideration”? n What standards should be used in determining if a particular activity is an inducement? n What standards should be used in determining when compensation is “nominal”?

Discussion Questions n From a consumer perspective what harm or benefit might result if some situations currently considered to be rebating were allowed? ¨ Purchase decisions based more on price ¨ Incentive to do excessive shopping around ¨ Increase in unfair discrimination ¨ Purchasing power of consumer – large vs small ¨ Lower price

Discussion Questions n From a producer perspective what harm or benefit might result if some situations currently considered to be rebating were to be allowed? ¨ Small vs large producer ¨ Urban vs rural ¨ Personal vs commercial ¨ By line of business ¨ Resident vs non-resident

Discussion Questions n From an insurer perspective what harm or benefit might result if some situations currently considered to be rebating were to be allowed? ¨ Insolvency (consider recent impact of legal competition via schedule rating) ¨ Decrease in competition ¨ Larger insurers become larger/small insurers leave market

Possible Future Action by the Division 1. Issue bulletin clarifying Alaska laws and including Q&A to: ¨ ¨ 2. promote a level playing field through consistent interpretation and compliance with the laws; and reduce the number of questions the Division receives regarding the legality of a particular activity. Possible legislative or regulatory changes.