DISCLOSURE OF THE way in which agents and brokers are compensated has become a significant issue as state regulators and industry insiders deal with the fallout of New York Attorney General Eliot Spitzer's investigation into insurance industry practices. The National Association of Insurance Commissioners in December adopted model legislation that it believes will create clearer ethical practices through better disclosure of compensation arrangements. And officials and regulators in states like Connecticut and Nevada are writing reform legislation that deals with the issue of compensation as well.
Agent compensation reform is likely to affect certain meetings and incentive programs in the financial services and insurance industry, but its exact implications are unclear. NAIC's model legislation, for instance, requires producers to disclose to the buyer the amount of compensation he or she receives from the insurer, as well as the way in which that compensation is calculated. In this case, compensation includes awards, gifts, prizes, or “any other form of valuable consideration,” as well as monetary compensation. NAIC's model says that if “the amount of compensation is not known at the time of disclosure, the producer shall disclose the specific method for calculating the compensation and, if possible, a reasonable estimate of the amount.”
National insurance organizations have complained that some of these disclosure requirements are too broad and will place too much of a compliance burden on agents and brokers. In comments sent to NAIC during the drafting phase, Trei Wild, president of the National Association of Health Underwriters, expressed his concern that disclosure be accomplished “without sidetracking the sales process.” He went on to comment that “Techniques such as trips or points towards prizes are also often used as sales tools. Disclosure of those items in monetary terms may be impossible.”
Concern about compensation disclosure crosses international borders as well. The Canadian Life and Health Insurance Association in December issued a package of reforms targeted at disclosure, including one initiative specifically aimed at travel incentives.
The CLHIA requires that member companies that offer travel incentives make disclosure of those incentives by the producer to the buyer a condition of eligibility for participating in the program. “Travel incentives can be an appropriate form of nonmonetary compensation for performance,” according to the CLHIA. “At the same time customers should be made aware of the possibility of such compensation.”
