A little over five months after issuing a proposed regulation requiring agents and brokers to disclose any and all commission on insurance policies they write, the New York State Insurance Department is now putting the matter in the hands of consumers.

The department issued on July 8 a new approach, whereby agents and brokers writing business in the state must make either a written or oral disclosure of their commission if requested by the purchaser.

The new resolution marks a big shift from one proposed in January under former-Insurance Superintendent Eric Dinallo, whereby prior to issuing or renewing any insurance contract, a producer would be required to give written disclosure including the nature and amount of compensation and a description of any material ownership interest by the producer and/or the insurer. Dinallo resigned, effective July 3, and has been replaced in an acting capacity by First Deputy Superintendent Kermitt J. Brooks.

The department even provided a five-paragraph boilerplate notice that would have been required to accompany all policies outlining the nature of compensation and commission relationships in the insurance industry.

Matt Gaul, special counsel for the NYID, told IFAwebnews.com that the new draft comes after a “lengthy outreach process,” with lots of input from the insurance industry and agent associations on an issue that has met with lots of resistance, he said.

“This is an effort to work with various constituents and find the right balance of a pragmatic and workable regulation and something that gives consumers informed decisions,” he said. “There is no doubt there has been huge resistance and there remains resistance regarding disclosure of any kind.”

Industry reaction

The original proposal introduced in January drew a mixed response from the industry, with several agents’ groups showing concern over the onerous new rules and firms, including Aon Corp. and Marsh & McLennan, voicing their support.

In response to the new draft, the Professional Insurance Agents of New York State said it was pleased that the boilerplate notice, which included language stating producers have incentives to recommend particular policies based on commission levels, was eliminated.

“PIANY found this provision highly offensive and led the charge for its elimination through a series of meetings with the [New York State Insurance Department],” the agents’ group said in a statement.

Tim Dodge, director of research and external communications for the Independent Insurance Agents & Brokers of New York, told IFAwebnews.com that the group “truly appreciates” the way regulators have reached out and sought the opinion of its membership.

“We are still in the process of reviewing the new draft,” Dodge said. “We have some concerns about some of its aspects, and we will work with the department to craft a regulation that is fair and not unduly burdensome to New York agents and brokers and that satisfies the department’s concerns.”

New proposal

Under the new draft proposal, made by Brooks, if requested by a client, agents and brokers must disclose that they will receive compensation from an insurer for that contract. They must also disclose that compensation varies from carrier to carrier and a consumer can request additional information.

If a customer requests more information about the producer’s compensation or alternative quotes, a written notice must be given prior to issuance of the contract including a detailed description of the nature, amount and source of any compensation received, detailed information on alternative quotes obtained or considered by the agent or broker, and any material ownership interests.

Gaul said the department has dubbed this “role” disclosure, with the agent and broker getting the opportunity to better share their role in insurance to the consumer.

“The key portion [of the latest draft] is a prompt at the end of the process that says if you want more information, I will provide it,” he said.

The insurance department is seeking input on the newest draft regulation by July 29.

Gaul said the department’s goal of getting a regulation in place this year is “still achievable” despite the controversial nature and the end goal is better transparency in the industry.

“We are moving the ball down the field,” he said. “If this is what we end up with, it will still be the strongest disclosure regime in the nation, stronger than the [National Association of Insurance Commissioners] model, and with the right balance.”

Leading the way

The proposed regulation comes after hearings last summer where representatives for the insurance department and New York Attorney General Andrew Cuomo explored compensation arrangements for insurance agents and brokers and disclosure of fees to customers. The hearings also discussed forms and disclosure of producer compensation, including ways to curb steering certain forms of compensation.

Since New York has taken the initial steps to review compensation and commissions, other neighboring states have followed.

In the last few months, regulators in Maryland, Washington, D.C., and Delaware have told IFAwebnews.com they intend to investigate possible regulations, while officials in Virginia and Pennsylvania say they have no immediate plans for similar regulations.

Gaul said the department is always talking with other state regulators and the NAIC to exchange information and would “like to be a leader” on better commission disclosure regulation.

“Obviously, this is a hugely controversial area and these are difficult waters to wade, but it is important for us to take the lead,” he said. “Especially since the issue was generated here [with the 2008 hearings].”