Your Advocates

NAIFA-NYS Testimony on Advisor Compensation

Advocacy Gets ‘Commission Bidding’ Killed From Bill, But Agents Must Disclose Commissions

Robert Miller (foreground) of New York City, a trustee of the National Association of Insurance and Financial Advisors (NAIFA) and Sadler Hayes, president of NAIFA – New York State testify at a public hearing on whether additional legislation and/ or regulation is needed to restrict and/or disclose producer compensation. It was conducted by the NYS Insurance Department and Office of Attorney General. Miller and Hayes spoke for financial service professionals whose practices are focused on life insurance and annuities, health insurance and employee benefits, multiline, and financial advising and investments. NAIFA - New York State (formerly the York State Association of Insurance and Financial Advisors) has more than 3,100 New York State life and health licensed agents who are members of 18 local associations.

General Observations
Our members are more than just life insurance agents. Many hold multiple licenses - life & health, property & casualty, and equity products. The products they market to individuals are predominantly life and health coverage, which includes medical, dental, and disability.

The bid rigging scandals that came to public attention and placed contingent commissions under government scrutiny in 2004 do not happen with these products because the rates for individual life and disability are published. The cost of the products to the consumer is the actual premium minus any cash or surrender value that accumulates in the product. Unlike stocks and bonds, the commission is not added to the price. If an agent does not want to receive a part or all of the commission, the company cannot lower the premium to the consumer. In addition, the maximum compensation that companies can pay is regulated by statute. All agents who market life products have an agent’s contract only, with the multiple carriers they might represent. An agent develops a relationship of service and trust over a long period of time with life insurance clients. This relationship is the basis of the agent’s continuing business and referrals and is primary to any carrier compensation or anything else.

Most life insurance coverage is not required. Life and annuity products are truly sold, not bought, and our ability to successfully market our products depends in large part on the public’s confidence in our business.

Consumers tend not to distinguish between lines of insurance. Therefore, the specific abuses brought to light in New York four years ago and chronicled in the news media, tarnish the entire industry. Abuses and improper practices must be corrected so the integrity of the industry is upheld and public confidence maintained.

What New Legislation/Regulation Should Do
Any proposed legislation or regulation must recognize that contingent commissions or other existing forms of producer compensation are not inherently harmful to the consumer. They do serve legitimate purposes in the marketplace.
Additionally, any proposed legislation or regulation mandating disclosure to the insured of the producer’s compensation, or that the insured must give written consent before a producer can receive any compensation, should remain focused on instances in which an insurance producer receives compensation for the placement of insurance both from the person or entity making an insurance purchase decision and from an insurance carrier.

We believe any legislation to regulate compensation disclosure should require disclosure of the amount of compensation where an insurance producer or any affiliate of such producer receives compensation from the customer for the placement of insurance, or represents the customer with respect to that placement.

Compensation that must be disclosed should also relate to the relevant sale because compensation from any other transaction is not relevant to the understanding of the policyholder or applicant for insurance to the instant transaction.

Finally, we strongly believe that any proposed regulation or legislation must remain sharply focused on the improprieties that have surfaced in the past and warrant corrective action.

The amendment to the Producer Licensing Model Act adopted by the National Association of Insurance Commissioners in 2004 is a well reasoned and thoughtful approach to this situation and one that is as far as consensus within this industry can take us.

The practices that have been identified as problematic, whether associated with the property and casualty or the life insurance business, all involve situations where a producer received compensation from two unrelated sources and where additional disclosure regarding the producer’s role and relationship to the parties would have proved beneficial to the individual or entity making the insurance purchase decision.

Commission Disclosure Background
Over the years, there has been a wide range of formulas and techniques advanced for communicating the cost of life insurance to the consumer. While having technical merit, these have not provided a clear understanding of policy costs. In recent years, some groups have proposed that commission disclosure at the point of sale is one of the keys to better consumer understanding. They argue that consumers should be informed that agents have a financial interest in the products they recommend and that the public should be aware of the agent’s commission.

NAIFA is strongly committed to total cost disclosure. We believe that consumers should clearly understand the full costs of the products they are considering in order to make an informed decision. However, we do not believe it is in the consumer’s best interest to mandate disclosure of a life insurance agent’s commission in the sales process, absent compensation paid to the agent by the customer and the insurer.

Summary of Position on Cost and Commission Disclosure
For consumers to make informed purchasing decisions, they should know the amount and type of coverage they need or desire and its total cost. An insurance company incurs many types of expenses; it is the total of these expenses – not any specific one – that is important for consumers to understand. These full costs are clear in the diff erence between the amount of premium paid and the surrender value created by that payment. This is the direct cost to the consumer and can be seen in the illustration of the policy. The only additional cost is the time value of money until the time of death or withdrawal of policy values.

Mandatory commission disclosure at the point of sale under circumstances where compensation is not received by the producer from the customer and the insurer would be adverse to the consumer’s best interest for a number of reasons, including:

• Focusing on only one expense – agent commissions – could lead to misunderstanding of the policy’s total costs.

• It would encourage buyers to look for the lowest commission policy rather than the best combination of policy values and service.

• While it may satisfy some curiosity, commission disclosure would disrupt the sales process by drawing attention away from the consumer’s needs and the policy’s ability to meet those needs. Such disruption could easily lead to fewer purchases and less adequately protected consumers.

• Commission disclosure could lead to pressure on agents to illegally rebate a portion of their commission as an inducement to make a sale. Rebating has been outlawed in 48 states for a number of reasons, including discrimination among purchasers and company solvency problems.

• Commissions are not just profit to an agent. They also cover an agent’s cost of selling and servicing policies. It is impractical, if not impossible, to quantify and disclose the agent’s business expenses that support the services he or she provides the customer.

• With the increasing use of other selling systems such as advertising, telemarketing and salaried employees, it would be discriminatory to require companies using traditional agents to disclose their commission costs without requiring the new companies to disclose their sales costs.

• Since compensation patterns vary significantly among companies and normally include many elements in addition to commissions, commission disclosure alone would not adequately describe agent compensation. This complexity of compensation arrangements makes it difficult to calculate what compensation to disclose.

• Commission disclosure would not materially reduce inappropriate replacements.

• While it is argued that commissions are routinely disclosed in the real estate and securities industries, the truth is that actual compensation paid to the salesperson is not required to be disclosed and typically isn’t. What is disclosed is the total cost – comparable to that which is currently disclosed in a life insurance illustration.

• Consumers who want to learn how their agent is compensated can simply ask their agent. Most will readily provide whatever information is available. The insurance marketplace is extremely competitive and if a consumer isn’t satisfied, he or she can always buy from another source.

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