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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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