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PIA National Policy Discussion:Broker Disclosures and Compensation
Edition - November 11, 2004
Executive Summary for Policymakers:
This executive summary is provided for your quick reference. It outlines the key elements of PIA National’s position concerning several issues in your current policy discussions.
In light of recent events, a sense of urgency has developed to craft a public policy response. PIA National believes it is critical that this urgency be tempered to allow for sufficient deliberation. Significant confusion now exists regarding certain aspects that are being included in ongoing policy discussions. It is necessary to clear up this confusion first, so that successful responses to the regulatory issues at hand can be crafted.
Our position: PIA National supports a model regulation that requires disclosure of fees charged, services provided, and compensations received by a broker that is taking compensation from the insured and the insurer in the same transaction. Since the 1960’s, PIA National has worked with NAIC and PIA affiliates and their state departments of insurance in addressing various forms of insurance regulatory required fees and disclosure practices in both personal and commercial lines in the admitted direct insurance marketplace. Our current policy approach is an extension and expansion of those previous efforts.
Points for you to consider as you continue your deliberations:
- Placement Service Agreements (PSAs) involving mega-brokers are not the same as compensation arrangements in other insurance market segments, specifically the retail admitted market. Both cannot be treated with the same regulatory disclosures.
- Compensation is key to the American Free Enterprise system: The broad varieties of compensation arrangements that exist in insurance are not unique to the insurance industry. They are used throughout the U.S. economy – in both the private and public sectors – to financially reward success and productivity.
- Avoid unintended consequences and don’t overreach: PIA National believes that model regulation should not unwittingly overreach, or conflict with requirements already clearly established in insurance common law. These requirements provide protection for consumers and give state oversight authorities many existing tools to pursue wrongdoers.
- In denying critics of state regulation, state insurance departments should look to the NAICmodel regulation process and coordinate their individual efforts so that a uniform and workable solution can be achieved.
Additional discussion and detail on each of these points is available upon request.
A Brief Discussion of PIA National’s Policy Points:
Central PIA Policy Approach Being Proposed:
So that the model process not confuse fee-disclosure requirements already established in a number of state insurance regulations that address different market segments and needs – PIA suggests NAIC focus in the insurance segment giving rise to this current discussion – the large Fortune 500 insurance market segment. PIA sees the following policy approach as the starting point:
Core - In simple terms and for the large commercial insurance segment/transactions, when an insurance broker is charging fees from the insured for services they are providing for the client, and at the same time in the same insurance transaction and for the same insurer with which the insurance will be placed, the broker is receiving a compensation from that insurer – the broker is required to disclosure to their client in general terms the nature of the compensation received and services performed for the insurer. The broker is to do so in advance of the transaction being completed; with reasonable time for the insured to decide if they wish to proceed; and the insured signs the notice that they’ve been advised, agree to the terms, and approve the insurance transaction being completed.
NAIC should consider allowing this process to be executed by the insurance broker firm – instead of the individually licensed brokers working for the firm. Also, please consider the insurance broker firm being able to execute this on a client-basis where the broker-client insurance relationship is ongoing as opposed to a transaction-by-transaction one.
Mega-Broker Compensation Arrangements are Different: PSAs (placement service agreements), MSAs and all the various compensation arrangements that mega-insurance brokers have with their insurers are unique, individually negotiated compensation arrangements that are one-on-one developed by the mega-commercial insurance brokers with their insurers. Mega-commercial insurance brokers enjoy equity of relationship and market -size position enabling them to develop their own customized arrangements with various insurers. Each of these insurance brokerage operations manage hundreds of million of dollars in insurance placements each year.
In stark contrast Retail Independent Insurance Agency Compensation –PIA members, as independent insurance agencies, do not regularly receive any compensation or fees from their insureds, but receive their compensation from their carriers, costs that carriers are already required to specifically account for in the details of theirrate filings and/or annual statement filings.
Commission - One part of our members' compensation is paid by the carrier to the agency in "upfront commission" earnings based upon a percentage of the gross/final pricepremium of the insurance sold (for new business) and business that has beenserviced, updated and "sold" upon renewal.
This commission is earned per policy placement and comprises the portion of the agency’s earning used to pay the day-to-day expenses of running their insurance agency. Even today and where permitted, fees charged by most PIA member agencies to their clients is a small portion of their earning and is designed to hopefully cover the full cost/expose to the agency for providing the specified service, e.g. covering the cost of the MVR report, but competition among insurance agencies will modify such fee-structures.
Contingency Earning - The second part of the independent agency's compensation from their appointed carriers comes after the close of the calendar year-end. This portionof the compensation is referred to as a "contingency earning",and comprisesthe portion of earning that independent insurance agencies rely upon for their working capital to support the ongoing operations of their insurance business, payment to afford competitive employee provided benefits (to include L&H), and the balance is their margin of year-end profit to be used for employee salary increases and performance bonus awards.
How PIA member's contingency earning portion of compensationoperates:
In order to be able to receive it (or qualify), as well as how muchthe earning will be is contingentupon the agency successfully achieving anumber of performance factors established and required by the insurer to be metthat year. This compensation is developed and earned on the overall book of
business the agency has produced for the insurer in that year, may be modified by previous year off-sets, and the cumulative achievement of several performance standards.
Insurers’ annual oversight and evaluation of PIA member agencies’ performance set against the goals and guidelines established by each carrier is an annual performance review of each independent insurance agency. Agencies that are successful their performance for the year are able to share on a pro-rated basis in an earning from the compensation pool, a finite amount of dollars available for this set by the carrier, and reported in their rate filings and annual statements.
Those that do not perform do not share in this earning, and repetitive poor performance by an agency causes the insurer to terminate the business relationship. This supports a financially successful and sound result for the insurer developed in a profitable manner by its appointed agencies based upon the expressed goals of the insurers. This benefits the stockholders, policyholders, agencies, and employees of the insurer. At the same time, it creates a financially sound insurance marketplace that is able to insure the variety of risk exposures that exist, at competitive quality and in a manner that complies with the law.
Compensation by Any Other Name:
All businesses provide and use a wide variety of compensation and incentive based-earnings system to pay their sales forces, executives and employees. Whether it isincentives to sell more ties, bonuses for closing the most cases successfullywith fewest state dollars spent in a state district attorney's department;
executive bonus arrangements for top corporate year-end financial performanceor an employee's annual performance and salary review - the vast majority ofemployed people in the U.S. private and public sector participate in an incentive compensation system.
How people are compensated and how a company structures that for the benefitof everyone, as well as to direct their collective achievement of the goals setand needed for the corporation to thrive is fundamental to and protected underthe America Free Enterprise System; and has proven over time to be effective for theindividual, business entity, economy and the public at large.
It is a given and legal fact certain that any compensation program (formal or informal) between two or more parties used in any business to include insurance are required to achieve the businesses’ end-financial goals, and to do so complying with all applicable law related to the enterprise.
Leonard C. BrevikPatricia A. Borowski
Executive Vice President & CEOSenior Vice President
Ph. 703-518-1340Ph. 703-518-1360