December 8, 2004

To: The Honorable Diane Koken, NAIC President and Pennsylvania Insurance Commissioner

From: Trei Wild, President, National Association of Health Underwriters

We appreciate this opportunity to provide follow-up comments on the revised proposed Broker Disclosure Amendment to the NAIC Producer Licensing Model Act. To reiterate our previous comments, we condemn the deceptive practices, price fixing, and corruption alleged by Attorney General Spitzer, and we do believe that these are isolated examples that do not represent the way health insurance brokers normally conduct their business.

We would like to state again as we did at the meeting in New Orleans that we do not oppose disclosure of commissions. Our members provide a valuable service to their customers and many already routinely disclose commissions as a matter of doing business. Our continuing concerns are primarily in the area of contingent commissions and in commissions that may change during the course of the year. In this regard, the issue is not in disclosing the commissions, but rather in the difficulty of doing so accurately.

Many bonus arrangements are contingent on the placement of a certain number of cases or a dollar volume of business with a given carrier. They are usually paid at the end of the year, and a producer may not be aware whether they have qualified for the bonus until the end of the year. Other bonuses are paid on a rolling quarterly basis, and a producer may qualify one quarter but not another quarter. Some bonuses are based on both new business and retention of existing business. (In the health market, neither regular or bonus commissions are based on health status or loss ratios.) The bonus is often a flat amount based on a certain number of cases written and may not be allocated by customer.

Some bonuses are tied to sales contests, which may start mid-year but are retroactive back to business placed since the beginning of the year, making it impossible to notify customers prior to purchase about the additional compensation. On other bonuses, the formula for calculation may be known, but whether the producer will meet the minimum number of cases to qualify is often unknown at the time of the placement of insurance, or the formula may vary based on the total volume of business placed by the end of the year.

Sometimes even basic commissions are difficult to estimate. Commissions in the small employer health insurance market are increasingly being paid on a capitated basis, and sometimes the commission rate changes during the course of the year based either on participation by employees and dependents in the customer’s health plan or on total premium volume of the producer’s business to date. Other commission schedules are on a sliding scale where the percentages change based on total premium volume, which can vary based on the number of employees the employer insures over the course of the year. Finally, other techniques such trips or points towards prizes are also often used as sales tools. Disclosure of those items in monetary terms may be impossible.

NAHU also believes that licensed producers employed by or representing an insurance carrier clearly are representing that carrier’s interests, and should be distinguished from those who represent themselves as acting on behalf of the customer.

Our suggestions on changes to try to address these concerns are noted below.

Proposed Compensation Disclosure Amendment
To The Producer Licensing Model Act

Section __

A.        In any insurance transaction involving the placement of insurance where any insurance producer or any affiliate of such producer receives any compensation from the customer or acts on behalf of the customer, neither that producer nor the affiliate shall accept or receive any compensation, including commissions, from an insurer or any other third party related to the transaction unless the producer has, prior to the customer’s purchase of insurance: (1) obtained the customer’s documented acknowledgment that such compensation will be received by the producer or affiliate and (2) disclosed the amount of compensation from the insurer or other third party related to the transaction, including any contingent compensation, if the availability of any contingent compensation is known and the amount can be reasonably be estimated at the time of the transaction. If the amount of compensation is not known at the time of disclosure, the producer shall disclose a reasonable estimate of the amount and method for calculating such compensation. If a portion of the entirety of the amount of compensation is not known at the time of the disclosure, the producer shall disclose the possibility of additional compensation, based on future unknown events.

B.         An insurance producer who represents an insurer or insurer(s) or who is employed or appointed by only one insurer must disclose the following, if applicable, to a customer, prior to the purchase of insurance:
1.         That the producer will receive compensation from the insurer(s) for the sale;
2.         That the compensation received by the producer may differ depending upon the product and insurer(s); and
3.         That the producer may receive additional compensation from the insurer(s) based upon other factors, such as premium volume placed with a particular insurer and loss or claims experience.

C.        For purposes of this section:
1.         “Affiliate” means a legal entity that controls, is controlled by, or is under common control with the producer.
2.         An individual shall not be considered a “customer” for purposes of this section if the individual is merely:
(a)            A participant or beneficiary of an employee benefit plan that the producer administers or sponsors or for which the insurance producer acts as a trustee, insurer, or fiduciary;
(b)            Covered by a group or blanket insurance policy or group annuity contract sold, solicited or negotiated by the insurance producer or affiliate; or
(c)           A claimant under a workers’ compensation law.
3.         “Documented acknowledgement” means the customer’s written consent obtained prior to the customer’s purchase of insurance or, in the case of a purchase over the telephone or electronic means, consent documented by the producer followed by the customer’s written consent.

Drafting Note:             States that are considering the licensing of business entities should reference subsection 6B of the NAIC’s Producer Licensing Model Act and the Uniform Application for Business Entity License/Registration, which address the licensing of a business entity acting as an insurance producer.

Drafting Note:             The provisions of this section shall not apply to an insurance producer or any business entity related to such producer that accepts or receives only a nominal fee from the insured.

Drafting Note:                       The provisions of this section shall not apply to a person licensed as an insurance producer who acts only as an intermediary between an insurer and the customer’s producer, for example, a managing general agent or wholesale broker.



Thank you again for this opportunity to offer comments. We would welcome the opportunity to provide any additional information that would be helpful to you in your endeavor to produce a meaningful model.