Rebating Reform: Free at Last?

Could the “No Action Is Contemplated” NAIC (also known as the National Association of Insurance Commissioners) be changing its M.O.?

Might we be seeing a shift in the regulators’ approach from their traditionally slow and deliberative style to one that more closely reflects some, well, resolve?

With apologies to the late Dr. Martin Luther King Jr., the regulators seem to be feeling the “fierce urgency of now” as they have turned their attention to potential reform of anti-rebating laws.

Every state except for California and Florida currently prohibits insurers and insurance producers from reducing premiums or providing free services or other “valuable consideration” as an “inducement” for the purchase of insurance unless such “rebate” is specified in the insurance policy itself. These anti-rebating laws are nearly identical across the country and are based on model language from the NAIC.

These state rebating prohibitions have been on the books for decades and originally were conceived as a life insurer solvency protection mechanism. These rules have become particularly problematic for Council members, and reform or elimination of the anti-rebating regime has now been a priority for decades.

Not only is interpretation and enforcement of the rules inconsistent and uneven from state to state, but the entire framework fundamentally undermines the ability of insurance producers and their clients to freely negotiate the contractual terms (both the products/services that will be offered and the economic terms under which they will be offered) of their relationships.

Commercial consumers today demand more than they did in the 19th century or in 1947, when the NAIC adopted the current version of the anti-rebating rule. And technology is enabling commercial brokers, among many other market players, to offer new products and services to address those demands in new and more innovative ways.

Insurance does not exist in a vacuum—brokers and other market players can provide other products and services that their clients want and need, products and services that may be connected to the insurance product (risk management, for example), as well as products and services that might not be considered directly related but that still may be part of the same holistic ecosystem (human resources services, for example).

Unfortunately, under the current state anti-rebating regime, producers are largely prohibited from negotiating compensation and services in connection with an insurance placement. An added regulatory oddity here is that producers are required (in many cases) to disclose commission information to commercial clients but then are prohibited from negotiating it. In other words, for commission clients, producers are required to operate largely on a “take it or leave it” basis, with no ability to tailor or negotiate compensation and services with their clients.

Tech’s Driving Force

The regulators have become more cognizant of these competing factors and are (finally) responding by reexamining their utility and whether reform is in order. As we’ve noted in previous columns, the NAIC and state regulators are increasingly interested in the impact of technology on the insurance marketplace and consumers and on their own regulatory approaches in light of the market’s evolution. Rebating has emerged as an important issue in the regulators’ discussions about technology because of the ways in which rebating prohibitions inhibit—or might inhibit—development of new products and services for insurance consumers.

The NAIC’s Innovation and Technology Task Force spearheads the regulators’ efforts in the space. North Dakota Commissioner Jon Godfread has been the driving force behind the group’s dive into rebating reform. Under Godfread’s leadership, they’ve held several open sessions to take public comment and have accepted written comments as well. The Council has testified twice on the issue and submitted a written statement.

At their most recent meeting, in New York in August, the regulators took two important steps. First, they issued for public comment a draft “guideline” for compliance with the states’ vague statutory language. Similar to guidance issued in some of the states, the draft guidance is limited to products and services offered in connection with an insurance policy. This is not as broad as many in the industry—including The Council—would like, and we will press for changes. Having said that, adoption of a draft guideline is seen as a temporary step as the regulators work toward a more permanent fix: amending the rebating prohibition in the model Unfair Trade Practices Act (and ultimately in the states’ laws).

At the same time that the NAIC is working on its rebating reform efforts, state legislators are following suit through their national organization, the National Conference of Insurance Legislators (NCOIL). Like the NAIC, NCOIL has held a number of meetings on rebating reform and intends to discuss model law language at its meeting later this year. Although the two organizations are working independently, we are working through both processes in an effort to have them issue similar recommendations so that we maximize the probability that we might be able to achieve uniform reform nationwide.

For the record, The Council’s position on rebating reform is clear (and has been made clearly to the regulators and legislators): rebating prohibitions in the commercial insurance marketplace should be repealed. Rebating prohibitions do not help commercial policyholders, who should be able to negotiate the ultimate cost of their insurance and the services they wish to purchase from their broker, just as they do with their other service providers and business partners. Rebating prohibitions also cost brokers opportunities to provide their commercial clients with the best products and services at the best prices. They add compliance-related costs that are ultimately borne by consumers. Simply put, they do not make sense in today’s commercial insurance marketplace because they are not needed to protect sophisticated business consumers that want to get the best product and services for the best price but are unable to under today’s regulatory structure.

Perhaps we have now embarked on a journey that—at least with respect to the artificial anti-rebating restrictions on our ability to contract with our clients—might make us…free at last.