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Under the Dome by Joel WoodNo Your Client

When you can’t even give your client a calendar, you know anti-rebating laws are no longer about consumer protection, but industry protectionism.

By Joel Wood

The soft property-casualty market is putting pressure on the benefits divisions of brokers to pick up the slack, and from all of the empirical data, they have been doing so. But the shackles of protectionist insurance regulation—particularly in the area of anti-rebate statutes—don’t make it easy to compete.

In recent months, I’ve visited with benefits executives of two large Council member firms, both successful and growing. One of the executives told me about the tens of thousands of dollars in legal bills and distractions associated with a complaint against his firm lodged by a competitor on the basis that the COBRA administration services provided to clients violates their state’s anti-rebate statute.

An executive at another firm told me that they so strictly comply with anti-rebate laws that they won’t provide COBRA services or anything else that could be construed as an “inducement.” He shook his head at the competitive inequality that results from the handcuffs with which they’ve shackled themselves in the name of perfect compliance.

Anti-rebate statutes are a barrier to free and open competition and are inconsistent with the emerging sophistication and convergence of the commercial brokerage industry. Firms should be free to develop and provide newer and better services for clients, especially in the benefits arena. As it stands now, however, agents can use the club of anti-rebate laws, enforced by state insurance commissioners, to protect themselves from more efficient competition.

Google the term “insurance anti-rebating” and you’ll get a slew of interpretive letters by state commissioners answering questions such as this: “May a licensed insurance producer provide to a prospective insured a calendar, which can be downloaded on a computer, containing the producer’s name and contact information?” The answer to this question for a group health insurance broker in New York is no. It is a promotional discount banned by the New York anti-rebate law. Next question: “May an insurance agent or an insurer rebate certificates for the installation of alarm systems to homeowners insurance policyholders?” You know the answer—no.

Is this what our forefathers had in mind when they erected a market system wherein pricing is arranged by the mutual consent of buyers and sellers?

Anti-rebate laws have a tortured history. Complicated today by the fee-versus-commission, agent-versus-consultant/broker blurring of lines, they are exacerbated by differing interpretations from jurisdiction to jurisdiction. The early history of anti-rebating laws was understandable and defensible. Rebating was widely practiced in the late 19th century and early 20th century, as the life insurance industry exploded with growth. The well-known Armstrong Commission of the 1906 New York Legislature focused attention on a variety of unfair and deceptive practices, including rebating, high-pressure sales, self-dealing by insurers, false representations and excessive commissions.

“Rebating gradually became perceived as an evil that led to inequality and discrimination between applicants and was therefore considered a threat to the integrity of the insurance business,” said the Alaska attorney general in 1996. “Consequently, insurance regulators acting in the public interest sought to prohibit rebating.”

The interpretation of what constitutes rebating varies from state to state, but the rebating practice of returning part of a commission to a prospective client is banned in all states except California and Florida. Most states adhere to the view that rebating is a form of price discrimination wherein all policyholders in the same actuarial pool may not receive the extra-contractual incentives. And the policy concern is that rebating encourages insurer insolvency by effectively discounting premiums.

Consumer activists say that’s hooey. “By preventing competition, companies could avoid unpredictable agent behavior in return for legally price-fixing the commission at higher-than-market levels,” says Ralph Nader. “It has been a cushy arrangement for both companies and agencies as they otherwise pledge their allegiance to free enterprise and against government regulation.” Unlike other service industries, he says, anti-rebate laws are a “regulatory welfare handout to protect [agents] from the rigors of the uncouth marketplace.”

Nader has a point. There are completely different compensation arrangements for different forms of insurance (e.g., title insurance and whole life policies), and I suppose I could argue for or against Nader on a product-by-product basis. But if the idea behind anti-rebate laws is to protect against insolvency—the highest calling of insurance regulation—it is indefensible to suggest that providing COBRA administration benefits, or allowing clients’ employees to electronically access information for their employee benefits, in any way undermines the solvency of a carrier. And banning the provision of a calendar for a client or a coupon for a fire alarm? Give me a break.

Producer compensation has an extremely high profile today, but negotiation between producers and clients is constrained by anti-rebate laws and their lack of clarity and regulatory guidance. Anti-rebate laws may not be the “price-fixing” that Nader declares them to be, but they are an anachronism. Like licensing laws, surplus lines laws and countersignature laws, they are rooted in unjustifiable protectionism.

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