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Under the Dome by Joel WoodValue Abated

When is a value-added service a rebate? When outdated, protectionist laws say it is. What happened to competitive markets?

By Joel Wood

When the presidential candidates of both parties extol an agenda of radical, new, federal programs but promise “middle class tax relief,” hold on to your wallets. Similarly, when industry folks offer impassioned defenses of state insurance regulation, take it with a grain of salt. “Protecting insurance consumers” is often code for protectionism. 

Of course, the state-versus-federal debate has two legitimate sides. With the scheduled reintroduction of the Optional Federal Charter (OFC) legislation authored by Sens. Tim Johnson, D-S.D., and John Sununu, R-N.H., the debate is becoming more polarized over the appropriate boundaries of state regulation. State insurance commissioners strive to serve the interests of policyholders, and they are justly concerned about a loss of economic power should an OFC be created. But many of the laws the state commissioners enforce were erected by agents and companies not to protect consumers, but to protect smaller industry players against bigger ones. The result is economic inefficiency and higher costs for buyers. 

I am a veteran of the old banks-in-insurance debate. I drank the Kool-Aid, believing for years that banks would have unjust advantages and deny consumer choice. Today, not only are some of the country’s greatest brokerages housed in banks, but their competition and appetite for growth has increased the value of every significant independent agency or brokerage out there. The banks-in-insurance debate wasn’t about a “level playing field,” it was about agents trying to protect themselves from competition.

Not long ago, I saw yet another demand for a countersignature fee of 5% of premium from a Nevada agent. The producer of the account, a Council member in Texas, wrote me, “didn’t we get rid of all these laws?” Yes, after spending millions of legal dollars and years of time, we’ve won all the decisions, but the Nevada final ruling still hasn’t arrived. Local agent groups erected countersignature rules in the name of assuring policyholder protection. In reality, agents were protecting themselves from competition.

I recently visited a Council member firm in the South, a sophisticated and successful national firm. Their biggest problem at the moment is defending themselves from regulatory action for alleged violations of an anti-rebating statute. Their crime?  Providing COBRA administration services to group benefits clients. A value-added service to make their customers happy? Not according to the anti-rebating statutes, at least in the minds of some agents. In their world, if it isn’t enumerated in the policy, it’s an unlawful rebate. 

What possible public service is performed by perpetuating such statutes? Defenders disparagingly call such services “kickbacks” to the clients. Over the years, referenda in various jurisdictions have sought to eliminate anti-rebate statutes, but state agent groups have successfully defeated them with the kickback mantra.

What is the economic model—it certainly isn’t capitalism—that says that providing goods and services to clients that not explicitly enumerated in a carrier’s policy form is a kickback? Those who argue for this interpretation of the anti-rebate laws are simply trying to protect themselves from competition.

The Florida Surplus Lines Association has objected to provisions in the Council-backed “Nonadmitted and Reinsurance Reform Act.” This legislation passed in the House last year and under debate in Congress this year, would clear up the intolerable mess regarding access to surplus lines on a multi-state basis. The bill would clarify that the only rules that apply (regarding, licensing, declinations, eligibility and premium tax allocations) are those of the state in which the insurance is placed. The practical effect of this legislation is that states would finally find the incentive to develop an interstate compact regarding premium tax allocation, and the whole surplus lines world would be a better place, with savings to buyers.

Even the National Association of Insurance Commissioners has said good things about this bill, knowing of the decades of failed efforts to create a harmonious regime of surplus lines regulations. (In fairness, it’s hard to fault the states when there is no political imperative to coordinate.)

But apparently Florida’s association believes that such legislation would “undermine the small independent wholesaler” whose livelihoods are built upon the current inefficient and fragmented state-by-state system. Protecting jobs in state stamping offices shouldn’t be anybody’s economic priority. Opponents of this bill are trying to protect themselves from competition.

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