U.S. regulators draft model for broker compensation

U.S. insurance regulators have devised a draft of model legislation for broker disclosure of compensation.
The National Association of Insurance Commissioners (NAIC) had formed a task force in response to the investigations sparked by New York Attorney General Eliot Spitzer into broker compensation practices and the potential for conflict of interest in contingent commissions. A Senate subcommittee is this week holding hearings on the issue, and attorneys general and insurance departments in several states have launched their own investigations.
The NAIC draft model calls not for a ban on contingent commissions, but formalizes rules for disclosure of compensation agreements between brokers and insurers. The legislation would be handled as an amendment to the NAIC’s “Producer Licensing Model Act”.
“With this draft language, we are addressing disclosure of compensation in a two-part framework: disclosures triggered when a broker receives compensation from the insured and insurer, and disclosures required by all insurance producers,” says NAIC president and Pennsylvania insurance commissioner Diane Koken.
The model requires brokers to disclose compensation and the means by which it is calculated, as well as to obtain written consent from insureds prior to receiving compensation from insurers for a transaction. Because contingent commissions are not always known at the time of sale (for example, they might be paid on an annual basis based on loss performance of an entire book of business or overall volume of business) the model allows for brokers to provide a best estimate of the amount along with the method of calculating commission in this case.
The NAIC plans to elicit public comment on the draft at its December 4 meeting in New Orleans, with the hope of adopting model language by the end of the year.
The NAIC will also continue to look into alleged improper conduct by brokers, and will pursue development of a new online fraud reporting system.