Can Insurance Agents Share Commissions with Insureds who Buy a Policy?
As an insurance agent, you should be extremely careful with gift-giving when it comes to prospects and customers. Offering something of value to a client or prospect can cause you to violate anti-rebating laws in your state. As a result, this can get you a hefty fine from your state’s insurance department.
In this article we’ll discuss what rebating is and how to avoid it. You can expect multiple questions on your state insurance exam on the topic of ethics, and rebating will almost certainly come up.
In 1887 Massachusetts was the very first state to pass an anti-rebating law. New York followed that example two years later with an “anti-discrimination” statute, barring discrimination between customers of the same “actuarial class.” Ten states had passed similar laws within ten years of those first laws. By the early 1900s, just about every state had an anti-rebate law on the books. These laws were in large part enacted in response to the common practice at the time for life insurance agents to pay rebates to induce sales. The practice generally led to insurance agents asking for higher commissions to make up for the rebates. Ultimately it raised the question of whether it resulted in unfair discrimination, as the rebates were not offered consistently to all clients—resulting in the cascade of anti-rebating regulations we see today.
Though you’re no doubt learning about rebating in insurance school, it won’t hurt to review some of the important ideas. What are rebates exactly? Insurance regulators consider rebating to be the giving of value to a customer or prospect relating to an insurance purchase. All of the following, for example, would be considered a rebate in many states:
Returning commissions to the insurance purchaser
Gifts intended to encourage someone to purchase insurance
Premium payment on a prospect’s behalf by an agent
Offering free insurance conditioned on the buying of insurance.
Insurance regulators will usually look at anything an agent introduces into the process of purchasing insurance that isn’t already in the contract as an inducement or rebate. But what’s the difference between a rebate and inducement? Rebating involves the return of part of an individual’s insurance premium after the policy is sold. An inducement, on the other hand, is providing something of value in order to encourage the individual to buy. In both cases, insurance regulators enforce anti-rebating laws in order to establish an equal opportunity for all agents and insurance companies and to make sure that customers receive the same policy terms.
But how do you know when you’re in violations of a state’s anti-rebating laws?
Are you allowing, paying for, giving, or providing anything of value that isn’t clearly outlined in the contract of insurance?
And would a prospect likely purchase insurance on that basis?
Is the value you’re offering a reward to your existing clients?
Is the value you’re offering not related to the insurance purchase?
Although an answer of “yes” would suggest a violation, this isn’t always the case. Two states—California and Florida, as of this writing—don’t forbid rebating. As an example, in the State of Florida, you can provide a rebate to a client so long as you do it for all clients. Likewise, California agents can rebate as long as the insurance carrier permits it.
With the Florida and California examples in mind, many opponents of the anti-rebating laws argue that the current regulations are outdated, leaving little room for innovation in the staid insurance business. Because of the limitations forced upon agents by these laws, opponents argue that they prevent insurance brokers from being able to compete in a free market.
After all, the practice of rebating in the consumer goods sector is a widely-used competitive strategy, for both retailers and manufacturers. Why not insurance?
While the reasons why are really beyond the scope of this article, it’s food for thought nonetheless.
Use the following insurance exam test tips as guidance:
Even if the amounts are small, do not make offers of cash or cash equivalents. Any cash payments are likely to get you in trouble.
Check with your state’s insurance department about giving away items to attract customers. These are frequently allowed, especially if there is a company logo on the item, such as golf balls or keychains.
Do not condition an offer on the purchase of insurance. That’s a red flag to regulators.
Here’s the bottom line for insurance producers if you’re looking for insurance exam secrets: Think twice when you are tempted to give a gift to a prospect or customer in order to make a sale. Be sure to review your state’s anti-rebating laws before moving forward with your agency’s latest sales promotion, as all insurance departments view this issue differently.