Insurance Commission Rebates at Issue
Just how much is your insurance agent worth to you? That question is at the heart of a soon-to-be-decided legal battle between big insurance companies and a handful of California insurance agents who want to rebate their commissions openly.
If the issue is ultimately decided in favor of the insurers, rebates could be much more difficult to find--eliminated by law or in practice. If it’s decided in favor of the agents, California will gain a greater reputation as an oasis where Americans can get what amounts to cut-rate insurance.
For life insurance customers, millions of dollars hang in the balance.
Although some people have quietly been getting rebates from their agents, many do not realize this is possible. Most of their first-year life insurance premium is paid to the agent--not the company that insures them. Agent commissions generally range between 50% and 100% of the first-year premium, depending on the company and the type of life coverage purchased.
Technically, California agents can rebate commissions on any type of insurance, including auto and homeowners coverage, but commission rates on types other than life are usually less. They range from about 50% on disability coverage to as little as 10% on some medical and property policies. With narrower margins, fewer health and property insurance agents are willing to offer rebates.
With life insurance, the commissions are fat. Roughly $700 of a $1,000 first-year premium for a term insurance policy would go to the agent, says Mark White, president of Direct Insurance Services in San Diego. On a whole life policy, $900 of that $1,000 first-year premium would generally go to the agent, he adds.
(Commission rates vary from company to company, but these are representative of first-year commissions on an average policy. Smaller commissions, ranging from 1% to 5%, are paid on renewed business as well, but renewal commissions are rarely rebated.)
As a result, many California life insurance agents are willing to rebate as much as 75% of their first-year commissions. But finding an agent willing to do so is tougher than finding a speak-easy during Prohibition. Commission rebates, though legal, are kept secret. You generally have to ask--or be referred to a rebating agent by a savvy insider--to get one.
For example, Peter Katt, a Michigan-based fee-only insurance salesman, sends many of his high-end clients to a cooperative California agent. But he’ll give you that agent’s name and address only when you’re ready to fly out to California and sign on the dotted line.
Meanwhile, experts estimate that between 15% and 25% of the life insurance agents in California offer rebates, but only one--White--agreed to be identified and quoted in public hearings in San Diego.
Why all the secrecy?
Agents who openly rebate commissions suddenly find themselves unable to write insurance for many of the biggest companies, such as Prudential, Metropolitan Life Insurance and New York Life, regulators say. That’s because these and other insurers have contractual agreements with the agents that say, essentially, that independent insurance agents can write their policies as long as they don’t get on the companies’ nerves. Otherwise, the company can terminate the agent.
The ability to “sever appointments”--stop the agent from writing insurance with your company--is important for dealing with unscrupulous agents who falsify policyholders and claims. But it is also used against law-abiding agents who rebate their own commissions.
“Agents are very concerned about retaliation,” says Bill Ahern, deputy commissioner for rate regulation with the California Department of Insurance. “Based on the Mark White case, they appear to have good cause.” White was barred from doing business with several big insurers because he openly offers rebates.
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Why do insurance companies care whether agents rebate? The money, after all, comes out of the agent’s pocket, not the insurer’s.
The official industry arguments from the American Council of Life Insurance boil down to concerns that people will buy the wrong policy just because of a rebate, that most rebates will go to people buying big policies, and that there is a risk of problems and abuses similar to those that occurred when rebates were last common at the turn of the century.
Many insurers privately acknowledge that these public arguments are bunk.
In reality, most reputable insurers don’t object to the rebates; their agents do. After spending three hours in your kitchen hounding you about your life insurance needs, the last thing an agent wants to hear is, “Just how much are you making on this?” If rebates became commonplace--and common knowledge--that uncomfortable question will come up more and more often.
Moreover, if California agents could advertise the availability of rebates in other states, savvy insurance consumers everywhere would be dumping their local agents and booking flights to the rebate state. Out-of-state residents can buy policies in California--regardless of their own states’ anti-rebating laws--as long as they’re in California when they sign the contract.
As a result, agents have kept pressure on companies to pressure agents not to rebate. Many companies, which would rather sell insurance than squabble, have an unwritten “don’t ask, don’t tell” policy. Agents can rebate as long as they do it quietly enough so competitors don’t squawk.
In the next few months, California Insurance Commissioner John Garamendi will decide whether rebating agents should be able to come out of the closet. To do that, he’d have to rule that companies cannot sever appointments solely because of an agent’s rebates.
Even though Garamendi has publicly stated that he favors rebates, supporting them would be difficult, given the legal and political firepower insurers have marshaled in the fight.
Garamendi is encouraging public comment. Consumers may write to Bill Ahern, deputy commissioner for rate regulation, California Department of Insurance, 45 Fremont St., San Francisco, CA 94105.
