To the Point

By Joseph S. Harrington, CPCU

REVISITING REBATES

New risk technologies force review of long-standing prohibitions

In the R Street Institute’s R Street Shorts No. 8,  Ian Adams writes, “If giving away a service that is completely incidental to an insurance transaction is deemed illegal, then in a market of increasingly intertwined services, firms essentially are barred from offering insurance and non-insurance products simultaneously.”

Did you get that? Do you have a problem with it? Adams does.

Adams, R Street Institute’s western region director, is among the growing number of voices calling for reform or repeal of state laws barring rebates and other forms of non-insurance consideration from insurance transactions.

[A]s a growing range of services and pricing options are combined into coverage packages, … insurance products may become as complicated and difficult to compare as cell phone plans.

Since the late 19th century, states have banned the use of premium rebates and other inducements for purchasing insurance. The bans were imposed to prevent buyers from sacrificing long-term reliability for short-term rewards, and to prevent insurers from discriminating unfairly in extending rebates and other benefits.

Anti-rebating laws have recently come under the spotlight as carriers, brokers, and technology firms argue that the bans are no longer necessary, thanks to solvency regulation and anti-discrimination laws, and that they impede the adoption of new risk technologies into insurance product offerings.

Innovation and expectations

“The marketplace is demanding simpler and more innovative insurance solutions,” said the American Property Casualty Insurance Association (APCIA), a leading association of P-C carriers, in a statement to a task force of the National Association of Insurance Commissioners (NAIC) that is considering a revision of the NAIC’s model anti-rebate law. “[This includes] the combination of insurance products with non-insurance products and services in a single offering.”

By “non-insurance products,” APCIA primarily means electronic monitors and sensors installed in buildings and vehicles and worn on the person. These devices are intended to help policyholders understand their own risks and provide insurers risk-related data through the Internet of Things (IoT).

More generally, APCIA says the ability to provide ancillary services along with insurance responds to consumer expectations for fast access to services unencumbered by outdated restrictions. “Customer experience is even more than before the battleground for differentiation and competitive success,” the group said in its statement.

On that score, the Council of Insurance Agents and Brokers (CIAB), whose members serve mostly large commercial accounts, champions outright elimination of anti-rebating laws in commercial lines.

“What purpose do anti-rebating laws play in today’s commercial insurance environment?” asked John P. Fielding, the CIAB’s general counsel, in his remarks to the NAIC committee.

“[Anti-rebating laws] certainly do not help commercial policyholders,” Fielding continued. “[Buyers] would love to be able to negotiate the ultimate cost of their insurance and the services they wish to purchase from their broker.” Among those services, said Fielding, are services related to loss control, claims, human resources, and data analytics.

No simple matter

Producers, however, are split over the matter of rebating and related practices.

While the CIAB believes anti-rebating laws have outlived their usefulness, at least in commercial lines, the Independent Insurance Agents and Brokers of America (IIABA) cautions in written testimony to the NAIC Innovation and Technology Task Force that “there is nothing occurring that requires or justifies a significant paradigm change.”

While agreeing that certain reforms are advisable, Wesley Bissett, the IIABA’s senior counsel of government affairs, told the NAIC group that “radical revisions to the statutory framework governing rebates and inducements are not warranted or appropriate.”

As it is, those seeking reform stand a good chance of attracting support for two of their goals:

• More consistency from state to state in defining what is appropriate and inappropriate consideration for an insurance purchase, and greater consistency in enforcing the distinction
• Recognition of the need to allow incorporation of risk monitoring devices and loss control services into insurance products and pricing, provided the devices and services address the risks insured under the policy

Beyond that, agents and brokers are wise to be wary about “offering insurance and non-insurance products simultaneously,” to quote Ian Adams’s line at the outset of this post.

As long as value-added services are as simple as a discount for a vehicle telematics device, producers can comprehend and communicate the value comfortably.

But as a growing range of services and pricing options are combined into coverage packages, producers face the prospect that insurance products may become as complicated and difficult to compare as cell phone plans. How’s that for your E&O exposure?

In the contract?

If there’s one issue in the “rebate debate” that agents and brokers should pay attention to, it’s the question of whether all conditions and consideration in an insurance transaction should be expressed in the policy contract.

Currently, state rebating laws allow latitude for non-insurance consideration in insurance transactions so long as that consideration is expressed in the policy. To those who want flexibility in providing ancillary services, this is a burdensome requirement, especially for admitted carriers that have to file their forms and rating plans with regulators.

To other producers, however, it matters whether what they sell is fixed in a contract, which they are reasonably expected to understand, or dependent on the operation of non-contractual services, which can evolve and perform outside their purview.

Some producers, like those represented by the CIAB, relish the opportunity to enhance their value as risk counselors by helping clients understand complex coverage options with leading-edge risk management features.

Few will argue with that, but others will still want to emphasize and maintain a clear distinction between the insurance policies they stand behind and services they don’t control.

The author

Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.

This article first appeared in the Rough Notes Coverage Concerns newsletter.