One could argue that virtually everything one does, and does not do, influences thinking and decisions, so where are the boundaries?
By Linda Koco
A few state insurance regulators are continuing to push for increased disclosure of annuity agent commissions.
That became clear during a very brief exchange at a phone conference of state insurance regulators and industry experts last week. So did awareness that commission disclosure remains a dicey topic to broach.
The session had been called to continue revising the old Annuity Buyer’s Guide from National Association of Insurance Commissioners (NAIC).
It was a work session, with regulators and industry representatives going through the draft section by section, deciding on what to say here and say there. Then one of the participants pointed out that the California Department of Insurance had sent in some suggested revisions, too.
One of those suggestions turned out to be a proposal to amend a sentence on commission disclosure that had seemed to be squared away. Specifically, California Senior Staff Counsel Jodi S. Lerner had written, in a comment letter, that the sentence should say: “You [the consumer] have a right to ask how much the individual selling you the annuity will earn from the sale."
In addition, Learner wrote, “I also suggest raising this as a question in [the] section [of the Buyer’s Guide] titled ‘What Questions Should I Discuss with the Annuity Salesperson?’”
Her explanation: “Disclosure of this information is beneficial to consumers,” Learner wrote.
Those were simple enough words, but within a matter of seconds, Kim O'Brien, executive director for National Association of Fixed Annuities, objected. So did Gary Sanders, vice president of securities and state government relations, for National Association of Insurance and Financial Advisors.
The current version of the document does disclose that annuity sales persons do typically earn money from the sale of an annuity and that the buyer can ask about how this happens, O’Brien pointed out.
But both O’Brien and Sanders opposed seeing the question that California suggested being added to the question list. They didn’t elaborate. They just said “no.”
Their objection is understandable. Such a question would encourage annuity buyers to ask the agent, point blank, how much money the agent would make from the sale. Proposals to allow this have been a sore point among insurance agents for several years, especially among agents who work primarily on commission.
Many of these agents do not believe their customers have the “right”—in the sense of a legal right—to ask. Some also maintain that giving out “the number” will confuse the client, take the focus of discussing insurance protection needs, and provide clients with information that most don’t want anyhow. Others resent the not-so-veiled implication that, by working on commission, they are hoodwinking consumers into buying products that pay the most commission, even when other products would do the job as well or even better.
On the other hand, some insurance advisors have told InsuranceNewsNet that they don’t mind disclosing what they make from insurance commissions. These tend to be dual-licensed advisors. They work on both fee and commission, often through a registered investment advisory firm. They figure that since they disclose their fees anyhow, disclosing insurance comp is just part of their business model. They resent critics who say that their business model makes it so that they gravitate towards serving only higher net worth individuals, leaving mid-market customers who can’t afford high fees in the dust.
Keeping equilibrium between these opposing views will be a challenge for regulators and industry, as everyone seeks to find a common ground that is fertile for all concerned.
To date, New York is the only state that has moved to bridge the divide. Two years ago, it implemented New York Regulation 194 on Producer Compensation Transparency, a regulation that requires insurance producers to provide consumers with compensation disclosure information.
It defines compensation as “anything of value, including money, credits, loans, interest on premium, forgiveness of principal or interest, trips, prizes or gifts, whether paid as commission or otherwise.”
This regulation does not say that consumers have a “right” to learn how much money the sales agent makes from an insurance sale. But it does require the producer to provide disclosure regarding compensation in a proscribed manner.
For instance, Regulation 194 says “…the purchaser may obtain information about the compensation expected to be received by the producer based in whole or in part on the sale…by requesting such information from the producer.”
If the buyer wants to have more detail before policy issue, Regulation 194 says the producer shall disclose “a description of the nature, amount and source of any compensation to be received by the producer….” There is a lot more to it than this, but that’s the gist.
Must a producer in New York initially disclose how much compensation the producer will be paid for the sale of the policy? No, says the New York State Department of Financial Services in a Frequently Asked Questions section of its website. A producer “need only disclose the amount of the compensation if the purchaser asks for additional information.”
By the way, this regulation did not go into effect without a fight. The Independent Insurance Agents and Brokers of New York, the Council of Insurance Brokers of Greater NY, and some insurance agencies, did challenge it, but the State Supreme Court in Albany upheld it, and then, last March, the New York State Supreme Court Appellate Division upheld the lower court’s ruling.
Current Buyer’s Guide language
What about the Buyer’s Guide pointer on agent disclosure and commissions? Here is the current language:
“Insurance companies usually pay the annuity salesperson after the sale but the payment doesn’t reduce the amount that goes into the annuity. You also can ask your salesperson how s/he earns money from the sale.”
The NAIC Annuity Disclosure (A) Working Group will have another conference call on March 5 to comb over the entire document, so this and many other sections of the document could change. It’s all part of the process of bridging that divide.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at firstname.lastname@example.org.
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