There has been much discussion and debate about insurance producer compensation in Louisiana over since August of last year. The scope of this article is to alert the reader to the overall issues and to identify some of the current activity that may effect insurance producer compensation.
On August 9, 2010, Louisiana Commissioner of Insurance, James J. "Jim" Donelon signed two promulgations, Advisory Letter No. 2010-01 ("Advisory Letter") and Bulletin No. 2010-05 ("Bulletin"). The Advisory Letter deals with producer compensation and was addressed to all insurers, brokers and producers. The Bulletin deals with rebating and inducements and was addressed to all brokers and producers selling accident and health insurance.
The Advisory Letter interprets several provisions of the Louisiana Insurance Code to set forth the position of the Louisiana Department of Insurance ("LDI") with regard to flat fee arrangements and quotes net of commission. While the statutes that are cited in the Advisory Letter have been in effect for years, the interpretation of them as set forth in the Advisory Letter is res nova.
First, the Advisory Letter states that an insurer shall use one rating scheme, if required to file rates, that establishes either a commission based on a percentage of the premium or a commission based upon a flat fee. A compensation scheme that would provide both a flat fee and a percentage based on the amount of premium would be prohibited based upon the wording of the Advisory Letter.
Second, it is stated that an insurer, producer or broker shall not quote a premium that is "net of commission." The term insurer is interpreted to include both admitted insurers and approved unauthorized insurers (surplus lines insurers). To support the stated provision, the LDI relies upon La. R.S. 22:855(A) which states in pertinent part "[t]he premium quoted by the insurer shall be a specific dollar amount which shall be inclusive of all fees, charges, premiums, or other consideration charged for the insurance or for the procurement thereof ...."
Many insurance producers with large commercial accounts have historically negotiated the amount of their compensation with their customers in lieu of receiving compensation from the insurer. As this common practice is prohibited by the Advisory Letter, there is an effort underway to seek a statutory exemption for certain commercial transactions. There are two bills pending in the current legislative session that address producer compensation, HB 137 and SB 96. The two legislative bills are similar in that they both create new sections within the Louisiana Insurance Code that permit an insurance producer and a property and casualty insurer to negotiate any combination of commissions and fees to compensate the insurance producer for the placement of commercial property and casualty insurance coverages if the policyholder meets anyone of the following criteria: (1) has total property and casualty insurance premiums in excess of five hundred thousand dollars; (2) obtains insurance coverage with a per occurrence or per claim deductible or self-insured retention of fifty thousand dollars or more for worker's compensation, general liability, or automobile insurance coverages; (3) has a net worth in excess of twenty-five million dollars; or (4) qualifies as a self-insurer with the state of Louisiana. SB 96 provides for a fifth qualifying criteria for a governmental entity that had a contract prior to August 9, 2010 with an insurance producer on a stipulated fee basis for the placement of commercial property and casualty insurance coverages.
The Bulletin, on the other hand, provides guidance and clarification as to the services often referred to as "value added" services that may be provided to insureds or potential insureds without running afoul of the rebating and inducement provisions set forth in the Louisiana Insurance Code. In addition, certain services not specified in the insurance policy if provided by an insurance broker or producer to an insured or prospective insured for free or at less than cost may run afoul of the rebating and inducement prohibitions. Such services include, but are not limited to, COBRA administration, payroll processing, developing of employee handbooks, providing human resource software, risk management or loss control services, and legal services.
Unlike the Advisory Letter, the Bulletin appears to be well received by all in the industry as it establishes a level playing field as to what services may be provided and which services may not be provided by insurance producers.
It should be noted that even though La. R.S. 22:855 which is the basis for the prohibition of quotes "net of commission" specifically excludes life, accident, health, and reinsurance policies, some within the LDI consider that the quoting of a health insurance policy "net of commission" violates the statutory provisions prohibiting rebating and inducements.
Aetna recently submitted notice to the LDI of its intent to no longer pay base commissions or any other form of compensation that is a component of premium. Instead Aetna proposed to transition to a direct, service fee model under which the customer would compensate the producer directly. In response to the notice, the LDI replied that the proposed changes in producer compensation were denied and directed Aetna to advise its producers that the proposed producer compensation plan would not be implemented. The basis for the denial was the LDI's interpretation of La. R.S. 22:34 as requiring that the insurer must ensure that each potential insured is given the same quoted premium from each of its appointed producers. The definition of "premium" as set forth in La. R.S. 46(13) is strictly interpreted as including all sums charged, received, or deposited as consideration for the purchase or continuance of insurance for a definitely stated term. In other words, producer compensation is to be included in the calculation of premium.
The LDI has been gracious with its time in accommodating numerous meetings and discussions on the scope of the Advisory Letter and the Bulletin. Commissioner Donelon himself has been attentive to the issues and has welcomed input from anyone who wanted to voice a position. The debate on the two legislative bills has not yet commenced; however, a resolution should be forthcoming as the session must end no later than June 23rd. Stay tuned for further developments.