The insurance industry is a highly competitive one that has created a lot of cross-carrier savings offers in order to win new business and customers from other insurance carriers. Up until this current time, customers have grown to expect various savings and incentives to sign up with certain insurance providers. The highly competitive environment has compromised the stability of the insurers. With the passing of the Model Act (Act Relating to Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance), insurance rebating, which is the most common type of incentive, was disallowed.
Insurance rebating is a practice wherein something of value is provided to lure a prospective buyer into purchasing insurance. An example of insurance rebate is when a buyer receives a refund for all or part of the commission for the sale. The rebate can take the form of cash, services, gifts, employment, or anything else of value.
The Model Act
Rebating is considered an unfair practice in the insurance industry. The National Association of Insurance Commissions created the “Model Act” in order to stop insurance agents, brokers, and companies from offering this incentive. The act also stops consumers from accepting such incentives in some states.
The Model Act holds the view that insurance rebates is a type of price discrimination because not all policy holders receive the same benefits. However, the main premise of the law is that insurance rebates increases the risk of insurer insolvency by essentially discounting premiums. The practice of returning an agent’s commission to a prospective buyer is prohibited in all states except California and Florida.
The Case of California and Florida
All states with the exception of two – Florida and California – disallow agents from returning part of all of their commissions to their customers. A lower court of California has initially found in favor of anti-rebating. However, this decision was later rendered moot by the California Supreme Court, which found that insurance rebating is a valid practice.
Meanwhile, the Florida Supreme Court judged that restricting insurance rebates hinders competitive pricing. Although it acknowledges that the state has the duty to protect insurers against insolvency, the court does not believe that this cause is helped by implementing anti-rebates statutes.
Types of Insurance
The Model Act only covers certain types of insurance, including the following:
- Accident Insurance
- Life Insurance
- Health Insurance
Many states have expanded the Model Act to include anti-rebating statutes into other types of insurance policies. However, it is important to research and know the individual laws in each state to ensure full compliance due to varying regulations from state to state. Please note that some states have created a provision that allows an individual or an entity (not licensed in the state) to receive override commission for the insurance sales, as long as the payment does not violate the rebating laws of the issuing state.
The Chief Insurance Negotiator in most states is responsible for the investigation and penalties associated with insurance rebates. There are various civil sanctions and legal penalties that can be used for insurers, agents, and brokers who are found violating the law and issuing rebates with insurance policies. The most common penalties include non-renewal of license, revocation of license, and cease-and-desist orders. Some states, however, consider insurance rebating as a criminal offense so harsher penalties may apply.
Insurance Protection for the Future
The Model Act has been put in place to stop unfair pricing practices in the insurance market. It ensures that policy holders will have the same benefits under the plan that they paid for with some regularity across carriers. The rights of the consumers are protected because steep price discounting that might compromise the insurer is avoided. Following this anti-rebating rule ensures that everyone will win because it works to keep the insurance industry ethical and fair.