Producer compensation disclosure, an issue that garnered significant attention following New York Attorney General Eliot Spitzer’s and other industry investigations, has touched many independent insurance agencies and brokerage firms. Nearly one year after Spitzer filed the first lawsuit on this issue, you still might be asking: Why is producer compensation disclosure such a big issue when I’ve never had a customer or prospect question or even express any concern about how carriers pay my firm?

Should you disclose to policyholders or prospects information about your firm’s compensation from carriers? Of course, agents and brokers should adhere to any applicable laws or regulations requiring producer compensation disclosure. To the extent there are no laws or regulations mandating such producer compensation disclosure, there is no one right answer for every firm. That decision must be made individually by each producer based on factors such as its business needs, its relationship with carriers and policyholders and how it interacts with prospects.

We all know that policyholders and prospects do not shop for coverage based on the amount of compensation an agency or broker may receive—they shop based on factors such as the firm’s professionalism and service, policy coverage choices, carrier reputation and financial strength and price. So, if you feel there is no direct policyholder value in informing consumers that your firm will be compensated by carriers for business it places with them, why do it? Simply put, some feel it will provide a measure of protection in the litigious environment in which producers conduct business.

It is widely believed that brokers who exclusively represent the policyholder should disclose any compensation received from carriers for that business. The NAIC model law, which has not been adopted in a single state, and the NCOIL model law that has been adopted in a few states, both call for brokers to disclose their compensation to policyholders in this situation.

What should a producer disclose if the agency chooses to make a compensation disclosure? Most firms that have decided to make producer compensation disclosures are using a generic statement that says they receive compensation from the insurer and that they may receive additional compensation if certain criteria are met. It also may cover a variety of other points, such as a description of the benefits of using an independent agent or broker, an explanation that quotes are not developed based on the potential impact on a firm’s compensation, a statement that carriers each set their own compensation schedules and criteria for incentive compensation, an explanation that there is no way for the producer to know if it will qualify for any incentive compensation when business is placed because the firm cannot predict or control which criteria established by the carrier will be met, and that the firm will provide additional information upon request from policyholders or prospects. Agencies are taking a wide array of approaches to this, from putting it in writing for presentations on new or renewal business, to inclusion with any application forms to be completed by the policyholder or prospect, to customer mailings, to Web site postings, to other options. Insurers have also been carefully studying the producer compensation disclosure issue. IIABA is adamantly opposed to carriers MANDATING any of their own producer compensation disclosure requirements on independent agencies (as opposed to expecting compliance with applicable laws and regulations). If carriers were to begin mandating their own disclosure forms and requirements on agencies, it would significantly disrupt agency workflows, increase inefficiencies and thereby raise costs in those firms.

The Big "I" adopted a Board Policy Regarding Insurance Company Disclosure of Producer Compensation during its September 2005 meeting that says, in part, "If an insurer believes it has a legal need to disclose to consumers that it compensates the sales force distributing its products, the insurer is urged to consult with IIABA, its state associations and independent agents selling its products before implementing any such disclosure and to make the basic disclosure on its own (e.g., on or by notice with the policy). Any such disclosure that an insurer chooses to make should notify the insurance purchaser that: 1) the insurance policy was placed by an independent insurance agent or broker, not an employee of the company; 2) the company believes it is efficient and effective to distribute its policies through independent agents and brokers; 3) the agent or broker placing the policy with the company may receive commission for that placement; 4) if applicable, the agent or broker may be eligible to receive additional incentives; and 5) any questions about the nature of the compensation should be directed to the agent or broker." To read the complete policy, go to www.independentagent.com, log on as a member, and click on the "legal advocacy" section.

The bottom line is that independent agencies and brokerage firms each need to determine for themselves how to address producer compensation disclosure. As part of the independent agent culture to go the extra mile for policyholders and prospects, and out of an abundance of caution and to avoid possible legal distractions, agencies may want review their approach to producer compensation disclosure.

Bob Rusbuldt (bob.rusbuldt@iiaba.net) is CEO of the Big "I."