CONCISE EXPANATORY STATEMENT; RESPONSIVENESS SUMMARY; RULE DEVELOPMENT PROCESS; AND IMPLEMENTATION PLAN

Transcription

1 As required by The Washington State Administrative Procedures Act Chapter RCW Matter No. R CONCISE EXPANATORY STATEMENT; RESPONSIVENESS SUMMARY; RULE DEVELOPMENT PROCESS; AND IMPLEMENTATION PLAN Relating to the adoption of Insurance Producers Sharing of Commissions and Referral Fees with Nonlicensed Persons August 1, 2014

2 TABLE OF CONTENTS Section 1 Introduction pg. 3 Section 2 Reasons for adopting the rule pg. 3 Section 3 Rule development process pg. 3 Section 4 Differences between proposed and final rule pg. 4 Section 5 Responsiveness summary pg. 4 Section 6 Implementation plan pg. 13 Appendix A Hearing Summary pg. 15 2

3 Section 1: Introduction Revised Code of Washington (RCW) (6) requires the Office of Insurance Commissioner (OIC) to prepare a concise explanatory statement (CES) prior to filing a rule for permanent adoption. The CES shall: 1. Identify the Commissioner's reason s for adopting the rule; 2. Describe differences between the proposed rule and the final rule (other than editing changes) and the reasons for the differences; and 3. Summarize and respond to all comments received regarding the proposed rule during the official public comment period, indicating whether or not the comment resulted in a change to the final rule, or the Commissioner's reasoning in not incorporating the change requested by the comment; and 4. Be distributed to all persons who commented on the rule during the official public comment period and to any person who requests it. Section 2: Reasons for Adopting the Rule In 2007 the Legislature amended numerous sections in chapter RCW to change the existing statutes on agents and brokers to the NAIC model for insurance producers. As part of this change, RCW was amended to permit insurance producers to share commissions or pay fees to non-licensed persons, as long as these payments do not violate the anti-rebating and antiinducement statutes. As a result of this change the Commissioner has received inquiries from licensed producers as to what is and is not permitted as a result of the statutory changes. Section 3: Rule Development Process On May 23, 2012 the Commissioner filed a CR 101 pre-proposal notice of intent to adopt rules. The comment period was open until June 29, The Commissioner received one comment letter. Prior to filing the CR 102, the Commissioner s staff met with stakeholders and provided drafts of the proposed rule to industry representatives and received comments in response. On May 7, 2014 the Commissioner filed a CR 102. The comment period was open through June 9, The Commissioner received four comment letters. The Commissioner held a public hearing on the proposed rule on June 10, Six persons testified at the hearing. The hearing summary is in Appendix A. 3

4 Section 4: Differences Between Proposed and Final Rule The word compensation in the second line of WAC was changed to consideration to use the same word as in the statute being implemented, RCW Section 5: Responsiveness Summary Summary of Comments & Commissioner s Response 1. The OIC must work harder to develop and communicate clear standards and uniform application so that those governed by the insurance code might understand and integrate OIC regulatory policy into compliance efforts. The Commissioner agrees with this comment and that the development and communication of clear standards for uniform application of those standards is the purpose for this rule-making. 2. The rebating and inducement laws do not prohibit producers from spending income whenever a policyholder might be psychologically influenced to do business with the producer. So long as the producer expenditure does not change or hide the approved price of coverage, the OIC should not be involved. The Commissioner disagrees with this comment to the extent that a producer engages in conduct that violates RCW , RCW , RCW , RCW , RCW , and/or RCW Unless a transfer of producer compensation directly benefits the policyholder or beneficiary thereby effectively changing the price of coverage, the transfer should be permitted. The Commissioner disagrees with the standard for permissible transfers of producer compensation to policyholders or beneficiaries articulated by the commenter. The criteria for such transfers are specified in RCW , RCW , RCW , RCW , RCW , and RCW If a professional association earns income through the promotion or endorsement of insurance products to its members, the association should be free to use those funds for the benefit of the association. 4

5 The Commissioner agrees with this statement to the extent that an association is not engaged in activities requiring licensure as an insurance producer and complies with WAC (12) and WAC relating to endorsements of insurance products. 5. If a member of a professional association directly benefits from compensation promised in an insurance transaction such as a direct gift to the member in excess of $25, then the gift or sharing of commission should be prohibited. Members should be permitted to support their association through the use of services while not personally benefitting. The Commissioner disagrees with the standard articulated by the commenter for prohibiting compensation to a member of an association. The standard is not whether a person directly benefits from receiving compensation relating to an insurance transaction. The standard is established by law as set forth in RCW , RCW , RCW , RCW , RCW , and RCW The Commissioner agrees that members of a professional association are permitted to support their association by using services endorsed by it that result in revenue but, if the revenue derives from a commission paid in connection with an insurance transaction, the requirements established in the referenced statutory provisions must be satisfied. 6. Rules should explicitly permit contributions by producers to non-profit organizations uninvolved in the insurance transaction that do not directly benefit policyholders or policy beneficiaries. The Commissioner acknowledges that producers are free to contribute to non-profit organizations beneficiaries but the producers must comply with RCW , RCW , RCW , RCW , RCW , and RCW and all applicable rules including these rules. 7. Rules should explicitly permit insurer and producer payments to persons not a party to the insurance transaction for marketing and insurance support services. For example, an endorsement contract between a local government and a licensee or a similar contract for marketing services should be permitted if such contracts otherwise comply with marketing rules like the FTC endorsement regulations. 5

6 The Commissioner acknowledges that such payments are permissible if the marketing and insurance support services are activities requiring licensure and the person receiving payment is properly licensed. If the person is not licensed and the activities require a license, the payments are prohibited under RCW , RCW , RCW , RCW , RCW , and RCW There is no need to address this situation in these rules because current law is clear. 8. Rules should explicitly recognize freedom to advertise financial support for causes like any other business. For example, if a producer wishes to advertise a 10% donation of commissions for the benefit of green causes, the producer should be free to engage in such commercial speech so long as the statement remains true and the producer does not rebate the funds to her insurance purchasers. Rules should distinguish between direct benefits to the insurance purchaser and support for causes that influence customer loyalty. These rules do not interfere with a producer s freedom to advertise support for causes, but provide guidance to assist producers in complying with the requirements of RCW The rules should provide flexibility for marketing-related activities that are common in today s business environment that were not contemplated in decades-old insurance-specific rebating and illegal inducements laws. The Commissioner s flexibility in adopting rules is restricted by the authority granted by the legislature. That means the Commissioner does not have the authority to adopt rules that amend or conflict with laws relating to rebating and illegal inducement, such as RCW , RCW , RCW , RCW , and RCW [See: Pierce County v. State, 66 Wn.2d 728, 731 (1965); Pringle v. State, 77 Wn.2d 569, 573 (1970); Kitsap-Mason Dairymen s Ass n v. State Tax Comm n, 77 Wn.2d 812, 815 (1970); Juanita Bay Valley Community Association v. Kirkland, 9 Wn. App. 59, 79, (1973); Fahn v. Cowlitz County, 93 Wn.2d 368, 383 (1980); Superior Asphalt v. Labor & Indus., 84 Wn.2d 401, 405 (1996); State ex rel Evergreen v. WEA, 140 Wn.2d 615, 634 (2000); Wash. Pub. Ports Ass n v. Dep t of Revenue, 148 Wn.2d 637, 646 (2003); and Edelman v. State ex rel Pub. Disclosure Comm n, 152 Wn.2d 584, 591 (2004).] 10. Washington state s rebating and inducement statutes specifically the $25 annual per-person cap broadly applied to RCW (4) and (1)(c) 6

7 and administrative rules are impacting the way independent agents can market by limiting them from rewarding the people who make referrals. The Commissioner acknowledges that the referenced statutory provisions restrict marketing by producers by limiting the rewards producers may make to those who refer business to them. The Commissioner s authority in adopting rules is restricted by law. That means the Commissioner does not have the authority to adopt rules that amend or conflict with laws relating to rebating and illegal inducements. 11. The OIC should use its regulator authority and flexibility to exempt from the definitions of rebating and illegal inducements any activities involving gift cards and raffle programs that are implemented by agents to encourage and acknowledge customer referrals. The Commissioner s authority in adopting rules is restricted by law. That means the Commissioner does not have the authority to adopt rules that amend or conflict with laws relating to rebating and illegal inducements. 12. The proposed rules applicable to giving nominal gifts for referrals and conducting promotional games of chance conflict with the Medicare Marketing Guidance for nominal gifts. Although the Medicare Marketing Guidelines are directed at the plan sponsors, the Centers for Medicare and Medicaid Services considers producers to be an extension of a healthcare plan s workforce. Producers selling to potential Medicare enrollees will have two sets of partially conflicting guidelines to follow if these proposed rules are adopted as currently proposed. By way of example, the OIC s proposed rules limit the value of a prize in a promotional game of chance to twenty-five dollars with a maximum aggregate of twenty-five dollars per person from a producer per year, and the Medicare Marketing Guidance contains a limit of fifteen dollars or less based on the fair market value of the item with a maximum aggregate of fifty dollars per person per year. We suggest that the proposed rule be amended to permit producers to follow applicable federal guidelines such as the Medicare Marketing Guidelines. The Commissioner acknowledges this potential conflict between the limits set forth in the Medicare Marketing Guidelines and RCW and RCW as well as these rules. The Commissioner s authority in adopting rules is restricted by law. That means the Commissioner does not have the authority to adopt rules that amend or conflict with laws relating to rebating and illegal inducements. 7

8 13. If the OIC considers that payments for referrals with gift cards or gift certificates are cash equivalent payments, these types of payments should be added to the list of prohibited payment methods. In my experience as a compliance officer, brokers did not consider gift cards or gift certificates to be cash equivalents, which they are. Most gift cards or certificates can only be exchanged for goods, wares, or merchandise from the entity issuing the gift card or one that accepts payment via the gift card. Therefore, for this purpose, the Commissioner does not consider gift cards or certificates to be equivalent to cash but are permitted under RCW and RCW We ask that the OIC not move forward with the rule adoption at this time. We intend to work with the industry, the OIC, and the Legislature on legislation for consideration during the 2015 legislative session that would modernize state law in a number of areas impacted by the proposed rules. As has been previously communicated, the Commissioner is willing to work with interested parties on such proposals for legislation when they are offered. To facilitate this effort, the Commissioner is adopting these rules with an effective date of July 1, The proposed rule institutes a series of new barriers, conditions, and restrictions that are unduly burdensome, restrictive, and inconsistent with the existing statutory framework (and regulatory interpretations adopted in other jurisdictions). The restrictions are created by the statutes and the proposed rules are consistent with those statutes. These rules provide guidance to licensed producers as to what is permitted under the existing statutory framework. These rules are also consistent with the statutes and rules of the majority of other states, except that the majority of other states rebating laws are more restrictive than Washington s in that the other states have $0 limit on allowable payments as compared to the $25 limit contained in the Washington statutes. 16. Administrative rules should be modernized to provide reasonably flexibility for marketing-related activities. The Commissioner agrees that, to some extent, rules should be used to reflect current marketing-related activities. However, the Commissioner does not have the authority do 8

9 adopt modernizing rules that amend or conflict with existing statutes. [See case citations in the response to comment 9. above] 17. Use of gift cards, lead cards and mailing lists, and promotional games of chance, and engagement in charitable organizations are activities that are central to the success of locally owned, community-focused independent insurance producers. Over-regulation of these activities place local insurance agencies at significant disadvantage against nationwide insurance companies that do not use a producer-based mode. The Commissioner acknowledges that the use of these activities assist in the success of locally-owned, communityfocused insurance producers. However, rules must be consistent with existing statutes. 18. The OIC appears to take the view that a contribution to a charity could constitute valuable consideration or an inducement under RCW We ask that the OIC outline the specific statutory foundation for this provision. This comment includes the statutory foundation for this provision. In addition RCW , RCW , RCW , RCW , and RCW are also applicable to this activity. 19. The fourth provision in the charitable contribution section is unworkable and unnecessary. This restriction creates compliance challenges for producers who are likely to be unfamiliar with the extent and precise manner to which their existing or prospective customers are involved in charitable efforts. This restriction should be deleted. The Commissioner disagrees that this provision creates compliance challenges for producers but rather assists them with compliance. Under these rules it is not necessary for a producer to have knowledge about the extent and precise manner in which their existing or prospective customers are involved in charitable efforts. It is only necessary to comply with the conditions set forth in the proposed rule when donating to a charity commission generated from sale of insurance to a customer. 20. The charitable section as proposed applies to all or a portion of a commission, fee, or other compensation received in connection with the sale, solicitation, or negotiation of insurance to charity. This section is not clear if a producer may make charitable contributions from sources other than 9

10 commissions or fees, which unfairly restricts one s ability to financially support a civic or charitable organization of their choosing. The Commissioner disagrees that this section is not clear if a producer may make charitable contributions from other sources other than commissions or fees. The conditions set forth in the proposed rule are intended, when satisfied, to ensure that the insured or prospective insured does not receive a benefit prohibited by RCW , RCW , or that the producer is not violating RCW Where the source of contributions is not tied to compensation received in connection with an insurance transaction, a producer is free to make charitable contributions as he or she chooses subject to all applicable law including RCW , RCW and RCW We do not understand why producers should not be able to obtain lead cards and mailing lists from entities that are not expressly in the business of selling such items. We also fail to see how RCW and RCW provide a statutory foundation for these new restrictions and limitations. We urge the elimination of this section in its entirety. This section is intended to recognize as lawful the purchase of lead cards and mailing lists from unlicensed persons. The conditions are designed to ensure that any compensation paid by a producer to an unlicensed person for lead cards or mailing lists is proper under RCW If one or more of the conditions are not satisfied, the seller will be deemed to be engaging in acts requiring licensure. In that situation, the payment of compensation to an unlicensed person is prohibited by RCW If the seller of lead cards or mailing lists is not in the business of selling those items, payment of compensation constitutes a referral fee subject to limitations as set forth in RCW and RCW The proposed rule relating to referrals affirms a strict interpretation of RCW and RCW We believe the OIC has the regulatory flexibility to exempt by definition certain activities, such as the use of gift cards for referrals. Additionally, the proposed rule is especially challenging in instances where fees are paid to individuals who are not existing or prospective customers. The Commissioner s flexibility in adopting rules is restricted by the authority granted by the legislature. That means the Commissioner does not have the authority to adopt rules that amend or conflict with laws relating to rebating and illegal inducements such as RCW , RCW , RCW , RCW , and RCW 10

11 [See case citations in the response to comment 9. above.] In addition, the language used by the legislature in RCW and RCW is very broad. 23. We ask the OIC amend the section on referrals that allows the producer to pay a referral fee as long as the person receiving the fee does not sell, solicit, or negotiate insurance and the payment and the amount of the fee is not conditioned upon the person who is referred upon applying for, or obtaining, or both insurance through the producer. RCW provides that a producer may pay fees as long as the recipient does not sell, solicit, or negotiate insurance AND the payment does not violate RCW , RCW , RCW , RCW , and RCW When a fee is based upon the referred person applying for or obtaining insurance through the producer, this changes the fee from one for referral to one for sale, solicitation, or negotiation. Only a properly licensed person may receive a fee for the sale, solicitation, or negotiation of insurance. 24. For promotional games of chance, we believe the proposed language is too restrictive. The proposed language would prohibit producers from conducting raffles and other contests unless the value of the prize is no more than $25 and five conditions are satisfied. We disagree with this substantive outcome. Producers should have the ability to conduct raffles and other contests without being limited to a $25 prize amount as long as the raffle or contest is open to the public and there is no obligation that a participant apply for, purchase, or renew insurance. The statutes expressly limit the amount that can be paid an insured or prospective insured to $25 and the Commissioner does not have the authority to adopt rules that amend or conflict with laws relating to rebating and illegal inducements such as RCW , RCW , RCW , RCW , and RCW [See case citations in the response to comment 9. above.] The underlying purpose in promotional games of chance is to sell insurance. Therefore, all participants are prospective insureds. 25. Our company has a referral business in Washington relating to lines of insurance that the company does not write. Under our program, an unlicensed representative provides a toll-free number or web address to connect potential customers with the licensed third-party agency with which our company works. The representative does not engage in any conduct that would constitute the 11

12 sale, solicitation, or negotiation of insurance. Individual licensed agents at the insurance agency provide all the quotes and other information about coverage and take applications. The carriers represented by the agents handle all servicing of policies and claims. The representative receives a one-time flat fee for this service if the referred customer submits an application. In certain circumstances, the representative may also receive a flat fee at renewal. We believe that section 820 of the proposed rules will have a detrimental impact on our independent representative s business by prohibiting them from any remuneration for referrals. RCW prohibits the payment of such referral fees if the person receiving the referral fee is not licensed and is selling, soliciting, or negotiating insurance or if the payment violates RCW , RCW , RCW , RCW , and RCW The Commissioner disagrees that in the scenario described by the commenter, the representative is not engaging in conduct that would constitute the sale, solicitation, or negotiation of insurance. When a fee is based upon the potential customer applying for insurance, this changes the fee from one for referral to one for sale, solicitation, or negotiation. Only a properly licensed person may receive a fee for the sale, solicitation, or negotiation of insurance. The state of Washington has a very broad definition of what constitutes the solicitation of insurance. See National Federation of Retired Persons v. Insurance Commissioner, 120 Wn. 2d 101 (1992). 26. We believe that the proposed rule conflicts with state law, specifically the Producer Licensing Model Law (PLMA), enacted in Washington and effective July 1, 2009, that allows compensation for referrals by unlicensed persons who are not selling, soliciting, or negotiating insurance; provided that such compensation does not violate state rebating laws. There are important policy reasons for restricting rebates and inducements, however, the reason for these restrictions do not apply to the payment of referral fees. The Commissioner does not agree that the proposed rule conflicts with the state law or the PLMA as enacted in Washington. The Commissioner agrees that there are important policy reasons for restricting rebates and inducements but the Commissioner disagrees that the reasons for these restrictions do not apply to the payment of referral fees. When a referral fee is paid to an insured, it constitutes an unlawful rebate and is prohibited by RCW When a referral fee is paid to a prospective insured, it constitutes an illegal inducement and is prohibited by RCW

13 27. By enacting the PLMA Washington brought the state into conformity with the majority of states on the matters of licensure. RCW , which the proposed rules purport to clarify, permits licensed producers to pay unlicensed persons as they see fit, provided the persons do not engage in licensable activity, and the payments do not violate rebating laws. Therefore, we ask that the OIC reconsider the need to include section 820 in the proposed rules or use our proposed alternate language. The Commissioner agrees that by enacting the PLMA it brought Washington into conformity with the majority of states on the matters of licensure. The Commissioner also agrees that RCW permits licensed producers to pay unlicensed persons, but only under certain conditions. Among them are the requirements that the persons receiving the payments do not engage in licensable activity and do not violate rebating laws. Paying a referral fee to an unlicensed person for referring a customer who submits an application constitutes the sale, solicitation, or negotiation of insurance under RCW Section 820 is included to inform producers how to pay referral fees without violating RCW The approach taken by the Commissioner is consistent with that taken in many states that have adopted the PLMA including Alaska [AS , AS and AS ], Florida [ (8), (1)(h) and (m) Florida Statutes], Indiana [Bulletin 177, April 16, 2010], Michigan [Order No M, August 25, 2011], Utah [Utah Code 31A-23a-504(3)], and West Virginia [West Virginia CSR ]. 28. The rules are focused on producers, not insurers, but we have a concern as to how the proposed rule will affect producer/insurer relationships. For example, would a producer be permitted to compensate an insurer for a mailing list? Yes, since preparing mailing lists is sometimes part of an insurer s business. Section 6: Implementation Plan A. Implementation and enforcement of the rule. B. How the Agency intends to inform and educate affected persons about the rule. 13

14 The Agency will post the rules on its website and directly a copy of the rules to all active licensees. Type of Inquiry Consumer assistance Rule content Authority for rules Enforcement of rule Market Compliance Division Consumer Protection Consumer Protection & Legal Affairs Policy Consumer Protection- Producer Licensing & Oversight, & Legal Affairs Consumer Protection C. How the Agency intends to promote and assist voluntary compliance for this rule. Since the effective date of the rules is not until July 1, 2015, the posting of the rules to the website and ing a copy of the rules to licensees should provide licensees sufficient lead time to modify their business practices to conform to the rules. The Agency Licensing staff will be educated on the rules and will be resourced to address questions. D. How the Agency intends to evaluate whether the rule achieves the purpose for which it was adopted. Once in effect, surveys/questionnaires will be sent to individual and business entity licensees by Licensing staff a well as spot-checking examinations of licensees. 14

15 Appendix A CR-102 Hearing Summary Summarizing Memorandum To: Mike Kreidler Insurance Commissioner From: James E. Tompkins Presiding Official, Hearing on Rule-making Matter No. R Topic of Rule-making: Insurance Producers Sharing of Commissions and Referral Fees to Non-licensed Persons This memorandum summarizes the hearing on the above-named rule making, held on June 10, 2014 at the Insurance Commissioner s Tumwater office over which I presided in your stead. In attendance and testifying: Tom Echols & Suzanne Loomis (on behalf of Primerica), Roger Smith, Bill Stauffacher (on behalf of the IIABW), Mel Sorenson, and Jon Hedegard (on behalf of the Allstate Companies). Contents of the presentations made at hearing: Our company has concerns about proposed section 820 of the proposed rule regarding payment for referrals. We have a referral business in Washington to multiple providers of P&C insurance. When we go into a market we seek certainty. We believe that section 820 has the unintended consequence of abrogating the NAIC model act. Under the model act certain referrals are permitted as long as the activities do not rise to the level of a sale, solicitation, or negotiation. We have concerns because our business model does not arise to the level of a sale, solicitation, or negotiation of insurance, but there may be some confusion that our business model may be prohibited under section 820. In particular focusing on the small business impact, we ask that the OIC clarify the impact that this might have on the small business owners that are selling for our company and we be allowed to contribute to the small business impact study so that the OIC will understand the kind of monetary impact the proposed rule would have. We ask that the OIC strike the provision that appears to be inconsistent with the model act and use the language we proposed in our written comments. We would like the OIC to consider if the proposed rules are inconsistent with the model act. 15

16 I have concerns about the first section of the rule on charitable contributions. The wording seems to apply a quid pro quo standard. It raises a concern of whether or not a producer may contribute all or a portion of a commission or other funds to a charity even though the insured does not influence the contribution. We wish to address the big picture themes. We ask that the OIC not proceed with the adoption of this proposed rule after this hearing. We are willing to work with the industry and the OIC to develop legislation in the 2015 legislative session to modernize this scope of the law and how it relates to the activities addressed in the proposed rule. The existing law came into effect decades ago when there was fierce competition among local agents and these statutes helped to protect this fierce competition for crossing the line into inducement and rebating activity. The marketing activities in today s world are much different and that some of these activities are quite common among retail businesses of all types, not in this state but nationwide. It is probably time to modernize what has become an antiquated law. We had hoped that the OIC might use its interpretive authority to try to create flexibility, but it appears to us that that it is the view of the OIC that you have to take a strict interpretation of the law itself. The best way to deal with this issue is the underlying law and not through rules. Therefore, we wish to work together on legislation for the 2015 session and we might have a much different law that might we might be able to more forward with a much different rule. We understand that these rules are to provide guidelines for producers and not companies. However, we are concerned about a producer compensating an insurance company for the purchase of lead cards. Is that going to be prohibited? The rules are focused on producers, not insurers, but we are not sure how the proposed may affect producer-insurer relationships. The hearing was adjourned. SIGNED this 11th day of June, James E. Tompkins Presiding Official 16