New York Regulation Requires Compensation Disclosure to Clients
Effective January 1, 2011, New York has implemented a new regulation that will require compensation disclosure(s) by producers to clients. Lincoln has established a cross functional team led by Bob Sheppard (LNY Counsel) to determine next steps to support producers in complying with this regulation as they transact business in New York. The following is a summary of the new Reg:
Summary of Reg 194* – "Producer Compensation Transparency"
What does the new Reg cover and where is it applicable? The new Reg is only applicable to business solicited in the state of New York, or in cases where the legal situs is New York. It includes the following:
- Mandatory Initial Disclosure of compensation (a verbal disclosure is acceptable, but must be followed up in written form).
- Full Compensation Disclosure at the request of the purchaser
- For the purposes of this Reg, compensation includes not just cash compensation, but also anything of value, both known and unknown at the time of sale.
- The "purchaser" refers to the person or entity to be charged under an insurance contract or a group policyholder, but not a certificate holder, in most situations.
Why was the Reg created? To insure there is no bias based on compensation issues, largely in response to the following:
- The property and casualty bid rigging and steering schemes investigated by the NYAG and NYID from roughly 2004 – 2006, and
- Consumer groups repeatedly telling the NYID that the customer does not really understand the role of the producer, e.g. that the producer receives incentive based compensation that might impact their recommendations.
Who else (besides the client) is impacted by this reg?
- Producers - The producer who is in front of the client bears the responsibility for the disclosure. For products regulated by section 4228, this is the person who has "individual limits" rather than "GA limits" under that reg.
- Insurers - Insurance companies have the following responsibilities:
- Bears record keeping responsibility for compensation paid directly to producer
- May choose to take responsibility for record keeping for reg 194 disclosures
- No other regulatory role, but practically needs to develop support role for producer.
When does the Reg become effective? This regulation becomes effective January 1, 2011.
*Note: This is only a summary: the entire Regulation should be reviewed for an in-depth understanding of its provisions.
Lincoln expects further guidance on this regulation in the form of a circular letter from the New York State Insurance Department (NYSID). Numerous industry trade associations have been actively working with New York to address the questions and challenges raised by this regulation. While Lincoln carefully follows these efforts, there are still a number of unanswered questions without the publication of a final circular letter.
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