The New York Insurance Department has issued a third draft of its proposed regulation requiring certain disclosures in connection with producer compensation. The Department has sent the proposed regulation to the Governor’s Office of Regulatory Reform for review. If approved, the proposed regulation will be published in the New York Register, followed by a 45-day period for public comment. The Department can thereafter adopt, revise or withdraw the proposed regulation. Counsel for the Department has stated, however, that the proposed regulation is “close to finished.”

Disclosures Required Under the Near Final Draft Regulation

If it becomes effective, the regulation will require all producers (both brokers and agents) to disclose “orally or in a prominent writing” to the purchaser:

  • whether the producer represents the purchaser or the carrier;
  • that the producer will receive compensation from the carrier;
  • that the compensation may vary based on a number of specified factors; and
  • that the purchaser can obtain information upon request from the producer concerning the expected compensation and any alternative quotes obtained.

If the purchaser requests additional information, the producer is required to disclose “in a prominent writing” to the purchaser:

  • the nature, amount and source of any compensation;
  • alternative quotes;
  • any ownership interest the producer has in the carrier or the carrier has in the producer; and
  • “a statement whether the insurance producer is prohibited by law from altering the amount of compensation received from the insurer for the sale.”

If the nature or amount of compensation is not known at the time of disclosure, then the producer must describe the circumstances that may determine the amount of compensation and an estimate of its value. Producers must retain copies of the written disclosures for three years. In the case of oral disclosures, a producer must retain a certification that the disclosure was made or an audio recording of the disclosure. The draft regulation would not apply to the placement of reinsurance, placement of coverage with a captive, and to sales and renewals where the producer has no direct contact with the purchaser.

While the new draft regulation relaxes disclosure requirements proposed in the first draft—unless the customer requests a more complete disclosure—producer organizations believe that the new regulation is unnecessary and still goes too far. In particular, they object to the requirement that the producer disclose to the insured who it represents, contending that such a disclosure could confuse the insured. Risk management organizations, however, believe that the proposed regulation is inadequate. They take the position that producers should be required to disclose their compensation without a specific request from the insured.

The draft regulation is less rigorous than the disclosure requirements agreed to by Marsh, Aon and Willis in their 2005 settlements with the New York Attorney General. Under their settlements, these producers may not accept any commissions unless they are “fully disclosed” in “plain, unambiguous written language” and “the client consents in writing.” In addition, Marsh, Aon and Willis agreed to disclose in writing prior to binding a policy “all quotes and indications sought,” “all quotes and indications received,” any broker “interest in or contractual agreements with any of the prospective insurers,” and “at the end of each year all compensation received during the preceding year or contemplated to be received from any insurer or third party in connection with the placement, renewal, consultation on or servicing of that client’s policy.”

The Draft Regulation Fails to Address Forms of Compensation

The draft regulation, like its predecessor drafts, contains no ban on contingent commissions or any other form of compensation. In this regard, it is less stringent than the limitations agreed to by Marsh, Aon and Willis in their settlements.

The settlement agreements provide that Marsh, Aon and Willis may accept only “a specific fee to be paid by the client; a specific percentage commission on premium to be paid by the insurer set at the time of purchase . . . ; or a combination of both.” The settlement agreements bar the brokers from “directly or indirectly” accepting or requesting a contingent commission from any insurer. (Note, however, that various amendments have loosened the ban on contingent commissions in the settlement agreements by allowing the brokers to accept contingent commissions if they are acting as an MGA or underwriting manager for insurers. Similarly, if they acquire a company that is not bound by the settlement agreement, they may continue to accept contingent compensation relating to the acquired company’s existing book of business for three years.)

The failure of the draft New York regulation to address contingent commissions could become an issue of significant disagreement among producers. The major brokers view the continued acceptance of contingent commissions by their competitors as a competitive disadvantage, and in connection with prior drafts of the regulation urged that contingent commissions be eliminated (potentially through rules directed at carriers preventing their payment). Independent agent groups, however, viewed the draft regulation as recognizing the legality of contingent commissions. Department counsel previously said that any conflict of interest potentially arising from contingent commissions should be dealt with by disclosure but added that the new disclosure regulation could be followed by additional agency action in the area if deemed warranted by future developments.

Impact on Insurers

Aside from an obligation to keep records of the amount of any compensation paid to a producer, the proposed regulation imposes no obligations on carriers.

Related Activities in Other States

Many states have statutes or regulations governing the disclosure of producer compensation, primarily based on Section 18 of the NAIC’s Producer Licensing Model Act. Generally, Section 18 provides that where a producer receives compensation from a customer or represents the customer, the producer cannot accept compensation from the carrier without (a) disclosure of the amount of the compensation, and (b) the customer’s documented consent. The model rule does not apply to producers who receive no compensation from the customer and represent the insurer, as long as the agent discloses that he represents the insurer and will receive compensation from the insurer. States have, however, modified the model act, so individual state laws should be consulted if specific issues arise.  


The final form of the New York Producer Compensation Transparency Regulation is not yet known. However, it is not likely to significantly change from the current draft. It likely will continue to receive criticism from producers and risk managers alike and thus can be viewed as a middle ground.