The National Association of Insurance Commissioners (NAIC) has adopted amendments to the model Unfair Trade Practices Act (the Model Act), which, if enacted by the states, will make significant changes to the more than century-old anti-rebating laws first enacted in 1887.
Existing state insurance anti-rebating laws present roadblocks to innovation by making it difficult to offer value-added products and services in connection with the sale of insurance. The changes adopted by the NAIC (once enacted by the states) are expected to bring insurance anti-rebating laws into the 21st century and modernize insurance marketing practices. These changes will be particularly welcome for InsurTech companies and other market disruptors who will be able to implement marketing strategies that are now uncertain under the laws of many states, yet which are widely accepted in other industries and beneficial to consumers. The changes to the Model Act follow in the path of states that have taken regulatory or legislative action in recent years to allow insurers and producers greater latitude in the offering of value-added products and services.
The amendments to the Model Act allow insurers and producers to offer value-added products and services to customers and prospects at no cost or a discount even if the products or services are not specified in the insurance policy, as long as they are related to the insurance coverage and satisfy one or more specified conditions, such as mitigating loss, reducing claim costs, enhancing health, or assisting the administration of employee benefits. Other specific requirements must also be met. For example, the cost of the product or service must be reasonable in relation to the customer's premiums or insurance coverage, the product or service must be made available based on documented, objective criteria, and the offering must not be unfairly discriminatory.
The amendments also permit insurers and producers to offer non-cash gifts, items and services in connection with the marketing of insurance, as long as the customer is not required to purchase insurance in return, the cost of the item or service is reasonable and the offer is not unfairly discriminatory. These provisions go beyond the "de minimis" exceptions now found in many state anti-rebating laws. The NAIC suggests that an appropriate limit on reasonable cost is the lesser of 5% of premium or $250. The cost of gifts, items or services offered to commercial or institutional customers may not be included in any amounts charged to another person or entity. In addition, the amendments allow insurers and producers to conduct raffles and drawings so long as certain requirements are met.
Because insurance is regulated by the states, individual states will need to enact the amendments in order for these changes to take effect. Most states have enacted the existing Model Act, and many are likely to adopt the new amendments.
What do the changes mean for InsurTech and others?
The amendments to the Model Act are intended to strike a balance between protecting consumers from unfair practices while permitting them to benefit from innovations that reduce risk, mitigate loss, enhance health and financial wellbeing, and provide valuable administrative services. The amendments will create a range of new marketing opportunities for insurers, producers and their partners by allowing them to offer various types of value-added products and services, such as behavioral modification apps, risk-mitigation services, and "smart" sensors designed to prevent loss.
Other benefits include:
• Speed to Market. InsurTechs and other disrupters in the market will be able to provide new, emerging technology and services to insurance customers on a value-added basis without having to incorporate these benefits into the insurance policy, which can require obtaining regulatory approvals on a state-by-state basis.
• Potential for Greater Uniformity in Regulation. The old anti-rebating laws have evolved into a patchwork of requirements varying from state to state. If the amendments to the Model Act are widely adopted, state standards governing value-added products and services will take a turn toward greater uniformity, relieving some of the burden on compliance programs.
• Mitigated Risk and Lower Rates. Both consumers and insurers will benefit from new value-added products and services that mitigate risk and reduce losses. Some consumers will benefit directly when unnecessary losses are avoided. Many others will benefit indirectly from the lower rates made possible by loss reduction.
Morris, Manning & Martin's attorneys are highly experienced in advising insurers, insurer producers, InsurTech companies, and others on complying with state anti-rebating laws and other regulatory requirements. If you have any questions about this legal update, please contact a member of our Insurance & Reinsurance Team.
Authors: Tony Roehl, Joe Holahan, and Jennifer Lee