Producer Compensation Disclosure

Q.        What is the effective date of the producer compensation disclosure law?

A.        August 12, 2005

Q.        What is the purpose of Arkansas’s 2005 Producer Compensation Disclosure Law?

A.        Section 9 of Act 1697 of 2005 amends the current Producer Licensing Model Act (PLMA) in Arkansas to create more transparency for insurance consumers through better disclosure of insurance producer compensation.  Some insurance consumers do not understand who the insurance producer they are dealing with legally represents and is compensated by.  For the vast majority of producers who do not act as brokers, the disclosure requirements will simply be to tell the customers: (a) the source of the producer’s compensation for that placement of insurance, and (b) that the producer represents the insurer and will be providing services to the consumer on behalf of the insurer. 

            The Act requires greater disclosure for those insurance producers who act as brokers (who represent insureds), OR who receive compensation from the customer; this producer must disclose whether he will receive additional compensation from the insurer or other third party and provide the customer an estimate of the amount of such compensation if the customer requests such additional information.

            These PLMA amendments will ensure consumers are provided the necessary information to understand any potential conflicts of interest a producer may have because of the manner in which the insurance producer is compensated.

Q.        Are licensed, salaried producers required to disclose compensation?

A.        No.  Salaried insurance carrier employees licensed as insurance producers who are not compensated for insurance placements and sell insurance only for their employer shall not be subject to the disclosure requirements of Section 9 of Act 1697 of 2005.  These producers are not receiving “compensation for the placement” within the intention of this law.

Q.        Does the certificate holder/employee need to receive the disclosure on a group insurance policy?

A.        No.  The producer should make the disclosures to the entity named on the policy as the group policyholder.  The disclosure should be made to the person actually applying for the insurance or that person’s authorized representative.  The producer is not required to provide the disclosures to each individual certificate holder under a group insurance policy.

Q.        Does this license apply to insurance placements of credit life or credit disability?

A.        No.  Placement of credit life or credit disability insurance is not subject to the requirements of Act 1697 of 2005, Section 9, codified at Ark. Code Ann. § 23-64-520(d)(5).

Q.        Does this Bulletin and law apply to surplus line brokers or to producers for surplus lines policy sales?

A.        No.

Q.        Does this law apply to agents acting directly for the insurer and licensed only as a sole proprietor for sales of burial expense life policies or annuity contracts?

A.        Yes, as the producer is not exempt under Act 1697 of 2005, and must disclose the insurer commission as the source of his/her compensation, and any from other third parties to the customer at point of sale.

Q.        While I understand the disclosure may be made verbally, I’m thinking it might be wise to put it in writing and was wondering if the Arkansas Insurance Department is going to mandate or promulgate a disclosure form or otherwise pre-approve any written disclosures?

A.        No.

Q.        What is a “broker” as defined by Arkansas law?

A.        A broker is one who is required to be licensed as an insurance producer and who represents insureds or prospective insureds (perhaps receiving compensation from the insurance consumer for such representation under a contract between the two) and does not represent or act on behalf of an insurer.  A broker is deemed under Arkansas law to be the agent of the insured.  The vast majority of insurance producers in Arkansas contractually represent the insurer (and for that matter, are compensated solely by the insurer) and are, therefore, not acting as brokers.

Q.        Does this Bulletin apply to commercial lines policies?

A.        Yes.

Q.        Does this disclosure requirement apply to producers receiving compensation under six percent (6%)?

A.        It applies to all compensation.  There is no compensation cap.

Q.        Does this disclosure requirement apply to life and accident and property and casualty insurance?

A.        Yes.

Q.        What is the penalty for non-compliance?

A.        Non-compliance is a violation of Ark. Code Ann. §§ 23-64-216 and 23-64-512.  Penalties under Ark. Code Ann. §§ 23-64-216 and 23-64-512 include probation, fines up to $1,000 (or up to $5,000 for willful violations), license non-renewals, license suspension or revocations, all depending upon the severity of the offenses.  Also included in these laws are the Commissioner’s ability to order forfeiture of the agent/broker/producer profits on sales (commissions for the transaction(s) related to the Commissioner’s proceeding against the license) to the State of Arkansas, as well as monetary restitution of actual losses (no punitive awards) to affected persons.

Q.        Is disclosure required for existing policyholders at renewal?

A.        The Act says no disclosure need be given upon renewal “unless the information previously disclosed under subsection (b) has substantially changed”.  A renewal, as opposed to modifications to existing policies that do not involve the customer evaluating options related to the purchase, is to be considered a placement of insurance triggering a disclosure if such a disclosure has not previously been given.