Rebating: Why is Rebating Still Illegal in Many States?

[0b1kanobee]

I don't know one producer who rebates let alone one that is a BIG producer making good money. Rebating is like paying someone to be able to work for them. Or poor me, I suck so bad I'll give you money to do business with me.

I say if you want to do it, go for it. It won't effect my business none. I ain't skeered but you should be. Let us know how it works out for ya!

 

[BNTRS]

Good stuff BNTRS. I'm a little confused about CA. On one hand, you say precedent makes it an illegal act to rebate in CA. On the other hand, Hefe linked to a CA based agent offering rebates. How do I reconcile the two? So is New Foundations running an illegal operation or are there very specific procedures that need to be followed to allow some form of rebating but avoid getting into trouble in CA?

This is the marvel of the American Judicial System. The answer is it's a definite maybe. Legal precedent means technically that's what the law is now supposed to follow, however judges have discretion to re-write the law if they wish. So, in order to shut this person's operation down, you'd need to have a Prosecutor bring suit against him. Since it would fall under criminal law, the process is somewhat more lengthy than civil law (aka torts).

Because CA does not have a specific law that deems this act illegal, it makes the process of prosecuting it more complicated, and there probably isn't anyone at the DA's office with political aspirations who cares enough to give this individual trouble.

 

[mrpink]

mrpink,

If you stick around this business long enough you don't have to worry about reduced commissions, the carriers take care of that for you.

Yep. A separate topic worthy of its own discussion. The shift to online and the competitiveness of direct sell is putting a lot of pressure on legacy commission structures.

 

[Norwayguy]

This is the marvel of the American Judicial System. The answer is it's a definite maybe. Legal precedent means technically that's what the law is now supposed to follow, however judges have discretion to re-write the law if they wish. So, in order to shut this person's operation down, you'd need to have a Prosecutor bring suit against him. Since it would fall under criminal law, the process is somewhat more lengthy than civil law (aka torts).

Because CA does not have a specific law that deems this act illegal, it makes the process of prosecuting it more complicated, and there probably isn't anyone at the DA's office with political aspirations who cares enough to give this individual trouble.

Excepto maybe the prosecuter in thw Neasham case.

 

[BNTRS]

Excepto maybe the prosecuter in thw Neasham case.

Maybe, but I'm betting she's thinking she struck gold with Neasham, and really doesn't need to go through the work all over again.

 

[mrpink]

This is incorrect. CA repealed their anti-rebating legislation and technically has no law against it. But it has set legal precedent declaring it an illegal act.

Quick follow up. Do you know the case that set the legal precedent? I want to read more about it.

 

[djs]

Why are you so interested in rebating?
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By the way, there are MANY cases of the CA DOI going after companies (and individuals) for rebating. I think this was one of Poizner's pet peeves, though he loved to go after title companies.

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[GMANPRO]

If rebating was legal we would end up with hge brokers that barely make anything on each sale but sell a lot of policies. The quality of the person selling it would go down to reduce costs, the average insurance agent would go out of business and shopping for insurance would be like going to the grocery store. Also, like said before, the consumer may take a crappy policy because they need the free $$ for signing up. Not really something that should be going on.

Point is, it seems like a fair idea but people will abuse it and turn it into something that would bring WAY more harm than good. Happy?

 

[rousemark]

DOIs don't really care if agetns make money or not but most forbid rebating for the protection of the insured. With the current commission structure rebating cannot be sustained beyond the first year of the life of a product. So if anything other that one year term is being offered, the insured is going to take a bath. They will end up being induced to change plans every year and never build any value within the plan. Eventually, should they live, they will be come uninsurable and be stuck with a plan that has such a high premium they cannot keep it in force.

In effect rebating = inducement and leads to churning. Even if rebating is not forbidden by a state, at least one of the other two is so an agent who actively practices rebating can still end up in a heap of trouble.

Another reason rebating is forbidden, is it can threaten the solvency of a company. Most companies pay out far more than one years premium just to issue a policy. In the case of FE companies, they are paying 125%+ in first year commission plus the cost of MIBs, Script Checks, Underwriter Salaries, H.O. expenses, etc. If I can get by with rebating, and I am on 125% commission, I can advertise "Free Life Insurance plus $100.00 signing bonus to applicants". I can arrange with a financing company to front the annual premiums on a 30 day loan. I submit a $2000.00 premium, the company pays me $2500.00, I pay the client $100.00 and the finance company $2050.00 and I still have made $350.00. When the second year premium comes due, I roll it to another company doing the same thing. The company is in the hole $3000.00. That is why most companies forbid rebating.

 

[mrpink]

Why are you so interested in rebating?

I was originally trying to understand the pricing differences between going direct or through an agent. That led me to do more due diligence on commissions and understand rebating and anti-rebating laws.

While rebating is illegal, seems like the insurance companies are doing the "rebating" for you by squeezing commissions over the long term. This made me question why we still have anti-rebating laws. So here I am asking stupid questions
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If rebating was legal we would end up with hge brokers that barely make anything on each sale but sell a lot of policies. The quality of the person selling it would go down to reduce costs, the average insurance agent would go out of business and shopping for insurance would be like going to the grocery store. Also, like said before, the consumer may take a crappy policy because they need the free $$ for signing up. Not really something that should be going on.

Point is, it seems like a fair idea but people will abuse it and turn it into something that would bring WAY more harm than good. Happy?

Got it. A lot of people see the world this way but I think it shakes out differently.

I can see big low cost brokers forming but I also think the industry continues to have high caliber agents (who are paid accordingly) since many customers will want quality advice. IMO, it would look a lot like the tax or investment industry.
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DOIs don't really care if agetns make money or not but most forbid rebating for the protection of the insured. With the current commission structure rebating cannot be sustained beyond the first year of the life of a product. So if anything other that one year term is being offered, the insured is going to take a bath. They will end up being induced to change plans every year and never build any value within the plan. Eventually, should they live, they will be come uninsurable and be stuck with a plan that has such a high premium they cannot keep it in force.

In effect rebating = inducement and leads to churning. Even if rebating is not forbidden by a state, at least one of the other two is so an agent who actively practices rebating can still end up in a heap of trouble.

Another reason rebating is forbidden, is it can threaten the solvency of a company. Most companies pay out far more than one years premium just to issue a policy. In the case of FE companies, they are paying 125%+ in first year commission plus the cost of MIBs, Script Checks, Underwriter Salaries, H.O. expenses, etc. If I can get by with rebating, and I am on 125% commission, I can advertise "Free Life Insurance plus $100.00 signing bonus to applicants". I can arrange with a financing company to front the annual premiums on a 30 day loan. I submit a $2000.00 premium, the company pays me $2500.00, I pay the client $100.00 and the finance company $2050.00 and I still have made $350.00. When the second year premium comes due, I roll it to another company doing the same thing. The company is in the hole $3000.00. That is why most companies forbid rebating.

Thanks! Very helpful.