WHILE rebating is seemingly proconsumer, the main reasons for the prohibition are actually grounded on consumer protection, to wit: one, is that rebating encourages “price discrimination,” since policy-holders, in the same actuarial pool, may not receive the same rebates; two, is that the practice will lead to the insurer’s insolvency, because the premium received will be less than that approved; and, third, rebating undermines agent professionalism.
The first would apply where rebates are given only to a select group; the second would appear valid only in cases of excessive rebates. The third argument is that agents should focus more on the quality of service, rather than on the price and commissions. Various court decisions have dealt with the antirebating law. The Pennsylvania Supreme Court stated: “The thrust of the antirebate provisions of the statute is against the placement of insurance, whereby the insured secures the insurance at a favored rate, regardless of the mode of the manner in which such favored rate is obtained. The court below well stated that, “as is universally stated and recognized, a reduction of cost is the test of whether or not the statute is being violated.”
The prohibition against rebating is gathering discussion in the US, with the Supreme Court of Florida (in 2000) and California striking down antirebating statutes and ruling that it is a valid practice. It continues to be prohibited in the other 48 states of the US. In 2012 the state of New York, in amending the antirebating law, passed a law allowing insurers and agents to give nominal promotional and advertising materials worth up to $25 to the insured or prospective clients during the insurance sales process. It is called the “keepsake” exception and covers such merchandise as pens, calendars, key chains and flashlights. The New Hampshire Insurance Department ruled that the promotional item cannot be tied to the purchase of insurance. Meaning, the promotional item must be offered to a consumer whether or not the consumer purchases a policy. The New York Insurance Department has issued advisories on prohibited acts, such as: offering to supply free cellular-phone device to those who complete an insurance application; and offering a free car wash to prospective clients to whom the agent is providing an automobile insurance quote. In Florida an insurer refused to provide infant car seats to automobile policyholders, citing the antirebate law. In Washington State the insurance commissioner advised agents that a promotional free trip to Seattle to watch a football game was illegal inducement. Indeed, there are advocates for the repeal of the antirebate law, invoking free-market and competition. It has even been pointed out that rebating is difficult to regulate, as it is not easy to detect and that it is widely considered as a legitimate marketing activity for the benefit of the public.
The prohibition against rebating started in the 1800s, when serious abuses in the sales of life insurance became rampant. Cutthroat competition flourished to the detriment of the insured. Any means were employed just to make the sales and increase profits. Some agents called “lightening agents” even committed outright fraud by selling policies and then simply disappearing. The most common, of course, was splitting the commission with some policyholders. As the practice became rampant, insurers gave larger commissions to enable agents to give larger rebates. From 10 percent on new business and 5 percent on renewals in 1860, it increased to 33-1/3 percent and 16-2/3 percent, respectively, in 1866. It spawned a race to attract agents with higher commissions. Moreover, with varying rebates being given out randomly, some policyholders were, in effect, subsidizing the rebates being given to other policyholders, and, thus, the issue of discrimination. The chaotic state, needless to say, led to ruinous competition among the insurers.
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Dennis B. Funa is currently the deputy insurance commissioner for Legal Services of the Insurance Commission. E-mail: dennisfuna@yahoo.com.