Conflicts of Interest and Disclosing Compensation

Every producer has interests of their own: commissions, bonuses, ties to an insurer, sometimes a stake in a client’s affairs. A conflict of interest arises when one of them could pull your advice away from what is best for the client. Wisconsin law requires you to disclose some conflicts, to avoid or manage others, and bans a few outright.

Definitions

Material conflict of interest

Under Wisconsin’s annuity statute, “a financial interest of an insurance intermediary in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation” (s. 628.347 (1) (ar), Wis. Stat.). Cash and noncash compensation are excluded from this definition and handled by disclosure instead.

Cash and noncash compensation

Cash compensation includes commissions, fees, overrides, sales charges and other cash benefits; noncash compensation is everything else, such as health insurance, office rent, office support and retirement benefits (s. 628.347 (1) (ac), (aw)).

Know Whose Side You Are On

A broker acts in procuring insurance “on behalf of an applicant for insurance or an insured” and acts for the insurer only in collecting premiums or other ministerial acts; an agent is an intermediary acting “other than as a broker” (s. 628.02 (3), (4)). A licensed agent “may act as an agent or as a broker” (s. 628.04 (1m)), so the same person can represent an insurer in one transaction and a buyer in the next.

A buyer who thinks you are shopping the market for them, while you are placing business with the one insurer that appoints you, is relying on a false picture. Say plainly whom you represent before you recommend anything.

Fees Charged to the Client

Wisconsin allows you to be paid by the client as well as, or instead of, by the insurer. Because the client cannot see that arrangement unless you show it, s. 628.32 (1) sets a strict condition. You may not accept compensation from an insured, or from both an insured and another source, for the insured’s purchase of insurance or for advice about the insured’s insurance needs or coverage, unless you disclose:

• the amount of compensation the insured will pay, not counting commissions the insurer pays you; and
• if another source will also pay you, the fact that you will be paid by that source too.

Three features of the rule matter in practice:

• Timing. The disclosure must come before the insured incurs an obligation to pay. A fee first mentioned on the invoice is too late, even if the client pays it without objection.
• Form. It must be in writing and made “clearly and conspicuously,” not buried in small print. The Commissioner may prescribe the form by rule (s. 628.32 (2)).
• Scope. It covers fees for advice as well as for a purchase.

Suppose an agent charges a client $500 to review her commercial coverage and may also earn a commission if she buys through him. Before she agrees to the review, he gives her a written statement of the $500 fee and the fact that the insurer will also pay him. She can now weigh whether the commission shapes his advice. Without that disclosure, he could not lawfully accept the fee.

Annuities: Identify, Avoid or Manage, and Disclose

Annuities are where Wisconsin states a producer’s conflict-of-interest duty in so many words. When you recommend an annuity you must act in the consumer’s best interest, “without placing the financial interest of the intermediary or insurer ahead of the consumer’s interest” (s. 628.347 (2) (a)). Of the standard’s four parts (care, disclosure, conflict of interest and documentation), two address conflicts directly.

The conflict of interest obligation. You “shall identify and avoid or reasonably manage and disclose material conflicts of interest, including material conflicts related to an ownership interest” (s. 628.347 (2d)). If you own part of the firm that wholesales a product, identify that interest, then either avoid it, for instance by not recommending that product, or manage it and tell the consumer.

The disclosure obligation. Before you recommend or sell an annuity, you must prominently disclose, on a form substantially similar to the one the Commissioner’s office posts on its website (s. 628.347 (2c) (a)), among other things:

• the scope and terms of your relationship with the consumer and your role in the transaction;
• which insurers you can sell for, described as “from one insurer,” “from 2 or more insurers,” or “from 2 or more insurers although primarily contracted with one insurer”;
• the sources and types of cash and noncash compensation you will receive, including whether you are paid by commission or by a fee for advice; and
• the consumer’s right to ask for more information about cash compensation.

If the consumer asks, you must give a reasonable estimate of your cash compensation, which may be stated as a range of amounts or percentages, and say whether it is paid once or repeatedly (s. 628.347 (2c) (b)).

The law separates pay from bias. You need not recommend the annuity with the lowest compensation (s. 628.347 (2b) (e)), but insurers must eliminate sales contests, quotas, bonuses and noncash compensation based on sales of specific annuities within a limited period (s. 628.347 (3) (a) 9.), because a prize for selling one product this month distorts advice.

Sidenote

Exam tip

Under s. 628.347, compensation is disclosed; material conflicts are identified, then avoided or managed and disclosed.

Controlled Business

“Controlled business” is insurance on the intermediary’s own property, life or other risk. Wisconsin limits the commission you can earn on it: you may not receive compensation from an insurer for insuring your own risks “unless during the preceding 12 months the intermediary had effected other insurance with the same insurer with aggregate premiums exceeding the premiums on the intermediary’s risks” (s. 628.51). Every license applicant must show an intent to comply with this rule (s. 628.04 (1) (b) 3.).

The test runs insurer by insurer. If your own auto, home and life policies with Insurer A carry $4,000 in premium, you may take a commission on them only if, in the preceding 12 months, you placed more than $4,000 of other business with Insurer A. Business with Insurer B does not count.

Your Own Stake in a Client’s Affairs

A “customer” is any individual you are doing, or within the past 3 years have done, insurance business with (s. Ins 6.60 (1) (c), Wis. Adm. Code). With a customer, you may not enter into a personal financial transaction, such as a loan in either direction, custody of or a power of attorney over their money, or a share in their profits or losses (s. Ins 6.60 (1) (d), (2) (a)), unless:

• the customer is a relative or lives in your household;
• the deal is a bona fide arm’s-length transaction and the customer is qualified to assess it, or is advised by a qualified person other than you; or
• you are acting lawfully under securities or investment advisory authority.

You also may not knowingly be named beneficiary of a customer’s life insurance or annuity unless you have an insurable interest in the customer’s life (s. Ins 6.60 (2) (b)).

Agents Who Work for Lenders

A lender’s director, officer or employee who is also an agent is a “captive agent” (s. Ins 6.09 (2) (c)). The borrower needs the loan and may feel pressed to buy the lender’s insurance, so every borrower should have a reasonable opportunity to buy the property coverage the lender requires from any licensed insurer through any licensed agent, and at a minimum should be able to substitute another adequate, approved policy within 30 days after coverage first begins and within 30 days before each annual anniversary (s. Ins 6.09 (3) (b), (c)). Neither a captive agent nor an agent who knows or should know the facts may sell the coverage if the lender refuses approved policies from other insurers or penalizes substitution (s. Ins 6.09 (4)).

Lesson summary

• For annuities, a material conflict of interest is a financial interest of yours that a reasonable person would expect to affect the impartiality of your recommendation (s. 628.347 (1) (ar)).
• A licensed agent may act as an agent for the insurer or as a broker for the buyer (ss. 628.02, 628.04 (1m)); tell the client which.
• Before a client is obligated to pay you any fee, disclose in writing, clearly and conspicuously, the amount and the fact of any other compensation (s. 628.32).
• For annuities, identify and avoid, or reasonably manage and disclose, material conflicts, and disclose your role, the insurers you represent and how you are paid (s. 628.347 (2c), (2d)).
• You may earn commission on your own risks only if, in the preceding 12 months, your other business with that insurer exceeded those premiums (s. 628.51).
• Personal financial transactions with customers of the past 3 years, outside narrow exceptions, and naming yourself a customer’s beneficiary without insurable interest, are unfair trade practices (s. Ins 6.60).
• Borrowers must have a real choice of insurer and agent, including 30-day substitution windows (s. Ins 6.09).