What Is Rebating In Insurance?

Rebating in insurance means returning a portion of the premium or the agent’s commission on the premium to the insured or other inducements to place business with a specific insurer.

Basically, rebating occurs when any part of the commission or anything else of value is given to the insured as an inducement to buy a policy.

Rebating seriously violates insurance law that comes with not only legal penalties imposed by state regulators but also various sanctions from insurance companies.

In most cases of rebating, the insurer will terminate its relationship with the agent/broker and other companies may choose to refuse to establish a relationship with an agent/broker who committed rebating in the past.

Rebating seems like a simple concept but its main purpose is to ensure that insurance agents cannot share their commissions with their customers.

The idea of rebating is intended to prevent insurance agents from offering current and prospective customers an inducement to buy a life insurance policy. With that inducement being directly funded by the commissions earned on the sale.

What Are The Cons Of Rebating In Insurance?

Rebates are mostly put in place for the benefit of the customers. Many people think that rebating is a fair deal because it is a part of negotiations.

Even though rebates are quite popular in sales, the insurance business is quite different and there are many cons in using this practice.

Some of the reasons why are:

The biggest companies can work on small margins and destroy competition. So, people will not save money but will pay more when fewer companies dictate the rules.
Insurance companies keep liquid cash available to pay off claims. And the rebating practice can increase the risk of insolvency, damaging the business built on trust.
The practice is a moral hazard for the insurance agents and can lead to unfair
deals.
The agents can use it to have unfair advantages over other agents from the
same or other company.
It gives advantages to tricks over honestly and could damage the insurance
industry in the long run.
Equally, it can ruin long-term relations, especially in life insurances. These are long-term
policies and having rebating on them can hurt both sights.

Is Rebating Illegal Everywhere?

They have made rebating illegal. However, there are two exceptions to the rule where rebating is illegal but with some restrictions- Florida and California.

In Florida, once they offer a rebate, the rule is that it should be offered to the next customers on the next deal.

The rebate in question must also be by the rebating schedule filed by the agent with the insurer issuing the policy to which the rebate applies. This limitation provides some protection from unfair insurance agents practices.

Also, in California where rebating is legal, agents can rebate commissions on any type of insurance, including auto and homeowner’s coverage.

California has the most remarkable history concerning insurance rebating and its current laws governing the practice warranted discussion beyond a simple table. California law originally prohibited insurance rebating of any kind, but the state repealed this law in the ’80s.

The Florida Supreme Court reaffirmed the validity of agent premium rebating in a 2000 decision. In practice, rebating is not common because an agent must offer the same rebate to all prospective purchases.

Although a Lower California court upheld the validity of anti-rebating statutes, the decision was rendered moot with the passage of Proposition 103 in 1988. The California Supreme Court ultimately upheld the validity of rebates.

Why Is Rebating Rarely Used?

Of recent, it has been rare to see rebates in insurance. Some of the reasons why this is so are:

Asides from the two states listed above, a rebate is illegal and as such, the usage of
rebating can bring along legal issues.
Agents who use rebating can have both legal issues and problems with their respective insurance companies.
When insurance companies use rebates, they may go through losing their licenses
revocation, nonrenewal, and other penalties depending on the state.
The short benefits always come with a price in a loss of good reputation, legal
issues, and less cash flow in the long run.

What Is The Purpose Of Rebating Laws?

Different purposes rebating law serves. Some of them are:

Rebating laws seek to level the playing field for insurance producers. It does this by avoiding unfair advantages that some agents may have if they are in a position to offer a portion of their commissions to their prospective clients.
By putting rebating laws in place, if a company chooses to pay higher compensation than another, the agent may use that higher commission rate to offer a rebate to his/her potential client to win the sale.
Rebating laws generally speak to rebating in a way that silos insurance companies from insurance producers.
The rebating law has also been implemented to ensure that the difference between an intent to gift a potential customer a thing and rebating is well differentiated.
The law has provided that gift must not be tied to the purchase of an insurance policy and cannot exceed $15. Also, most gifts are not allowed especially gifts used to induce someone to meet with an agent to hear about insurance or provide information that could lead to a quote. Several states have laws that specifically guide the giving of gifts. Some other states like Utah, Vermont, and Virginia, have no guidance given on the said gifts.
While most rebating conversations take place in the context of new business, rebating laws apply to inducements used to persuade a current policyholder to continue paying his/her premiums.
Rebating laws generally speak to rebating in a way that silos insurance companies from insurance producers (i.e. agents and brokers).

What Is The Difficulty Of Anti-Rebating Laws?

Anti-rebating laws were originally enacted to combat unfair and discriminatory sales practices and to protect insurer solvency.

The NAIC’s Unfair Trade Practices Act (#880) created a measure of uniformity in handling anti-rebating issues across states. Many states allow exceptions to anti-rebating rules.

The state anti-rebating laws have been faced with the issue of lack of consistency from state to state, both by statute and especially by interpretation.

Some states, such as California, don’t even have anti-rebating laws. Many insurance startups don’t have the regulatory compliance staffing to tailor their business practices to the 50 different state insurance jurisdictions, and instead, want a one-size-fits-all solution that works in all
50 states.

This has proven difficult with state anti-rebating laws where the rules vary quite a bit.