Rebating in insurance is a term used to describe the practice of returning a portion of an insurance premium or commission to the policyholder or customer with the intention of inducing an insurance sale.
Rebating might include rebates, premium discounts, or reimbursements.
Rebating is illegal in most states and provinces because it can lead to unfair competition, inadequate customer coverage, and insurer insolvency.
Understanding Rebating in Insurance
Definition of Rebating in Insurance
Rebating in insurance is the act of an agent or broker offering to pay part of their commissions to a policyholder or customer as an incentive to buy from them. Rebating or “inducement” might involve indirect payments or advantages from the agent or broker.
How Rebating Works?
Rebating works by giving the customer a financial advantage or reward for purchasing an insurance policy from a specific agent or broker.
For example, an agent may offer a customer a rebate of 20% of their premium if they buy a life insurance policy from them. Alternatively, a broker may offer a customer a discount on their next premium if they renew their auto insurance policy with them. Or, an insurer may offer a customer a refund of a portion of their premium if they cancel their policy within a certain period.
The Illegal Aspects of Rebating
1. Unfair and Deceptive Insurance Practices
Rebating is considered illegal in many states and provinces because it can result in unfair and deceptive insurance practices. For instance, rebating can create unfair competition among insurers and agents who may not be able to offer the same incentives to their customers. This can reduce the quality and diversity of insurance products and services available to consumers. Moreover, rebating can deceive customers into buying insurance policies that they may not need or want, or that may not provide adequate coverage for their needs. This can expose customers to financial risks and losses that they may not be aware of.
2. Offering Incentives to Induce the Purchase of an Insurance Policy
Rebating is also illegal because it violates the principle of offering incentives to induce the purchase of an insurance policy. According to this principle, insurers and agents are not allowed to offer anything of value to customers that is not provided for in the policy or contract. This is to ensure that customers are making informed and rational decisions based on the features and benefits of the policy, not on external factors or inducements. Offering incentives to induce the purchase of an insurance policy can also be seen as a form of coercion or manipulation that interferes with the customer’s free choice and consent.
3. Giving Something of Value Not Provided in the Policy
Rebating is also illegal because it involves giving something of value to customers that are not provided for in the policy or contract. This can create problems for both insurers and customers. For insurers, rebating can reduce their profitability and solvency by lowering their premium income and increasing their expenses. For customers, rebating can create tax liabilities and legal issues if they receive something of value that is not reported or accounted for properly.
Regulations and Penalties
1. Rebating Laws and Regulations
Rebating laws and regulations vary widely across different states and provinces. Some states restrict insurers and brokers from providing consumers rebates, while others allow them under specified circumstances and limitations. In general, rebating laws and regulations are enforced by the insurance department or regulator of each jurisdiction. Customers who are offered rebates by insurers or agents should check with their local insurance department or regulator before accepting them.
2. Prohibition of Inducements and Coercion in Insurance
Rebating rules and regulations prevent insurance inducements and compulsion. Many US states have adopted the NAIC Model Act, which prohibits this. The Model Act prohibits unfair discrimination in life insurance or annuity rates, dividends, or other benefits, or contract terms and conditions between individuals of the same class and equal expectation of life. The Model Act also prohibits unfair discrimination between individuals of the same class and essentially the same hazard in the amount of premium, policy fees, or rates charged for any policy or contract of an accident or health insurance, in the benefits payable thereunder, in any of the terms and conditions of such contract, or in any other manner.
3. Examples of Rebating and Its Consequences
Rebating can have serious consequences for both insurers and customers who engage in it. Here are some examples of rebating and its consequences:
- In 2018, a New York life insurance representative incurred a $1.5 million penalty from the state’s Department of Financial Services. He had been refunding more than $1 million to his clients over six years. His license also faced revocation and he got prohibited from insurance sales within the state.
- The following year in 2019, a Florida health insurance intermediary received a sentence of 18 months imprisonment and a mandate to repay $2.5 million for providing refunds of over $2 million to his clientele over four years. He also confessed to tax evasion and wire fraud offenses.
- Lastly, in 2020, a California agent dealing with property and casualty insurance faced a $10,000 fine from the state’s Department of Insurance for offering a $500 rebate to a client who acquired a homeowners insurance policy from him. This agent had his license suspended for six months and needed to fulfill an ethics course.
