How States Regulate or Restrict MGA Non-Fee Charges: A Pattern
This post is part of a series sponsored by AgentSync.
Managing general agents (MGAs) are a black hole of insurance knowledge – with many avenues of compensation, it can be confusing to understand how MGAs are even allowed to collect revenue, and it varies by state!
(Of course it does, but you already knew that, you smartypants.)
MGAs and their life insurance counterparts, MGUs, are often skating the edges of insurance regulation. In some contexts, they’re regulated like agencies, in others, like carriers. The Venn diagram of opportunities to get mixed up about when they’re regulated like what is a perfect circle.
With that in mind, if you’re responsible for MGA or MGU regulation, keep in mind this is a starting point, but it’s not the basis for legal decisions. Readers must do their own due diligence, period, exclamation point.
Agency-like MGA compensation
Because MGAs hold a strange space in the industry, they might get paid through a variety of means.
MGAs and MGUs that provide downstream producer sales will likely have assigned commissions from those producer sales, as well as any relevant sales incentive perks or “finders fee” type incentives. These fees are the same that an agency acting in the same capacity would make.
Carrier duty MGA compensation
An MGA or MGU that is doing underwriting, claims-paying, or taking on other duties for a carrier is going to be compensated by that carrier according to their specific state-mandated contract.
The MGA or MGU is acting in a fiduciary capacity, acting on behalf of the insurance carrier in this instance, and their actions are going to be held up as if they are the actions of a carrier.
Similar to a TPA arrangement, MGAs are generally going to be compensated by the insurance carriers for these services either as a percentage business or via a transaction-based fee. This is another area where being familiar with basic MGA regulation is so key, and understanding your carrier contract is critical.
Underwriting, specifically, though, is a funny thing. If you’ve ever been underwritten for a life insurance policy, there’s a good chance you didn’t pay a thing. But if you’ve purchased a home, the underwriting for your bank’s mortgage insurance likely was included in your cost, even if it wasn’t exactly clear as a line item.
Non-commission consumer fees
If carriers don’t have to compensate MGAs for underwriting, and that might be passed on to a consumer, what else can be passed on? Genuinely, compensation structures raise a lot of questions!
For instance, say an MGA specializes in a brokerage-style service, building a plan and seeking a specific carrier coverage for the client that delivers on a niche need? The MGA may want to collect a broker’s fee for service, separate from any commission for the ultimate sale of the policy.
Or, how about a life insurance MGU that hires a concierge medical service to conduct medical fitness exams for life insurance qualification screenings? Is that a fee the MGU can pass on to consumers?
Most states maintain a pretty tight rein on the charges they allow carriers, MGAs, agencies, and producers to pass on to consumers, but even as we dive in, this is an area with a lot of variation, nuance, and gray space.
Regulation regarding MGA non-commission fees
If you read our past piece on broker compensation, a lot of those sentiments apply here, too: States have different ideas, and, while all states say “consumers shouldn’t pay twice for the same service,” they don’t all agree on what that actually means. (Seriously you should read that broker piece. We’ll wait.)
Like brokers, MGAs and MGUs hold a wibbly jibbly middle ground where there aren’t a lot of regulations specifically directed toward their specific business structures. Instead, as we noted from the outset, they often switch between agency and carrier regulatory contexts. To make things more complicated, agencies and MGAs are often held to the same standard as producers when it comes to due diligence and certain product regulations.
To get a straight answer, then, on the specifics of their regulation, we asked a few states directly. “How do you handle MGA fees that aren’t commissions?”
Rhode Island’s approach to MGA non-commission fees
The Rhode Island Department of Business Regulation pointed to a bulletin it released in 2002 interpreting state law. The bulletin uses “P&C producer” throughout the piece, but, since this was in response to an MGA-specific question, we’re interpreting it to apply to MGAs, as well.
The bulletin says if the producer collects a commission, they can’t also charge a fee for “services that are customarily associated with the selling, soliciting or negotiation of the insurance.”
Additionally, carriers can’t pass on charges in the P&C space that are part of the cost of doing business. Instead, the bulletin says the carrier needs to factor commissions and other costs into ratepayer arguments they submit for approval to the state.
And Rhode Island’s bulletin specifically instructs the parties involved not to charge based on how a consumer pays for insurance products: If there are back-end fees for credit card charges or cash transfers, the state says plan ahead for those expenses because you can’t pass them on to consumers.
In the full text of regulation for surplus lines brokers, Rhode Island says surplus lines brokers must charge a tax and may pass on pre-agreed and pre-approved costs of underwriting to insureds. If you’re confused about taxes and insurance, remember nonadmitted insurance – which is sold through surplus lines brokers – isn’t covered by the full protections and benefits of state law, so it is taxed as a sale.
Maryland’s approach to MGA non-commission fees
The Old Line State also responded to our request for fee guidance. Similar to Rhode Island, Maryland has a fee or commission (not both!) response, although there are some nuances to Maryland state insurance laws that are worth talking about.
- Variable commissions on commercial policies: If a producer sells a policy to an exempt commercial policy holder (which comes with very solid guidelines, outlined in this handy 2018 bulletin), they can accept a variable commission payout that doesn’t follow standard state-approved guidelines only if it will mean the policyholder will pay at or below the state-approved rate .
- Commission or a service fee: Producers can charge a fee of up to 15 percent of the policy premium only if the insurer or MGA isn’t paying a commission back to them.
- Life insurers (or, presumably, MGUs if they are filling this role) can pass on the cost of a medical examination to underwrite a life insurance applicant.
- Surplus lines brokers can pass on the cost of the sales tax associated with selling non-admitted insurances, and can – to a limit – pass on the costs of underwriting, inspecting, or writing a policy.
- A producer can pass on the charges of placing a policy in the Maryland Automobile Insurance Fund, including the cost of procuring a driving record from the Maryland Motor Vehicle Administration.
- An insurer can charge a fee for late premium payments, or charge to have a lapsed policy reinstated.
- A producer or a surplus line broker can pass on the cost of running a payment through a credit card or other fee-incurring process. You’ll note, this is explicitly different from Rhode Island’s guidance.
Kentucky’s approach to MGA non-commission fees
Kentucky’s law is quite brief regarding insurance fees. The state’s insurance department pointed us to a section that basically just says insurance distributors should only collect premium for insurance, and any additional actual costs necessary to secure that insurance. Another amendment to Kentucky law in 2010 adds that P&C insurance producers can collect to cover the costs of underwriting if those costs have been approved by the Kentucky insurance commissioner.
The Kentucky Insurance Department’s response to our questions also included the department’s own interpretation:
The Department does not produce a breakdown of allowable or prohibited fees, but rather has advised entities in the past of the Department’s interpretation of KRS 304.12-190.
The Department’s position is that an agency may pass mailing and credit card fees to an insured, so long as the agency is not profiting off of the additional fees. Additionally, you have specifically referenced underwriting fees. This is addressed in KRS 304.13-171, which allows underwriting fees to be passed to insureds as long as those fees have been filed with and approved by Kentucky’s Insurance Commissioner.
You’re probably thinking, “Well thanks a lot for that sample, now I’ve got a list of three states that each take different approaches to a simple question.” And you’re right. Our takeaways:
- Notice, Maryland and Kentucky both specifically say it’s fine to pass on the cost of accepting credit card payments to your customer. Meanwhile, Rhode Island specifically says you can’t do that.
- All three allow surplus lines insurers to pass on underwriting fees, but take varied approaches to how other lines of business should handle those costs.
- Your best bet is to check specifically with each state to see what fees it does or doesn’t allow before you get yourself in regulatory hot water.
AgentSync can’t solve your state-by-state allowable fee headaches, but if you’re tired of reading through state legislation and doing your own interpretation of state requirements for producer licensing and compliance, we feel your pain. If you’re a carrier, MGA, or agency and want to take a regulatory aspirin, see how AgentSync can help.