How States Regulate or Limit MGA Non-Commission Fees: An Example

This post is part of a series sponsored by AgentSync.

Managing general agents (MGAs) is a black hole of insurance knowledge – with many compensation paths, it can be confusing to understand how MGAs are even allowed to collect revenue, and it varies depending on the state!

(Of course it does, but you already knew that, your smartypants.)

MGAs and their life insurance counterparts, MGUs, often go over the edges of insurance regulation. In some contexts they are regulated as agencies, in others as carriers. The Venn diagram of opportunities to get involved in when they are regulated as what is a perfect circle.

With that in mind, if you are responsible for MGA or MGU regulation, remember that this is a starting point, but it is not the basis for legal decisions. Readers must do their own due diligence, punctuation, exclamation marks.

Agency-like MGA compensation

Because MGA has a strange space in the industry, they can get paid in different ways.

MGAs and MGUs providing downstream producer sales are likely to have been awarded commissions from these producer sales, as well as any relevant finder fee benefits or “finder fee” incentives. These fees are the same as an agency acting in the same capacity would do.

Carrier-mandatory MGA compensations

An MGA or MGU that guarantees, pays claims or takes on other tasks for a carrier will be compensated by that carrier in accordance with their specific government mandate.

MGA or MGU acts in a confidence-building capacity and acts on behalf of the insurance companies in this case, and their actions will be upheld as if they were the actions of a carrier.

Similar to a TPA arrangement, MGA will generally be compensated by the insurance companies for these services, either as a percentage of the business or through a transaction-based fee. This is another area where it is so important to be familiar with basic MGA regulation, and understanding your operator agreement is crucial.

However, underwriting, specifically, is a fun thing to do. If you have ever taken out a life insurance policy, there is a good chance that you have not paid anything. But if you bought a home, the guarantee for your bank’s mortgage insurance was probably included in your cost, even if it was not exactly clear as a line.

Commission-free consumer fees

If carriers do not have to compensate MGAs for emission guarantees, and it can be passed on to a consumer, what more can be passed on? Reimbursement structures really raise many questions!

Say, for example, that an MGA specializes in a broker-like service, builds a plan and seeks a specific carrier coverage for the customer that meets a niche need? MGA may want to charge a brokerage fee for service, separately from any commission for the final sale of the insurance.

Or how about a life insurance MGU who hires a medical concierge service to conduct medical aptitude tests for life insurance qualifications? Is there a charge that MGU can pass on to consumers?

Most states have fairly tight reins on the charges that they allow carriers, MGAs, agencies and manufacturers to pass on to consumers, but even when we dive into this, this is an area with a lot of variety, nuances and gray space.

Regulation on MGA commission-free fees

If you read our previous paragraph on compensation for brokers, many of these feelings apply here as well: states have different ideas, and although all states say that “consumers should not pay twice for the same service”, they do not all agree on what it really means. (Seriously you should read that broker. We’ll wait.)

Like brokers, MGAs and MGUs have a shaky middle ground where there are not many rules that are specifically aimed at their specific business structures. Instead, as we noted from the beginning, they often alternate between the regulatory context of authorities and the carrier. To make things more complicated, agencies and MGAs are often kept to the same standard as manufacturers when it comes to due diligence and certain product rules.

To get a straight answer, we asked some states directly about the details of their regulation. “How do you handle non-commission MGA fees?”

Rhode Island’s approach to MGA non-commission fees

The Rhode Island Department of Business Regulation pointed to a bulletin released in 2002 that interpreted state law. The bulletin uses “P&C producer” throughout the paragraph, but since this was in response to an MGA-specific question, we interpret it to apply to MGA as well.

The bulletin says that if the producer collects a commission, they can not also charge a fee for “services that are usually associated with the sale, order or negotiation of the insurance.”

In addition, carriers can not transfer fees in the P&C space that is part of the cost of doing business. Instead, the bulletin says that the carrier must take into account commissions and other costs in the taxpayers’ arguments that they submit for approval to the state.

And the Rhode Island Bulletin specifically instructs the parties involved not to charge based on how a consumer pays for insurance products: If there are back-end charges for credit card fees or cash transfers, the state says to plan ahead for those expenses because you can not pass them on to consumers.

In the full text of the Ordinance for Surplus Line Brokers, Rhode Island states that surplus line brokers must levy a tax and can transfer pre-agreed and pre-approved insurance costs to the insured. If you’re confused about taxes and insurance, remember that unsecured insurance – sold by brokers with surplus lines – is not covered by the full protections and benefits of state law, so it’s taxed as a sale.

Maryland’s approach to MGA non-commission fees

Old Line State also responded to our request for fee guidance. Like Rhode Island, Maryland has a fee or a commission (not both!) Answers, although there are some nuances in Maryland state insurance laws that are worth talking about.

• Variable commissions on commercial policy: If a producer sells a policy to one exempt commercial policyholders (which comes with very solid guidelines, as described in this practical 2018 bulletin), they can accept a payment of variable commission that does not follow standard guidelines approved by the state only if it means that the policyholder will pay at or below the state-approved interest rate .
• Commission or a service fee: Manufacturers can charge a fee of up to 15 percent of the insurance premium only if the insurer or MGA does not repay a commission to them.
• Life insurance providers (or, probably, MGUs if they fill this role) can transfer the cost of a medical examination to take out a life insurance applicant.
• Surplus brokers can transfer the cost of sales tax associated with selling unapproved insurance and can – to a limit – transfer the cost of taking out, checking or writing an insurance policy.
• A manufacturer may pass on the fees for placing insurance to the Maryland Automobile Insurance Fund, including the cost of obtaining a Maryland Motor Vehicle Administration driver’s license.
• An insurer can charge a fee for late premium payments or charge to have a overdue insurance reintroduced.
• A producer or a surplus broker can transfer the cost of running a payment through a credit card or other fee-based process. You will notice that this is explicitly different from Rhode Island’s guidance.

Kentucky’s approach to MGA non-commission fees

Kentucky’s law is quite short when it comes to insurance premiums. The State Insurance Department referred us to a section which in principle only states that insurance distributors should only collect premiums for insurance and any additional actual costs required to secure that insurance. Another amendment to the Kentucky Act 2010 adds that non-life insurance manufacturers can collect to cover the cost of insurance if those costs have been approved by the Kentucky Insurance Commissioner.

The Kentucky Insurance Department’s answers to our questions also included the department’s own interpretation:

The department does not produce a breakdown of permitted or prohibited fees, but has rather informed units in the past about the department’s interpretation of KRS 304.12-190.

The department’s position is that an agency can transfer postal and credit card fees to an insured person, as long as the agency does not benefit from the extra fees. In addition, you have specifically referred to insurance premiums. This is addressed in KRS 304.13-171allowing insurance premiums to be transferred to insured persons as long as those premiums have been filed with and approved by the Kentucky Insurance Commissioner.

You’re probably thinking, “Thank you so much for that test, now I have a list of three states that each take a different approach to a simple question.” And you’re right. Our takeaways:

• Note that both Maryland and Kentucky say it is a good idea to pass on the cost of accepting credit card payments to your customer. At the same time, Rhode Island specifically says you can not do that.
• All three allow surplus insurance companies to transfer insurance premiums, but have different approaches to how other industries should handle these costs.
• Your best bet is to check specifically with each state to see what fees it allows or does not allow before getting yourself into statutory hot water.

AgentSync can not solve your headache with state-authorized fees, but if you are tired of reading through state legislation and making your own interpretation of the state’s requirements for producer licensing and compliance, we’ll feel your pain. If you are a carrier, MGA or agency and want to take a regulatory aspirin, see how AgentSync can help.

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