This post is part of a series sponsored by AgentSync.
Managing General Agents (MGAs) is a black hole in insurance knowledge – with so many compensation avenues, it can be confusing to understand how MGAs are even allowed to collect revenue, and they vary by state!
(Of course it is, but you already know that, smarties.)
MGAs and their life insurance counterparts, MGUs, often skid over the edges of insurance regulation. In some contexts, they are regulated like agencies, and in others, like carriers. Venn diagram of the opportunities that can be confused when they are structured like a perfect circle.
With this in mind, if you are responsible for regulating an MGA or MGU, keep in mind that this is a starting point, but not the basis for legal decisions. Readers should do their due diligence and the period and exclamation point.
MGA compensation like agency
Since MGAs have a peculiar space in the industry, they may be paid through a variety of means.
MGAs and MGUs that provide final producer sales may have charged commissions from these producer sales, in addition to any related sales incentive perks or “finder fee” type incentives. This fee is the same as that paid by an agency acting in the same capacity.
MGA Duty Carrier Compensation
An MGA or MGU that is underwriting, paying claims or assuming other duties of carrier will be reimbursed by that carrier in accordance with its specific contract imposed by the state.
MGA or MGU acts in a fiduciary capacity, acting on behalf of the insurance company in this case, its actions will be suspended as if they were the actions of the carrier.
Similar to the order of TPAMGAs will generally be reimbursed by insurers for these services either as a percentage of the business or through a transaction-based fee. This is another area where you are familiar With basic MGA regulation is key-Understanding your carrier contract is critical.
The underwriting, specifically, is funny. If you’ve ever taken out a life insurance policy, there’s a good chance you haven’t paid anything. But if you’ve just bought a home, underwriting your bank’s mortgage insurance will probably be included in your cost, even if it’s not quite as obvious as an item.
Consumer fees without commission
If carriers don’t have to reimburse MGAs for underwriting, and that may be passed on to the consumer, what else might be transferred? Truthfully, compensation structures raise a lot of questions!
For example, let’s say MGA specializes in a brokerage-style service, develops a plan and researches specific carrier coverage for a client that presents a niche need? MGA may wish to charge a broker fee for the service, separate from any commission for the final sale of the policy.
Or how about MGU Life Insurance that hires a medical concierge to conduct medical fitness tests for life insurance qualification examinations? Is this a fee that MGU can pass on to consumers?
Most states are very strict about fees that they allow carriers, MGAs, agencies, and producers to pass on to consumers, but even while diving in, this is an area with a lot of variance, nuance, and gray space.
MGA Non-Commission Fee Regulation
If you are Read our previous article on broker compensation, a lot of these sentiments apply here, too: Countries 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 this broker piece. We’ll wait.)
Like brokers, MGAs and MGUs have a jibbly middle ground where there aren’t a lot of regulations specifically geared toward their specific business structures. Instead, as we noted from the start, they often switch between agency and carrier regulatory contexts. To make matters more complicated, agencies and MGAs are often held to the same standards as producers when it comes to due diligence and certain product regulations.
To get a straight answer, then, about the specifics of their regulations, we asked a few states directly. “How do you deal with MGA fees that are not commissions?”
Rhode Island’s approach to non-commission MGA fees
The Rhode Island Department of Business Administration referred to a leaflet it issued in 2002 to explain state law. The post uses “Product P&C” throughout the piece, but since this was in response to a question specific to MGA, we’re interpreting this for an MGA app as well.
The prospectus says that if the producer charges a commission, it also cannot charge “services normally associated with the sale, solicitation or negotiation of insurance.”
Additionally, carriers cannot pass on P&C fees that are part of the cost of doing business. Instead, the prospectus says the carrier needs to factor in commissions and other costs into the rate payers’ arguments they submit for approval to the state.
The Rhode Island prospectus specifically directs interested parties not to charge fees based on how a consumer pays for insurance products: If there’s a background fee for credit card fees or cash transfers, the state says plan ahead for those expenses because you can’t. pass it on to consumers.
In the The full text of the list of redundant line brokersSurplus line brokers, Rhode Island says, must charge tax and may pass on pre-approved and pre-approved underwriting costs to insureds. If you’re confused about taxes and insurance, remember that non-approved insurance—which is sold through overflow brokers—is not covered by the full protections and benefits of state law, so it’s taxed as a sale.
Maryland’s approach to non-commission MGA fees
The old line country also responded to our request for guidance on fees. Similar to Rhode Island, Maryland has a fee or commission (not both!), although there are some nuances Maryland Insurance Laws Which is worth talking about.
- Variable commissions on commercial policies: if the producer sells a policy to Exempt commercial document holder (Which comes with very powerful guidelines, explained in this helpful 2018 handout), they can accept variable commission payments that do not follow standard state-approved guidelines only if it means the policyholder will pay at or below the state-approved rate.
- Commission or Service Fee: Producers can charge up to 15 percent of the policy premium only if the insurance company or MGA does not pay them a commission.
- Life insurers (or, more likely, MGUs if they fulfill this role) can pass the cost of a medical examination to insure the life insurance applicant.
- Surplus line brokers can pass on the cost of sales tax associated with the sale of non-acceptable insurances, and they can – to a certain extent – pass on underwriting, inspection or policy writing costs.
- The producer can pass a policy placement fee in the Maryland Auto Insurance Trust, including the cost of obtaining a driving record from the Maryland Department of Motor Vehicles.
- The insurance company can charge a fee for late premium payments, or charge a fee for returning an expired policy.
- The overflow producer or broker can pass the cost of making a payment through a credit card or other fee-based process. You will notice that this differs significantly from the Rhode Island guidelines.
Kentucky’s approach to non-commission MGA fees
Kentucky law is very brief regarding insurance fees. The state insurance department has guided us to a section that basically just says Only insurance distributors must charge the premium and any additional actual costs necessary to insure this insurance. else Kentucky law amendment in 2010 He adds that P&C insurance producers can charge underwriting costs if those costs are approved by the Kentucky Insurance Commissioner.
The Kentucky Department of Insurance’s response to our questions also included an explanation of the special section:
The Department does not provide a breakdown of the fees that are allowed or prohibited, but has notified entities in the past of the Department’s interpretation of the fees. 304.12-190 KRW.
The department’s position is that the agency may pass the postage and credit card fees on to the insured, as long as the agency does not benefit from the surcharge. In addition, you have specifically mentioned the underwriting fee. This is covered in 304.13-171 kronerwhich allows the underwriting fee to be passed on to the insured as long as that fee has been filed and approved by the Kentucky Insurance Commissioner.
You might be thinking, “Okay, thanks so much for that sample, I now have a list of three cases that each take different approaches to a simple question.” And you’re right. Our takeaway:
- Both Maryland and Kentucky specifically note that it’s a good idea to pass the cost of accepting credit card payments to your customer. Meanwhile, Rhode Island specifically says you can’t do that.
- All three allow excess line insurers to pass the underwriting fee, but they follow various ways of how other lines of business handle these costs.
- Your best bet is to specifically check with each state to see what fees they allow or don’t allow before you get yourself in the regulatory hot water.
AgentSync can’t solve each state’s allowable fee issues individually, but if you’re tired of reading state legislation and doing your own interpretation of state requirements for product licensing and compliance, we can feel your pain. If you’re a carrier, MGA, or agency and want to take regulatory aspirin, learn how AgentSync can help..