This post is part of a series sponsored by AgentSync.
Managing General Agents (MGAs) are an insurance knowledge black hole – with so many compensation opportunities, it can be confusing to figure out how MGAs are even allowed to collect revenue, and it varies by state!
(Of course you do, but you smartypants already knew that.)
MGAs and their life insurance counterparts, MGUs, often touch the boundaries of insurance regulation. In some contexts they are regulated as agencies, in others as carriers. The Venn diagram of opportunities get confused on when they are regulated as what is a perfect circle.
With that in mind, if you are responsible for MGA or MGU regulations, keep in mind that this is a starting point, but not the basis for legal decisions. Readers should do their own due diligence, exclamation point.
Agency-style MGA compensation
Because MGAs occupy an odd place in the industry, they can be paid through a variety of means.
MGAs and MGUs that provide sales to downstream producers will likely be awarded commissions on those sales to producers, along with relevant sales incentives or “finder’s fee” type incentives. These fees are the same as those paid by an agency acting in the same context.
MGA carrier duty offsets
An MGA or MGU that performs underwriting, claims payment, or other duties for a carrier will be indemnified by that carrier in accordance with its specific state-mandated contract.
The MGA or MGU is acting in a fiduciary capacity, acting on behalf of the insurance company in this case, and their shares are going to be held as if they were the shares of an insurer.
Similar to a TPA agreement, MGAs will typically be remunerated by insurance companies for these services, either as a percentage or through transaction-based fees. This is another area where knowing basic MGA regulations is so essential, and understanding your carrier contract is key.
The subscription, in particular, however, is a fun thing. If you’ve already purchased a life insurance policy, chances are you haven’t paid anything. But if you bought a house, buying mortgage insurance from your bank was probably included in your cost, although it wasn’t exactly clear as an item.
Consumption fee without commission
If carriers don’t have to pay GAs for subscription, and that could be passed on to a consumer, what else can be passed on? Really, compensation structures raise a lot of questions!
For example, let’s say a GA specializes in a brokerage-type service, develops a plan, and searches for specific carrier coverage for the customer that meets a niche need? The MGA may wish to collect a brokerage commission for the service, separate from any commission for the final sale of the policy.
Or, how about a life insurance MGU that hires a concierge medical service to perform medical fitness exams for life insurance qualifying screenings? Is this a charge that the MGU can pass on to consumers?
Most states maintain a fairly tight grip on the fees they allow carriers, MGAs, agencies and producers to pass on to consumers, but even if we dive into it, this is an area with a lot of variations, shades and gray space.
MGA Non-Commission Fee Regulations
If you read our previous article 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 “, they don’t all agree. about what it actually means. (Seriously, you should read this broker article. We’ll wait.)
Like brokers, MGAs and MGUs hold a shaky middle ground where there aren’t many regulations specifically directed at their specific business structures. Instead, as we noted from the start, they often switch between agency and carrier regulatory contexts. To complicate matters, agencies and MAs 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, on the specifics of their regulations, we asked a few states directly. “How do you handle MGA fees that are not commissions?”
Rhode Island’s Approach to MGA’s Non-Commission Fee
The Rhode Island Department of Business Regulation pointed to a bulletin it issued in 2002 interpreting state law. The newsletter uses “P&C producer” throughout the article, but since this was an answer to an MGA-specific question, we interpret it to apply to MGAs as well.
The bulletin states that if the producer receives a commission, he cannot also charge a fee for “services usually associated with the sale, solicitation or negotiation of insurance.”
Additionally, carriers cannot pass on fees in the P&C space that are part of the cost of doing business. Instead, the bulletin says the carrier must consider commissions and other costs in taxpayer arguments they submit for state approval.
And the Rhode Island bulletin specifically directs affected parties not to charge based on how a consumer pays for insurance products: whether there are overhead charges for credit card charges or cash transfers , the state says to plan ahead for these expenses because you can’t pass them on to consumers.
In the full text of the regulations for excess line brokers, Rhode Island states that excess line brokers must charge a fee and can pass pre-agreed and pre-approved underwriting costs on to policyholders. If you’re confused about taxes and insurance, remember that non-admitted insurance – which is sold through excess line brokers – is not covered by all the protections and benefits of the state law, so it is taxed as a sale.
Maryland’s Approach to MGA’s Non-Commission Fee
The Old Line State also responded to our request for fee guidance. Similar to Rhode Island, Maryland has a fee or commission response (not both!), although there are some nuances in Maryland state insurance laws that are worth considering. discussed.
- Variable commissions on commercial policies: If a producer sells a policy to a exempt commercial insured (which comes with very strong guidelines, outlined in this 2018 how-to bulletin), they can accept a variable commission payout that does not follow standard state-approved guidelines only if it means the policyholder will pay at at or below the state-approved rate.
- Commission or Service Fee: Producers can charge a fee of up to 15% of the policy premium only if the insurer or MGA does not pay them commission.
- Life insurers (or, presumably, MGUs if they fill that role) can pass on the cost of a medical exam to underwriting a life insurance applicant.
- Surplus online brokers can pass on the cost of sales tax associated with the sale of unregistered insurance and can – to some extent – pass on the cost of underwriting, inspecting or drafting a policy.
- A producer can pass on the cost of placing a policy in the Maryland Automobile Insurance Fund, including the cost of obtaining a driving record from the Maryland Motor Vehicle Administration.
- An insurer may charge a fee for late premium payments or charge for reinstatement of an expired policy.
- A surplus line producer or broker may pass on the cost of executing a credit card payment or other fee-based process. You will notice that this is explicitly different from the Rhode Island tips.
Kentucky’s Approach to MGA Commission-Free Fees
Kentucky law is fairly brief when it comes to insurance costs. The State Department of Insurance gave us a section that simply says that insurance distributors should collect only the insurance premium and any additional actual costs necessary to secure that insurance. Another Kentucky law amendment in 2010 adds that P&C insurance producers may collect to cover underwriting costs if those costs have been approved by the Kentucky Insurance Commissioner.
The Kentucky Department of Insurance’s response to our questions also included the department’s own interpretation:
The Department does not provide a breakdown of permitted or prohibited charges, 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 can pass on mailing and credit card charges to an insured, as long as the agency does not profit from the additional charges. Also, you specifically referred to subscription fees. This is discussed in KRS 304.13-171which allows underwriting fees to be passed on to policyholders as long as these fees have been filed and approved by the Kentucky Commissioner of Insurance.
You’re probably thinking, “Well, thank you so much for that sample, I now have a list of three states that each take a different approach to a simple question. ” And you are right. Our takeaway meals:
- Notice that Maryland and Kentucky specifically say it’s okay to pass the cost of accepting credit card payments on to your customer. Meanwhile, Rhode Island specifically says you can’t do that.
- All three allow insurers in surplus lines to pass on underwriting costs, but take varying approaches to how other lines of business should manage these costs.
- Your best bet is to check specifically with each state to see what fees they allow or don’t allow before you get into regulatory hot water.
AgentSync can’t solve your state-by-state authorized fee issues, but if you’re tired of reading state law and making your own interpretation of state licensing and producer compliance requirements, we feel your pain. If you’re a carrier, MGA, or agency and want to take a regulatory aspirin, see how AgentSync can help.