Flood Rebating Prohibited…This is Seismic!

In what many agents and carriers will find monumental, though for widely diverging reasons, the federal government has just instructed Write Your Own (WYO) flood carriers to cease allowing agents to rebate any portion of their commission.

For those rebating and those competing with those who rebate…this is seismic!

The memorandum (W-12026) explaining the decision was received just today by WYO carriers and the NFIP servicing agent in charge–it’s effective October 1, 2012 for both new and renewal business.  Signed by Edward Connor, Deputy Associate Administrator for Federal Insurance, its foundation was straight forward…

“The goals of the NFIP are better suited by a system of uniform national pricing that will insure that policyholders pay the same price for the same risk.”

Sounds like a done deal.  And it probably is, but…this wicket has always been far stickier than it appears.

After all, this isn’t the first time federal flood authorities have prohibited rebating.

I recall efforts by the Florida Association of Insurance Agents (FAIA), especially its venerable Director of Education, Bob Ross who, along with IIABA had done a good job convincing NFIP of the evils of rebating.

Once a prohibition was implemented, however, a large broker or two raised objections citing Florida’s supreme court decision (See NOTE #1, below) which outlawed the NAIC “anti-rebating” statute lobbied by FAIA’s predecessor in 1915.  The case was brought by the Dade County Consumer Advocate, Walter Dartland who alleged the statute violated the due process clause of the Florida constitution. Click here for background and arguments.

Eventually NFIP reversed itself deferring to the rebating laws of each state. Today, only two states allow rebating; Florida, due to the supreme court decision, and California due to the infamous 1988 voter initiative, Prop-103.

With an absolute prohibition off-limits, Florida lawmakers saw fit to implement a strict set of statutory guidelines limiting the practice of rebating, (§626.572); one of which states:

“… rebates shall not be given to an insured with respect to a policy purchased from an insurer that prohibits its agents from rebating commissions…”

With this decision by the fed, WYO carriers are being directed to no longer authorize agents to rebate flood commissions.

It’s too early to tell exactly how the marketplace will react, but…it doesn’t bode well for those agencies founded as flood rebaters–agencies built on rebates that often exceeded more than half their commission income and that was the lure for other business.  They used the promise of a rebate on flood for large condo’s, for example, to attract the rest of the account, using whatever market they could find, mostly E&S and Citizens.

On the other hand, those who lost business to the rebaters, or who formed rebating subsidiaries to compete, may get a chance now to rebid that which they lost.

We’re talking millions in “commission” income!

Those interested in the background and history of Florida’s Anti-Rebating Law can read a white paper by the same name, drafted for FAIA a while back by yours truly.  Those with information on this decision or its impact, pro or con, please feel free to share it with me, in confidence if you prefer.

There’s more to come…count on it!

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NOTE #1: In 1977 a licensed Florida insurance agent, Joseph Blumenthal, had sued the Florida DOI/OIR, arguing that the anti-rebate laws prevented him from competing. The lower court held that the laws were constitutional, and Mr. Blumenthal petitioned the state supreme court, but died during appeal and his case was dismissed.  In May of 1983, Walter Dartland, Director of the Dade County Consumer Advocates Office, picked up the case ultimately leading to a decision by the Supreme Court that the anti-rebating statute was unconstitutional.

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