Please remember that this answer is provided in the spirit of public education, not as legal advice. If you require legal advice for a particular situation, you should consult an attorney.
A life insurance trust is a trust that is set up for the purpose of owning a life insurance policy. If the insured is the owner of the policy, the proceeds of the policy will be subject to estate tax when he dies. But if he transfers ownership to a life insurance trust, the proceeds will be completely free of estate tax. (The proceeds will be exempt from income tax either way.)
Given the current estate tax rate of 35%, a life insurance trust can save hundreds of thousands of dollars in estate taxes. However, there are several drawbacks to such an arrangement:
1. You can't change the beneficiary of the policy.
The insured must give up the right to change the beneficiary of the policy (the trust itself will be the beneficiary). The trustee alone has that right, and the insured cannot serve as trustee of his own life insurance trust. Of course, the insured will designate the beneficiaries of the trust (for example, his children). But because this designation cannot be changed after the life insurance trust has been set up, the insured will lack the flexibility to deal with changed family circumstances with this particular policy.
2. You can't borrow from the policy.
The insured can no longer borrow against the policy. If the trust allows him to borrow against the policy, he will be deemed to be an owner of the policy for estate tax purposes.
3. You can't transfer an existing policy to the trust -- unless you live for at least 3 more years.
If the insured transfers an existing policy to a life insurance trust and dies within the next three years, he will be treated as the owner of the policy and it will be taxed in his estate. Even if he survives another three years, he will have made a taxable gift in the amount of the cash value of the policy (of course, this is usually preferable to having the entire face value subjected to estate taxes). If the life insurance trust takes out a new policy on the insured's life, however, the insured will never be deemed to own the policy. Furthermore, no cash value will have built up yet, so no taxable gift will be made.
4. The life insurance trust must be irrevocable.
Once you set up and fund the trust, you cannot get the policy back. If you become uninsurable, you will be committed to this trust as your only life insurance.
5. Premium payments may use up your estate tax exemption.
If the policy has not yet endowed, you must find a way to pay the premiums without using up your estate and gift tax exemption. If you transfer securities to the trust so that the trustee will have income with which to pay the premiums, the full value of the securities will be a taxable gift. If you transfer cash to the trust each year to pay the premiums, each transfer will be a taxable gift. However, you may be able to exempt these premium payments from gift or estate taxes by setting the life insurance trust up as a Crummey Trust (see the FAQ on Crummey Trusts). Then each premium payment can be sheltered by your annual gift tax exclusion, which is $13,000 (indexed for inflation) per trust beneficiary.
6. You must find or hire a trustee.
The insured cannot serve as trustee of the life insurance trust. That means that he will have to find or hire a third party trustee. However, many banks and trust companies offer reduced fees for life insurance trusts because they involve essentially no investing decisions.
Despite these drawbacks, many people find that the tax saving potential of a life insurance trust is worth the cost and hassle. It allows you to remove from your estate a significant asset that you are unlikely to want access to during your life. And it ensures that the life insurance proceeds go 100% to the beneficiaries, not the federal government.
This program allows individuals who have purchased an LTCi policy and have exhausted the policy benefits, to protect some of their assets from Medicaid/Medical spend down requirements (i.e., the requirement that Medicaid recipients be legally destitute before receiving benefits).
The states are using the program to encourage the sale of private Long Term Care insurance in order to decrease the pressure on state Medicaid budgets. The program hoped to attract lower- to middle-income earners since they are most likely to turn to Medicaid but surprisingly it attracted higher-income Americans as well.
Originally the program was pilot in 4 states - California, Connecticut, Indiana and New York. However, given the high success of the program in the initial four states, as part of the Deficit Reduction Act of 2005 (DRA) the program was expanded. Now, ALL states are allowed to provide Partnership policies through The Deficit Reduction Act of 2005. DRA 05 also directed the U.S. Department of Health and Human Services (HHS) to draft a reciprocity agreement, which is optional for states. This reciprocity agreement allows claimants to use their policies in other Partnership states.
There are two significant differences between Partnership and non-partnership policies.
Partnership policies carry an endorsement from the state that they meet minimum standards in terms of policy benefits.
Partnership policies include a feature known as Medicaid Asset Protection. Protected assets will be disregarded for the purposes of determining financial eligibility for Medicaid, if an individual needs to apply for Medicaid to help pay their long-term care bills. Only Partnership policies provide Medicaid Asset Protection.
Technology and Total Insurance System
All TIS modules derive their information from a single instance database and business rule repository. The application supports the entire spectrum of core insurance related functions including client administration, underwriting, policy and endorsement generation, claims management, Co-insurance/Reinsurance handling, billing and collection of payments, cash receipts and disbursements, agency and commission management, production processing and management reports - all combined within a multi-company, multi-currency and multi-lingual system.
Our Total Insurance System includes a comprehensive solution that:
(a)enables identified users such as local and remote insurer's employees, agents, underwriters, claims adjusters or service providers, to process and complete transactions through the Internet, and;
(b)provides Point of Sale Self Service for Policies and Quotations for unidentified users (the broad public of Internet users) enabling them to enter information through the Internet, receive quotations and even bind and procure actual policy coverage. Full customer disclosure and transparency reduce service costs and improve service levels.
Flexibility is a key benefit of TIS as its table-driven structure, through user-administered tables, provides the capabilities to tailor operations to suit the unique needs of individual clients - to incorporate their business logic, define their particular dialog with their customers, and even alter and modify the system's GUI visual design - all this without re-programming.
Fundamentally, the ability to tailor the system enables TIS to support virtually all Personal, Commercial, and Health lines of business on the same common platform.
TIS complementing products include modules such as:
·Document management and imaging
·Self Service and agent portals
·Printout Design & Routing
·Reports & Statistics
Our Total Insurance System can optionally be integrated with Content Manager (or similar products) for document management and archiving. The combination of Total Insurance System and products like Content Manager enables the incorporation of archiving, retrieval and viewing of documents, pictures and forms throughout the policy, claims and collection processes.
TIS integrated modules are available as a complete comprehensive enterprise solution or may be deployed as functional components according to the client's business needs.
The Company was founded in 1927, originally as the Farmers Mutual Insurance Company. At that time the company was started to provide auto insurance to farmers. Over the years, the company has expanded its product line to incorporate a family of insurance products including Life Insurance. Since 1963, Farmers Mutual Insurance Company has been known as the American Family Mutual Insurance Company to reflect the selling of Life Insurance and other insurance products to a wider clientele. The Company is headquartered in Madison, Wisconsin and operates in 19 other states nationwide. Last reported earnings for December 2007 in terms of Gross Revenue were: $6.867 billion. As its name implies the American Family Insurance Company is dedicated to family values. It offers a line of life insurance products that can help growing families build a secure future.
To meet these needs, the company offers a variety of Term and Permanent Life Insurance options including, Universal Life, and Whole Life. American Family's Term Life Insurance policies are among the most affordable in the country and are available from for 5, 10, 20 or 30 year terms. Permanent Life Insurance policies from American Family are more expensive, but build cash value, and remain in effect for the entire lifetime of the policyholder. American Family offers both Whole Life and Universal Life insurance polices, both are Permanent Life Insurance, but Universal Life affords the policy holder the ability to change premium and death benefit amounts over the life of the policy.
Most Colleges have not yet recognized the need for a major specifically for those who wish to become Claims Adjusters, however there are some professional designations that have become prevalent among higher achievers in the field. For example, The American Institute for Chartered Property Casualty Underwriters awards the Chartered Property and Casualty Underwriter (CPCU) designation to experienced underwriters. Some Adjusters find that gaining these types of designations have been very advantageous to their careers. Many insurance companies prefer their claims adjusters to have a 4-year college degree preferably in business related fields, however having a degree in liberal arts is acceptable as well. There are times in which a person with a high school education will become a claims adjuster usually by promotion from within the claims department while serving as a customer service representative. Since there are no college majors for claims adjusters, many states require a state certification in order to practice as an adjuster. States also require that a certain number of continuing education credits for claims adjusters are earned each year in order to maintain their license. This continuing education is achieved by attending seminars and online training from different claim adjuster educational resources. One brief example of an educational seminar is where a group of claims adjusters will meet and discuss how to distinguish a false claim from a true claim.
Florida is one of the few states in the United States that has created specific designations for the licensing of insurance claims adjusters. The Accredited Claims Adjuster Designation, created by statute in coordination with Polk State College in 2002, allows an individual to obtain the Florida All Lines Independent or Company license, without taking the state licensing exam.
In some instances, such as with collapse insurance, courts have been involved in order to predicate a reasonable understanding of the guidelines of the policy in question. The meaning of terms such as "collapse" have undergone rigorous constitutional assessment. This leads to some ambiguity between what the law says and what is enforceable by modern mandates. The idea of "Structural Integrity" may not always be a universally understood term, but several articles have been published on the topic which suggests the field is evolving toward a continuity in terminology. For those interested in the claims adjustment field, in-depth study of legal principle is a necessity.
Most states require licensed adjusters to continue their education through a 'continuing education' requirement. Florida requires 24 hours of CE every two years. Texas Department of Insurance,Continuing Education
Working Conditions
Claims adjusters work long hours including work nights and weekends. Their work is appointment based and must revolve around the needs of clients.
Staff adjusters are those who work for a specific insurance company and usually have a company provided office from which to work. Independent and public claims adjusters often work from home. They receive their work assignments daily by fax machine, email, or by checking in to a designated website. Staff adjusters receive their assignments when they arrive at the office first thing in the morning. In the case of a severe natural disaster such as floods or tornadoes, or other catastrophe, independent and public adjusters travel to the area to supplement local adjusters. Often this requires the incoming adjuster's presence in the field for days to weeks at a time.
Catastrophe adjusters may spend days to weeks in a hotel or RV near the field of operations. Husband and wife teams often enjoy this type of work as it allows them to work and travel together to different parts of the country. Adjusters should become familiar with the reimbursement rules for each company with whom they work and track all expenses used in the line of work. Keep your receipts for everything as virtually all expenses, while deployed in the field, are tax deductible (confer with a qualified tax specialist for specific advice on what is and isn't deductible as an expense). A good software program or bookkeeping system is recommended.
Computer skills are essential, including keyboard skills. Most insurance companies store all documentation digitally. A digital camera is highly useful in documenting claims visually. Estimates, including auto and property losses, are prepared on computers connected to a corporate network. Laptop computers, pad, and other technologies make claims adjusting easier and consume less time. However, claims adjusting also requires a level of physical strength and stamina.
Property adjusters, for example, are often required to operate a 50-pound ladder and must stand, walk, kneel, crawl, and perform other physical demands as they investigate damaged property.
For insurance sales agent jobs, most companies and independent agencies prefer to hire college graduates-especially those who have majored in business or economics. High school graduates are occasionally hired if they have proven sales ability or have been successful in other types of work. In fact, many entrants to insurance sales agent jobs transfer from other occupations. In selling commercial insurance, technical experience in a particular field can help sell policies to those in the same profession. As a result, new agents tend to be older than entrants in many other occupations.
College training may help agents grasp the technical aspects of insurance policies and the fundamentals and procedures of selling insurance. Many colleges and universities offer courses in insurance, and a few schools offer a bachelor’s degree in the field. College courses in finance, mathematics, accounting, economics, business law, marketing, and business administration enable insurance sales agents to understand how social and economic conditions relate to the insurance industry. Courses in psychology, sociology, and public speaking can prove useful in improving sales techniques. In addition, because computers provide instantaneous information on a wide variety of financial products and greatly improve agents’ efficiency, familiarity with computers and popular software packages has become very important.
Insurance sales agents must obtain a license in the States where they plan to do their selling. Separate licenses are required for agents to sell life and health insurance and property and casualty insurance. In most States, licenses are issued only to applicants who complete specified prelicensing courses and who pass State examinations covering insurance fundamentals and State insurance laws. As a result of the Gramm-Leach-Bliley Act of 1999, the industry is increasingly moving toward uniform State licensing standards and reciprocal licensing, allowing agents who earn a license in one State to become licensed in other States upon passing the appropriate courses and examination.
A number of organizations offer professional designation programs that certify one’s expertise in specialties such as life, health, and property and casualty insurance, as well as financial consulting. Although voluntary, such programs assure clients and employers that an agent has a thorough understanding of the relevant specialty. Agents are usually required to complete a specified number of hours of continuing education to retain their designation.
Employers also are placing greater emphasis on continuing professional education as the diversity of financial products sold by insurance agents increases. It is important for insurance agents to keep up to date on issues concerning clients. Changes in tax laws, government benefits programs, and other State and Federal regulations can affect the insurance needs of clients and the way in which agents conduct business. Agents can enhance their selling skills and broaden their knowledge of insurance and other financial services by taking courses at colleges and universities and by attending institutes, conferences, and seminars sponsored by insurance organizations. Most State licensing authorities also have mandatory continuing education requirements focusing on insurance laws, consumer protection, and the technical details of various insurance policies.
As the demand for financial products and financial planning increases, many insurance agents are choosing to gain the proper licensing and certification to sell securities and other financial products. Doing so, however, requires substantial study and passing an additional examination—either the Series 6 or Series 7 licensing exam, both of which are administered by the National Association of Securities Dealers (NASD). The Series 6 exam is for individuals who wish to sell only mutual funds and variable annuities, whereas the Series 7 exam is the main NASD series license that qualifies agents as general securities sales representatives. In addition, to further demonstrate competency in the area of financial planning, many agents find it worthwhile to earn the designation “Certified Financial Planner” or “Chartered Financial Consultant.”
Insurance sales agents should be flexible, enthusiastic, confident, disciplined, hard working, and willing to solve problems. They should communicate effectively and inspire customer confidence. Because they usually work without supervision, sales agents must be able to plan their time well and have the initiative to locate new clients.
An insurance sales agent who shows ability and leadership may become a sales manager in a local office. A few advance to agency superintendent or executive positions. However, many who have built up a good clientele prefer to remain in sales work. Some—particularly in the property and casualty field–establish their own independent agencies or brokerage firms.
To understand the commission structure, first it is good to know a little about the different types of life insurance. Term life insurance and cash-value life insurance policies (whole and universal life) are two of the basic types of life insurance policies. The main difference between these types is that term life insurance lasts for a certain term, such as 10, 20, or 30 years and whole life insurance lasts your entire life often with a cash value building up with it (your money is invested to build the cash value but the investments are not profitable and there are usually many hidden fees). Yes, to most the second option sounds much better but it is much more expensive and for this reason and the fact that most people don't need life insurance when they are elderly, for most people term life insurance is sufficient.
So, depending on the type of insurance you choose, the commissions can vary. Although every company is different, on average life insurance agents make about a 30-70% commission on term life insurance and around 90-105% commission on whole life products. Keep in mind that this is the first year commission on the premium and subsequent year commissions are much lower with an average of 6% per year for whole life products and 4% per year on term life insurance products. Some life insurance agents may also get a one time fee commission on top of the above commission just for starting a new life insurance policy.
Let's take a look at a real life example: Beth is married, 33, a non-smoker, and would like to purchase life insurance since she has 2 children. She has received quotes for a term and whole life insurance policy with both of them valued at $250,000. The term insurance policy is for 30 years and has a premium of $26.00 per month. Her whole life premium quote is $160 per month. So, the insurance agent would make $7.80-$13.00 per month for the first year of the term insurance and about $1.04 per month for the remaining 29 years. On the whole life policy the agent would make $144-$152 per month for the first year of the policy and about $9.60 per month for the remainder of the policy.
It is easy to see why insurance agents would rather sell whole life policies instead of term life policies. Since Beth only needs life insurance while her children are dependent on her, then 30 years is more than enough time for a life insurance policy. If Beth still wanted a usable cash value at the end of her insurance term, it would still be better for her to purchase the term life insurance policy and invest in mutual funds any remaining amount she would have paid for a whole life policy. Every situation is different and every life insurance company is different so it is good to do the research and talk with your life insurance agent about what is best for your situation.
Remuneration-law and regulation of Insurance broker:
Types of remuneration
Insurance brokers acting on behalf of an insured can be paid for their services in a variety of ways. The most straightforward is a simple fee arrangement between broker and client. More commonly, however, the broker earns a commission, which is agreed with the insurer but taken out of the premium paid by the insured.
In some circumstances, the insurer and the broker may have entered into a further arrangement whereby the broker receives an additional fee or commission from the insurer for bringing in a certain volume of business or reaching agreed profit targets. This is sometimes known as a contingent commission, placement service agreement or market service agreement.
In recent years, the issue of commissions, particularly contingent commissions, has raised difficult questions about lack of transparency and the potential for conflicts of interest between broker and client.
The broker's duties
When a broker places insurance, it is usually assumed that he is acting as agent of the prospective insured. As agent, the broker has a legal duty to act in good faith in what he believes to be the interests of his client. This means he must account for any secret profit that he makes, and he is not allowed to put himself in a position in which his interest and duty conflict.
More specifically, an agent must not, without his client's knowledge, acquire any profit or benefit from his agency other than that contemplated by the client at the time client and agent entered into their contract. Where a broker is found to have breached a fiduciary duty, anyone knowingly assisting in the breach of that duty (such as an insurer) can also be held directly liable to the broker's client.
Other types of insurance intermediary, such as aggregators or tied agents, who act only for the insurer, are not acting as the agent of the insured and so will not owe the insured any fiduciary duties.
All insurance brokers and intermediaries must, however, also abide by the FSA's Handbook, including the Insurance Conduct of Business Sourcebook (ICOBS).
At the heart of the Handbook lie the high-level principles for businesses (PRIN). Particularly relevant for brokers are Principle 8, which provides that "A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client" and Principle 6, which requires firms to treat customers fairly.
On 1st April 2009, insurance brokers and intermediaries also became subject to new rules and guidance on the effective management of conflicts of interest which form part of the systems and controls (SYSC) section of the Handbook.
Fees
In terms of transparency and potential conflict of interest, a fee arrangement is perhaps the least problematic form of remuneration since the amount will be negotiated and agreed between broker and client.
The broker must provide the client with details of any fee (or the basis of calculating any fee) before the client incurs any liability to pay, or before the conclusion of the insurance contract, whichever is earlier (ICOBS 4.3.1R). This extends to all fees charged over the lifetime of the contract, but not to premiums or commissions.
Commission
The main issue with a normal commission arrangement is transparency.
Under current market practice, the insured, at best, is likely to have only a vague idea of the amount of commission the broker will earn for placing a contract on his behalf. In December 2007, a report by CRA International found that, typically, mid-sized commercial insureds believe commission is around 10% when it is nearer 20%.
A wider question raised by the European Commission in its 2007 business insurance sector inquiry was the extent to which lack of transparency affects competition because commercial clients are unable to make informed decisions about which broker they use.
Disclosure to commercial customers
ICOBS only requires a broker to disclose his commission to a commercial customer if the customer requests it (ICOBS 4.4).
In March 2008, the FSA published a discussion paper putting forward options for reform, including mandatory disclosure of commission to commercial customers.
Following further research and discussions with trade associations, insurers and intermediaries, however, the FSA decided against the compulsory option. Instead, its feedback statement of December 2008 favoured industry guidance aimed at improving the information commercial customers are given during the sales process.
That guidance, published on 1st April 2009, was drawn up by the British Insurance Brokers' Association (BIBA), the London and International Insurance Brokers’ Association, the Institute of Insurance Brokers and the Association of British Insurers (ABI).
It has been given special "confirmed" status by the FSA, which means that the regulator will take into account whether a firm was acting in compliance with the guidance before considering taking any enforcement action against it.
In addition to expanding on the Handbook rules, the guidance suggests model wordings for disclosing whether the firm is acting for the customer, the insurer or both, the extent to which it will search the market for suitable products and how it will be remunerated.
The suggested template for remuneration disclosure identifies how the firm will be paid – by an agreed fee or by commission – how much that commission will be and any additional commission the firm will earn for arranging premium finance and/or as a result of an arrangement with the insurer, such as a profit share or volume commission.
Although intermediaries are still only required to disclose their commission on request, firms are advised to have written procedures in place to enable all relevant members of staff to respond to such requests promptly and accurately. Commercial customers should be reminded in writing at least every twelve months about their right to ask for this information.
The guidance also advises firms not to rely solely on making generic disclosures in their terms of business agreements, which can easily be overlooked during the sales process. It suggests raising customer awareness by setting out the most pertinent disclosures (such as status, capacity and remuneration) in a separate letter or single-page document accompanying the quotation or invitation to renew.
In oral sales, the firm should disclose the information orally and repeat the disclosure in writing as part of its post sale communication, as well as keep a file note of the conversation.
Disclosure to consumers
Consumer customers are not covered by the industry guidance. There is currently no provision in ICOBS for the disclosure of commission to consumers and the FSA says it has no intention to change this situation, at least not for general insurance sales.
If a consumer asks for commission information, the broker is not obliged by the regulations to respond, although ICOBS reminds firms that the disclosure rule is additional to the broker's legal obligations as agent of the insured - including the duty to account for any secret profit and avoid conflicts of interest.
But unless the amount of commission is excessive, a consumer client may have difficulty succeeding on a secret profit claim. Provided the level of commission is consistent with the market "norm" for placing that type of business, the client will be deemed to have knowledge of it (whether or not he actually does) so the broker will not be considered to have made a secret profit.
A successful claim, however, could result in the broker being ordered to pay the insured the amount of commission earned in excess of the market norm. Arguably, the court could order the broker to repay the entire brokerage earned on the account.
Insurance intermediaries who do not act as agents of the insured, such as aggregators or tied agents, will not owe fiduciary duties to the insured so no duty to account will arise.
Pure protection sales
The disclosure rules for sales of pure protection products (critical illness, income protection and non-investment life insurance) under ICOBS will change at the end of 2012 as a consequence of the FSA's Retail Distribution Review (RDR) The new RDR rules affect advice given to retail clients (broadly, consumers) about retail investments under the Conduct of Business Sourcebook (COBS), which applies to designated investment products and long-term life insurance business. The rules ban commission-based sales and require financial advisers to agree a fee (the adviser charge) with the client in advance.
Firms are, however, able to choose whether to sell pure protection products under ICOBS or COBS rules.
In order to maintain a level playing field between the two rulebooks, the FSA has confirmed that retail investment advisers selling pure protection products "associated with" investment advice will not have to apply adviser charging, whether the sale is made under COBS or ICOBS. This special rule will mean advisers will still be able to earn commission on the sale.
Firms will, however, be required to explain how they are paid for these pure protection services and to disclose the actual amount of commission received if the customer then goes on to buy a pure protection product.
For ICOBS sales, this marks a significant departure from the current disclosure rules, where there is no requirement to disclose commission to a consumer. The FSA, however, denies that it has changed its general approach to remuneration disclosure:
"For standalone sales not associated with investment advice, our view remains that the customer's main concern is the premium he will have to pay rather than his adviser's remuneration," its policy paper states.
"It is only in the specific circumstances where the customer is also paying an adviser charge that we are concerned confusion could arise about what the adviser charge covers. We think it is important that the customer understands the entirety of his adviser's remuneration in these circumstances."
Contingent commission
The fact that a broker may be earning additional commission if he brings business to a particular insurer gives rise to a potential conflict between his commercial interests and the objectivity of the advice he provides his client.
The fact that the broker's client may not be aware that he is earning additional commission also raises the question whether such payment might breach the broker's duty to account for any secret profit.
Despite these concerns, the FSA's research into contingent commissions has shown that, although their use is widespread, they account for only about 1.5% of intermediaries' total income.
There is no regulatory ban on offering or accepting inducements (defined as any benefit offered with a view to the recipient adopting a particular course of action). But insurers and intermediaries are reminded of the Principle 8 requirement to manage conflicts of interest fairly and that this extends to soliciting or accepting inducements that would conflict with a firm's duty to its customers (ICOBS 2.3G).
Receiving an inducement "other than a standard commission or fee for the service" is flagged up as one of the warning signs of a potential conflict of interest in SYSC 10.
A firm should also consider whether offering inducements conflicts with its obligations under Principle 1 (to act with integrity) and Principle 6 (to treat customers fairly).
Disclosure of contingent commission
The normal rule about disclosing commission to commercial customers on request applies to all forms of remuneration, including arrangements for sharing profits, payments relating to the volume of sales, or payments from premium finance companies in connection with arranging finance (ICOBS 4.4).
The new industry guidance on transparency and disclosure advises firms to give their commercial customers regular written reminders about their right to ask for this information and to have procedures in place to ensure the firm is ready to respond to such requests.
The suggested wording for such disclosure specifically identifies any additional commission the intermediary may receive and explains how it will be earned, for instance for achieving pre-agreed profit or volume targets.
The model wording suggests stating the maximum additional amount the firm could earn (in percentage terms) should these targets be met, and the maximum extra commission (as an actual amount) that the firm could earn in respect of this particular policy.
As well as helping to keep firms on the right side of the regulator, following the industry guidance may also help to protect intermediaries from claims that they are in breach of legal duties owed to their commercial clients. A broker who discloses a contingent commission cannot be said to be making a secret profit.
It is less clear what the position would be if (in accordance with the guidance) a commercial customer is clearly reminded of his right to request commission information but chooses not to do so.
Without knowing that the broker is receiving a contingent commission (and arguably how much that commission is), it is difficult to see how the customer's failure to ask could amount to consent to the arrangement. Potentially, the broker could still be vulnerable to a secret profit claim.
In addition, of course, the guidance only applies to commercial customers. Intermediaries are currently under no regulatory requirement to disclose commission, contingent or otherwise, to consumers.
In law, a consumer client will be deemed to have knowledge of a broker's "normal" commission, provided it is not excessive, but this may not apply to contingent commission. Unless he discloses the fact (and probably the amount) of any contingent commission, the broker could face a secret profit claim.
In Wilson v Hurstanger 2007, a loans broker whose consumer clients were made aware that he might receive an additional commission from the lender (on top of his normal fee), was found by the Court of Appeal still to be in breach of duty because, without knowing the actual amount, his clients could not give their informed consent to the potential conflict of interest.
The Court of Appeal noted that there was no clear authority to say that it was an agent's duty to disclose the actual amount, but, taking into account that borrowers in this particular market were likely to be vulnerable and unsophisticated, it concluded that disclosure of the amount was necessary "to bring home to such borrowers the potential conflict of interest".
This was not an insurance case, but might by analogy apply to an insurance situation. In most types of retail insurance, however, the amount of contingent commission earned per consumer is likely to be very low (far lower than the £240 in Wilson v Hurstanger), making it less likely that such a claim would be brought - at least on an individual basis.
Managing conflicts effectively
Detailed rules and guidance on managing conflicts of interest came into force for insurance intermediaries on 1st April 2009. The provisions in SYSC 10 are aimed at helping firms identify conflicts and set up procedures to deal with them effectively.
When identifying potential conflict situations, firms are advised to take into account, as a minimum, whether the firm is likely to make a financial gain at the client's expense, has a vested interest in the outcome of a transaction, an incentive to favour one client over another or will receive an inducement other than a standard commission or fee for the service.
This last proviso distinguishes standard commissions and fees from inducements, but may raise issues as to what is "standard".
There is also a new rule that, where a firm is unable to manage a conflict adequately, it must disclose this to the client before undertaking business for that client. Failing to manage a conflict means not being reasonably confident that any risk of damage to the client's interest has been prevented.
Firms are, however, warned not to use disclosure as a means of getting round the requirement to manage conflicts appropriately.
The recent industry guidance on transparency and disclosure includes advice on managing conflicts of interest as well as suggested wording for disclosing the intermediary's status, services and remuneration.
Firms are recommended to carry out a thorough risk assessment of their business to identify those activities which have the potential to give rise to conflicts of interest and to assess the risk of such conflicts actually arising.
They should then decide what control systems are needed and who in the management team is responsible for overseeing and reviewing those systems. It is also suggested that firms make conflict management a standing agenda item at board meetings.
The guidance gives examples of circumstances where conflicts are more likely to arise. In addition to profit share agreements and volume over-riders, these include corporate hospitality and gifts, claims handling and binding authorities, training support provided by the insurer, "soft" loans (where an insurer offers credit at below market terms) and where insurance placement is used to encourage the insurer to use the same intermediary to place its own reinsurance.
The message to intermediaries is clear - be proactive. "It is not sufficient to have informal management processes and controls to deal with potential conflicts of interest" the guidance states.
Firms need to be able to "demonstrate that the management of conflicts is a live and ongoing activity within the business and one that is championed by senior management and at board level".
