This article was originally published on Agency Checklists in December of 2011.
On April 1, 2012, the second paragraph of Massachusetts General Laws c.175 §162E will expire by its terms. With the expiration of this part of c.175 §162E, the right that independent agents have had to receive the statutorily required commission rate enjoyed since the implementation of managed competition also will end. Chapter 175 §162E specifies that automobile insurance commissions shall remain fixed for a four year period after the transition from the fixed-and-established system to managed competition. That four year period will end on April 1, 2012.
Since the start of managed competition, insurance companies have had to pay their independent agents the commission rate that had been fixed and established by the Commissioner of Insurance under the old system of rate making. This fixed commission equaled approximately a 12.8% of the premium fixed and established by the Commissioner of Insurance for 2007.
Starting April 1, 2012, this mandatory commission law disappears and along with it an important aide supporting many agencies’ current commission payments. Managed competition for Massachusetts auto insurance premiums began April 1, 2008, but the old fixed-and-established system of rate making by the Commissioner of Insurance did not entirely disappear. Under the requirements of Section 162E, insurance companies had to pay out the full fixed-and-established commission rate but could “…vary the amount of commission paid to any agent by not more than plus or minus ten per cent.” Since 2008, this has effectively placed a legal minimum and maximum on commission payments made to agents. The minimum commission requirement probably benefited agents with acceptable but less profitable books of automobile insurance business where companies could not reduce their commission rate below the ten percent deviation allowed by law.
That, however, is about to change.
Under competitive rating, insurance companies still have to “specify the amount which such insurer shall pay to such agents as fair and reasonable expense premium commissions” and also will be required to guarantee that the “total amount paid out shall in the aggregate, total the amounts applicable” to the policies that are placed with these companies. In other words, all commissions specified in the rate filing have to be paid out to the companies’ agents.
But, it appears that come April 1, 2012, companies will no longer have to abide by the limitation on the ten percent deviation in commission rates. As such, insurance companies will be legally free to allocate commissions within their agency plan based upon whatever market criteria they deem advantageous. Agency Checklists wanted to warn agents of this change as the removal of a commission floor could affect a number of independent agencies, both favorably and unfavorably.
By Owen Gallagher