What is rebating in insurance? Let’s see the definition. There are a short and simple answer and a longer explanation.
The short answer is – Additional value provided by insurance agents which are not in the policy and it is not available for other customers.
Additional value can differ but in most cases mean financial benefits for the customer (as paybacks), expensive gifts, tickets, etc.
This practice is prohibited in most of the states, excluding Florida (with exceptions) and California.
Rebating in Insurance: Pros and Cons
Obviously, discounts and rebates are something beneficial for the customers. Many people think that rebating is a fair deal because it is a part of negotiations. And rebates are common practice in the retail sales, online purchases, etc.
But insurance business is quite different and there are many cons in using this practice.
First, the biggest companies can work on small margins and destroy competition. So, in fact, people will not save money but will pay more when fewer companies dictate the rules.
Second, insurance companies are responsible for keeping liquid cash available to pay off claims. And the rebating practice can increase the risk of insolvency which can damage the business built on trust.
Third, the practice is a moral hazard for the insurance agents and can lead to unfair deals.
Fourth, it can be used by the agents in order to have unfair advantages over other agents from the same or other company.
Fifth, it gives advantages to tricks over honestly and could damage the insurance industry in the long run.
Sixth, It can ruin long term relations, especially in life insurances. These are long term policies and having rebating on them can hurt both sights.
Florida and California Exceptions
There are two states where rebating is legal but with some limitations.
- Florida – In short, if you offer a rebate in Florida once, you should offer it always in your next deals and to your next customers. Also, the rebate shall be in accordance with a rebating schedule filed by the agent with the insurer issuing the policy to which the rebate applies. This limitation provides some protection from unfair insurance agents practices.
- California – rebating is legal. Agents can rebate commissions on any type of insurance, including auto and homeowners coverage. But while not illegal, most of the insurance agents have restrictions with the insurance companies. And an agent who breaks the restrictions can have his contract terminated.
Risks and Moral Hazards
The above topics cover the question what is rebating in insurance. This one covers some risks and moral hazards.
First, rebating is illegal. So in some states, even customers can have legal issues, if they use rebating.
Second, agents who use rebating can have both legal issues and problems with their respective insurance companies.
Third, insurance companies can lose their licenses revocation, nonrenewal, and others penalties depending on the state.
Moral hazard is always a part of the picture and it is usually related to Agent and Customer negotiations.
When the bets are high, there always will have people who will be ready to break the rules.
Nevertheless, the responsibility for good practices in the insurance business is shared between customers, agents, and companies.
The short benefits always come with a price in a loss of good reputation, legal issues, and less cash flow in the long run.
Each US state has Insurance Board where rebating is investigated, hearings are conducted and penalties are executed.
Each Insurance State Boards has different /but still similar/ processes for investigating rebating and operates independently.
All states adopted Model Act in whole or in part in order to provide a framework for moral behavior.