Have you ever been to a website that offers you a deal - a coupon code, a gift card - just for signing up for their email list? Or maybe you’ve made a purchase from your favorite online retailer, and as a thank you, you get a discount on your next purchase, as well as a coupon to send to your BFF? Everyone likes a little freebie and to feel appreciated and rewarding customers is one of the ways brands build loyalty. In exchange for a small gift, the brand not only has happy customers, they get free PR as well. Everybody wins!
Well what about in the insurance space? After all, the industry knows that it must continue to modernize in order to stay competitive as consumer shopping trends shift. Whether you’re offering a thank you in-person or online, it’s worth looking into the differences between a referral and a rebate, and what some potential compliance issues are for both.
Let’s start with some general definitions. Keep in mind I’m using my own broad descriptions here, since each state's specific language may vary. TIP: If you’re looking for state specific information, a great starting place is the state’s unfair trade practices, as well as any compensation laws.
Referral: an act of referring someone or something for consultation, review, or further action
Rebate: returning a portion of the premium or the agent’s/broker’s commission on the premium to the insured, or other inducements to place business
By “potential issues” I mean “practices that may end up causing compliance problems for agents, marketing organizations, agencies, and/or insurers, either from regulators, or possibly in the form of litigation.” While state specifics vary on what is, or isn’t allowed, I want to lay out broad categories under each practice (referrals and rebates) that need compliance attention. Note that rebates and referrals are not the same thing - they’re different! However, they can be related to one another in that you may be considering a referral program that also provides an inducement to the individual who is being referred. Additionally, while state rules regarding referrals often live in the compensation laws, they typically reference a state’s trade practices laws as well, as it’s usually a requirement that the referral fee doesn’t violate a state’s trade practice laws.
First up, let’s talk a little about a referral program; A program in which you compensate existing clients who refer a prospect to you. For this discussion, let’s say a referral means a policyholder provides their insurance agent with a list of three people they think would be a good fit for the insurance services. For many states, compensating an unlicensed individual for a referral is ok, as long as the compensation is a fixed dollar amount and the compensation is not contingent upon the sale of insurance.
The two things to keep in mind when developing a client referral program are content and conditions. Here, I’m focusing specifically on the content of the discussions the referrer is having with the referee and the conditions for obtaining the fee.
I’ll touch on content first. In order to be compensated for the sale, solicitation, and negotiation of insurance, an individual must be licensed. Like I stated above, many states do allow the compensation of an unlicensed person as long as the compensation is a fixed dollar amount and is not dependent upon the purchase of insurance. If the referral program you want to use compensates policyholders for a list of names, the policyholders are not acting as unlicensed agents. Where I believe things become grey, and where I think licensing may become an issue, is when a program functions more like a lead generation service.
For example, if the program is designed so that a policyholder can advertise to the masses, say through their social media accounts or a blog, or by distributing promotional content to their communities, then it may be viewed that a line has been crossed. Depending on what the content of those messages say and what the compensation is, it may no longer be viewed as a simple refer a friend program.
The other issue is if there is a condition that in order to get the referral fee, there must be the purchase of an insurance policy. Most states prohibit requiring a purchase to be made in order to compensate for referrals, so having the actual purchase be a condition of receiving compensation is a violation in those states.
Our recommendation is, if you’re considering using a referral program that offers compensation, do not require business to be placed in order for someone to earn the fee, ensure that the fee doesn’t violate state trade practice laws, and if you’re going to design a program where your policyholders are marketing to the masses on your behalf, understand that you’re taking on more risk than if your program simply is asking policyholders for a list of names.
If you’re using policyholders as a more robust lead generation system, carefully review any messaging you provide so you can confidently explain how those individuals are not participating in the sale, solicitation, and negotiation of insurance. Also consider how the policyholder is being compensated. It’s one thing if they receive a free tchotchke every time a referral meets with an agent, if they start receiving $30 a head, and they are pushing out messaging to 1000 of their closest Facebook friends and family, it may be viewed by regulators as a violation.
How about rebates? Unlike in the case or referral fees, in most states, rebates and inducements are illegal. What exactly constitutes as a rebate or an inducement, and at what point any given threshold is crossed, is where we find quite a bit of variety from state to state. For the answer to that question, you can purchase our 50 State Gifting and Rebating Survey here. To give you an idea of the differences and limits, check out this information provided by NY, as well as this one by Florida. For this blog post, the big takeaway I want you to get, is that there are often many more restrictions on what types of things can be offered, and what the value of those items can be. In general, cash or cash equivalents, even for small amounts of money, can be a violation of a state’s laws.
Our recommendation is, if you’re going to offer anything to prospects or clients that isn’t specifically stated in the contract, review your state unfair trade practice laws to ensure you’re not offering an illegal inducement or rebate. If it’s still unclear if your offer is a violation or not, ask yourself this question, “Is this offer something that would induce someone to enter into an insurance contract?” This is obviously a judgement call, but this is the type of questioning a regulator would likely apply when evaluating an inducement. You should be prepared to explain why what you’re offering isn’t impacting someone’s decision to purchase insurance.
As you work to reward customers and spread awareness of your products and company, be sure to review your plans with a fine-toothed comb, as compliance issues can easily get tangled together, and result in unexpected and multiple types of compliance - and potentially litigation - exposure.