Governmental Affairs
Insurance Regulation
What agents need to know about new laws
Compensation for placing premium finance business
Under this new law, agents have the opportunity to negotiate compensation for the placement of premium finance business
directly with the premium finance company without having to obtain a special license. New disclosures are required (HB
2965) (6/30/05)
Q: What is the purpose of HB 2965?
A: This law changes the way insurance agents can be legally compensated for placing premium finance
agreements with licensed premium finance companies.
With regard to commercial lines of insurance only, agents can now negotiate compensation for the placement of premium
finance business directly with the premium finance company, without having to obtain a premium finance license, subject
to disclosure requirements in some cases.
Note: Throughout this Q&A, “person” refers to an individual or any type of legal entity, regardless of organization type,
and “insurance agent” refers to individuals or entities with one or more of the following licenses: general lines property
and casualty; surplus lines; general lines life, accident, health and HMO; managing general agent; life and health insurance
counselor; specialty lines; non-resident; risk manager.
Q: When did this law become effective?
A: The law became effective June 17, 2005, when HB 2965 was signed by Gov. Perry.
Q: How does the new law change the way insurance agents were participating in premium finance transactions under
the old law?
A: Under the old law, licensed premium finance companies were prohibited from directly or indirectly
paying insurance agents any compensation as an inducement for placing finance agreements.
However, agents formed and licensed their own premium finance companies, either as separate entities owned by one or
more of the same individuals that owned the licensed insurance agency, or as a subsidiary of the licensed insurance agency.
These agent-owned premium finance companies accepted premium finance agreements from customers, then assigned the agreements
to another licensed premium finance company which actually serviced the agreements. The agent-owned premium finance company
then received a percentage of the amount financed from the servicing premium finance company in consideration for the assignment.
Under this arrangement, the old law inferred that the agent-owned premium finance company could transfer the proceeds
received from the servicing premium finance company to the owners of the agent-owned premium finance company as a distribution
of profits but could not transfer the proceeds directly to the licensed insurance agency unless it was the owner of the
agent-owned premium finance company.
These arrangements can continue under the new law, but only with respect to commercial lines of insurance.
There is no change in the law that currently permits, for commercial or personal lines, an insurance agency to be licensed
as a premium finance company and hold premium finance agreements made or delivered by insureds that are payable to the agent
or to the agent’s order; however, see the questions below related to premium financing of commercial lines and personal
lines for details on a new disclosure requirement in this case.
Q: Who is required to hold a premium finance company license?
A: Any person who negotiates, transacts, or engages in the business of insurance premium financing in
this state, with the following exceptions:
- An insurance agent does not need to hold a premium finance license in order to prepare and deliver a premium finance
agreement on behalf of a licensed premium finance company.
- An insurance agent does not need a premium finance license to charge late fees or finance premiums at lower interest
rates allowed for this purpose. For more details on these options, see the IIAT report in InfoCentral under Agency Management
> Finance > Premium Financing.
The new law also clarifies that licensing is not required for a person that purchases or otherwise acquires a premium
finance agreement (such as a bank or other financial institution), provided the original premium finance company retains
the obligation to service the agreement (disbursing, billing and canceling) and to collect payments due.
Q: What types of arrangements does the premium finance law allow with regard to financing premiums? What are
the new disclosure requirements?
A: Commercial lines
The old law permits an insurance agency to be licensed as a premium finance company
and hold premium finance agreements made or delivered by insureds that are payable to the agent or to the agent’s order.
The old law allows for an individual insurance agent to own a licensed premium finance company – either as a sole proprietorship
or sole stockholder of a corporation.
The new law permits a licensed premium finance company (including agent-owned premium finance companies) to compensate
an insurance agent for placing premium finance agreements on commercial lines when the compensation is based on actual premiums
financed. The insurance agent is not required to hold a premium finance license.
The compensation may not be 1. an advance on future premium finance agreements, or 2. a form of bonus for agreeing to
place finance agreements with the premium finance company.
If the amount of compensation received by the insurance agent does not exceed 2 percent of the amount financed, the agent
must disclose in writing the source of any compensation to be received by the agent.
If the amount of compensation received exceeds 2 percent of the amount financed, the agent must disclose in writing not
only the source of the compensation, but also the amount of compensation, as a percentage of the premium financed.
An individual insurance agent may be the sole owner of a licensed premium finance company (sole proprietorship of sole
stockholder of a corporation).
Personal lines
An agent or an employee of an insurance agent may share in the profits of a partnership,
or other entity if the payment is based on that individual’s percentage of ownership in the partnership or entity and is
not based in whole or in part, by the amount of premium dollars financed.
An insurance agent who is the sole owner or sole shareholder of an insurance premium finance company may receive profits
and fees of the insurance premium finance company if the insurance agent discloses in writing the agent's ownership interest
in the insurance premium finance company.
An insurance agent may not be individually compensated for the placement of personal lines business with a premium finance
company.
Q: Can a premium finance company pay an agent bonuses or an pay an advance for future premium finance agreements?
A: No, payments to agents can only be based on actual finance agreements placed. Bonuses and payments
for future finance placements are prohibited.
Q: Can a premium finance company pay a partnership or other entity for the placement of both commercial and personal
lines business?
Some premium finance companies have created partnerships with agencies in order to legally compensate those agencies
for production of business under the old law. These partnerships can still exist, but the rules are different.
In personal lines, an agent can only share in the profits of the partnership or entity based on their percentage of ownership,
not the volume of business financed. In commercial lines, the reverse is true. Payments to the partners must be based on
volume of business financed, not the ownership share in the partnership.
Q: What disclosures are required?
A: A sole owner of a premium finance company is required to disclose, in writing, their ownership interest
in the premium finance company.
An agent who is being compensated less than 2 percent of the amount financed must disclose, in writing, the source of
their compensation.
An agent, who is being compensated more than 2 percent of the amount financed, must disclose in writing, the amount of
the agent’s compensation, as a percentage of the premium financed.
Q: Who is required to make the disclosure?
A: The agent is required to make the disclosure. While laws will often indicate if an affiliate can
satisfy this requirement, the wording in this law is silent on that issue. Rules adopted by TDI may clarify this point.
Q: Does the disclosure have to be on a form approved by the Texas Department of Insurance?
A: TDI has not promulgated a form to be used. While this law now requires disclosures, the law does
not require that the disclosure form be on a promulgated form or on a form approved by TDI.
Q: When must the disclosure be made?
A: The law does not specify when the disclosure is required; however, we recommend that the disclosure
be made before the premium finance agreement is finalized.
Q: Will rulemaking be required by the Texas Department of Insurance?
A: TDI has not informed us if they will be adopting any rules to implement this law.
top
|
