As part of our insurtech practice, we are frequently asked to advise on state insurance anti-rebating laws. These laws prohibit insurance companies or brokers from providing policyholders with anything of value (above certain de minimis thresholds) that is not specifically included in the terms of the policy, as an inducement to purchase the policy or otherwise. The anti-rebating laws are often over a hundred years old and are intended to prevent unfair discrimination between those policyholders who receive a rebate and those who do not, as well as require policyholders to focus on the terms of the policy rather than the size of the rebate when selecting an insurer. As one might expect, many insurtechs find these century-old anti-rebating laws to be out of date, hindering their ability to offer innovative, pro-consumer benefits to their customers. Based on these concerns, the National Association of Insurance Commissioners’ (NAIC) Innovation and Technology Task Force has begun to look into updating these anti-rebating laws.
While the principal purpose of anti-rebating laws is to prevent insurance companies or brokers from offering rebates as inducements to purchase a policy, in practice anti-rebating laws can prohibit a wide swath of innovative services insurtechs hope to provide to their customers. For instance, insurtechs often want to run sweepstakes, raffles or other contests to build brand awareness and reward their customers for their loyalty. However, these contests will run afoul of state anti-rebating laws if directed towards the insurtechs’ policyholders or potential policyholders.
Other insurtechs want to provide their customers with home or vehicle sensors as a way of mitigating risk. These sensors can also be considered rebates if not specifically included in the terms of the policy, even though they clearly benefit consumers by reducing the risk of an accident that might lead to an insurance claim. In practice, insurtechs can provide these services without violating anti-rebating laws if they receive prior regulatory approval to include the services in the terms of their policy, but the regulatory approval process can be slow and cumbersome, hindering the speed of innovation that is critical for insurtechs to compete with their more established competitors.
The other difficulty with state anti-rebating laws is their lack of consistency from state to state, both by statute and especially by interpretation. Some states, such as California, don’t even have anti-rebating laws. Many insurance startups don’t have the regulatory compliance staffing to tailor their business practices to the 50 different state insurance jurisdictions, and instead want a one-size-fits-all solution that works in all 50 states. This has proven difficult with state anti-rebating laws where the rules can vary quite a bit.
In response to industry requests to reform the anti-rebating laws, the Innovation and Technology Task Force adopted a motion at the NAIC’s 2019 Summer Meeting in New York to begin the process of amending the NAIC’s Model Unfair Trade Practices Act to revise the Act’s anti-rebating provisions. The purpose of these amendments would be to allow insurance companies to offer certain pro-consumer, value-added services, such as sensors, without the need to include them in the policy and obtain prior regulatory approval. Industry stakeholders have urged the Innovation and Technology Task Force to go even further and repeal the anti-rebating laws for commercial lines of insurance where policyholders are more sophisticated and there is less of a need for consumer protection.
Amending the Model Unfair Trade Practices Act will take at least a year, and the process of adopting the model law in each state will take even longer. In the meantime, the Innovation and Technology Task Force is considering publishing model guidelines to help standardize the interpretation of these anti-rebating laws. The task force is using North Dakota’s Guidance on Rebating as a prototype. These guidelines would allow insurance companies to offer certain value-added services as long as they are related to the coverage provided, help mitigate risk and don’t result in unfair discrimination or undermine the solvency of the insurance company. Under these guidelines, insurtechs could offer risk mitigation services, such as sensors, without prior regulatory approval, but no other marketing/brand loyalty services such sweepstakes or prizes.
The action taken by the Innovation and Technology Task Force at the summer meeting is just the first step in a long process. In the meantime, insurtechs must always make sure that, before they offer their customers any services or benefits that are not included in their policy, they check with their lawyers to ensure these services are in full compliance with the anti-rebating laws.