New York Regulation of General Agency Expense Allowances

This paper analyzes New York Insurance Department Regulation 49, which governs the payment of expense allowances to general agents of New York licensed life insurers. The paper relies heavily on responses to a questionnaire sent to all New York licensed life insurers. The findings imply that negative aspects of the regulation may outweigh its potential benefits to policyholders. Moreover, any adverse effects of the regulation may be more severe for small insurers. Consequently, the author recommends that the regulation be modified. Regulation 49 of the New York Insurance Department [ 12], an administrative ruling governing life insurer agency expense allowances, is intended to enforce certain provisions of Section 213 of the New York Insurance Law. Section 213 imposes two principal limitations on expenses for all life insurers writing ordinary life and annuity business in New York: (1) a calendar-year limit on total field expenses for first-year and renewal business, and (2) a calendar-year limit on total field expenses for first-year business with maximum commission sublimits of 55 percent of the first-year policy premium for the soliciting agent and 60 percent of the first-year policy premium for a general agent including the commission payable to the soliciting agent. Section 213 also establishes a total expense limit for insurers that write participating business. The philosophy underlying Section 213 is that expense limitations are necessary to prevent the expense component of the cost of life insurance products from reaching an unreasonable level because of imperfections in the life insurance market. ' The influence of Section 213 is national in Scott E. Harrington is an Assistant Professor in the Insurance Department of the Wharton School, University of Pennsylvania. A Ph.D. from the University of Illinois, he is a member of the Risk Theory Seminar and has published several articles in the Journal. He received a Journal of Risk aind Insurance Award for one of the best feature articles publishes in 198 1. Financial assistance for this research was provided by the Life Insurance Council of New York. The author benefited from the comments of numerous industry representatives and members of the New York Insurance Department when conducting this study. Special thanks are due Dan M. McGill and Robert A. Zelten for their helpful advice. The conclusions expressed in this paper are those of the author, as are any remaining errors. l Section 213's predecessor, Section 97 of the former New York Insurance Law, was enacted in 1907 in response to recommendations of the Armstrong Committee in 1905. Sackman [ 13] provides a discussion of the Committee's findings and summarizes the evolution and philosophy of Section 213. Mayerson 17] and Rappaport [10] provide further discussion of why competition may increase rather than decrease the expense component of life insurance costs. The essence of the argument is ( 1) that competition will tend to bid up first-year compensation to sales personnel, given that consumers may lack information with regard to product and price and the often passive nature of consumer demand for life insurance, and (2) that high first-year compensation will contribute to high lapse rates.