Agents may split their commissions with another agent who is Florida-licensed and appointed for that line of insurance. Splitting of commissions with non-licensed persons is considered “rebating”, which is permitted only under tightly regulated circumstances.
For example, John Williams holds a life license and is an appointed life agent. While he feels comfortable discussing traditional life insurance and fixed annuities with his clients, when it comes to variable annuities he refers his clients to Maria Perez, a licensed life and variable annuity agent. Maria cannot pay John a referral fee or split the commissions on variable products with John, since he does not hold a variable annuity license. (She could, however, split a commission on an equity indexed or fixed annuity with John, as he is licensed and appointed for that line of business.)
Annuity Disclosure Procedures
Variable annuities originated as a supplement to fixed dollar annuities. Fixed annuities provide safety of principal but are subject to inflation risk. Variable annuities provide a hedge from inflation but are subject to investment risk. The two types of annuities complement each other. When soliciting variable annuities, Florida agents must inquire as to the prospect’s sources of income. The purpose of this inquiry is to call attention to the client’s overall financial situation. It does not require or prohibit any other action on the part of the agent or prospect. The agent must simply ask the question. This requirement applies to all prospects regardless of age.
Variable annuities are treated as securities under federal securities laws. A “prospectus” must accompany sales presentations of these products. A prospectus contains information about the nature and purpose of the annuity, the separate account(s) and the risks involved. It is a primary source of information for the prospect. Materials, such as direct mail letters or brochures, that advertise variable products also must have prior approval by the SEC.
Buyers Guides and Contract Summary
Under Florida's General Solicitation Law, a Buyer’s Guide and a Contract Summary must accompany sales of all types of annuities. The Buyer's Guide is a generic brochure designed to provide consumers with basic information regarding the purchase of insurance and annuities. The Contract Summary will summarize the details of the annuity contract, set forth in a format consistent with NAIC guidelines. The Contract Summary will contain information on the specific type of contract and any applicable riders, premiums, dividends, benefit amounts, cash surrender values, charges and fees, etc.
The Safeguard Our Seniors Act requires all annuity contracts to have a coversheet stating the Free Look period (see below), contact information for the issuer and the agent., as well as DFS’s toll-free consumer assistance number.
Often a client will wish to replace or exchange an existing contract for a new one offered by the agent. While replacement is a legitimate activity, there have been problems in the past with agents who encourage contract exchanges as a way to generate commissions for themselves. Agents and insurers must make several disclosures when proposing a new contract if they know (or should now) that an existing policy or contract will lapse or be significantly reduced in value.
Provisions of the Seibel Act
The Senior Suitability provisions were the primary focus of the 2008 update, but the Seibel Act included a number of other important amendments to Florida’s Insurance Code. These provide additional protections to the general insurance-buying public, not just “senior consumers”.
Buyers Guides & Contract Summaries
Under prior state law, these documents were not required in the sale of variable annuities. (A prospectus, a federal disclosure requirement, must accompany the sale of variable annuities.)
The Seibel Act now requires a Buyer's Guide and Contract Summary for the sale of all annuity contracts -- fixed, variable or indexed — for purchasers of all ages. (Sales of variable annuities must still be accompanied by a prospectus.) As noted above, the Safeguard Our Seniors Act requires all annuity contracts sold to senior consumers to have a coversheet stating the Free Look period (see below), contact information for the issuer and the agent., as well as DFS’s toll-free consumer assistance number.
Prior to the Seibel Act, state law mandated a 10-day "Free Look" period for the sale of all life insurance products and fixed annuity contracts. The "free look" provision is designed to give purchasers an opportunity to review the terms of the contract, and if they choose, to return the contract within the first ten days for a full refund on the premiums. Issuers could avoid the "free look" refund provision by giving the prospective purchaser a Buyer's Guide and Policy Summary (for life insurance)/Contract Summary (for annuities) ten days prior to purchase. But if these documents are delivered at the time of purchase — as they usually are — the contract must include the refund provision.
The Seibel Act extended the "Free Look" period from 10 days to 14 days for purchasers of all ages. The Act also broadens the Free Look refund provision to include variable, as well as fixed, annuities.
The Safeguard Our Seniors Act extends the Free Look provision to 21 days for senior consumers who purchase any type of annuity. (For younger purchasers, the Free Look period remains 14 days.)
Florida law prohibits both "twisting" and "churning". Both practices rely on misrepresentations, and therefore are considered unethical. Twisting is the replacement of one insurance product for another issued by a different company, based on false or misleading information with the agent's intent to earn a commission. Churning is sometimes called "internal twisting": the client is induced to exchange one company's product for another product issued by that same company. A related, prohibited practice, is known as "stripping" -- in which the cash value in one insurance product is used to finance the purchase of another insurance product (again, based on misrepresentations).
The Seibel Act modifies the definition of “churning" to cover direct or indirect churning. Indirect churning occurs when a policy is surrendered and the resulting funds are used to purchase an immediate annuity (specifying payments to begin at once) which is then used to fund a deferred annuity or a life insurance policy. It is often done because the agent can receive a double commission for the immediate annuity and the deferred annuity or life insurance policy that it funds.
Florida Statutes Chapter 626.9541(1)(l) and (aa), Florida Administrative Code 69B-215.215
Fraudulent Signatures / Forgeries
One commonly used type of insurance fraud involves forged signatures on applications and other documents.
The Seibel Act creates a new prohibited act and makes it a third degree felony to willfully submit to an insurer an insurance application or policy-related document on behalf of a consumer that contains a false or fraudulent signature.
Florida Statutes Chapter 626.9541(1)(ee)
Unlawful designations or credentials
Another type of misrepresentation occurs when agents use credentials to mislead prospects into thinking the agent is more experienced and knowledgeable than is indeed the case. There are a number of organizations that, for a fee, will simply hand out credentials and official-looking designations to bolster the agent's resumé.
The Seibel Act prohibits the agents from using designations or misrepresenting the agent qualifications:
¨ When making a sales presentation or solicitation for insurance, an agent is prohibited from utilizing designations or titles that falsely imply that he or she has special financial knowledge or has obtained specialized financial training or is certified or qualified to provide specialized financial advice to senior citizens.
¨ Terms such as “financial advisor” may not be used to falsely imply that an agent is licensed or qualified to discuss, sell, or recommend financial products other than insurance products.
¨ When making a sales presentation or solicitation for insurance, an agent is prohibited from falsely implying he or she is qualified to discuss, recommend, or sell securities or other investment products in addition to insurance products.
The law makes exceptions for bona fide credentials. An agent who also holds a designation as a certified financial planner (CFP), chartered life underwriter (CLU), chartered financial consultant (ChFC), life underwriter training council fellow (LUTC), or the appropriate license to sell securities from the Financial Industry Regulatory Authority (FINRA) may inform the customer of those licenses or designations and make recommendations in accordance with those licenses or designations.
Florida Statutes Chapter 626.9541(1)(ff)
Prior to the passage of the Seibel Act, those violating the “Unfair Insurance Trade Practices Act” (which include twisting and churning) could be fined for up to $2,500 for each non-willful violation up to an aggregate $10,000 fine. Willful violations could result in fines up to $20,000 for each willful violation up to an aggregate $100,000 fine. Willful violations of these provisions was also subject to criminal prosecution as a second-degree misdemeanor
The Seibel Act increases the penalties for agents or insurers who engage in certain unfair trade practices, such as twisting, churning (directly or indirectly), deceptive use of credentials or fraudulent signatures. Violations of these rules are now punishable with a $5,000 fine for non-willful violations up to an aggregate of $50,000. Willful violations could result in fines up to $50,000 per incident, up to an aggregate $250,000 fine. Willful violations of the twisting, churning or misleading use of credentials are also subject to criminal prosecution as a first-degree misdemeanor. Willfully submitting fraudulent signatures on policy-related documents is a third-degree felony. The Safeguard Our Seniors Act increases the possible fine for twisting, churning or submission of fraudulent signatures to $75,000 per willful violation.
Florida Statutes Chapter 626.9521(3)(a-b)
And as noted in Chapter 1, the Seibel Act also gives the Office of Insurance Regulation the power to rescind unsuitable contracts — which may impose additional financial losses on companies. Likewise, the Department of Financial Services may take reasonable corrective action against agents for harm their unsuitable recommendations cause clients. While technically not "penalties" — the mitigation provision should act as additional disincentive for unsuitable recommendations.
Licensing & Jurisdiction
As mentioned in Chapter 1, The Safeguard Our Seniors Act extends the jurisdiction of the Department of Financial Services to cover third-party marketers who assist an agent in violating the Insurance Code during a sale to a senior consumer. This law also authorizes the Department to initiate disciplinary action against an agent who has been disciplined under a securities broker-dealer license or other related licenses.
If a licensed agent has his or her insurance license revoked as a result of a solicitation or sale of insurance or annuities with a senior consumer, the Safeguard Our Seniors Act prohibits the Department from reinstating that agent’s license or issuing any other insurance license. Likewise, agents whose licenses have been revoked twice (for any cause) may not be relicensed. Effectively, this law permanently bans such agents from the Florida insurance market.