DOI Bulletin Warns Against Illegal Rebates by Affiliated Non-Insurance Entities

A non-insurance unregulated affiliate’s action can trigger a rebate violation for carrier or producer

The Massachusetts Division of Insurance (DOI) has issued Bulletin 2024-06, reminding insurance companies, officers, and producers about the prohibitions on inducements, rebates, and special favors outlined in M.G.L. c. 176D, §3(8). The Bulletin highlights the importance of compliance for direct inducements by insurers or producers and indirect inducements through affiliated non-insurance entities.

According to Bulletin 2024-06, insurance companies and producers are prohibited from allowing an affiliated non-insurance entity to offer payments, reductions, or discounts contingent upon the purchase of insurance or intended to induce the purchase of insurance. This prohibition applies to any program, scheme, or method that provides “anything of value” or “any valuable consideration” not specified in the insurance contract.

The Bulletin does not define an “affiliated” entity

A short dictionary definition of an “affiliate” is “an individual or organization that is officially connected with, associated with, or controlled by another, typically larger organization.” An affiliate relationship can involve ownership, control, or a formal connection between entities.

Legally, “affiliate” is often used to describe business ownership relationships. Usually, it refers to a situation where one company owns a minority stake in another company’s stock. Alternatively, it can define a relationship where two or more companies are subsidiaries of the same parent company.

However, In the Internet context, “affiliate” primarily describes a relationship where one company sells another company’s products or services, earning a commission for each sale. This concept has expanded to include online partnerships, where an affiliate drives internet traffic and generates sales for another company through their digital platforms.

One area ripe for possible unrecognized rebating violations is embedded insurance

Bulletin 2024-06 does not give examples of affiliated non-insurance entities’ actions that might trigger a violation of § 3(8). However, it seems the Bulletin’s focus might be particularly relevant to the growing trend of embedded insurance on the Internet.

In the Internet context, embedded insurance refers to integrating insurance coverage into the digital purchase of a product or service, often offered by a non-insurance company in partnership with an affiliated insurer.

A hypothetical example of embedded insurance rebating for travel insurance coverage offered by airlines

Airlines partner with insurers to provide travel insurance options to customers as they purchase their flights online. The airlines earn millions of dollars each year from these insurance affiliations. However, if an airline were to award frequent flyer points, a discount on in-flight purchases, or other similar rewards to induce customers to purchase travel insurance from the airline’s affiliated insurer during the booking process, this practice would seemingly violate the prohibitions outlined in Bulletin 2024-06.

Carriers and agencies with embedded insurance programs may need to police their “affiliates”

Compliance with the statute Bulletin 2024-06 reference is mandatory for all parties involved in the insurance industry, including those offering embedded insurance products.

Embedded insurance may offer a unique regulatory risk since independent affiliated entities may unilaterally decide on marketing schemes or programs that directly or indirectly provide inducements to a customer purchasing the embedded insurance product.

In the worst case, a routine marketing incentive offered by an unregulated business affiliate, without consulting the insurer, of an embedded insurance product could become a program-busting regulatory complaint for the insurers or agency that has to respond to the insurance department’s enforcement section.

A copy of the Division’s Bulletin 2024-06 is available below:

Section 3(8), cited in Bulletin 2024-06, is defined as one of the “unfair methods of competition and unfair or deceptive acts or practices in the business of insurance” prohibited by Chapter 1766D. It states:

(8) Rebates: Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any insurance contract, including but not limited to a contract for life insurance, life annuity or accident and health insurance, or agreement as to such contract other than as plainly expressed in the insurance contract issued thereon, or paying or allowing, or giving or offering to pay, allow, or give, directly or indirectly, as inducement to such insurance or annuity any rebate of premiums payable on the contract, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement whatever not specified in the contract; or giving, or selling, or purchasing or offering to give, sell, or purchase as inducement to such insurance contract, or annuity or in connection therewith, any stocks, bonds, or other securities of any insurance company or other corporation, association, or partnership, or any dividends or profits accrued thereon, or anything of value whatsoever not specified in the contract.