Estimates of Commissions Payable to Insurance Agency The above table shows the difference between insurance commissions payable on group and individual policies generally. It should be noted that group insurance commissions are not affected by member turnover. To illustrate the relative levels of agency compensation on the sale of individual policies versus group term polices, we estimated the commissions which would have been payable during a 10-year period on two blocks of insurance purchased during the first 2 years of the Plan. A block of insurance, for this illustration, is the insurance purchased in either of the first 2 years of the Plan plus replacements after issue sufficient to maintain a constant total amount of insurance in force. In other words, for each termination or death there is a corresponding new entrant. We considered the first year of each block to be newly issued in calculating group commissions. Estimates were developed as though each of the particular companies involved were actually providing the entire insurance coverage for the Plan. We estimated the commissions payable based on two assumptions regarding member turnover. --There would be no terminations. This assumption is unrealistic but illustrates, simply, the dif- --Ten percent of the members would terminate each The premium level used in the first illustration of the table (two blocks of $510,000) is approximately the amount of premiums which the plan paid on the individual policies purchased during the 2 years. The lower premium level is an estimate of what the premiums on the same amount of insurance coverage would have been during the first policy year if a group term insurance policy had been purchased. Our estimate of $125,000 is based on the statutory minimum firstyear premium for companies doing business in New York State. The minimum, prescribed by law, is designed to sufficiently cover most groups. Estimates of Commissions Payable to Insurance Agency The above table shows the difference between insurance commissions payable on group and individual policies generally. It should be noted that group insurance commissions are not affected by member turnover. Investigations of agency compensation rates by New York Insurance Department New York Insurance Department officials said the Department investigated rates of compensation payable by Executive Life and by Trans World Life on Plan policies in December 1972. Executive Life The master general agents agreement of Executive Life provides for a persistency bonus in addition to its regular scale of commissions payable to general agents for renewal policies. The persistency bonus was to be a payment of 12.5 percent of the premimum for the second year of insurance, 17.5 percent for the third and fourth years, and 7.5 percent for the fifth through tenth years. The Assistant Chief of the Life Bureau of the New York Insurance Department notified Executive Life on November 16, 1971, that the renewal commissions plus the persistency bonus were in excess of the section 213 maximum, that the company should be guided by that opinion, and that any payments made not in accordance with the opinion would constitute willful violations of the insurance law of the State of New York. New York Insurance Department officials in December 1972 said they understood that Executive Life was not paying the persistency bonus. Trans World Life The New York Insurance Department was investigating whether the insurance agency qualifies for the agency development allowance paid by Trans World Life to supplement its commission scale. The allowance is 63.5 percent of the first-year commission which, in turn, is 55 percent of the first-year premium; therefore, the combined first-year commission and agency development allowance is almost 90 percent of the first-year premium. New York law allows such an agency development allowance to supplement the maximum scale prescribed in section 213 in the case of new general agents who are establishing and developing an agency organization. A general agent with prior service as a general agent or agency manager with any life insurance company or companies must have less than 5 years of total service to be considered a new general agent. The New York Insurance Department was also investigating why the regular commission scale of Trans World Life was used on Plan policies even though the guaranteed-issue principle was used for these policies. The general agent's contract with Trans World Life provides for paying a commission scale lower than the regular scale when policies are issued on the guaranteed-issue basis. Such policies are issued regardless of the applicant's state of health and therefore are subject to a higher rate of mortality than regularly underwritten policies. One way the companies have to offset this extra mortality is to pay the agent a lower amount of commission for guaranteed-issue policies. PLAN WAS NAMED AS BENEFICIARY OF INSURANCE POLICIES The insurance policies purchased from both Trans World Life and Executive Life on the life of each member were issued to Plan trustees, and named the Plan as the beneficiary and owner. The trustees therefore received the proceeds from the insurance upon a member's death. Furthermore, the trustees required that, if a member terminated for reasons other than death and chose to own the policy, he would have to purchase the policy from the trustees for the cash value. Executive Life Policies were issued on the basis of an application for each policy signed by an agent of the trustees. The policies were issued without a consent agreement or an application signed by the insured persons. The New York Insurance Department questioned the legality of this procedure. The Department cited Executive Life on February 9, 1972, for violating section 146(3) of New York Insurance Law because the applications did not contain the signed consent of the insured. New York Insurance Department officials advised us in December 1972 that hearings had been held on this citation but that the Department had made no decision. |