Rebating

What Does Rebating Mean?

Rebating is the practice of returning all or part of a broker’s commission to the insured in an effort to induce an insurance sale. This rebate is typically provided by the insurance agent.

Rebating is sometimes referred to as “inducement,” though inducement can also include indirect forms of payments or benefits offered by the broker or agent.

Rebating is illegal in many provinces and states. While legislation governing rebating varies, the primary goal is to protect consumers from unfair sales practices by insurance companies and licensed agents. In life insurance, a broker who offers rebates or incentives to clients to purchase policies risks losing their insurance license.

Insuranceopedia Explains Rebating

Rebating is a practice where a potential insurance client is encouraged to purchase an insurance product by returning the commission intended for the broker or agent as compensation for the sale. Additionally, insurers may offer discounts on premiums or gifts. Insurance commissioners view this as an unfair practice because it promotes unfair competition and could lead to insurer insolvency.

To address this, the National Association of Insurance Commissioners developed the Model Act in the U.S. to discourage and penalize rebating. Similarly, the Canadian Council of Insurance Regulators outlines the following objectives in its rebating rules:

• Protect consumers from making inappropriate insurance purchasing decisions,
• Ensure fair competition between insurers and intermediaries of different sizes,
• Prevent the cost of incentives from being passed on to all consumers through higher product prices,
• Guarantee that premium reductions are offered equally to all similar risks and not arbitrarily to select consumers.

In most jurisdictions, rebating is an offense, although the laws and enforcement vary. In some cases, the focus is on penalizing the company, broker, or agent, while in others, the client can also be considered an offender for knowingly participating in the practice. A broker who engages in rebating or offers incentives to clients to purchase life insurance risks their insurance license and the stability of their company.