Prohibited Practices
Several specific practices are prohibited in insurance sales. Understanding these is essential for the licensing exam and ethical practice.
Rebating
Rebating is offering anything of value as an inducement to purchase insurance that is not specified in the policy.
What Constitutes Rebating
| Prohibited | Allowed |
|---|---|
| Returning commission to buyer | Policy dividends (if in contract) |
| Cash payments for purchasing | Premium discounts (if filed) |
| Expensive gifts | Nominal promotional items |
| Stock in the agency | Published rate reductions |
| Payment of non-insurance expenses | Experience-rated premium adjustments |
Key Points About Rebating
- Applies to both the giver and receiver of the rebate
- Even partial commission sharing with non-licensed persons
- Offering to pay premiums for a period of time
- Providing services of value not available to all
Exam Tip: Most states prohibit rebating because it's considered unfair discrimination—one buyer receives something others don't. However, a few states (like California and Florida) have modified anti-rebating rules.
Twisting
Twisting is inducing a policyholder to lapse, cancel, or switch insurance policies through misrepresentation.
Elements of Twisting
| Element | Description |
|---|---|
| Existing Policy | Client has current coverage |
| Replacement | Producer induces replacement |
| Misrepresentation | Uses false or misleading statements |
| Detriment | Client is harmed by the switch |
Examples of Twisting
- Falsely claiming the existing policy will "become worthless"
- Exaggerating problems with the current insurer
- Misrepresenting the benefits of the new policy
- Hiding the disadvantages of replacement
Key Point: Twisting involves misrepresentation. Legitimate policy replacement with full and accurate disclosure is NOT twisting.
Churning
Churning is the practice of inducing a policyholder to replace an existing policy with a new one from the same insurer, using the cash value to pay premiums on the new policy.
How Churning Works
- Producer identifies policy with accumulated cash value
- Convinces policyholder to surrender or borrow from policy
- Uses those funds to buy new policy from same company
- Producer earns new commission
Why Churning Is Harmful
| Harm to Consumer | Details |
|---|---|
| Surrender Charges | May lose value to surrender fees |
| New Contestability | Starts new 2-year contestability period |
| New Suicide Exclusion | Restarts suicide exclusion period |
| Higher Premiums | New policy costs more at older age |
| Lost Benefits | May lose grandfathered provisions |
Exam Tip: The key difference between twisting and churning is the insurer involved. Twisting involves replacing with a different insurer; churning keeps the policy with the same insurer.
Sliding
Sliding is adding coverage or products to a policy without the customer's knowledge or informed consent.
Examples of Sliding
| Practice | Description |
|---|---|
| Adding Riders | Including optional riders without explaining cost |
| Bundling Products | Adding ancillary products without disclosure |
| Increasing Coverage | Raising limits without customer agreement |
| Adding Policies | Selling additional policies without clear consent |
Why Sliding Is Prohibited
- Consumer pays for coverage they didn't request
- Violates principles of informed consent
- Constitutes deceptive business practice
- May increase premiums without value to consumer
Unfair Discrimination
Unfair discrimination is treating similarly situated individuals differently based on factors not related to risk.
Permitted vs. Prohibited Discrimination
| Permitted (Risk-Based) | Prohibited (Unfair) |
|---|---|
| Age | Race |
| Health status | National origin |
| Occupation | Religion |
| Tobacco use | Gender (varies by state/product) |
| Driving record | Marital status (varies) |
| Credit history (varies) | Sexual orientation (many states) |
Key Principle
Insurance underwriting can discriminate based on factors that are:
- Actuarially justified
- Related to the risk being insured
- Not prohibited by law
Insurance underwriting cannot discriminate based on factors that are:
- Not related to risk
- Protected characteristics
- Prohibited by state or federal law
Key Point: The key word is "unfair." Discrimination based on legitimate risk factors is permitted and necessary for proper underwriting.
Controlled Business
Controlled business occurs when a producer writes insurance primarily on their own life or property, or that of family members, employees, or business associates.
Why It's Regulated
| Concern | Issue |
|---|---|
| Adverse Selection | May only insure known risks |
| Lack of Market Activity | Not genuinely serving the public |
| Commission Abuse | Using license just to get discounts |
Typical Limitations
- Many states limit controlled business to a percentage (e.g., 25-50%) of total premium
- Producer must demonstrate service to general public
- Excessive controlled business can result in license action
Comparison of Prohibited Practices
| Practice | Key Element | Same Insurer? |
|---|---|---|
| Rebating | Offering inducement not in policy | N/A |
| Twisting | Replacement through misrepresentation | Different insurer |
| Churning | Replacement using cash value | Same insurer |
| Sliding | Adding coverage without consent | N/A |
A producer offers to pay the first month's premium for a client who purchases a policy. This is an example of:
What is the key difference between twisting and churning?
A producer adds an accidental death benefit rider to a policy without informing the applicant about the additional premium. This is:
Which type of discrimination is generally PERMITTED in insurance underwriting?
A producer who writes insurance primarily on their own family members and employees may be engaging in:
35.1 Replacement Regulations
Chapter 35: Policy Replacement and Ethics