Rebating is the act of giving back part of a purchase price as a means of getting people to purchase a specific product or service. This method is used widely throughout a number of industries, although insurance rebating is forbidden in many countries. Rebating is not technically considered illegal in many areas but it can lead to insurance agents losing their licenses as well as receiving large fines for the agent or the company that provides rebating.
In rebating, a customer is provided a monetary incentive when they purchase an insurance product. This normally includes cash discounts but can also include various gifts and other incentives. Some areas forbid insurance companies to even send out Christmas cards as this can be misconstrued as insurance rebating. Any gift no matter how large or small can be considered rebating depending on the circumstances surrounding that particular gift. Many agents find insurance rebating to be a very useful method of getting new clients although again, some areas strictly forbid this practice.
Because insurance companies are held responsible for large amounts of liquid cash in order to quickly pay claims, rebating has been deemed forbidden in many areas. A large amount of the premiums that are paid for insurance do not technically go straight to expenses. This makes it very possible for insurance companies or individual agents to rebate or offer discounts on premium payments in order to gain new clients or to give them a competitive edge against other insurance companies. Larger insurance companies would clearly have the upper hand and could very easily take advantage of the amount of cash that they would be able to offer for rebates. This could ultimately push smaller companies out of business. In addition, companies that are competing for new customers could wage a price war using rebates that could significantly reduce their profits, so much so that they may not be able to pay claims from their other customers.
In areas where insurance rebating is not allowed, there may be different penalties for different states or regions. Individual insurance agents as well as owners of agencies who are caught could ultimately lose their license to sell insurance and could incur very heavy fines as well. Larger insurance companies that are proven to be rebating could also incur large fines and may be strictly forbidden from further operating in the state in which they were found to be rebating. Some companies are forced to stop operations in certain states for many years as a result of insurance rebating.
In the United States, the Insurance Board of each state is responsible for the penalties and fines related to insurance rebating. In addition, these different state boards will conduct hearings and investigations into any suspected insurance rebating. Each state board has a specific process by which they investigate as well as prosecute agencies, agents or companies that are proven to be offering rebates in this way.
Specific examples of insurance rebating include any agent or company that offers to pay a portion of their sales commission to a customer for purchasing an insurance policy or anyone who offers to provide customers with valuable gifts for policy purchases or for referring additional customers to the agency. There are some states that do allow a certain level of rebating provided the rebate or gift is not worth more than a specific limit. Most limits are around $5 or so. Some agents and companies are allowed to offer gifts to a customer for requesting an insurance quote, provided this does not require the customer to purchase an insurance policy from that specific agent or company. Agents are also allowed to share their commissions provided they are not doing so with customers in exchange for policy purchases. Overall, although insurance rebating is not illegal in most areas it is considered to be unethical.