Sweat the small stuff: advertising compliance shouldn't be ignored--it could cost agents their licenses.

Key Points

* Some state insurance departments require multipage disclosures for certain products.

* Before publishing or distributing any materials, agents should submit them to the insurer's compliance department for approval.

* Many departments of insurance levy fines against agents for using advertising materials with misleading information.

Just about everything today has some kind of product disclosure attached, from movies and magazines to hammers and toys. These often-ignored lines are intended to prevent consumers from misusing the product and causing harm to themselves or others. These disclosures protect the manufacturer or distributor from lawsuits that may arise from product misuse.

It's usually a customer complaint or legal action that compels manufacturers to attach disclosure statements to their products. In the same way, consumer complaints about insurance products and marketing techniques have triggered the need for disclosures on these products.

Advertising disclosures serve an important purpose for industries, by protecting companies and their customers from product misuse. In the insurance industry, disclosures help protect the agent, as well as the carrier and insured.

Defining Disclosure

Insurance disclosures help manage risk. A disclosure is the act or process of revealing or uncovering information. Advertising disclosures are usually needed for all levels of insurance communications, from relatively low-risk home office employee communications to comparably higher-risk consumer solicitations.

In some states, departments of insurance require multipage disclosures for certain products, sometimes called "statements of understanding." Agents distribute these longer disclosures to consumers at point-of-sale. However, most advertising disclosures for insurance products are formatted as small-print text at the bottom of the page in advertising materials.

Size and placement are critical elements of advertising disclosures. Not only do they need to be seen, but they also must be readable. Most state DOIs mandate that disclosures cannot be smaller than the average font size on the rest of the page, and some states specify that disclosures must be at least 10-point font size. Additionally, disclosures must appear close to the text to which they refer.

Carriers' advertising compliance departments develop their disclosures from several different sources--litigation, federal and state regulation, market-conduct exams, prior experience and consumer complaints. Based on new developments from any of these sources, advertising compliance teams write disclosure text that is appropriate for each circumstance.

Also, the National Association of Insurance Commissioners has provided definitions to guide advertising compliance efforts. Insurers' compliance departments typically use the Unfair Trade Practices Model Act and the Accident and Sickness, Life, Medicare Supplement and Long-Term Care Advertising model regulations to direct advertising compliance.

To emphasize the importance of advertising compliance, the Insurance Marketplace Standards Association has made it part of the ethical principles to which member companies must adhere in order to earn IMSA certification.

Agents: Manage Risk

Most states hold insurers responsible for advertising compliance--whether materials are developed by the home office or by the insurer's independent agents. That's why carriers usually require agents to adhere to compliance review procedures for all marketing materials. Although agents who are eager to solicit new business can sometimes view this as a cumbersome delay, compliance review is necessary to protect all parties involved: the agent, the carrier, and--hopefully--the consumer.

Before publishing or distributing any materials created by agencies, agents should submit them to the insurer's compliance department for approval, regardless of whether they name the insurer or product. Types of materials that must be reviewed include Web sites, agent recruiting letters, seminar invitations, sales scripts, and prospecting or form letters.

Even an agent's business cards and stationery/letterhead should be reviewed for advertising compliance before using them, because state requirements vary. Compliance departments know the ins and outs of each state's requirements and can provide you with this kind of information.

Why Bother?

When agents submit advertising materials for compliance review, the carrier becomes the first line of defense for regulatory inquiries. If the materials were approved for use by the insurer's compliance department, and later become the subject of a consumer complaint, the insurer will assist with the DOI's inquiry or market-conduct exam as required.

DOIs throughout the country regularly levy fines against agents for using advertising materials that contain misleading information. Multiple infractions can cause agents to lose their licenses. Even if you keep your license, a consumer complaint against you can become public information if the DOI publishes information on its Web site or in a newsletter.

Consider your insurer's compliance department a valuable part of your marketing team, helping you help consumers understand the products that you sell. Better understanding will increase your sales and persistency.

RELATED ARTICEL: Types of disclosures.

Insurance advertising disclosures provide information about the product or service being marketed. Most disclosures fall within the four categories described below.

What company is responsible for the product?

For all insurance products or services, an advertiser must identify the underwriting company and the location of its home or administrative office. If the carrier is marketed as a member of a group of insurance companies or a subsidiary of a larger parent company, this connection must also be explained.

An advertiser may choose to provide additional general information about the underwriting company, including financial strength ratings that may apply.

The following are examples of this type of disclosure:

* ABC Life Insurance Co., administrative office, Safetown, IN.

* ABC Life Insurance Co. is a subsidiary of XYZ Inc. The financial condition and contractual obligations of XYZ Inc. are separate from its subsidiaries.

* ABC Life and Health Insurance Co. has received strong ratings from major independent rating agencies. A.M. Best has rated ABC Life and Health"A (Excellent)."

What is the product?

In most states, an advertiser must identify the product being marketed by the policy form number as filed with that state's department of insurance. But it must also identify the product in consumer-friendly terms, to avoid confusion with other products.

* Policy form ABC-1000 issued by ABC Life Insurance Co., administrative office, Safetown, Ind.

* A long-term, indexed, flexible-premium deferred annuity.

* This is a cancer-only policy.

Are there any complexities in using the product? J

This is where most advertising disclosures originate, since insurance products are intangible and sometimes misunderstood by consumers. Disclosure language informs the reader that the product may have limitations or that, although the marketing material may include an example, circumstances may change the outcome for consumers.

With certain insurance or annuity products, disclosures may counsel consumers to seek tax advice from independent tax advisers. This protects insurers against complaints from consumers who claim that tax advice was offered through marketing material.

* Rates are subject to change.

* Subject to state availability.

* The information above was written to support the sales and marketing of insurance policies offered by ABC Life Insurance Co. Based on your particular circumstances, you should seek advice from an independent tax adviser. You cannot rely upon or use the information above for the purposes of avoiding any tax or tax penalty that may be imposed by the Internal Revenue Service.

What do agents need to know?

When a carrier develops communications for its agents, it can be a little more liberal in the promotion of premium rates and competitive information. To ensure that this information is not misused, however, disclosures are added to guide the agent in its use.

* For agent information only. Not for public use.

* The information contained in this material is protected by state and federal laws and regulations and must not be shared with any other entity or person per your sales agreement with the company. Failure to keep this information private is a violation of the agreement.

Contributor Emil Loya is assistant vice president, compliance, for Conseco Insurance Group. He is a founding member and current officer of the Insurance Advertising Compliance Association.