The need to know: insurance companies face a challenge to meet the demands for greater transparency at the point of sale.

Inquiries into the practices of certain large brokers and insurance carriers have prompted considerable discussion of insurance industry distribution approaches. The ensuing debate has included most insurance products and markets, and ranged from the appropriateness of certain forms of incentive compensation to the effectiveness of state vs. federal regulation. Yet most observers agree that disclosure of producers' compensation arrangements with insurance carriers to facilitate greater transparency at the point of sale can address many of the issues.

By adopting its model legislation for broker disclosures in late December, the National Association of Insurance Commissioners took a step toward regulating transparency. When and how such regulations will apply, remain to be seen. With continued debate, plus initiatives by individual insurers, it may be some time before the answers are clear.

The issues are complex. The life, property/casualty and health insurance businesses have important differences, and concerns vary considerably among retail, group benefits and commercial insurance buyers. In addition, the regulatory landscape is mined with overlapping interests, jurisdictions and politics--for example, 50-plus state insurance commissioners and attorneys general, and the national interests of Congressional committees, federal agencies, and the National Association of Securities Dealers.

Nevertheless, insurance company executives must understand the disclosure issues to set an effective course of action for themselves. Doing so requires that management understand the "insurance buyer's experience"-what it is today, how it might be improved and what might be required in the future.

Analyzing, and then possibly refining, the customer experience is a disciplined way for management to understand the regulatory forces and possible competitor/producer actions that may affect its business model. Even an insurer that distributes exclusively through independent producers should consider the opportunities for influencing an improved buyer experience. Succeeding here may become a source of competitive advantage, while failing to understand and manage the insurance-buyer experience might expose management to increased liability for the actions of others.

Much depends on the buyer's expectations and what is done to reasonably manage the buyer's expectations in the course of analyzing needs, developing a plan, recommending specific product solutions, and delivering the solution from application through underwriting to sale and customer service. Some considerations:

* The buyer's expectations of the producer's role. Where on the spectrum from an objective adviser to a product salesperson does the producer sit? What does the buyer perceive to be the objectivity of the producer's advice, the scope of products and services from which solutions will be offered, the producer's access to what specific range of product manufacturers, and the extent to which the producer is subject to an insurance company's quality assurance efforts? In the event of an alleged error or omission, to whom is the buyer likely to turn for restitution? With what criteria can the quality of the producer's actions be judged?

* The producer's role. Is the producer described as an insurance agent or broker, or a financial, estate, risk or investment adviser or planner?

* The producer's relationships with insurance companies. Is the producer employed by or exclusive to a specific product provider or truly independent, placing business with many companies? Or does the producer work primarily with a core of three to six carriers?

* The producer's compensation. Presumably all compensation ingredients should be identified to ensure a complete picture: first-year and renewal commissions, long- and short-term bonuses, goods and services provided by an insurance company to support the sale of the company's products, marketing/wholesaling support and special trips.

* What choices does the buyer have in paying for advice?

The case for disclosure relies on the buyer's ability to make a sensible decision with the benefit of complete information. The considerations above suggest the potential scope and complexity of the disclosure that may be required, but also the opportunities to ensure a reasonable alignment of expectations.

Richard K. Berry, a Best's Review columnist, is a Towers Perrin principal and consultant for the firm's Tillinghast business. He can be reached at [e-mail].