What is rebating in insurance
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Rebating is defined as giving a customer something of monetary value in exchange for making a purchase. This is usually conceived of as cash discounts, but can include expensive gifts, free trips or concert tickets, prizes, anything of significant value. Some states specifically exclude token gifts, such as calendars and Christmas cards. In others, even such small gifts must be demonstrably independent of actual purchase.
Why Is Rebating Illegal?
Insurance companies are responsible to keep large quantities of liquid cash available to pay off claims. This means a large portion of premiums don't go to any set expenses. It would be possible for insurance companies to discount or rebate premium payments to create a competitive advantage. Large companies could take advantage of this, selling policies at minimal profit to drive smaller companies out of business. Also, competing companies engaging in a "price war" of rebating could reduce profits so much that they are unable to make payments on claims.
The specific penalties for rebating vary from state to state. Individual insurance producers and agency owners caught rebating will lose their license and may face fines. Insurance companies caught rebating will pay large fines and may be forbidden from operating in the state where they engaged in rebating for several years.
The Insurance Board of the state where rebating is suspected investigates, conducts hearings and levies penalties for rebating. Each state Board will have a defined process for investigating rebating and for appeals on their decision. In general, the Insurance Board operates independent of law enforcement.
Pro-active enforcement, such as sting operations, is rare in investigating rebating. Because rebating is an unfair business practice, Insurance Boards get most of their investigative leads from other insurance producers. Individual agencies are highly motivated to avoid allowing their competitors that kind of advantage. Once a complaint has been filed, pro-active enforcement of that specific producer or agent becomes more likely.Source: ehow.com