The New York Insurance Department moved a step closer to finalizing new transparency rules for how insurance brokers inform clients about how they are paid for insurance policies they place.

The proposed Producer Compensation Transparency Regulation was developed after public hearings and "extensive outreach to interested parties," beginning in July 2008, the insurance department said in a Thursday press release.

The proposed regulation requires insurance brokers to let their customers know whether they represent the purchaser or the insurer in the sale, whether they receive compensation from the insurer based on the contract they sell and that compensation insurers pay may vary based on a number of factors, such as the total volume of business the broker brings to the insurer. Brokers must also tell purchasers that they can request more information about the compensation.

If the proposed regulation is approved by the Governor's Office of Regulatory Reform, it will be open to public comment for 45 days, after which the department may adopt or modify it.

Insurer-paid commissions based on profitability or total business volume are sometimes called contingent commissions and have been the subject of debate over whether they create a conflict of interest for brokers.

The three largest insurance brokers, Aon Corp. (AOC), Marsh & McLennan Cos. (MMC) and Willis Group Holdings Ltd. (WSH), all agreed to no longer accept the commissions, the result of an investigation into the payments several years ago.

The proposed regulation won't affect those agreements, said Matthew Gaul, special counsel in the insurance department.

The regulation is geared at setting a standard of "transparency" for any type of compensation a broker receives, whether contingent or not, Gaul said.

-By Lavonne Kuykendall, Dow Jones Newswires; (312) 750 4141; lavonne.kuykendall@dowjones.com