Final answer:
Rebating is the act of an insurance broker or agent returning a portion of their commission to the policyholder, which is forbidden by the federal government as it can lead to unfair competition and market instability in the insurance industry.
Step-by-step explanation:
Rebating in the context of insurance is the practice where an insurance broker or agent offers a part of their commission to policyholders as an incentive to purchase or keep an insurance policy. This can take the form of cash, gifts, or services. The federal government considers rebating unethical and illegal because it can lead to unfair competition and financial instability in the insurance industry. It's also believed that rebating can influence the judgement of agents and brokers.
Since the federal government forbids brokers and agents from engaging in this practice, it is essential for insurance professionals to comply with these regulations to maintain a fair and reliable marketplace for insurance products. Rebating can lead to market distortions if some agents and brokers undercut others by offering rebates, potentially compromising the quality of service and undermining the professional standards of the industry.