Archive for November, 2009

This topic has come up once before (see “Are contingency commissions bad for business” post) and there are new rules about to be announced in New York concerning the disclosure process by brokers on additional fees they receive from insurance companies.  In a recent Bnet article “Is it alright for brokers to make money from both sides” by Ed Leefeld outlined the pro’s and con’s of the program as well as a short history of how we got to this point.

How do you know what compensation the broker may be receiving?   Ask them to outline the compensation they are receiving, not just from the policy in question, but for all activity they or their subsidiaries from the associated insurer.   Make sure you can recognize what some of the key payment opportunities are including:

Standard Commission- one of the traditional ways a broker receives payment for the services provided.  Some companies use this form of compensation rather than a standard fee paid on a scheduled basis from the company.  While it appears that the insurance cost is higher, when reviewed over the total cost of the programs, it will equalize.  Additionally, if the insurance payment is being financed, this fee becomes part of the overall insurance cost and is more easily rolled into the scheduled payments, and not treated as a separate line item. 

Fees – An agreed upon fee between the company and insurance broker for the services to be rendered as outlined through a service agreement.  This is a way of standardizing the cost to be fair to the broker (when the market is soft and the rates are dropping) or the company (when the market has hardened and the rates are rising).  The flat fee will not be affected by the rise and fall in the rates and the subsequent increased/decreased commission.

Contingent Commission – An additional compensation paid to the broker by the insurance company based on some performance relative to the performance of the broker or the individual.

Enhanced or Supplemental Commission- An additional commission negotiated by the broker with the insurance company over and above the customary commission and fees.

Excess and Surplus Line and Reinsurance Commissions – When the primary insurance company seeks outside participants to fill out the program.  Many brokers have specialized subsidiaries to make sure the compensation remains in house.

Profit Sharing – additional compensation based on percentage of profits.

Volume Over-Rides- Increased compensation when pre-defined thresholds are exceeded (amount of business booked with the insurance company).

Work Transfer Payments – Payments to the broker for services they will provide on behalf of the insurance company.  Care must be taken to make sure the services are not being paid as part of a service level agreement.

Service Income – Payment for services provided by the broker not specific to any insured.

Fiduciary Funds Income- Interest earned solely by the broker on the insured’s funds held by the broker in the form of premiums intended for the insurer’s and claims payments going to the insured.  Consider this the float for the time the broker holds the money between payment to the insurance company and claims and over payments that are being paid back to you from the insurance company.

Various other items – This would include advanced commissions, loans, marketing payments, sales incentives, etc.

I believe we all agree that payment should be received for services rendered.  That payment can come in the form of commissions from the insurance company, fees paid by the insured for the service the broker will perform or a combination of the two.  The important thing is that the you are aware of the total compensation that the broker may be receiving for placing this business with the insurance company (insurer).  The broker should disclose all sources of payment.  However it is your organizations responsibility to ask this important question.  

This disclosure should be asked for in either your request for proposal from the broker (and subsequent carriers) or in the service level agreement between your company and the broker.  In both instances the request for disclosure should be spelled out and indicate this information is one of the criteria for evaluating responses.

The Illinois General Assembly has passed a law  banning the use of cell phones and other devices to be used for texting and accessing the Internet while driving.    The law goes into effect on January 1, 2010 and is one of two laws associated with the use of personal communications while driving.

The other law (public act 096-0131) prohibits the use of cell phones in school zone speed limits, constructions zones and use by individuals under 19 while driving.

These steps will help in the reduction of accidents, injuries and death due to distracted driving and I applaud the state government for taking this action.  It also helps you set HR policy for your company on the use of cell phones and other communication devices that send or receive text messages or connect with the Internet.

In a previous post (texting while driving can contribute to insurance cost increases) I talked about how a “no cell phone use while driving” can contribute to a reduction in insurance costs and an overall reduction in your total cost of risk.  The establishment of a policy like this, and enforcement, demonstrates the companies commitment to reducing auto accidents.  With this type of demonstration and the historical data showing a reduction of auto accident claims, your company is in an excellent position to negotiate a reduced rate (or reduced increase depending on market conditions).

Establishing this type of policy will not be easy, especially if your C-level employees are the type who “multi-task” while driving.  However the up side in savings, both in human life and in costs should be a major factor in putting this policy into place.

IMPORTANT UPDATE

(November 14, 2009)

Rhode Island is the latest state to ban texting while driving, bringing the number up to 18 states with laws on the books or some coming into effect.  The law went into effect on November 9 and carriers a fine of up to $125.00.

Pennsylvania is also considering a ban on texting with the added twist of making this a primary offense which would allow the police to stop a driver even if no other infraction is committed.

With the significant increase in these types of laws across the states it is more important than ever to have a policy in place to protect your company and employees.