Entries tagged with “BNET”.

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.

In what I considered a surprise move, Illinois Attorney General Lisa Madigan provided a green light to resume collecting “contingent commissions” to Arthur Gallagher & Company.  Considered to be the fourth largest broker they are headquartered in Illinois and regulated by the state of Illinois. It’s surprising as they along with Marsh and McLennan, and AON had agreed to a settlement several years ago brought about when former NY State Attorney General Eliot Spitzer forced the major insurance brokers to stop this practice.

In case you are not familiar with contingent commissions, these are commissions paid by insurance companies to the insurance broker to push their products to companies, and in many cases the company is paying the insurance broker to negotiate and secure insurance coverage.

I should point out that the agreement between Spitzer and some insurance brokers did not put a halt to contingent commissions.  Many smaller insurance brokers continued to collect these types of commission either as a contingent or a “supplemental” commission.  

As a buyer of insurance programs it is important to understand your relationship with your insurance broker or agent as well as the their relationship with the insurance company.  Is your agreement with them fee based, where you are providing a payment to them for the services they are providing?  Or, is the agreement based on a commission they are receiving from the insurance company for the policy?  Or, is it a combination of the two, where there are some payments provided by you and some commission provided by the carrier.  This should be spelled out in your agreement with the broker, or outlined in the proposal itself. 

Review and understand the proposal that is presented to you at the time of renewal.  Make sure there is a disclosure statement included by your broker which indicates if they are receiving a commission for the placement of the insurance and if they are participating in a contingent or supplemental commission program with the carrier.  If there is no clear documentation, ask your sales rep.

It is important to clearly define your relationship with your insurance broker or agent.  It is also important to understand the breakdown in the cost of the program, if commission is added to the premium, or if there is a portion of the premium dollars that is being earmarked for commission. 

The fact that a contingent commission is associated with an insurance policy should not be a deal breaker, each organization must review the policy and determine if the coverage, and service meet their requirements.  Understanding what makes up the costs help to make an informed decision.

For additional information and another thought on the contingent commission, please review the BNet posting discussing this and the potential pitfalls by Ed Leefeldt.   His posting is a great perspective on the situation.