The Trouble with Commissions

Insurance Commissions

The commission basis of engagement remains the overwhelmingly dominant model in Asia for procuring insurance broker services. This method (whilst not recommended) is the one that many Asia’s CEOs are most familiar with. The key to an effective engagement under this model is to ensure competition by reviewing regularly the appointment of the broker as well as the markets. It is also important to ensure an active dialogue is happening directly with the markets themselves. The key aspect overall is to understand what commissions are included for the broker, and to match that with required service expectations, key performance indicators, contract management, and delivery.

Here is a selection of some of the commissions, contingent commissions (or over riders in certain UK parlance) or other normal business practices of brokers to be aware of. Not all of these commission types apply in all countries or regions.

1. Original commission This is a simple percentage based on the amount of the insurance premium paid by the insured corporation. It can be zero sometimes when there is a separate fee arrangement or when the purchase is through direct channels. For online purchases it can be between 1% and 5%. For commercial policy lines depending on the nature of the insurance type it can range from around 10% to 20% rising to 40% or more in exceptional cases. In Asia, many CEOs and corporations seem to believe this is the only income for the broker from the insurance process. That may not always be the case. If you don’t ask, you don’t know.
2. Carrier / Service Level Agreement payments. In entering carrier agreements with larger brokers it has been suggested that the competition between insurers to win the right deal for the right fee with the right broker becomes more important than the price to the buyer. The potential conflict of interest centers around the broker being influenced to recommend an insurer who offers a higher level of payment for bringing in a certain volume of business or reaching agreed profit targets. The practice has been defended on the basis that payments are made based upon the whole book of business that a broker places with an insurer, and not for individual cases. Also that the practice is intended to compensate brokers for activities carried out on behalf of the insurer, rather than on behalf of their customers (for which they receive brokerage or fees).
3. Profitability / ‘No Claims’ Bonuses This one is particularly hard for buyers to understand or accept as it concerns payments made to brokers by insurers for limiting claims paid out. This can also be included in Service Level Agreements. Probably makes sense to exclude these in the RFP process unless there are exceptional reasons why not.
4. Insurance Panels and Pools Panels of insurers are developed in certain market segments. Participating insurers are reviewed on a variety of factors. Commission rates on panel placements may be higher than rates paid on business placed outside of the panel process. In some instances, insurers pay an administration fee (which can be very significant) to participate in the panel process, or for additional reporting.
5. Subscription Market Brokerage This is added by some specialty departments in brokers that place business into the subscription markets, predominantly in London but elsewhere too. The principles underlying this charge (which anecdotally can be around 15% or more) include increased infrastructure costs such as those arising from presentations to, and negotiations with multiple entities in the subscription market along with the additional administrative, regulatory, accounting and support functions this requires.
6. Premium funding An additional service which allows for larger insurance policies to be paid in installments rather than all at once. It’s particularly prevalent in certain countries, but perhaps less so in Asia. This is a profitable area for the brokers, to such an extent that some have set up separate companies to take advantage of the very low rates available for the secured lending available through this method.?
7. Ownership Interest. Some brokers have investments in insurers and may have a tendency to steer buyers to those specific markets as they will have indirect investment income that accrues accordingly. One to watch for the buyer.?
8. 90 day Payment of Premiums. Whilst the broker will sometimes chase for prompt payment by the insured they themselves may delay payment to the insurers until the last possible time, sometimes on a 90 day term agreement. This prudent business practice can allow brokers to remain cash positive, arguably at the expense of the insured.

The relationship between brokers and markets is constantly evolving so it isn’t possible to capture everything meaningfully in a brief summary. A cynical observer might perceive that the ever changing complexity and terminology is especially designed to obfuscate the insurance sector to outsiders, particularly the non-expert CEO buyer. I would not suggest that for one moment of course.?

In addition to the retail markets, the complexity of reinsurance hasn’t been touched on here at all. Reinsurance sidecars, quota shares, treaty versus facultative, and other arcane structures all increase complexity and potentially reduce visibility further up (down?) the insurance business chain.

Under current UK law the broker must not, without his client's knowledge, acquire any profit or benefit other than that contemplated by the client at the time client and broker entered into their contract. Where a broker is found to have breached a fiduciary duty, anyone knowingly assisting in the breach of that duty (such as an insurer) can also be held directly liable to the broker's client. However, the onus is on the insured to ask for the details first.

In Asia, the regulatory protections for corporate buyers are much more nuanced, and in some jurisdictions, almost non-existent. Therefore a prudent CEO will use contract law to protect the organization's position. Regular, carefully worded, requests for proposal (RFPs), say once every three years or so, are a hygiene factor for this, and other reasons. For the first timer, getting external help to run the RFP is advisable.??

Next time we will turn to some of the historical details, and controversy around contingent commissions. As always if you have any questions don’t hesitate to add in the comments below or reach out to us directly.?

For more details on this, and other best practices for the Risk focused CEO in Asia do sign up to my new Substack here: https://tunstallasc.substack.com/ . Exclusive content coming soon.?

#PARIMA #commissions #broker #insurer #insurance #reinsurance #risk #riskamanagement #riskmanager #premiums #ownership #profit #claims #brokerage #brokers #CEO #Asia