A combination of softening markets, greater regulatory pressure and changing consumer preferences has squeezed insurance agent commission to the point that many are leaving once-profitable lines of business – but it may not have to be that way, some industry professionals are saying.
Insurer responses to the Affordable Care Act have fueled the biggest hits against agents. Earlier this year, four of the largest health insurance companies in the country announced they would be limiting and even completely axing the commissions they pay agents for selling their plans on ACA exchanges. Without that support, many agents say they can no longer afford to devote their time to the individual market.
“Every independent broker in the state would no longer write a policy – period,” Mary Jennings, a Connecticut health insurance agent, said of ConnectiCare’s proposed plan to cut commissions. “Many of my colleagues have already positioned themselves to exist.”
Group health is also suffering. While the majority of small businesses are still offering traditional employer-based plans, many are considering alternatives that either don’t include agents or leave them in a financially unsustainable role.
According to a recent survey from Arthur J. Gallagher, an estimated 15% of businesses are expected to switch to a defined contribution plan by 2018. That’s a whopping 650% increase in just two years, and one that would leave agents assisting in considerably less lucrative individual sales.
Outside of health and benefits, agents report dissatisfaction with commissions paid by personal lines insurance carriers. In an August report from Channel Harvest, agents asked to rate their insurers gave companies comparatively low ratings on “agency compensation” – a product of serious financial headwinds and new competitors, says Channel Harvest Principal Peter van Aartrijk.
“Online shopping by consumers, coupled with the number of direct/captive carrier choices, are much higher [than in commercial lines],” van Aartrijk said. “There are also aggregators and shopping websites in the fray. With lower premiums, companies don’t have the margins you might see in commercial lines. All of this puts downward pressure on compensation to agencies in personal lines.”
Insurance agencies have responded to this squeeze on commissions by diversifying their offerings or specializing in niche areas. These are important steps, but Bill Ziebell, Executive Vice President, North Central Region at Arthur J. Gallagher, suggests another.
“Why do you have to depend solely on commission?” Ziebell told Insurance Business America
. “If your sole job is just one line, you’re going to get squeezed. Why can’t you get a retainer agreement or invoice the client for your services? Ask yourself what value you provide to your clients – not what commission rates are.”
Others have pushed back against the idea of changing agent compensation, however.
“I am comfortable with the commission structure,” said Michael Gottlieb, managing director of BizCover. “[It’s why] the industry can operate and everyone can receive advice. If it all became fee for service, small businesses would not be able to afford advice.”
Tommy McDonald, MarshBerry vice president and author of recent report, Producer Compensation: Behind the Numbers,
believes splitting the difference may be the best approach to solving commission woes. According to the report, most agents earn 40% on new business and 25% on renewal.
But if agents are looking to grow their business?
“We believe in a higher new business split relative to renewal so there is an incentive for people to go out and hunt new business. A [15 to 20 percent] spread is typically what we recommend,” he said. In fact, McDonald would argue that top producers who generate a lot of new business should be compensated with a much higher new business commission, such as 60%.“The bigger the spread on new and renewal can be an effective way to drive new business to an organization. The last thing you want to happen is to lose your best producer because you did not think about something that matters in the comp change.”
Gradual, creative and strategic conversations around compensation can help add value and improve a business by transforming how it is structured. Then, communicating why you are adjusting compensation is key.
“If you can communicate to your sales people that the reason why you are adjusting comp is because you want to invest in the business and re-adjust so you can remain independently-held and continue to grow the company strategically, those are things that people need to realize,” said McDonald.
The bottom line: one size does not fit all. How a company structures comp differs based on circumstance, needs and goals. What is simple about comp is that there simply is no one comp plan that works across the board, and how agencies decide to do it can make or break their business.
“We take a cautionary line with how we approach our advising clients because of circumstance,” McDonald concluded.
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