Insurance Business forum is the place for positive industry interaction and welcomes your professional and informed opinion.

Notify me of new replies via email
Insurance Business | 02 Jun 2016, 09:00 AM Agree 0
We want your thoughts on broker commissions and whether there is a better way for brokers to be paid
  • Mark | 02 Jun 2016, 10:22 AM Agree 0
    Commissions are necessary for the lower end policy, eg house, car, small SME. Unfortunately the direct industry has commoditised these products, forcing us into a price war, consumers will start negotiating on our fees as well. No other industry has to show their income on their products, does Harvey Norman have to disclose the kick backs, margins etc he makes on each product? Why do we?
  • Sam Greco | 02 Jun 2016, 10:59 AM Agree 0
    Time has come to pass when client (fiduciary) relationships can be rewarded through commissions. In my view like all other commercial relationships, remuneration must be linked to economic value delivered and ‘valued’ (measured) by a client. Commissions are from last century or in closed economies. So who goes first? The industry evolves under its’ own leadership and aligns with market expectations or let government intervention drive change again!
  • Rolf Van Dulst | 02 Jun 2016, 11:00 AM Agree 0
    I have found that remuneration by fee provides a great deal of transparency for our clients. It requires me, as a broker, to articulate the services and benefits a client receives for the fee I am charging. Negotiating these services up front lets both the client and me to agree what is in scope and what is out of scope and what is a fair price. It takes time and effort but I believe it strengthens the long term commercial relationship between client and broker to both their benefit. It is the best way to combat transactional, price driven decision making by clients. It doesn't suit everyone but is a good differentiator to no advice, self serve, on-line options.
  • Robert Cooper | 02 Jun 2016, 11:34 AM Agree 0
    For large Corporate Clients, fees make sense. For small to medium businesses, it is best that we remain on commission. Historically, an Insured could buy the identical policy direct with a company or through a Broker placed through the same company. Then insurers had factored in a cost of having a Sales Force. That was the same amount as a commission to the Broker. Then Insurers dropped their sales force because they could not be a one stop shop for all the client's insurance needs. However Brokers had the flexibility to place different parts of a Business Insurance risks with different companies to maximise the savings and coverage for the clients. Now we have a situation that some insurers have decided to go direct to the customer again using on-line and cheap call centres offering no advice. All clients expect advice. Declaring "General Advice only" means nothing to most clients. What Brokers offer compared to going direct, is that we have a duty of care to provide advice. If we fail to give the right advice or no advice where it is needed, we can get sued. There is a cost to this advice, but most small to medium businesses do not think they need any advice, and they focus only on the cost of cover. It is easier to say we get paid by the insurer for placing your business with them than try and justify a fee out of proportion with their premium. They will then seek to save money by going direct to the cheap direct insurers thinking they have avoided large Broker Professional fees, when all they have done is buy themselves inadequate cover. They will drop covers like Business Interruption because no one explains it to them and it will save them money.
    Small to Medium Businesses need an Insurance Broker's expertise, and making it look more justifiable without hefty fees to cover our costs will better serve this sector.
    What we need to do is explain this to Small to Medium Business and sell our good news stories. Insurance Brokers do not have the advertising budgets of large insurers. It would be preferable if the Insurers could support us more in this regard. CGU did a great Advert about a Nurseryman who suffered a fire and the Broker helped get his claim settled. They are more of the stories we need out there.
  • John | 02 Jun 2016, 12:08 PM Agree 0
    Irrelevant discussion.

    Put simply - brokers have no role / value in the distribution of commoditised products (personal lines / Small / Micro business). The market will address this segment through innovative mobile / social / analytics based solutions (NB: The shift is already on).

    The challenge for brokers is the traditional heartland is going to be disrupted by offerings that leverage IoT / sensors / analytics that will help innovative companies come up with prevention based propositions as opposed to price / claims based propositions (e.g. Smart Agri).

    In many ways it is going to force brokers to get back to what they were set up to do.... Extension of risk function. Technology has the potential to help brokers deliver this proposition at scale. Those who fail to innovate and keep pace with developments will rapidly get rendered to the history books....
  • Paul | 02 Jun 2016, 12:19 PM Agree 0
    I have always told clients my commission from the Insurer is x% and I charge a fee so that my gross margin id y% " do you object to that". Most clients are surprised that brokers gross margins are so small. I agree that for larger clients a fee for service and fee for claims service is appropriate. Smaller SMEs will be driven to direct sellers with all the non advice issues that flow from non advice. However ASIC must be forced to change its stand on independence , as they are in a closed mindset in this area.
  • Terry Mills | 02 Jun 2016, 12:37 PM Agree 0
    Most corporate - non-retail - business is now handled on a fee for service basis and that's the way a profession operates. A client expects objective and impartial advice and should be prepared to pay for it.

    A strong argument in favour of a fee for service model is that the broker's bottom line is not impacted by soft markets or by actually doing his/her job and saving the client money on premiums : remuneration is agreed in advance and is based on the level of service provided.

    Perhaps the strongest argument against commissions is the law : the Corporations Act (s923A) restricts the use by financial service providers - including brokers - of the terms 'independent', 'impartial', or 'unbiased' where the broker receives commissions unless they are rebated in full
    Surely the ability to call yourself independent, impartial and unbiased is in itself good enough reason to abandon commission based remuneration ?
  • Phil | 02 Jun 2016, 12:56 PM Agree 0
    I agree with Rob's comments 100%. If anyone thinks ending commission payments to brokers is the magic bullet to fix the image of brokers generally they are kidding themselves. As for John - interesting comments that brokers have no role or real value for commoditised products; I must make a point of asking my clients why they have stayed with us year after year after year. It may very well have everything to do with the advice and value I and many other insurance intermediaries offer clients in this space. Think you are getting a little ahead of yourself John and your value proposition sounds almost like it has removed the quality of a human being from the equation.
  • Just an Observer | 02 Jun 2016, 03:23 PM Agree 0
    In have been in the insurance industry for just on 40 years. Over that time the question of commission has been a regular "issue".

    Over 40 years I have dealt with everything from Multi National & Large Corporate clients to Personal Lines clients and everything in between.

    For Large Corporate clients I have often charged more as a fee than I would make as commission. The Fee charged should always be based on the amount of work involved with managing clients insurance.

    In 40 years very very few clients have questioned the amount or level of commission. When they have then once I have explain how much the commission is and what other services are provided to support relationship none have objected.

    True some clients do taken advice I have given and go direct to insurer thinking they have saved them selves money. When that happens I explain that the most "important" service Brokers provide is when the client has claims. I point out that if a client deals direct then they have to also deal direct when they have claims. That small and often over looked fact usually makes them have second thoughts.

    One thing that Brokers must do is educate the public that the real value of a broker is when a client has a major, life changing claim.

    Direct insurers are ok for small claims, but as we all know, when there are big dollars involved that is when the "Fine Print" comes into play.
  • Broker | 04 Jun 2016, 08:01 PM Agree 0
    My question to those brokers already on a fee for service basis or those who are looking into it. How do you determine your fee? An easy example say a home and contents policy. One insured has 200k on building and 50k on contents with a base premium of $1,000. 20% commission makes it a $200 earn for broker. Now another Insured wants 400k on the building and 100k contents. The premium is $2,000 so on 20% commission its a $400 earn. Now on both of these the quoting and binding of cover and time taken would be the same in reality. So in this case what fee would you charge on the policies?
  • glenda | 06 Jun 2016, 09:43 AM Agree 0
    well ive read all your comments - as i see commissions they are merely a standard mark up for the sale of a policy - fees are for advice and time. as insurance brokers we should be providing our clients with advice about the risks they want to insure - we should also be advising of the many ways to reduce their risk of loss with insurance being the last stop to cover losses they cannot avoid minimise or mitigate.
    i note a few of you talking about reducing premiums and cheaper insurance - well nowhere does it say we have any obligation to proved cheaper cover - we have obligations to provide appropriate cover.
    i also note that some of you are discussing the differences in commissions on similar policies - um well we are clearly Not to be comparing what we get for comissions but rather and only what is the most appropriate product for the client.
  • Broker | 08 Jun 2016, 09:46 AM Agree 0
    Glenda you are right that we should not just sell on price. We need to provide advice to an Insured and recommend the appropriate cover but this also needs to be cost effective, so premium is definitely a major consideration for the Insured
  • dcunneen | 17 Jun 2016, 09:11 PM Agree 0
    Robert - I agree. But as a broker for large corporate clients I will go one step further. In the current market (soft, competitive, cutthroat), it is easy for an attacking broker to look at a net program with a $200k fee and say, we will do this for $100k. Or even worse is the current fad when attacking flagship accounts - "free for the first 12 months". This is not broking. The fee-for-service model allows aggressive corporate brokers to win business without doing any meaningful work - in the worst case this happens post-tender, after the successful party has invested hundreds of hours repairing a technically deficient program, only to see an attacking broker sweep in to take on the account for half the fee.

    A remuneration structure based on commissions paid by insurers is less transparent, in some ways, than a fee structure, but I believe it is more honest. Many times I have been appointed to an account as a result of identifying critical gaps in the insurance program, and over the following 3-6 months bound additional policies to fill those gaps. It's only reasonable that the 3-6 months of work should be compensated by way of insurer commissions on the extra policies.

    The downside is that if you do a great job for an existing client, saving them 25% of their premium, you will lose 25% of your revenue. Fine! If that is the actual cost of the client's risk in the hands of a skilled broker, the shortfall will inevitably be compensated by referral business.

    The client's needs are the first priority and if you do a good job for your clients you will be rewarded. Waiving commissions in favour of fees may seem to be a better option, but in practice it will get in the way of that job.
  • dcunneen | 17 Jun 2016, 09:29 PM Agree 0
    Terry - very good points and ones that I have often considered. But, I'm on the way to changing my mind.

    Remuneration agreed in advance is all well and good, but does not take into account work which may be undertaken in the 12 months post-appointment in rectifying uninsured risks and binding extra policies. Imagine taking on a chronically underinsured client by quoting on their current program, matching an existing $5,000 fee, and then saying "by the way we will charge an additional $8,000 to negotiate & bind the uninsured risks we have identified". I have tried that - it doesn't work! Propose a broker fee to a client and they will haggle (I would too!) - but quote gross premiums against their current program and they will see the benefit.

    The challenge, of course, is ensuring that you act in the client's interests rather than presenting terms which will give you a higher commission. That is a matter of integrity. However, in my experience, if the service is good, the cover is appropriate, and the price is acceptable, no client will object to you taking an extra 5% over a competing quote.
Post a reply