To Fee, or Not to Fee

While service fees have been around for a long time, difficult market conditions and increased agency costs have made the use of service fees by agencies more popular in the past few years.

In recognition that the Illinois Department of Insurance statute regulating the use of service fees needed to be updated, the Professional Independent Insurance Agents of Illinois, through its government affairs committee, began work in late 2001 to introduce legislation to amend and clarify the service-fee language in the DOI statute. In June 2002, through the concerted efforts of PIIAI, Public Act 92587 was signed making the provisions of DOI regulation 215/500-80 effective June 26, 2002.

Ill. law on service fees
The new statute provides that a service fee may be charged to a policyholder as long as that policyholder is properly notified that such a fee is being charged. If the fee is less than 10 percent of the total premium, notification must be given but a signed statement is not required.

Anytime the fee charged is greater than 10 percent of the premium, notification must be given and a statement signed by the policyholder must be retained by the agent. Furthermore, if the policy cancels for any reason in the first 90 days, a pro-rata refund of the fee must be returned to the policyholder unless the statement signed by the insured contains language stating the fee is fully earned and nonrefundable.

In practice, many agents now charge fees and the vast majority of those have the policyholder sign a service-fee agreement regardless of the percentage of the total premium it represents.

These service fee agreements also contain specific language clearly outlining the fee is fully earned and will not be refunded to the policyholder under any circumstances. Personnel from the Illinois DOI have encouraged agents charging fees to eliminate any misunderstanding about fees by having all clients sign the appropriate service fee agreement. Samples of this agreement are available from the PIIAI office in Springfield, Ill. The Web site is www.piiai.org.

Chicago agencies choose to fee
Across the state the number of agents charging fees and the amount of those fees vary greatly. Most agencies in and around Chicago charge fees on both personal lines and commercial lines policies. In the central portion of the state the split appears to be equal between the agencies charging fees on new business and those electing waive fees at this time.

Farther South, the percentage of agencies charging fees is far smaller. Many agents feel the market in their specific area would not bear the imposition of fees on new business or for service work. Interestingly enough, the acceptance by both clients and agents who have implemented a service fee arrangement is universal.

Even those agents who believed fees would not be accepted by their clients find that, without exception, clients pay the fees without objection and understand the purpose and premise of paying fees to their agents for the professional services provided. These agents are now some of the biggest supporters of the needs for service fees in the independent agency.

Fees as a customer incentive
Many agents find that by using fees wisely they can also drive business into more profitable areas. For example, studies show that monthly payment programs or installment-type programs are the most costly for both agencies and companies. By agreeing to waive fees for clients who pay annual or semiannual premiums, clients recognize the financial incentive and often agree to more profitable payment arrangements.

In addition, the cost of administering policies with high-service requirements should be recognized at the time of writing the policy and fees appropriate with the amount of service work should be integrated into the premium. This is particularly true of commercial clients who likely involve significant numbers of certificates on accounts with relatively low premium volume.

The expectations by policyholders, mortgage holders, and certificate holders that agencies will provide immediate and instantaneous response to requests for documentation drives up the cost of providing those services. Agencies often delay work for new clients in order to provide service on accounts for existing clients when demands for immediate service are made. A growing number of agencies are beginning the process of imposing an expediting fee for mortgage holders requiring documents without notification at least two to three days in advance.

Also, some service work historically provided by the agency can now be shifted to the policyholder or be assessed a service fee. An example would be photos of property for new accounts. The widely accepted use of digital photography allows agents to request proper photos from their policyholders, thereby saving the unproductive time of sending staff or producers to take pictures of a risk.

If the policyholder cannot, or will not, provide the required photos or other documentation (such as motor vehicle records) the agency should charge a service fee for the expense, in both time and money, to provide the underwriting company with that information.

Many clients, when faced with a fee for that service, will take the necessary time to obtain the requested information and e-mail or fax it to the agency. With the recently increased costs of obtaining motor vehicle records from the Illinois Secretary of State (from $6 to $12) this is very important to the overall profitability of the agency.

Fee structures vary
In deciding fee structures, agencies across the state have developed many formulas. In larger agencies in the Chicago area that specialize in commercial accounts, some have implemented fee structures based on the total compensation from all lines of business within the account.

If specialty markets have been used which pay very low or inadequate commissions, the agency calculates the minimum percentage of compensation for that account and charges fees, which along with the commissions paid by carriers, brings the total compensation to a predetermined amount.

For personal lines business, most agencies have developed a flat fee structure by line of business. This ranges from $10 per policy to as high as $75 per policy, with the average being in the $20 to $25 per policy range. Many agencies also impose a reinstatement fee for clients who lapse for nonpayment with that fee increasing on each subsequent nonpayment lapse.

And finally, one caveat regarding service fees. In Illinois, agencies are prohibited from collecting a service fee on business written through the Illinois FAIR Plan. If agencies are licensed in multiple states, it’s important to check the regulations in each state regarding the use of fees.

Todd Davis is the owner of the Davis Agency in Peoria, Ill., and is the third-generation insurance professional in the agency.

Topics Agencies Legislation Illinois