Regulators are putting unwanted attention on commercial insurance broker compensation, but it’s unlikely that compensation plans will move away from the fee-based model the industry has been slowly migrating to the past several years.
Commercial insurance brokerages have come under fire for how they charge for their services. New York Attorney General Eliott Spitzer is looking into contingent and placement service agreements. In a contingent payment agreement a broker may steer clients toward an insurer’s policy in return for a commission. Critics argue brokers have an incentive to place business with certain underwriters, even when it isn’t in the client’s best interest. Brokers and insurance companies argue contingent fees are an acceptable—and fully disclosed—form of compensation. Industry observers note that Spitzer’s investigation is just one of many tempests when it comes to brokers’ compensation.
“The names may change, the way brokers are compensated may change, but their role in the property/casualty market will not,” said John Keefe, vice president and equity analyst with Ferris Baker & Watts in Baltimore. “Brokers will never change; they are entrepreneurial, heat-seeking missiles.”
Even if contingent agreements are outlawed, brokers will likely shift their fees elsewhere, and customers will pony up, said David Bradford, executive vice president of Advisen, an insurance research and consultancy firm in New York.
“Contingent payments are a significant portion of broker compensation,” Bradford said. Placement service agreements could make up as much as 20 percent of some brokers’ revenue this year. According to a recent Advisen study, 70 percent of the risk managers it surveyed felt that if contingent fees disappeared, costs would rise.
“Things could change, but brokers would simply seek out other avenues of compensation,” Bradford said. “There could be a modified form of contingent arrangement, but if it disappears, brokers would simply raise their fees and commission in other areas.”
Another study, by Swiss Re, notes that how brokers charge clients has been slowly changing the last two decades. Brokers have been moving towards fees instead of commissions. Some brokers generate “as much as one-quarter to one-third of their revenues from their fees,” according to the study.
Why the change? Avoiding insurance cycles: “By receiving a fee instead of a commission, brokers could increase the stability of their income since fees do not rise and fall in line with premium volume,” the Swiss Re report said.
Article reprinted from KPMG’s Insurance Insider with permission of KPMG LLP. Copyright 2004 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. Disclaimer from KPMG: All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.
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