The trouble with commissions
By Charlie Wilmerding
Commissions have been a fact of life for as long as there have been insurance brokers, but should they be? While businesses have always sought to contain or reduce their insurance- and risk-related expenses, insurance brokers have traditionally been paid a percentage of their clients’ premiums in the form of a commission. The more the client pays for their insurance, the more the broker makes. Brokers and agents have tried to position themselves as ‘independent’ and ‘trusted advisors,’ but in the end they are neither.
I don’t mean to suggest that all agents and brokers are bad people. In fact, there are many good, ethical people in the business. It’s not the people that are the problem. The problem is the business and its compensation structure.
The conflict of interest that underlies commission plagues the brokerage business at every step of the insurance-buying process, leaving customers without the leverage and power they deserve. As long as agents and brokers tie their compensation to insurance transactions, they risk becoming irrelevant as their clients seek alternatives to buying insurance that give them confidence they have been given a fair shake in the process.
Clients are looking for resources and information, objective advice and solutions, and access to insurance markets without having to worry about any backroom commission schemes that ultimately breed distrust. Without commission, a conversation about buying higher limits of insurance takes on a different and more productive tone – the broker doesn’t get paid any more or less as a result of their client’s objectively informed decision.
Insurance buyers aren’t the only ones affected by this conflict of interest. Insurance carriers are challenged by commission as well. As a rule, commissions are insurers’ second largest expense behind paid losses. Though carriers are most concerned with their net premiums written, they would prefer to have that net premium delivered directly to their insureds without commission inflating and distorting the actual risk transfer premium.
In Chubb’s 2016 annual report, Chairman and CEO Evan Greenberg called out brokers for some “abusive behavior” involving commission: “Cloaked in the mantra of ‘customer best interest’ or ‘treating customers fairly,’ they seek the cheapest price and broadest coverage at commission terms that, by any measure, are excessive,” Greenberg said.
As this statement implies, broker commissions have been impacting industry decisions forever for the sole benefit of one party in the insurance transaction: the broker. It’s time to pull back the curtain and embrace a different, fairer compensation model that gives the customer not only complete transparency, but also the power and leverage they deserve in what has traditionally been an opaque industry.
One way to put control back into clients’ hands is to eliminate commissions entirely and move to a fee-for-service model. When clients pay their broker a flat fee for the services they receive instead of a commission based on the amount of premium they pay, they’re empowered to make the right decisions for their business and themselves about their insurance coverage. Moving to a fee-based model allows brokers to truly become trusted advisors, which is essential for the survival of the brokerage business.
Importantly, fee-based still doesn’t mean ‘one size fits all.’ Charging fees allows brokers to customize a service plan for each client. At Altus, we’ve created a proprietary model using 10 service-based criteria that generate fees tailored to each client’s unique needs. Using this method, we significantly reduce our clients’ brokerage expenses in both the short and long term. In doing so, we are freed to aggressively seek out the best terms, conditions and pricing from underwriters without worrying if a lower premium will negatively impact our revenue.
As agents and brokers, we should strive to be considered vital partners who can help our clients navigate the often mysterious and confusing world of insurance while aligning our interests with theirs as best we can.
Let’s stop living under the assumption that the commission model works for everyone. The truth is it doesn’t work for anyone – except the broker. Let’s eliminate the conflict of interest so we can be the trusted advisors and advocates that clients want, need and value.
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Charlie Wilmerding is the founder and CEO of Altus Partners, which he started in 1997 to change the way that property & casualty insurance is bought and managed.
