Does your insurance broker have a conflict of interest? If your insurance
agency is a small- to medium-sized regional or local agent/broker, you may want
to inquire about “contingent commissions.”
These commissions — paid to the agent or
broker by some insurance carriers in addition to an upfront commission — are often
not, or only vaguely, disclosed by local and
regional insurance agencies.
“Contingent commissions may cause conflicts of interest,” says Jerry G. Kysela, resident managing director for Aon Risk Services
Inc. “Insurance agents that take contingent
commissions have an incentive to steer their
business to the carrier who pays them the
most, regardless of the client’s best interest.”
Smart Business spoke with Kysela about
the practice of contingent commissions.
Could you briefly explain how contingent
commissions get paid to the broker or agent?
These are cash incentive payments, in addition to upfront or base commissions, paid to
brokers and agents by insurance carriers
after the end of the year for the total volume
of premium these brokers and agents placed
with the carrier. These payments (which are
sometimes called ‘overrides’) can be as much
as 5 percent of the policy total, above the up-front commission or fee the agent receives.
For example, if a premium is $100,000 and
Carrier A pays the broker a 12 percent commission plus a contingency commission of 3
to 5 percent, the broker will get up to $17,000
for the placement. If Carrier B charges
$95,000 for the same policy, pays a 10 percent
commission but gets no contingent commission, the broker would only net $9,500 from
that deal. If the client isn’t aware of how this
works, and doesn’t have the opportunity to
discuss the broker’s true incentives in connection with the relative merits of carriers A
and B and their proposed policy terms, the
broker may be tempted to recommend
Carrier A to the client — regardless of what
is the better deal for the customer.
So these volume-based commissions can
cost money to the business customer?
Yes. Even for buyers who are aware of
these side agreements, many don’t understand the magnitude of this additional cost
and the extent to which they foot the bill.
Businesses may not even know whether or
not their broker has solicited quotes from
multiple insurance companies to find the
best value for them. They may be only presenting to the client the option that has the
highest total base and contingent income.
Are contingent commissions transparent to
the customer?
Generally, no. And, as a result, clients cannot make an informed, apples-to-apples comparison of their coverage options; they are
unable to completely evaluate the insurance
quotes they receive, nor do they understand
how their brokers are compensated. I want
to stress that contingent commissions are
legal, but the problem is their lack of transparency and the ability of the client to fully
understand what they are paying their insurance agent. A large insurance broker was
found to be actually ‘rigging’ bids to drive
clients to the insurers that paid the highest
contingencies. But, despite reforms by large
brokers, many small- to medium-sized insurance brokers and agents in local and regional companies still accept contingent commissions. This has resulted in a two-tiered insurance agent/broker compensation system
where the large brokers, who generally have
higher cost structures due to their greater levels of expertise and resources, are paid less
by insurers then local or regional agents.
How can business owners demand greater
transparency from their broker/agent?
Full transparency and disclosure is becoming increasingly important in all business
relationships given Sarbanes-Oxley and the
heightened regulatory environment. It is simply good business for all relationships to be
fully transparent. Whether it’s property and
casualty or employee benefits insurance, customers have a right to have all the facts. This
information should not be shrouded in secrecy. In the interest of full transparency, in addition to ensuring you secure the most cost
effective insurance program available, businesses should consider the following recommendations when evaluating their agency:
- Make certain your insurance agent/broker does not accept any contingent or volume-based compensation of any kind in
addition to a base or up-front commission or
fee. If it does, find another insurance agent
or broker. - Ask your insurance agent/broker for a
complete explanation of its transparency and
disclosure practices, and get a copy of this
policy in writing. - Ask if you will receive a year-end statement outlining and summarizing the agent’s/
broker’s compensation. - If the agent still accepts contingency payments, ask to have your premiums excluded
from the contingency calculation and require
the agent/broker secure a letter from the
insurer confirming this (many agents make a
verbal commitment to doing this but fail to
follow through, at their clients’ expense). - Require your insurance agent/broker to
provide complete written copies of all insurance company proposals to show you how
your program was shopped/marketed in
accordance with your direction.
JERRY G. KYSELA is the resident managing director for Aon Risk Services Inc. (www.aon.com), a risk management, human capital
and reinsurance-consulting firm based in Cleveland, and the largest middle-market insurer in the world. Reach him at (216) 623-4150
or [email protected].