Are Brokers Transparent Enough?
Point: More Transparency is Always Good
It looks like the reputational black eye that the insurance industry suffered more than five years ago over contingent commissions wasn’t enough of a lesson.
True transparency on brokerage compensation remains elusive. The situation hasn’t been helped by regulators, such as those in New York, who at first banned contingent commissions, then lifted the ban in 2010. If contingent commissions were viewed as a conflict of interest in 2008, what changed about them in 2010?
If we had industry-wide transparency, then most risk managers would know that the broker’s commission rates can vary widely, from, say 10 percent for a workers’ compensation risk to much higher for other, more exotic risks. But the industry does not provide that transparency.
Why is this range in compensation not more widely discussed? Why does it remain in the shadows?
It bears repeating that any system of compensation that rewards a broker for arranging a higher premium for the purchaser of insurance is problematic. On its face, such an arrangement creates a conflict of interest.
Brokers can provide a variety of crucial services, from the modeling of a property/catastrophe risk, to providing workers’ compensation risk management consulting. Brokers can and do provide those services in either direction, to the purchaser of insurance or the carrier.
But unless the source and amount of compensation are clearly understood, what is to stop the broker and the carrier from unfairly and without the buyer’s knowledge, shifting costs to the buyer of insurance?
If a broker is performing services for the carrier and the carrier is shifting the cost of that service to the buyer, charging a higher premium and paying the broker a higher commission, we have self-serving behavior to a degree that is shameful.
Allowing brokers and carriers to charge higher prices to buyers and in the bargain, not providing them with the best service, is a violation of ethics, whether somebody catches you or not.
Ethics and profits can go hand in hand, and it’s time in this industry that they did.
Counterpoint: Transparency is Already the Norm
Prohibiting contingent commissions is a solution for a problem that has never existed.
Corporate clients are not clamoring for new regulations that would force carriers and brokers to disclose the amount of commission on all policies.
When New York State held hearings on the contingent commission, hardly a voice was heard from corporate clients objecting to the practice. That’s because clients already know that they can require brokers and carriers to disclose that information to them.
In fact, commissions on policies are often disclosed by carriers and brokers — when the client specifies that the information be disclosed.
Back-end or contingent commissions are often paid to brokers based on the profitability of the brokers’ book of business. What’s wrong with paying brokers a bonus for bringing carriers the most attractive risks? A commission based on profitability — or, call it an incentive bonus if that makes the issue more clear — is certainly a common tool used throughout U.S. corporations.
Why make it harder for brokers to be profitable and to grow their businesses? Especially in this tough economic climate, governments should not be adding to industry burdens.
In addition, clients are able to negotiate whatever fee structure they want up-front. They don’t have to pay commissions.
There is nothing wrong with transparency. In general, it’s a fine philosophy. But, how can you disclose a profit commission or a contingent commission before the policy expires? How can you judge how profitable a risk may be until all claims have been filed?
And brokers typically disclose that they do receive contingent commissions at the front-end. Just look at the commission statements on the broker websites
No, it’s clear that this call for transparency is redundant and counterproductive. Information on commissions and fees is readily available to clients if they want it.
The last thing the industry needs is more bureaucratic regulations that will be costly, difficult to comply with and are designed to solve problems that don’t even exist.
Editor’s note: The opinions stated in the Zurich Point of Action are provided for informational purposes only and are solely those of Zurich in North America.
The Zurich Point of Action opinions are not legal advice and Zurich assumes no liability concerning the information above. The Point and Counterpoint opinions are those of Risk & Insurance® and are completely independent of Zurich.