Tom was in the market for a new car. He wanted to update his grey 4 door sedan. He told the sales representative at his local dealership what he wanted and the salesman proceeded to pitch Tom on the features and benefits on all of the various other models released since Tom’s last purchase. Two hours later, Tom was the proud owner of a brand new, red, 2 door SUV.
Back home, Tom pondered how he had ended up with a vehicle he liked but not what he had set out to buy.
The sales person was paid a higher commission on the car he ultimately sold to Tom than the one Tom had set out to buy. Tom was convinced by the input from an informed salesperson; advice clouded by the salesperson’s remuneration opportunity.
Why then look for “independent” advice from an insurance broker paid directly by an insurance company based on the products he or she sells?
There is no question that insurance brokers provide a valuable service and should be paid appropriately but when we need an independent opinion and they receive remuneration in the form of a sales commission should they be the first choice. Will Company A be recommended as best when Company B pays more?
Insurance brokers receive commission up-front and many disclose this to their clients, but they can also receive volume bonuses and/or maintenance awards sometimes known as persistency bonuses or contingent commissions that are rarely disclosed.
So does this conflict arise only when business is first placed? One of the broker’s key roles is to negotiate annual renewal rates on behalf of the client. Since commissions are a percent of premium the broker has a conflict. If your premiums increase so will his remuneration.
Commissions are embedded in insurance premiums but many insurers will reduce premiums if a client does not use a broker. We encourage our clients to consider whether commission is the best way to pay for advice particularly where cost containment is paramount.
Commission rewards the sales channel and can often amount to 10% to 15% of premiums.
In addition to periodic financial input brokers provide ongoing services e.g. updates on legislative changes, benefit trends, usage statistics etc as they are needed by the client. Commissions are paid however, year after year, without any reference to the workload incurred and often in advance.
Commissions increase with the size of your employee population, so too does your broker’s remuneration. How much extra work is involved in managing a plan for 40 people vs 100?
Consider whether compensation paid to your advisor affects the recommendations that you receive. If you do not know whether your advisor also receives compensation from third parties – just ask.