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
- 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/
- 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 Jerry_Kysela@ars.aon.com.