Technical knowledge, professionalism, responsiveness, industry knowledge, and transparency are some of the characteristics risk managers are looking for in a broker. In recent years, transparency has been put under a microscope.
The 2 most common ways insurance brokers are compensated are:
1. Commission and 2. Fee-for-service.
Commissions are paid to the broker by the insurance company out of the premium paid by the insured. It is not uncommon for clients to have only a vague idea of the amount of commission the broker will earn.
Fee-for-service is a pre-determined amount paid by the client to the broker for services they provide. This is typically paid in lieu of receving commission.
Risk managers have a desire, and a right, to fully understand how their insurance money is being spent. When doing renovations on your home, you know upfront what you are paying your contractor and specifically what that money is going toward. You receive a breakdown of supplies and labor costs. Risk managers are seeking the same transparency in their relationships with brokers.
There has been much conversation regarding this push for increased transparency in the insurance industry and some regulatory action has been taken. The state of New York lead the way with its Insurance Regulation 194 that requires licensed producers to provide an initial disclosure to a purchaser, and if the purchaser asks for more information they must provide a detailed disclosure of compensation amounts. The regulations vary significantly by state. In Indiana, disclosure is required when compensation is fee-based in lieu of commission or a combination of commission and fee. Compensation based on pure commission does not require disclosure in Indiana.
Regardless of regulations, many brokers are responding to risk manager’s desire for transparency and changing their methods. By providing risk managers with a better understanding of how their advisor is compensated the trust between the two parties is fostered and strengthened.
The topic of transparency is alive and kicking in both the commercial insurance and employee benefits worlds. Mid-sized and larger companies have much to gain by knowing how their broker is paid. Smaller businesses and personal insurance clients won’t be having many of these conversations simply due to the fact that the policies and payments are far less complex.
Here at Gibson, we advocate for transparency in our relationships. Many of our clients prefer a fee-for-service relationship and we choose to disclose our compensation regardless of the method we receive it. This creates trust and open dialogue, as well as holds us accountable to our clients on the promises we make.
