Spilling the beans on broker compensation

Spilling the beans on broker compensation

I'm bemused by recent regulatory inquiries, particularly in the state of New York, in matters concerning insurance brokers' compensation. While the thrust of these inquiries questions the covert additional compensation that many insurance brokers receive from insurers beyond identified commissions they routinely receive, the recent subpoenas suggest that these disclosures represent newly discovered improprieties. They are, in fact, methods of compensation that have been in effect for over 50 years. I am incredulous to read that risk managers and insurance buyers were unaware of their existence.

If readers will permit some broad generalization on the subject of insurance broker compensation, I'll attempt to identify the average commission a broker receives from insurers when it issues coverage in their behalf. I find it incomprehensible that buyers who routinely authorize the payment of millions of dollars a year in property, casualty and benefit premiums have little or no knowledge of the amount of commissions paid to the brokers or agents who represent them in the marketplace. While commission levels may vary geographically to some extent, my projections hopefully represent national average commissions by class of business.

-- Group benefits: Smaller cases, - those with less than 100 lives insured - rarely if ever are written with a brokerage commission greater than 5 percent. The larger cases are written with an average commission of 3.5 to 4 percent. The very large cases, defined here as those with more than 1,000 lives insured, record commissions of 1 to 3 percent, depending upon the buyer's ability to identify and negotiate annual fees that equate to comparable levels that do not exceed those earlier indicated commissions. Group life and long-term disability coverages pay greater commissions, but these average 10 to 11 percent on the smaller cases and 5 to 7.5 percent on the very large cases.

-- Property coverage: Identified classes include motor cargo, property, transportation and ocean cargo. Virtually all first-party coverages produce an average commission that rarely exceeds 15 percent. For the larger risks, those producing premiums in excess of $500,000 annually, commission levels are generally negotiated downward by insurers to the 10 to 12 percent range. If the property portion of the account produces in excess of $1 million annually, the commission level received by the broker is further reduced, sometimes substantially, to perhaps 7.5 percent.

-- Casualty lines - primary: Identified classes include general liability, automobile liability, employment practice liability and D&O (directors and officers) liability. These produce an average commission of 12.5 to 15 percent for the smaller risks. Risks recording in excess of $500,000 in annual premiums will average between 10 to 12.5 percent. The very large risks, which produce premiums of more than $1 million a year, will generate commissions of 8 to 10 percent.

-- Excess liability - umbrella: Regardless of the size of the account, the commissions paid to the broker rarely if ever exceed 10 percent.

-- Workers compensation: Smaller risks recording premiums of $100,000 of less annually will record a brokerage commission of not more than 10 percent. Risks producing premiums of $100,000 to $500,000 annually produce brokerage commissions that average 7.5 percent, and risks of $500,000 will produce a graded downward commission that may average 5 percent.

-- Additional commissions: Insurers often compensate their producers in other ways besides the commissions I have listed. These include a variety of agreements that bonus brokers for producing business that is consistently profitable to the insurer. These are known in the industry as contingent agreements. Additionally, if a broker's volume of business grows dramatically with the insurer, an additional bonus may be paid. These are known as production agreements. The two agreements are often combined. If both goals are attained, an additional bonus of between 10 to 15 percent of the net underwriting profit realized by the insurer on the entire volume placed by the broker might be achieved. If only portions of the objectives are achieved, the insurer's reprisal will substantially reduce this income accordingly. The current furor results from the failure of brokers to disclose the presence of these additional compensation agreements to their clients.

The average national commission paid to insurance producers, both mega-brokers and regional brokers, averages 11 percent. If the buyer is represented by the right broker, it's fair compensation for the services provided. If the broker is your brother-in-law, it's probably a rip-off.

Thomas A. Laffey is chairman of Polaris Risk Managers Inc., a transportation insurance consulting firm. He may be reached at (973) 882-3100, or via e-mail at polarisins@aol.com. On Insurance is a monthly column.