Cedric Stephens | Insurance Helpline | Floored by broker fee
QUESTION: I renewed one of my two motor policies recently. It, like the other policy, was placed by an insurance broker with an insurance company. I was most surprised to find out that the broker had charged a service fee of $5,000 to handle my account. I protested very strongly and they decided to waive the fee for this year. Aren't brokers normally paid a commission by the insurers with whom they place policies? If so, what is the justification for the service fee?
- H.J., Old Harbour P.O.,
INSURANCE HELPLINE: Your two questions could not have been asked at a better time. There are loud conversations going on now about how other players in the financial services industry - commercial banks - are introducing a slew of additional charges and fees to increase their already fat profits. The most ridiculous one was a fee to change a $5,000 bill into smaller notes. It has been rolled back.
Thankfully, the authorities have listened to what consumers are saying. The finance minister has promised quick, new measures to protect them.
For some time now, insurance brokers have quietly hopped on to the fee bandwagon. In the meantime, motor premiums have increased, so brokers should be earning more commissions. Unlike banks - who are required, presumably by regulators, to tell customers in written documents how much they charge for the different services they offer, insurance brokers impose their fees in broad daylight and without regulatory input or oversight.
They get three bites of the cherry. They can earn: commissions as a percentage of the premiums that the customers pay; a separate service charge of an arbitrary amount, say $5,000; in addition to an incentive commission paid by the insurer based upon the amount of premium placed.
Compensation systems can have profound effects on how persons in companies, including insurance companies and brokers, behave. The Organisation for Economic Co-operation and Development, OECD, recognises this. It says in guidance notes to insurance companies that: "The terms of remuneration of ... employees or other services in charge of claims management (should) not give incentives to disadvantageous treatment of policyholders/claimants/ beneficiaries, as regards the handling or the outcome of claims." There is no a similar rule in our regulations.
Local broker-insurer compensation arrangements bother me. This is not because of how much brokers earn for delivering poor-quality service. Rather, such agreements have the potential to create conflicts of interest for brokers. If these are not recognised and properly managed, customers could end up being shafted.
Buyers often enter into contracts with brokers without the ability to ask questions and anticipate problem, and brokers invariably keep silent about such deals.
Broker compensation should also be looked at in the context of the legal duty that they have to clients. According to Out-Law.com: "When a broker places insurance, it is usually assumed that he is acting as agent" of the insured. "As agent, the broker has a legal duty to act in good faith in what he believes to be the interests of his client. This means he must account for any secret profit that he makes, and he is not allowed to put himself in a position in which his interest and duty conflict. More specifically, an agent must not, without his client's knowledge, acquire any profit or benefit from his agency other than that contemplated by the client at the time client and agent entered into their contract."
Fortunately, there are other alternatives to buying motor insurance than doing so through a broker.
Here are some questions that you can ask in assessing the performance of your broker:
a) Is the broker earning his keep ,or is just another element in the insurer's distribution chain?
b) Does the broker understand his role to you versus the insurer's functions?
c) When it comes to handling claims, is the broker acting like a postbox?
d) Are the service providers courteous, professionally trained, knowledgeable, and do they deliver on their promises?
e) Does the company have the systems, processes and infrastructure to support the functions they exist to perform?
f) Do you get the impression that the company's main goal is to complete your transaction, collect the premium and then move on to making the next sale?
If the answers to two or more of these questions are unsatisfactory, consider changing your broker or buying direct from an insurance company.
n Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: firstname.lastname@example.org.