Embrace The Opportunity To Explain
Imagine if retailers were required to disclose their gross margins on products. Many customers might be shocked to see markups exceeding 500%. At first glance, this might seem outrageous. However, various costs contribute to the final price beyond the product itself. When considering all these factors, the markup ensures that the retailer can offer customers a wide range of products and services.
Broker Remuneration
On the other hand, brokers must disclose their remuneration (gross earnings). While this transparency should not concern brokers delivering appropriate value, clients may misunderstand the costs associated with these services, many of which are not visible to them. Broker remuneration typically consists of commissions, fees, or a combination of both. Explaining the difference between commissions and fees can help clients make informed decisions and appreciate brokers’ value.
Why Insurers Pay Commission
In the general insurance industry, a commission is a crucial payment the insurer makes to the brokerage. This compensation is for the broker’s role in distributing the insurer’s products, managing ongoing policy administration, and registering claims.
Insurers need to compensate brokers for access to their infrastructure, which requires significant capital, such as the physical footprint, most insurers no longer maintain branches, and their people resources. A broker’s efforts in distributing the insurer’s policies extend well beyond their duties. Brokers now perform quoting and binding policies, lodging claims, and providing ongoing policy administration support to clients throughout the policy life cycle, essentially performing data entry services for the insurer.
Brokers also play a pivotal role in delivering essential disclosure documentation, ensuring clients receive the necessary information, fielding complaints relating to the products (e.g. premium increases, coverage gaps, claims handling), and in most cases resolving them.
Costs Without Brokers
If insurers did not have access to insurance brokerages to distribute and service their clients, they would incur additional costs to replicate the broker’s services, which would be added back to the premium. Here are some of the key costs:
- Branch Infrastructure: Insurers would potentially need to establish and maintain their own branches to serve clients, which involves significant expenses for leasing office space, utilities, and other operational costs.
- Staffing: Insurers need to hire additional staff to manage client interactions, policy administration, and claims processing. This includes salaries, benefits, training, and ongoing professional development for employees.
- Marketing and Distribution: Without brokers, insurers would need to invest heavily in marketing and distribution channels to reach potential clients. This includes advertising, promotional activities, and establishing direct sales teams.
- Client Support: Insurers would need to provide direct customer support services, including call centers, online support, and in-person assistance. This involves costs for staffing, technology, and training.
Why Charge a Broker Fee?
In contrast, a broker fee is a direct charge to the client for the significant services provided by the broker beyond distribution and policy administration services. These services include risk profiling, market research, insurer marketing, claims management, and advocacy.
Broker fees are often necessary for more complex insurance needs, where the broker’s expertise and time investment are substantial. Many brokerages now offer risk engineering to help prepare detailed risk submissions to insurers, injury management and WHS services to complement their people risk expertise, and cyber risk consulting services to support company boards and SMEs in mitigating the risk of a cyber incident.
Net of Commission Structure
Brokers and clients can agree on a wholesale premium structure (excluding commissions) when the client’s premium volume justifies a program that aligns with its scale. More importantly, a fee-for-service model is beneficial when clients invest significant time and actively engage in discussions with insurers regarding risk profiling, internal claims management, workplace health and safety (WHS), and risk engineering.
A client willing to enter a wholesale arrangement is open to negotiating a broker fee that reflects the broker’s time investment and any additional services provided beyond the broker’s core offerings. The key is to ensure that the broker maintains a profitable margin to cover the business’s indirect expenses. Before proposing a broker fee, the client manager should understand the estimated direct costs and agree on a margin that supports the brokerage’s indirect costs.
The Value of Broker Services
Brokers offer invaluable services that go beyond simply selling insurance policies. They provide personalised advice, after-hours access, conduct thorough market research, and advocate on behalf of their clients during claims processes. By leveraging their expertise and resources, brokers ensure that clients receive the best possible coverage tailored to their specific needs. This comprehensive approach not only simplifies the insurance process for clients but also adds significant value to the overall insurance experience.
Conclusion
Understanding the difference between commissions and broker fees is essential for appreciating the full scope of services that insurance brokers provide. While commissions compensate brokers for distributing insurance products, broker fees cover the additional, often complex services that brokers offer. Together, these remuneration methods ensure that brokers can continue to deliver high-quality, personalised service to their clients.
When disclosing your income to clients, it’s crucial to provide a comprehensive picture that includes not just the gross income but also the associated services provided that may not be as obvious to the client, such as the distribution and policy administration costs mentioned above. This helps clients understand the full context and avoid making assumptions based solely on gross margins.
By offering a detailed and transparent view of your remuneration, you can build trust with your clients and ensure they clearly understand your business’s financial health and sustainability.
