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By CAROLYN M. SNOW, CPCU, director, insurance risk management, with Humana Inc. in Louisville, Ky.

There comes a time in every committed relationship where it is necessary to have the dreaded talk. You know the one about money. And anyone who has raised teenagers knows that the talk comes frequently, includes a fair amount of emotion and quite possibly some raised voices.

An argument can be made why some accounts remain on a commission basis. Some may be too small and no other service except insurance placement is expected from the broker, some lines of business and products are only available on commission due to company guidelines and sometimes there are reasons that both clients and brokers prefer to keep the cost hidden in the premium.

Some risk managers have a hard enough time justifying the cost of the premiums and may not want to put a spotlight on the amount of the fee and some brokers may not want a competitor to know what they are making. Having acknowledged this and with apologies to all authors of top-ten lists, I am suggesting at least seven very good reasons why fees are better for most accounts:

1. In commission arrangements the insurance company underwriter, who would have no knowledge of the service needs, is determining the value of the service as opposed to the client.

2. When paying by commission, hard or soft market conditions determine the compensation of the broker without consideration of the actual service provided.

3. Market conditions are a good measure of capacity and economic conditions but not a true measure of the amount of work done on the clients behalf.

4. Clients can determine the service they want through a service agreement and then set the fee to be equitable and measurable based on the actual service received.

5. Risk managers can tie performance standards to the fee and adjust it accordingly including awards and/or penalties.

6. The premium will more accurately reflect the true insurance cost and service to be provided by the company and should be reduced by the commission percentage that would have been paid to the broker.

7. Risk managers can negotiate one off fees for special projects as needed.

When I started in risk management one of my early projects was to re-evaluate the insurance program and to align broker compensation to service. Most of the program was already on a fee basis except for some specialty policies.

One example was a group of policies on a three-year guaranteed premium basis that were written in a very soft market that expired in a really hard market. At the renewal everything remained the same, the commission percentage, the limits and conditions of coverage and the carriers, however, the premiums increased in many multiples and so did the compensation based on commission. The timing was not the best, and the broker was initially unhappy with me and the suggested changes, but we were able to negotiate that and took into consideration the additional work generated by the hard market.

Over the past few renewals, the same policy has gone down in premium and the fee has gone up to reflect additional services provided. It took some time but the broker now agrees with me (or least says he does) that the fee is the best arrangement for everyone.

Risk managers who are looking to make a change from commission-based compensation will have some homework to determine the right fee and the easiest way to start is by simply coming up with a list of services wanted from the brokers.

When doing the list it is important to honestly analyze just how service intensive the account is and the demands made on the brokerage service including the quality and timeliness of the information that is supplied to them. It is easy for risk managers to underestimate the actual time spent on an account, and to recognize that our own lack of organization or planning can add unnecessarily to the level of work.

This may be especially true for risk managers who have not had prior brokerage or company experience and may not fully appreciate the amount of work required for some services.

Once the service agreement and fee schedule are set the hardest work has been done but both should be considered living documents that need to be reviewed for updates and changes on an annual basis. Most risk managers probably have this discussion included as a part of their broker's Stewardship Report.

Agreements and fees should change corresponding with service needs but interestingly enough many brokers seem hesitant to ask for increases. When speaking at a RIMS conference presentation, Don Bailey, president and CEO of Willis/HRH said that when he talks with their brokers the response is "I started to discuss it but then I got the look."When inquiring as to exactly what look, the response is, "you know, that look."

For those risk managers who are ready to have the talk and for those brokers willing to endure the look, the current market may not seem ideal. But, to quote Cicero, "there is grief in indecision," and the perfect time may never exist.

I believe that if we can create an atmosphere that helps achieve a true alignment of purpose which is based on client needs and brokers' services then it will be easier to have an honest discussion around compensation and in doing so we have the potential to elevate the entire relationship. After all, if we can talk about money we can surely talk about anything.

February 20, 2009

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