The Commission System is Here to Stay

Most brokers work hard. They hunt for the best prices and come up with terms of conditions that are fair to the buyer and the seller. They bring carriers new business, and keep buyers and sellers on track. The job requires a lot of work, endless travel and hours at the negotiating table. Fees alone can't compensate for all the work that a broker does for buyers and sellers, and that's a good reason for the marketplace to retain the commission structure.

Yes, you can argue about the details of the commission, who gets what when, as buyers and brokers do at every renewal. You can also argue about whether brokers ought to be paid by both the buyer and the carrier, and whether that kind of structure opens itself up to abuse, as did former New York Attorney General and Governor Eliot Spitzer when he sued the industry several years ago.

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You can't argue, however, that a commission-based model isn't a better system to properly compensate brokers for all the work they do. A complex insurance placement isn't a simple one-size-fits-all proposition. Commissions offer flexibility in compensation that a more inelastic, fee-for-service model can't approach. A commission, for example, can be credited back toward a fee, or conveniently rolled over into another form of payment.

Brokers and buyers can tailor the commission structure in any way they see fit, in any way both parties deem to be fair. Commissions have been used as a renumeration model for decades, remember, so it's not as if the industry is going to abandon a model on which it has relied for more than 100 years.

Risk managers appear quite comfortable with commissions. Two years agoTowers Watson found that a majority of buyers were happy with commissions, as long as the sources of the commissions were disclosed by the brokers.

That's a transparency issue, not a renumeration issue. And don't forget, corporate buyers are generally well informed to begin with. It's the responsibility of the risk manager to make sure the commissions collected by the broker are fair and accurately reflect the services delivered. It's true that in the soft market, commissions do not provide a way for a broker to grow from within, or organically. But that's a function of the marketplace, not of the remuneration structure.

Remuneration models should not change simply because of the latest market cycles. That would be unwise, for the market is always changing. Risk managers may sometimes have trouble wrapping their heads around how much in commissions they are paying their broker, but think of the headaches that would ensue in imposing new compensation structures every time the market changed.

CYRIL TUOHY is managing editor of Risk & Insurance®. He can be reached at ctuohy@lrp.com.

February 21, 2012

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