Let's Do Away with the Commission Structure

Incentive makes the economic world go around and no one in the insurance business would argue with that dynamic or try to change it. But the tradition of a commission-based system in compensating insurance brokers is outdated and doesn't provide enough control for risk managers.

The relationship between the risk manager and the broker is centered on the purchase of insurance, which we know. But we also know that there is a consulting role that the busy broker plays. He or she could be involved in a number of risk mitigating measures, be they analytics, advising or providing education on the construction of safety programs or some other task that doesn't involve the purchase of coverage. This is where a commission-based system starts to jar the relationship out of alignment. How can a broker best provide a full range of services, and be held accountable by the payer for the delivery of those services, with a system that incentivizes them only on the purchase of insurance?

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Let's add to this break in the alignment of interests what the industry has experienced in the way commissions have been defined and collected. Remember the substantial conflict of interest that arises when brokers accept commissions from the carriers they buy coverage from on behalf of the insured.

As one legal jurisdiction or another has weighed in on the legality or ethics of contingent commissions, we have seen them disavowed by brokerages, then embraced again, and again once more given a different name. All of this friction and motion and redefining is unsettling and confusing for risk managers and they don't need any more of that in their lives than already exists.

What's needed is a system that incentivizes hard-working brokers for the invaluable service that they provide to their risk management partners and better aligns the interests of the broker and the risk manager. The best system is a fee-based system, the same that we see in many other industries, that provides a base level of compensation for a defined range of services.

Excellent performance, saving risk manager money on coverage, for example, can be rewarded in the form of bonuses. Save the risk manager $5 million, and the broker pockets an additional $500,000 above the base fee.

When Jan. 1 rolls around, the risk manager and the broker can revisit the previous contract and examine whether the fee paid adequately compensated the broker for the work they did. This fee-based approach gives the risk manager more control over the relationship and provides ample room for the adequate compensation of the insurance broking professional.

DAN REYNOLDS is managing editor of Risk & Insurance®. He can be reached at dreynolds@lrp.com.

February 21, 2012

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