In most industries, there is a clear link between the price paid by the customer and the compensation received by the vendor. My industry, employee benefits, is an exception. Traditionally, an insurance broker’s compensation is “baked in” to the cost of the product and the broker is paid by the insurance company, leaving the buyer completely blind to potential conflicts of interest.
This type of arrangement isn’t necessarily a problem, but it can be if a seller is overly dependent upon a small number of suppliers. Due to unprecedented insurance market consolidation, there are now only a handful of insurance companies that offer group health insurance in Wisconsin. What’s more, the market is dominated by a few of the largest insurance companies who will do whatever they can to maintain or increase their market share.
One way insurance companies influence distribution is through how they pay brokers for bringing in and retaining accounts. Commissions, which are typically a percentage of premium or a per-employee or per-member fee, are just one part of this equation. Insurers also pay brokers bonuses and overrides for achieving sales and retention targets.
Each insurance company decides what it will pay its brokers in commissions, bonuses, and overrides. Some pay brokers higher commission than others, but these differences are not usually enough to create an incentive to steer business. It’s the bonuses and overrides that should be cause for concern among benefit purchasers.
With commissions, brokers don’t have to worry about not getting paid as long as they write your business. But commissions and overrides depend upon the broker’s overall activity with each insurer. So if the bonus schedule requires ten new groups in a quarter and the broker writes nine, the broker gets nothing. For some brokers who are on the brink of earning a bonus, the incentive to earn more can be enough to recommend the insurer offering the bonus.
Overrides are even more problematic because unlike one-time bonuses, they are paid on an ongoing basis as long as the broker meets retention targets. As a result, brokers can come to rely on overrides as a source of revenue. Like bonuses, overrides are also often an all or nothing proposition based on the broker’s retention of their book of business with the carrier. This powerful incentive can lead a broker to recommend an incumbent carrier even if the client could benefit by moving to another insurance company.
I believe the benefits buyers owe it to their organizations, their employees, and their families to eliminate these potential conflicts of interest. After all, premiums are now almost always paid with both employer and employee dollars. At a minimum, you should have a frank conversation with your broker about how they are compensated for your business through all channels – including commissions, bonuses, and overrides.
Better still, you can ask your broker if you can pay them directly rather than channeling compensation through the insurance company. If you do this, be sure to get a binding agreement that prohibits them from accepting commissions, bonuses, and overrides on your account. Only then will you know they’re working on your behalf and aren’t beholden to the insurance company.