In January, the Florida Association of Insurance Agents (FAIA) compiled a list of the state's admitted personal lines carriers and their commission percentages. The commissions ranged from a low of eight percent from several carriers (excluding Citizens Property Insurance Corp. at 6.9 percent) to a high of 17 percent. Of the 77 carriers listed, well over half reported commission percentages of between 10 and 12 percent.
It is probably safe to say that consumers think that is more than enough compensation for placing an insurance policy – "How hard can it be?"
A study conducted by three university professors provides some answers. ("Incentive Compensation and the Use of Contingent Commissions by Smaller Distribution Channel Members," published in September 2006 by James M. Carson, Ph.D., CPCU, CLU, Faculty of Risk Management and Insurance, College of Business, Florida State University; Randy E. Dumm, Ph.D., CLU, Faculty of Risk Management and Insurance, College of Business, Florida State University; and Robert E. Hoyt, Ph.D., CLU, ChFC, Faculty of Risk Management and Insurance, Terry College of Business, University of Georgia.)
In their report, the professors evaluate the industry and cite numerous positive assessments of agents and brokers and the strategic roles they play:
The independent agency system is critical to the existence of medium and smaller-sized insurers.
The greater complexity of commercial lines insurance over personal lines results in a greater demand for services provided by the independent agency channel.
More complex products require higher levels of service.
High value/high price types of insurance products will be best distributed by an independent agency channel.
Insurance products are viewed by most consumers as complex and intangible.
Services provided by independent agents and brokers frequently include: Client risk analysis, shopping for appropriate coverage, policy administration and issuance, premium collection, and claim administration.
Wholesalers Feel the Crunch
Accolades from academia notwithstanding, the current state of agent commissions exemplifies the maxim that no one is a hero in his own hometown.
"Most of the wholesale brokers have received reductions in their commissions in the last 24 months either because of increased premiums or higher cost of reinsurance or higher general costs," reports Dan O'Leary of the Jacksonville office of Shelly, Middlebrooks & O'Leary, Inc.
"The majority of wholesalers have probably held and absorbed that reduction in-house up until now. But if the wholesalers receive many more cuts in their commissions, the retailers will start to see reductions in what the wholesalers can pay."
O'Leary's company is a managing general agency and wholesale insurance broker providing both admitted and non-admitted brokerage markets to licensed insurance agents. He said in talking with his competitors, the consensus is that the retained portion of their commissions has been reduced by 10 to 25 percent. "They don't tell us specific carrier information, but they do talk about how their commissions are down," he says.
"The wholesalers have taken significant reductions in the last couple of years. We're optimistic that commission levels will hold for awhile. But margins are so thin that any more reductions are going to have to be absorbed by both the wholesale and the retail side."
Contingent Commissions Victim of Spitzer
Other forms of remuneration have been affected in the past few years as well.
On October 14, 2004, then-Attorney General of New York Eliot Spitzer received a lot of ink when he charged Marsh & McLennan with fraud. He alleged that the world's largest insurance broker had engaged in bid-rigging, price-fixing, and accepting payoffs from insurers. He also went after AIG, ACE Ltd., Munich American Risk Partners, and The Hartford Insurance Group.
The lawsuit against Marsh alleged that the company steered clients to favored insurers and worked with them to rig bids for property-casualty insurance coverage. At the heart of the matter were contingency fees.
Contingent commissions are paid at the end of an accounting period, after the actual profitability of a book of business has been established. If it was profitable, the agent usually gets some participation. Contingent commissions are not to be confused with incentive commissions, which usually involve some type of cash or gift award based on simply placing business with a specific carrier or product. Incentive commission programs traditionally are used to push up market share for new or struggling products.
The Independent Agents & Brokers of America says that despite Spitzer's crusade, no state has banned the payment of incentive compensation. Insurance carriers took care of that on their own.
On October 15, 2004, one day after the indictment, Marsh announced that it was voluntarily suspending contingency-fee-based arrangements. Others soon followed. Today, only a handful of regional carriers have contingency fee programs. "I only have maybe one or two carriers left that offer the agreements," O'Leary says.
If carriers express sadness over the loss of contingency commissions, they are shedding crocodile tears, according to O'Leary. "The carriers love it [not offering contingency commissions]," he says. "But they say, 'Oh, so sad we had to sign this agreement with the state. Gee, we're sorry.'"
But in insurance, almost everything is negotiable. Agents and brokers with strong books of business are expected to try to recoup at least part of the lost contingent commission by renegotiating their basic commission levels.
Orange Alert for Citizens
Additional talk of negotiation–this time, unwelcome–is being heard over at Citizens Property Insurance Corp. As the largest writer of property insurance in the state, the current focus on commissions is sending a red flag to Florida's insurance family. In reality though, perhaps the threat color should be reduced to orange, or even yellow.
Citizens' spokesperson Rocky Scott says that as of mid-March, no bills related to changing agent commissions have been filed, nor has the Citizens' Board taken any formal action on the matter. But the issue is far from dead. Scott conceded that, "policy count has exploded along with our rates. We are looking at ways to compensate agents other than what is currently in place."
Indeed, Citizens' Chairman Bruce Douglas announced in mid-March that agents' commissions would be discussed at the Board's April 26 meeting. There is no word yet on what the proposal will be or how or when it would be implemented.
Agent groups have not been shy about airing their concerns. FAIA has been particularly aggressive in voicing its opinion, issuing memorandums and papers outlining its position.
When the idea was first floated that Citizens' commission percentages or calculations should be placed into statutes, a FAIA memorandum said, in part, "FAIA opposes Citizens' commission percentages or calculations being placed into statutes. The Citizens board needs to have the flexibility to move percentages up or down based on rising costs and workload of agents in relation to rising premiums. FAIA has actually worked to remove statutorily-prescribed commission percentages in the past because of the management problems created by subjecting them to annual political review."
FAIA also rejected the idea that lowering commission rates would help downsize or improve Citizens:
Reducing commissions will lower service quality by attracting only specialty agents or those that traditionally deal in other lines.
Citizens' commission percentages are the lowest in the country and yet, Florida's residual property market should pay more than other states because of the post-hurricane workload.
Residual markets require more work of agents–certification of discounts; onsite inspections; two pictures; incompatibility with industry technology and operating norms; customer touch points are almost triple those of normal carriers; midterm work; up-front FMAP; etc. Other coverages must often be "wrapped" around and secured elsewhere. New classification plans, new EPA requirements all lead to time away from the office at training programs.
No agent would ever send a piece of business to Citizens given another viable option, so…cutting commissions won't reduce the policy count.
The association also reminded the powers-that-be that Citizens' commission percentages are about half those of the voluntary market: 6.9 percent for the homeowners' policy, which pays an average commission of only $127. FAIA says a similar policy in the voluntary market would bring an average commission of over 12 percent.
We're Fine, Thanks
Despite these calls by various agents' quarters to leave producer compensation alone, the government continues to conduct research and seek ways to tweak the system. In a study of Florida's P & C market issued last November, the Governor's Property and Casualty Insurance Reform Committee made numerous recommendations, including a call for transparency regarding commissions. Again, FAIA weighed in.
"The Governor's Committee recommended, and a lawmaker or two will therefore likely embrace, the idea of identifying the amount (by dollar) of the agent's commission paid on each policy," FAIA told its members. "Not only is this 'anti-business,' it's probably not possible for many carriers to implement. Most pay different agents different percentages, which can even vary by coverage and/or territory. Besides, commission percentages are often not applied to the full amount of the premium. This will likely add to customer confusion causing many to think that commission is profit, instead of revenue utilized to offset the agent's overhead and other related business expenses."
Bottom line from the agent side? If it ain't broke, don't fix it.
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