Most brokers are paid ‘fixed-rate’ percentage commission fees on whatever insurance business they place with insurance companies.
Some commentators believe that this system of remuneration is inherently wrong and is contrary to the public interest.
The main arguments against the commission system are these:
Brokers’ commission is usually paid as a fixed percentage of the insurance premium.
It follows that any rise in insurance costs automatically generates a corresponding increase in the brokers’ income.
Some commentators argue that this is wrong – because there’s no built-in financial incentive for the broker to search around to obtain a lower price for the client.
Furthermore, a broker’s income will increase significantly when market prices escalate (This regularly occurs because the insurance market is notoriously cyclical). This allows the broker to earn more – often without any extra effort by them.
All dealings between a professional insurance broker and his/ her client should be done, in an open, honest, trusting and transparent way, in the best interests of the client.
The client expects – indeed relies on – an insurance broker to provide impartial, professional, independent advice. When a broker recommends a particular product or course of action, the client has the right to believe that he’s getting ‘best advice’.
The broker’s true ‘independence’ must not only exist in practice – but it should be seen to exist. There should be no room for doubt or ambiguity on this issue.
When an insurance broker is remunerated by the insurance company, and not by the client, it creates a potential risk that the advice given may be tempered, in some way, to suit the interests of the insurance company.
Next, most insurance brokers earn commission on new business. If they fail to persuade the client to buy a product, they earn nothing for the preliminary work they have done on that client’s behalf.
This creates the possible danger that an insurance broker may recommend an insurance product that he can directly source – rather than a better one that might be available from another insurance company for whom the broker has no agency agreement.
Many people believe that the broker’s ‘commission’ is paid by the insurance company: and that the broker’s service to the consumer is free of charge.
In truth, the cost of ‘commission’ is built into the price charged by the insurance company. In other words, the service offered by a broker is ultimately funded by the policyholder.
That reality is, however, effectively hidden by the nature of the existing ‘commission’ payment system.
Indeed, it is so well masked that few people, when arranging their insurance, ever seriously consider how much they’re paying their insurance broker for his work and whether that level of payment is justified.
In effect, the fee is coming out of the client’s pocket but it’s done in an indirect and opaque way. And because the client is not directly paying the broker’s fee, he or she is not in a position to negotiate on it.
The client is thus effectively denied the bargaining power or negotiating ‘clout’ that would normally be associated with the payment of a large professional fee (as might happen say between the vendor of a property and an estate agent).
Finally, there is something plainly wrong with a system whereby the insurance company (by setting the level of commission payable) is effectively determining the price that the client should pay for the service he is getting from his insurance broker.
It is arguable that the commission system, as it now operates, is not in the best interests of the insuring public and should be scrapped.
