Broker commissions have become contentious again as insurers reveal plans for variable SME commissions. James Sullivan reports
Last week Zurich's UK commercial division revealed plans to offer variable commission rates for its SME brokers placing business online. Brokers will be able to choose from a number of commission rates, ranging from 0% to 20% for SME property and 0% and 12.5% for SME motor risks. The move has attracted a wide range of opinions. Understandably the initiative has received considerable criticism from brokers, who see it as just another attempt to cut costs. But those on the underwriting side of the fence see it as a move towards greater transparency in the run-up to regulation by the FSA. Norwich Union has expressed interest in Zurich's move and is looking at the repercussions of moving to variable commissions online. A spokesman says: "As far as the bigger risks are concerned we will happily vary our commission rates if that's what the broker wants. Regarding SME business, we have a project at the moment looking at this to decide whether it's a good or bad thing. "It works where you have an electronic relationship with a broker and they can select what commission they want, but you need the technology to do that. You have to be able to deliver flexibility, and ask 'does the market want it?'"But other insurers are sceptical of such a move. Brendan McManus, head of UK commercial at Royal & Sun Alliance, says: "I don't perceive any demand from brokers." He adds: "It's nothing new. Some brokers prefer net-rated business, but moving to this basis can be time consuming."He suggests that the size of the risk is crucial to the success of such a move, suggesting that it is really better suited to a different market altogether: "As you move towards the middle market, variable commissions might work a bit better; the tendency to move towards a fee structure increases as the size of the business increases."With opinions polarised in the market, Insurance Times looks at the two sides of the argument.
The insurer view: for variable commissionThe key arguments put forward by proponents, such as Zurich, are based around the provision of greater choice for brokers. They say that variable commission enables brokers to move to a fee-based service. It also helps them to win new business by allowing them to undercut competing brokers, they argue.It also allows them to choose the commission level that more accurately reflects the work that the broker does. David Smith head of market management for Zurich's UK commercial business says: "The real benefit is the flexibility it offers the broker to suit the work they put in. A broker will have different types of work for each customer, and this allows them to select the option they want."He says that for the first time it offers brokers a 0% rated option. "Now that may not be attractive to brokers at first, but really it enables them to go down the fee route."Most brokers will say that for SME business fees are too time consuming. But some brokers are, for various reasons, taking fees for some business. "Some believe they can add value to the customer, and some have an eye on the future. You are bombproof should the FSA look at commissions. Transparency will become a much bigger issue under the FSA."Smith also says that variable commission will help brokers to win and retain business. Brokers will be able to select a commission level that reflects the work they have to do for clients and new business prospects. It will also allow them to use commission levels as a way to differentiate themselves from competing brokers, selecting lower commission as a means of attack or defence.
The broker view: against variable commission The main argument against variable commission is that it will push down commissions and will not accurately reflect the work done by the broker in securing the business. Ian Ritchens, chief executive of commercial broker FM Green, says: "Zurich is using the argument that it's cheaper for the broker and insurers to deal online, but it's all relative to what business it is. "If you're just white labelling, there's justification for lowering commissions, but very often it's more than that. "You often have someone who offers the customer some business which is not only presented to Zurich, but three or four other insurers, so there's a lot of work there. Even if it's done online, we're still producing the documentation ourselves, so the insurer is saving an awful lot of money."A further argument is that variable commission will be used by insurers as a tool for further differentiating between favoured brokers. Simon Bolam, managing director of broker EH Ranson, says: "It's like rates; if you're a member of a broker network you get better rates, but I'd rather have a level playing field."He also says that the advent of regulation may actually work against the practice of variable commissions. "FSA regulation is coming and we all know that incentives must not be used to skew the sale."