The broker commission debate started by John Jackson and challenged by Grant Ellis prompted an enormous response from across the industry
Commission works
I am persistently reading about the continuing debate, in our industry, regarding fees and commission, particularly with the way in which accountants and solicitors operate.
What we must bear in mind is that, before a solicitor will act for you, he will require a substantial deposit on his fee (in advance) for the work he considers he will be undertaking. He will then only work until such a time as when the money has run out. He will then ask you for additional deposits.
With regard to accountants, the accountant will initially spend a few minutes looking at the work involved, ask to see previous accounts (obviously in order to establish the previous accountant's charges) and then will act for you only on the basis of an estimate and will ask you to sign an agreement regarding the estimated fees.
Without the involvement of neither solicitors nor accountants, can the extra costings in which the client will become involved be established in advance?
In our business we are expected to do the work and quote an exact premium prior to being instructed, which is an exact reversal of the way in which solicitors and accountants act.
I agree that with very large brokers that handle premiums running into tens or hundreds of thousands of pounds, it may be possible to rebate the commission and charge a fee. But with the vast majority of brokers handling policies of less than £20,000, considering the amount of work involved in possible ongoing costs throughout the year, the commission basis of working is far better. With administration costs being what they are many brokers will lose money on individual policies.
It is, of course, comparatively easy for brokers that have worked for a company for many years - retiring on, or looking forward to, a very secure pension - to be able to quote lower administration costs than established brokers that have spent their lives looking after clients.
WA Whittit
Whittit Insurance
Exeter
Ellis camp
The very fact that two such senior and influential figures are willing and able to debate a topical industry issue in the public domain at least gives a cynical old bugger like me some comfort that I am working in an industry where individual opinion and innovative business practices remain sacrosanct. I have a gut feeling that this inherent trait of our industry will be well and truly recognised by the FSA when the big day comes, in any event.
From a pure commercial viewpoint I concur with Grant Ellis's views entirely, common sense and "knowing your client and market" clearly being the key features of his argument for the defence. There is no doubt in my mind that those insurers who want to trade with successful brokers will pay almost any price to secure such a trading relationship. This price takes the form of pure commission and portfolio profit share. Any broker who knows his/her client base, buying habits and (yes it does matter) claims experience sufficiently well will know almost to the penny what that client will be comfortable with in terms of overall insurance costs - disclosure of the actual margin to the broker is largley irrelevant. Personal lines, as must be common ground in the debate, is a completely different animal.
From a purist and future regulatory point of view, John Jackson's argument for the prosecution has much merit.
If the FSA wants buyers of commercial insurance to have more information, then I am convinced that our public servants will ask people in the know at the GISC how to go about policing disclosure. I applaud Jackson's technical know-how and opinion generally, but he has linked consumer and commercial together in his argument, to his own detriment when debating the issue with industry practitioners - advantage Ellis, new balls please.
One logical answer is for insurers to provide genuine wholesale prices to brokers with whom they wish to trade. If clients don't like the price, they will go elsewhere
Ernie Hampson
Business Life Direct
Distressed Lloyd's member
An impartial view
We are a not-for-profit insurance customer self-help group, so have some useful consumer experience and, except in a few rather specialised cases, customers seem not to care much what the agent earns, as long as they get their insurance at a good price.
Stuart Cliffe
National Association of Bank and Insurance Customers
I agree, Mr Ellis
I must agree with Grant Ellis.
The discerning customer will make his decision based on price and quality of product and will not care how this is made up.
Paul Hampshire
Director
Ultimate Insurance Services
Keep the commission
There are two arguments : disclose commission or obtain net-rated policies and the broker charges a fee. Jackson appears to be advocating a fee-based structure which assumes net-rated policies.
How long before the chancellor increases insurance premium tax to recover the tax revenue lost? What will be the position of VAT on fees charged with consequent costs of compliance.
Jackson refers to solicitors and accountants as charging fees, but so do ladies of the night (not that I have any experience) - my hairdresser charges a fee. My plumber charges a fee as an hourly rate, so the worse he is the more I pay. They all charge a fee for a specific service.
Insurance brokers receive remuneration up front, which pays all costs for the period of cover, and we charge no more irrespective of the number of queries, or claims or visits we need to make. If a change occurs that reduces the risk and premium we even suffer a return of commission.
Either we charge a fee and provide a list of services or we charge an hourly rate. Do we have a variable hourly rate, depending on the level of experience of staff?
When a claim occurs our client calls upon our advice and assistance, which we currently provide willingly and free. What happens to client relations if we need to charge extra fees when the number of claims are more than, or more complicated, than first anticipated.
At the moment, we have close dialogue with our clients because it costs them nothing?
The end result is that we would charge an upfront fee to cover all work to be done. How do we calculate this? Presumably, as a function of the premium, because it is usually the case that the larger the premium the more difficult it has been to negotiate.
So we charge a percentage of the premium as a fee - strangely enough very similar to the present commission structure. Such commission covers all advice from insurance and risk management to claims settlements and contract consideration.
This fee is currently paid to us by the insurer by way of commission. If we net-rate a policy and charge a fee to the client, we are in effect charging the client for all the work we do on the part of the insurer. Our relationship with the insurer must change significantly.
Net-rated plus a fee is such a silly proposition we must be talking about disclosure of commission.
The simple question is why? What good does it do the client? Even in these depressed times the insurance market is very competitive and the total premium is the comparison from one broker to another. Rebating commission is normal. As Ellis says, we never ask what the mark-up is when we buy a television and never ask whether the retailer has or will pay his supplier. I never ask Insurance Times how much it pays a journalist to write an article.
The thought that disclosure of commission adds to transparency is ridiculous. The client is interested in the quality of our advice and services and will compare our premium cost with others. Should we disclose the insurer's expense ratio just to be on the safe side?
The present system has worked well for many years, so why fix it?
I object to being forced to take some action based on a misplaced consumerist point of view.
Roy Griffiths
The Ellis way
Thank God for Grant Ellis. He clearly highlights the problems of ending commission and the benefits of the system. I was beginning to worry that I was the only one thinking this way.
Craig McGowan
McGowan Corporate Solutions
Dear Hypothetical Client,
Following the advice of respected and senior members of our profession, we wrote to you some time ago advising you that we at Douglas Insurance would change from commission-based remuneration to a fee base. You will recall that as your account is dealt with by me personally (a chartered insurance broker), we have followed our accountants' example and charged £100 per hour based on six-minute units. I would remind you that at your renewal three months ago, your premium of £3,000 reflected a £500 saving due to our foregoing commission. I now enclose a summary of our fee charges for the renewal for the three-month period:
Three calls to processing department to chase renewals £30
Receive conversion policy and study wording in detail £100
Ask insurer to correct spelling of your name and delete (incorrect endorsement) £30
Three calls to processing department including 10 mins in call queue £40
Rebroking - internet based quotes obtained £75
Renewal meeting with you to discuss new policy and revise cover £200
Arrange amendments to policy, confirm to you, check & forward endorsement £50
Discuss terrorism changes following Sunday Times article and comment on your holidays £50
Deal with instalment problem due to insurers' conversion error (15 min call queue) £40
Discuss employee accident, assist with employers' liability claim form, forward solicitor's letter to insurer £150
Write to you for missing information on previous wages of employee and handle response £20
Advise of loss adjuster appointment, brief you of purpose, discuss compensation culture £30
Deal with your change of premises, visit site, review cover, advise insurer £200
Accompany surveyor, discuss security £150
Discuss ACPO policy requirements with you and your alarm company £50
Liaise with bank, insurer and solicitor to provide proof of buildings cover £40
Receive change of address endorsement, ask for corrections, send to you £50
Referral of boundary dispute to insurer's legal advice line £10
Comment on failure of legal advice line to give any useful advice £10
Write this bill £50
Total for three months from renewal £1,375
For future reference, to avoid fees, don't allow the insurer to reissue your policy, don't let them have a call-queuing system or staff that need to refer matters to others, don't have a claim , don't move premises and do not ask us to give advice or discuss anything. In summary, as with the accountant, don't talk to me....ever.
Adrian Sutton
Chartered Insurance Broker
Any contribution to this debate or any other issue raised in our columns is welcomed and should be sent to : The Editor, Insurance Times, 30 Cannon Street, London, EC4M 6YJ or by email: letters@instimes.co.uk
