Level of cost isn’t always the determining factor for risk managers when choosing a broker, but when it comes to the question of how to pay, the majority prefer to use a flat fee model.
The new Risk Managers on Brokers Report 2018 includes insights from a cross-section of risk managers from 17 different countries about their relationships with insurance brokers. When it comes to compensation, 46% of respondents say they prefer to pay their brokerage a flat fee, while 26% use commission, and 28% use some of both.
Whether a risk manager chooses to pay fee or commission can depend on the nature of the policy. Ben McCallister, manager of risk, insurance, and continuity planning at the University of Victoria, prefers to use some of both. He works with three different insurers – Marsh, Aon, and CURIE – a reciprocal insurance exchange, to cover liabilities for a university of over 20,000 students. “We look at what our premium dollars with a particular broker are and we do an evaluation to see if it makes sense to pay commissions, or whether we can negotiate a fee based on our volume,” he says. “For some of our brokers that don’t have the same level of premium dollars, and have smaller dollar value policies, we’ll usually just pay commission.”
From the broker’s point of view, commissions are often a thing of the past. “I’ve been in this business for quite some time, so I have seen commission earnings die out, as it were,” says Clive Thompson, project director at Willis Towers Watson. “It’s often called the good old days – when we had commission in the broking world. The reason for that is because when you worked on a commission basis, there was no relation really to the value that the client got. If the premium was high because it was a high-hazard risk, that doesn’t necessarily mean that the level of work involved in placing it is much higher.”
“That’s an area that key clients identified and they were right in bringing that down because commission doesn’t really represent the value that you deliver to the client, which is why we prefer to work on a fee basis now,” he says.
But not all risk managers agree. In her 34 years at Cook Group, the world’s largest medical device manufacturer, insurance director Nada Jandrich has grown to prefer paying her brokers by commission. “We did fee-based years ago, and we found we were getting nickel-and-dimed to death every time we wanted to request a certificate, and we do so much of that,” says Jandrich. “We work our brokers really hard, and I would hate if they would nickel-and-dime me every time I call them, so commission is best for our type of business.”
There are some cases – like when the client is involved in a lot of M&A activity – where commission makes sense for brokers, too. Thompson says that in those types of complex situations with international global entities, where companies are being brought in and insurances are being taken over, it’s common practice to work on a commission basis. “We usually will work on a commission basis for the first year or two and then move to fee,” he says.