The Great Unbundling

Rightly or wrongly, the six-year-old battle over the payment of contingent commissions is reshaping the way the insurance-selling industry gets paid. It’s a practice that, at least for the big brokers, is vanishing. It’s a change that in some circumstances is warranted, in many circumstances is forced but in all circumstances will probably continue to trickle down to Main Street agents and brokers.

At least, that’s according to Barry Franklin, senior consultant for professional services firm Towers Watson, which recently surveyed 125 risk managers on their attitudes toward contingent commission.

It seems a foregone conclusion by now that the payment structure for agents and brokers will look quite different a decade from now. And a first-draft version of what that future will look like is starting to emerge.

Here’s a hint: It’s fees. Negotiated fees are going to become far more common for brokers – particularly with larger clients, Franklin said. It’s a practice larger brokers have already started instituting.

“In essence, companies are negotiating a fee for service with an individual broker,” Franklin said. “Contingent commissions enabled brokers to just put everything in there, and provide those services because they were being partly funded by insurers. Now, a lot of brokers are taking an approach where they’ll charge the going rate for transactions, and then unbundle some of the services that some of the other brokers don’t have. So the companies pay for those services separately.”

Of course, in many swaths of the industry, contingent commissions are still a normal part of the payment mix, particularly for smaller, regional brokers, Franklin said. That’s less true for the larger brokers, which have significantly more leverage with carriers and in many cases have negotiated higher standard commissions. These enhanced commission agreements are intended to reimburse the broker for risk management and other services that, in fact, benefit insurers where the broker is acting almost in essence as a front-line underwriter.

Since they tend to be negotiated fees on an annual basis, rather than volume-based fees, that eases the minds of individual risk managers who worry their business is being disproportionately steered to one carrier, Franklin said.

In the end, Watson predicted that concerns over contingent commissions will prompt “continued unbundling of fees, so that brokers who have claims advisory services, actuarial services, other services that benefit the client, will essentially price and sell those separately.”

Is that good for clients? “That’s difficult to say definitively,” Franklin said. “The spirit of disclosure and openness is good. And the whole movement toward more feeforservice brokerage compensation models is healthy because it allows companies to pick and choose what services they want to buy. But it makes it a little more difficult to compare, some of the brokerage fees that some of the national brokers and global brokers are charging with some of the regional brokers. It will be interesting to see how that plays out.”