Insurance Brokers’ Performance Through the Brokerage
Barron S. Wall and Karen Wallace Walter
prices are up, and so are broker’s commissions. While
commercial insurance premiums have escalated drastically over
the past three years, insurance brokers have benefited tremendously
from this difficult market, as their commissions are a percentage
of these same escalated premiums.
brokers are reluctant to disclose what portion of the premium
goes to their firm and try to avoid broaching a subject
that may cause the client to question the commission rate.
In reality, however, the percentage of commission is as
negotiable as the coverage and terms of the policy are.
As long as the insurance buyer is savvy enough, what a broker
is paid, and what he actually does for the client prior
to and during the policy year, can be clarified by means
of a brokerage service agreement.
service agreement should be an important component of any
risk management plan establishing the specific duties to
be performed by the broker and changing compensation from
a commission to a fee-based structure, or at least identifying
the commission to be paid. Paying the broker a fee, instead
of a commission, takes the compensation question out of
the equation when the broker is negotiating premiums and
coverage. No longer enticed by higher premiums that generate
higher commissions, the broker can focus on obtaining the
best coverage for its client at the lowest premiums.
service agreement should include the following provisions,
which help measure the services offered against the cost
of providing them.
An insured can interview, in advance, the broker’s
personnel that will be assigned to the account and identify
them in the agreement in order to ensure a certain level
of expertise and hourly rates commensurate with expectations.
An insured can set timelines and schedules for the broker’s
completion of specific goals, such as when the renewal
strategy and proposals are to be presented; when and how
frequently claims information is to be provided; and when
claims review meetings should be held.
Brokers should be required to undertake complete audits
of the insured’s policies to ensure they comply
with the terms agreed upon at binding. By requiring in
the agreement that the broker audit the policies within
a specific time frame, and follow up with the carriers
to obtain corrective endorsements, an insured can be assured
that the policies are complete and accurate.
Brokers should be held accountable for their acts and
errors. The agreement can require the broker to carry
and disclose its own errors-and-omissions insurance with
stated limits. The agreement can even incorporate other
monetary incentives or penalties for the broker based
upon the desired level of performance. In dire situations,
the agreement may also empower the insured to suspend
or terminate the broker’s services.
Brokers should be held to a high level of service quality.
Most brokers will not seek enhanced coverage endorsements,
higher limits, or expanded coverage terms where there
is no premium or commission attached to such a request.
Policy language and coverage terms are changing constantly,
and the best brokers immediately seek newly available
enhancements on their insured’s behalf. Most brokers
will do nothing to change, augment, or amend a policy
after it is bound or before it is next renewed, unless
there is a premium attached.
requiring constant monitoring of insurance coverage term
changes and requests for augmentation can be added to a
brokerage service agreement so a broker cannot sit idle
from policy period to policy period. Instead, the broker
should rise to a higher level of professionalism, placing
the client’s coverage interests at the forefront,
regardless of the incentive of earning extra commissions.
Brokers should maintain the confidentiality of the client’s
personal information. An insured may be required to share
with the broker confidential nonpublic information, such
as merger and acquisition plans, product introductions,
projected revenues and earnings, and ongoing litigation.
Disclosure to the public or unauthorized use of such information
could have dramatic negative consequences. The agreement
can identify how such information is to be handled, and
dictate terms requiring the strictest confidentiality
of the insured’s information.
Many insureds remit their premiums to the broker rather
than to the insurance company directly. If there is a
transmission delay or misappropriation of funds by the
broker, the insured may find that coverage has been cancelled.
in the agreement that permits the insured to audit the broker’s
accounts and records or, preferably, that authorizes the
insured to make premium payments directly to the insurer,
can provide assurance that the funds flowing through the
broker are properly accounted for.
Other provisions can be incorporated into the brokerage
service agreement, such as specific intervals at which
the insurance coverage is to be marketed, a timetable
for updates on the insurance marketplace, or provision
of updated claims information even after the termination
of the brokerage relationship.
a broker may resist signing such an agreement, there is
no reason that the parties’ expectations and compensation
should not be put in writing. The insured’s concern
should not be focused on the broker’s reaction, but
instead on the benefits of having such an agreement. Ultimately,
the insured and the broker are well served by having executed
a carefully drafted brokerage service agreement.
S. Wall, ARM, PMC, and Karen Wallace Walter,
Esq., ARM, are with ICA Risk Management Consultants,
headquartered in Mahwah, New Jersey. They can be reached at
201-512-9600 or email@example.com.