Opinion: Peter Blanc on the changing fees and commission landscape

IPT is pushing some areas of the market from commission to fee, says Peter Blanc

There has been some commentary lately regarding broker commissions and in particular a high profile falling out between an insurer and a broker which apparently has been caused by commission demands. As ever, this prompts discussion about the whole concept of commission as a mechanism for remunerating brokers. Is there a problem here? Does this remuneration system still work?

For the vast majority of day-to-day small insurance broking arrangements the commission model works perfectly well.

Consumers and SMEs benefit from dynamic competition in the insurance marketplace and customers simply want to understand the price they are paying for products and services. Time and time again surveys have proved that they are entirely disinterested about ‘who makes what’ in the value chain.

The individual quantum involved in their commission is generally very modest and clients have the security and comfort of knowing that brokers will look after them come what may during the course of the year usually for no additional charge. Some observers have suggested that the whole market should move to a fee only basis. I don’t think this assertion is based on any valid consumer research.

What has changed in recent years is Insurance Premium Tax. IPT is chargeable on gross premiums, which include the broker’s commission. If a broker switches to a fee basis then the client can save the IPT on the broker’s remuneration. For small customers and consumers the amounts involved are trivial and it’s not an issue. But as we move up the premium brackets IPT is becoming a real driver.

Lower threshold

We are finding that the premium threshold where clients convert from commission to fee is getting lower. It is rare for us to come across a client with premium over £50,000 where the broker is not charging a fee in lieu of commission. In effect, increasing rates of Insurance Premium Tax over the years has now achieved the objective of moving the market away from commission and towards fees.

What is more challenging is training broking staff to correctly value their services. It’s clear that many account executives are judged on their fee income in isolation and not on the profitability of their business. This can lead to a real problem of under-pricing in the market, particularly at the new business acquisition stage. As the market matures, however, brokers will become more used to fee charging and correctly valuing their services.

At the SME/consumer end of the market debate still rages about increasing commission demands. Underwriters, competing on premium to try and win business, are simultaneously trying to encourage brokers to recommend their products and offer attractive commission rates. This can be sustainable provided there is transparency at all levels.

The broker needs to understand the requirement for the underwriters to make a profit. If a broker knows that the insurer’s COR on their account is north of 100% then part of the value chain is going wrong. Either premiums are too low in the market place, claims are too high or the distribution costs are too high. In a sensible, grown-up conversation, brokers and underwriters can find compromise and a long-term sustainable relationship. Quite evidently this is what happens across the market.

There are many thousands of brokers in the UK insurance market so finding out that one insurer has cancelled the agency of one broker should hardly be a cause for re-examining the whole system.

The rate at which commission is paid is just one lever and, in a healthy broker/insurer relationship, it needs to be a regular discussion point to ensure that it’s working for all parties – clients, insurers and brokers.

Peter Blanc, chief executive officer, AstonLark Group

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