The reason why 4% in commissions doesn't just cost 4% of the premiums

Fee for Service VS. Carrier Paid Commissions?        

When it comes to choosing a group benefits broker, businesses have two main compensation models to consider: carrier-paid commissions and fee-for-service. Each model has its advantages and disadvantages, and the decision ultimately depends on the needs and preferences of the business.

Carrier-paid commissions are the traditional model for compensating brokers. In this model, the insurance carrier pays the broker a commission based on the premiums the business pays for its group benefits. This means that the broker's compensation is tied to the carrier's profits, which can create a perverse incentive for the broker to recommend plans that are more expensive or have higher premiums. While this model can lead to conflicts of interest, it is still the most common model used by group benefits brokers.

On the other hand, the fee-for-service model is becoming more popular among businesses looking for a more transparent and unbiased approach to selecting group benefits. In this model, the broker charges a fee for their services, which may be a flat fee or a percentage of the premiums paid by the business. This model allows the broker to be compensated for their expertise and advice, rather than for the carrier's profits.

The perverse nature of misaligned incentives comes into play when brokers are paid through carrier-paid commissions. This model incentivizes brokers to recommend plans that are more expensive, have higher premiums, or offer greater commissions, even if those plans are not the best fit for the business or its employees. This misalignment of incentives can lead to higher costs for the business and potentially lower-quality coverage for employees.

However, not all brokers are swayed by the potential for higher commissions. Many brokers prioritize their clients' needs and work to find the best fit for the business, even if it means recommending a plan with lower premiums or lower commissions. These brokers are committed to providing unbiased advice and creating long-term relationships with their clients.

Ultimately, the decision between carrier-paid commissions and fee-for-service depends on the needs and preferences of the business. For businesses that value transparency and objectivity in their broker relationships, the fee-for-service model may be the best choice. For businesses that value the traditional model of broker compensation and are comfortable with potential conflicts of interest, carrier-paid commissions may be a better fit.

It is important for businesses to carefully evaluate potential brokers and their compensation models to ensure that they are getting the best advice and value for their money. By understanding the potential for misaligned incentives and seeking out brokers who prioritize their clients' needs, businesses can make informed decisions about their group benefits and ensure that they are providing the best possible coverage for their employees.

What about retention bonuses?        

Some carriers also offer retention bonuses to brokers who meet certain performance metrics. Retention bonuses are a form of incentive compensation that carriers use to encourage brokers to continue doing business with them and to reward them for their loyalty.

While retention bonuses may seem like a positive thing for brokers, they can create another layer of misaligned incentives that may keep brokers from recommending a different carrier to their clients. In essence, retention bonuses incentivize brokers to continue doing business with the carrier even if another carrier may offer better coverage or more competitive rates.

For example, if a broker has a client who is looking for new group benefits coverage and Carrier A and Carrier B are both options, but Carrier A offers a retention bonus to the broker, the broker may be incentivized to recommend Carrier A over Carrier B, even if Carrier B offers better coverage and lower rates.

Retention bonuses can also make it difficult for brokers to negotiate better rates or coverage with carriers. If a broker is receiving a retention bonus from a carrier, they may be less likely to push back on the carrier's pricing or coverage options, even if they believe the carrier could do better.

Furthermore, retention bonuses may create a sense of obligation or indebtedness to the carrier, which can make it harder for the broker to recommend a different carrier in the future. This can limit the broker's ability to provide unbiased advice and recommendations to their clients and can ultimately harm the client's ability to get the best coverage at the best price.

To combat the potential negative effects of retention bonuses, some brokers have adopted a fee-for-service model, where they are paid directly by their clients rather than by carriers. This model removes the potential for misaligned incentives and allows brokers to provide unbiased advice and recommendations to their clients.

While retention bonuses may seem like a positive thing for brokers, they can create misaligned incentives that may limit a broker's ability to provide unbiased advice and recommendations to their clients. By understanding the potential for misaligned incentives and seeking out brokers who prioritize their clients' needs and provide unbiased advice, businesses can make informed decisions about their group benefits and ensure that they are getting the best coverage at the best price.

Why 4% in commissions doesn't just cost 4% of the premiums....you
are actually paying more than 4%, it is just factored in to the 
premiums.  This is what underwriters call placing a load on the 
premiums.          

In addition to the potential for the misaligned incentives we just covered, commissions paid by carriers can also put a significant load on the underwriting process. Underwriting is the process by which insurance carriers evaluate the risk of insuring a group or individual and determine the appropriate premiums and coverage options.

When commissions are paid to brokers based on the premiums paid by the business, carriers may be incentivized to increase premiums to cover the cost of the commissions. This can create a situation where the underwriting process is focused more on meeting the carrier's financial goals rather than accurately assessing the risk of the group or individual being insured.

Furthermore, the cost of commissions may be built into the premiums that businesses pay for their group benefits, which can make it more difficult for underwriters to accurately assess the true risk of the group. This can lead to higher premiums for businesses and potentially lower-quality coverage for employees.

The load that commissions put on the underwriting process can also impact the speed and efficiency of the process. When commissions are factored into the premiums, underwriters may need to spend more time evaluating the risk of the group or individual to ensure that the premiums accurately reflect the level of risk being insured.

Additionally, commissions can create a complex web of relationships between brokers, carriers, and underwriters. The more parties involved in the process, the more potential for miscommunications or errors, which can further slow down the underwriting process and potentially lead to mistakes or inaccuracies in the coverage.

To mitigate the potential negative effects of commissions on the underwriting process, some carriers and brokers have adopted a fee-for-service model, where brokers are paid directly by their clients rather than by carriers. This model can simplify the underwriting process by removing the potential for misaligned incentives and reducing the number of parties involved in the process.

In conclusion, commissions paid by carriers can put a significant load on the underwriting process, potentially leading to higher premiums, lower-quality coverage, and a slower and less efficient process. By adopting a fee-for-service model or seeking out brokers who prioritize their clients' needs and provide unbiased advice, businesses can ensure that they are getting the best coverage at the best price, while also simplifying and streamlining the underwriting process.

These are just a few of the reasons why we prefer to work with 
our clients in a fee for service arrangement.