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Broker payoff - Commission? Fee? or both? In the end, many risk managers may find that their optimum compensation arrangement is actually a combination of fees and commissions.

According to the RIMS/Tilling-hast 1992 Cost of Risk Survey, all but two types of broker/agent services were over-whelmingly remunerated on a commission basis, if they were paid at all. And except for environmental impairment, the same trend held for compensation based on line of coverage -- a straight or negotiated commission was the risk manager's preferred form of agent/broker compensation.

However, based on an unofficial hand poll at a session on broker/agent compensation arrangements at the 37th Annual Western Regional RIMS Conference, a sizable majority of the attendees utilized a fee-for-service form of broker/agent compensation. "The West Coast seems to be leading the country in a transition from a commission to fee-based form of compensation," observed Ellen Pfeiffer, compensation," risk manager for Borland International Inc. based in Scotts Valley, California. "A fee is not necessarily the way to go, yet it is an option risk managers should be aware of," remarked Karen Miller, risk manager of LSI Logic Corp. in Milpitas, California.

Risk managers may prefer commissions over fees, Ms. Pfeiffer noted, because: they are easier to administer; they tend to hide "the broker services costs from upper management, thereby reducing the likelihood of being cut during hard times;" it gives the risk manager the freedom to "ask for the moon" -- with fees, you get what you pay for; and, in a soft market, it can be less expensive than a negotiated fee. Conversely, the benefits of a fee-based form of compensation include the fact that a fee controls the amount of compensation, which is particularly important in a hard market. A fee also "removes the question of any conflict of interest," Ms. Miller noted, where the broker has no incentive to "pump up the premium dollar to increase his or her commission." A fee, Ms. Pfeiffer added, "creates a more professional relationship since compensation is based on servicces rather than the amount of insurance purchased." Furthermore, a fee "allows the separation of the cost of insurance from the cost of broker services, thus providing a clear correlation between broker compesnation and the work performed," Ms. Pfeiffer said.

However, using fees does present some challenges for the risk manager, according to Ms. Miller. For instance, fees require: the risk manager to develop a clear definition of the services and deliverables needed; a formal negotiation process for services to be provided and compensation made; and management's approval of the broker's compensation.

In the end, many risk managers may find that their optimum compensation arrangement is actually a combination of fees and commission. Som exaples presented include: a negotiated fee offset by commissions; commissions on insurance placements, fees for additional services; commission on new placements, fees on renewals; and fees on primary coverages, comissions on all others.

The speakers also touched upon the broker's perspective, provided an indepth look at how risk managers can determine broker fees, and furnished some general advice on the risk manager/broker relationship. For example, in Ms. Miller's experience, brokers negotiate their commissions with underwriters. "With commissions, brokers control their income on their account, not the risk manager," she said. Risk managers also need to be aware that some insurance companies cannot bill net of commission. "In this case, the risk manager pays the gross premium and credits the broker's fee," Ms. Miller added. Furthermore, a broker's use of other intermediaries (e.g., managing general agents, surplus lines brokers, etc.) should be disclosed, considering that they are often compensated on a commission basis, even on a fee-base account.

According to the speakers, this session is being developed and expanded even further. Moreover, the session will feature the addition of a broker to the panel, and is expected to be presented at the 1994 Annual RIMS Conference in New Orleans.
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Title Annotation:Risk and Insurance Management Society Western Regional Conference
Author:Kurland, Orin M.
Publication:Risk Management
Date:Nov 1, 1993
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