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How do insurance brokers get paid?
For the majority of business owners the thought of dealing with their insurance arrangements themselves fills them with dread, which is why they value the services of their insurance broker.
The use of an insurance broker is pretty much essential for most businesses, given their expertise and the work they do on the companies behalf. In addition to this they also represent good value for money, but how do you know?
The majority of general insurance is still transacted on a commission basis, which means that the broker receives a percentage of the premiums you pay from the insurance company. The amount of commission paid can vary greatly and is based on the type of insurance policy placed.
Whilst the commission based model is a very simple one it isn’t particularly logical as it tends to be based upon the profitability of the type of policy for the insurers and not the amount of work involved for the broker.
An example being motor insurance, which tends to involve a lot of work, particularly in respect of claims, however the commission paid by insurers is at the bottom end of scale.
So if commission isn’t particularly equitable, what is the alternative?
The answer is to agree to pay your broker a fee rather than commission, which has a number of advantages as follows:
Conflict of interest.
When working on commission there can be a conflict of interest as the broker will be paid more if your premium increases. Whilst this isn’t generally an issue when you first begin your relationship with a broker, it can be a reason why they may seem complacent over time. If they are working on a fee it is in their interests to ensure that your premiums are always as competitive as they can be, without compromising on cover.
Validity of advice.
You will generally find that insurance brokers tend to be a risk averse lot and as such often recommend additional covers, particularly with new and emerging trends, such as Cyber and Crime insurances in recent years. If you are paying a fee you can be sure that your broker is recommending the cover because they really do think you need it, rather than them trying to sell you an additional product from which they will earn more commission.
By moving onto a fee paying basis your insurance premiums will reduce and a broker’s fee does not attract either Insurance Premium Tax or VAT. Therefore the premiums liable for taxation will be lower, which is particularly pertinent in a climate where the government are increasing the rate of IPT on what seems to be an annual basis.
This is particularly relevant for larger premiums where the amount of commission can be excessive and bear no relevance to the work involved in looking after your insurance arrangements.
If you are paying more than £10,000 per annum for your insurances it is definitely worth looking at what commission your broker is earning.
Whilst a fee paying basis does have many advantages it isn’t right in all circumstances and may work out more expensive for smaller businesses. It is however always worth having a chat with your broker about how they are remunerated and what is a fair level of commission or fee.
What are admin fees?
In addition to the commission/fee debate above you will no doubt have noticed that many brokers now charge admin fees in addition to your premium. These are generally charged by brokers to cover the costs of dealing with low level admin and there is much debate about the fairness of them.
It is some professionals view that to treat customers fairly is to charge every customer an admin fee regardless of the size of the premium or what the broker is earning.
We firmly believe that admin fees are only justified where the value of the commission earned for a client is so low that it doesn’t cover our costs to deal with them. We have taken on a number of clients recently where the other broker was earning a good level of fee/commission but was charging an admin fee in addition, which we do not believe is fair.
If you would like any further information please do not hesitate to contact us.