Remuneration of insurance intermediaries
Generally, there are two primary mechanisms by which insurance intermediaries are compensated for their services:
- A fee system under which the client directly pays for the services provided;
- A commission system under which the intermediary is paid a percentage of the premium paid by the client for coverage based upon the intermediary's agreement with the carrier.
The remuneration of the intermediary being in principle commission–based with the possibility to agree fees, has been a major contributing factor to the successful and competitive development of insurance markets all over the world.
In the choice between commissions or fees, it is not only the size of the business that is important. Equally important are the nature and/or level of sophistication and the specific levels of service which are agreed. In any case, the decision to work on a fee or commission basis is a decision that should be taken between the parties based upon a transparent dialogue about the various options.
In 2003, in line with free market principles, BIPAR adopted the following principles related to remuneration:
- Principle 1: Every insurance intermediary has the right to be remunerated fairly for his or her services.
- Principle 2: Any remuneration or compensation for services of an intermediary should be considered as an issue between the parties.
- Principle 3: Legislation or concerted market agreements (or behaviour) limiting or imposing the rate or the means of remuneration is considered by BIPAR as a serious infringement of basic free market principles and would be against international market practice.
- Principle 4: Intermediaries may charge fees in addition to, in lieu of, or in combination with, commissions. In such case, the customer should be informed.
In a number of insurance lines and countries, insurance intermediaries offer the choice to the client to work either on a commission or a fee basis. When considering the choice between the two, the following factors are generally considered by both the intermediary and the client in their dialogue.
Commission is only payable if a contract ensues. A fee system creates uncertainty about the future cost, both at the time when the insurance is being effected, and when a claim occurs or when other services are rendered by the intermediary. In a fee system, clients should consider if they will be able to afford to pay fees based on time-spent in the event of a claim.
The commission system satisfies a need for services in the future. The consumer purchases a “product” that at the time of acquisition is incomplete. In addition to the guarantee, it comprises a whole range of services (issuing of policies, collecting of premiums, treatment of claims, amending the policy and sometimes advancing compensation) which are not quantifiable at the time of the purchase.
The commission system offers a form of service contract against the cost of the provision of services by the intermediary following the purchase of the insurance product whereby the intermediary will give service at no extra charge in the event of any service being required other than at the inception or renewal.
Whether a fee or a commission is the best choice should be decided by the parties on a case by case basis and in transparent dialogue about the various possibilities with the intermediary.
From an economic perspective, overall, there exists no system which is preferable in all circumstances and the co-existence of various remuneration systems, and in particular the freedom to decide about the remuneration systems between the parties, is the best guarantee for competitive, efficient and dynamic markets that work for the client.
