The debate continues regarding group insurance commissions
An old debate has resurfaced: the compensation of group insurance advisors. Some advisors pointed out to the Insurance Portal that there is a lack of transparency, as the billing process means that the client, the employer, often doesn't know how much the advisor received for their services.
The advisor sends their invoice to the insurer. The advisor's compensation is thus a fee buried among all the other administrative costs and taxes. This information, with few exceptions, is not included on the invoice sent to the employer.
Insurance Portal discussed this issue with advisors.
Is there, however, a standard?
The most common compensation model is the “Crown Scale” model: “Those of us who have been around a while know what I’m talking about,” says Dave Patriarche, founder of Mainstay Insurance Brokerage and the Canadian Group Insurance Brokers (CGIB), an association that promotes mutual support and provides training for group insurance advisors.
The Crown Scale model dates back to the 1970s. At the time, Crown Life (acquired by Canada Life) adopted a benchmark that represented a flat rate of 10% for the first $50,000 of annual premiums, 7.5% for the next $50,000, 5% for the following $150,000, 3% for $250,000, 2% for $500,000, followed by 0.5% to 1% for each additional bracket.
In 2018 and 2019, insurers and advisors attempted to establish a new standard when the Canadian Life and Health Insurance Association (CLHIA) introduced Guideline G19 on the disclosure of advisor compensation for group benefits and group retirement services. The discussions ultimately did not lead to any concrete outcome, and the CLHIA abandoned the initiative.
Since then, the annual premium volume has skyrocketed for each coverage or benefit, according to the advisors interviewed by the Insurance Portal. So has their workload.
New standard
CGIB member advisors agreed in 2020 on a new voluntary standard for its members. It consists of a base commission of 10%, even at renewal, which applies to the first tier of premium volume. The higher the premium volume, the lower the commission for each additional $10,000 of premium volume. Advisors are free to bill for excess premiums.
In practice, the new model means that for a monthly premium volume of $2,000 ($24,000 annually), the rate will be 10%; for $20,000 per month, it's 6.56%; For $100,000 per month, it's 2.98%.
The industry has changed a lot, says Patriarche. Some advisors stick to a fixed rate, but others apply a commission that varies depending on the complexity of the case or the number of participants. Many simply calculate an hourly rate or combine different forms of compensation.
One constant remains: the more participants the contract has, the lower the commission percentage, particularly for Administrative Services Only (ASO) plans.
With this type of plan, the insurer simply collects the administration fees from the employer. Medications, healthcare, and death or disability benefits are then financially covered by the employer, the union, or both. For these "self-insured" plans, which often cover hundreds or even thousands of people, advisor commissions are around 2% or less.
No uniformity
Today, there are no longer any standards, Dave Patriarche adds. Each advisor negotiates their own compensation with the insurer. No one knows who is charging for what. There is no transparency in the industry, he says. He believes that this context does not benefit clients. In his case, he systematically discloses his compensation and sees it as a competitive advantage.
Patriarche regularly speaks with members of the CGIB. After looking at his notes, he saw that most advisors are charging more than the Crown Life standard, he says.
This, he says, doesn't surprise him because, over time, the cost and complexity of coverage and benefits have skyrocketed. With paramedical services and medications, the inflation is very real. Participants are using more services, more often. And new ones have been added over the years. In his youth, there was no such thing as therapeutic massage. “Today, young people use it every month.”
In recent years, he explains, about fifty new drugs have been approved, some twenty costing over $100,000 annually. Certain gene therapies cost $1 million per treatment. This clearly shows where the industry is headed, he says. According to him, insurers have difficulty predicting claims costs for the coming year because there are so many variables. Patriarche has about fifty clients, all in group insurance. He observes an average annual increase in costs of 4%.
Some clients are experiencing increases of 35%, others decreases of 25%, he observes. Each employer’s situation varies depending on the type of coverage – life, disability, benefits, and other – as well as the age of the participants, the size of the company, and the industry sector. An organization with 300 employees will have a higher replacement rate, which translates into a lower average age, he explains. A client who buys out a competitor will often have the same effect on their group plan. All these factors influence advisors' commissions. In 30 years, the average cost per participant has increased from $2,200 to $4,500 for a typical group insurance plan, notes Patriarche. However, the larger the contract size, the lower the commission in terms of percentage. This is a reality that clients are usually unaware of.
More transparency?
Many advisors use the metaphor of the car dealership. When a consumer buys a car, they have no idea about the salesperson's compensation or how their commission is broken down, nor what percentage of the vehicle's total cost that compensation represents. The vast majority of buyers don't care, they believe. It's the same with group insurance. A minority of insurers and employers are concerned about the cost of advisor compensation.
Consumers are primarily looking for a fair price for their car, based on the market, says Dave Patriarche. It's the same in the group insurance industry, he adds. Compensation is based on both a fixed rate and a portion that varies according to the complexity of the case.
He considers this the ideal scenario, because you need an incentive to cover the additional work, such as analyses, meetings with participants, explanations of benefits, and managing special cases, like employees who take exorbitantly expensive medications, he explains.
These extras must be reflected in the advisor’s compensation, even if this commission decreases depending on the size of the contract. Patriarche advocates for advisors to disclose their compensation to employers. A quarter of his clients tell him he is not paid enough for the quality of his work, he says. A good advisor, who does their job properly, who knows the coverage, who offers appropriate advice, will save employers millions, he says.
According to Mario Malatesta, clients know very well what they are paying for. The vice-president and co-founder of GroupQuest Strategic Partnerships, a managing general agency working with about a hundred advisors, believes his industry is functioning well. It’s not the ‘wild west’ that some describe, he says.
However, if an advisor receives a 30% commission on a contract where the standard suggests 6%, is that justified? He says he imagines there will be a discussion with the insurer, but if the client doesn’t know the true cost, can they ask the advisor directly? If the advisor works diligently and offers a lot of support and information, then it's justified. But if they only show up at the client's office for annual renewals, the question of transparency arises.
Malatesta often directs his clients to the CGIB website, which displays the standards adopted in 2020. The site includes a public calculator where the advisor can enter their monthly and annual bonuses to reveal an approximate commission expressed as a percentage.
If the compensation exceeds the standard set by the CGIB, the client should authorize it in writing, he says, adding that he’s seen this happen in some circumstances. Otherwise, why disclose the advisor's compensation? “For me, the CGIB standard is sufficient,” he says.
Malatesta returns to the car dealership metaphor. If there's a $3,000 price difference for the same model between two dealerships, the consumer has the option to go elsewhere. In group insurance, it's the advisor who tests the market for the client.
He says he sometimes senses a feeling of injustice among human resources managers at some employers, who question advisor compensation when they see a hefty bill for the group plan. He says, he knows the industry, offers good service, and does not work on the cheap. It's a matter of trust with his client, he underlines.
Size matters
Byren Innes, Managing Director and Executive Consultant at Jennings Consulting, observes that an entrepreneur running a small business with five or ten employees simply pays the bill without asking questions. However, at companies with 5,000 or more employees, every penny counts.
As soon as an organization has at least 70 employees, the pendulum swings toward greater disclosure, observes Steve Fretwell, Executive Consultant at Jennings Consulting. Companies with 300 or more employees systematically require it, as insurers’ compensation varies depending on each insurance and benefits package.
He adds that some advisors are hungrier than others and adjust their compensation accordingly. But in 20 years of practice, he points out that many clients aren’t interested in this issue. He does so without hesitation when asked to disclose his compensation. Some players, like Mercer, require it systematically.
Should the regulator impose a certain level of transparency?
Byren Innes says he doesn’t see any value for the client. Insurers apply similar ratios, and so do advisors. The variations aren't significant, he adds. A good advisor provides a service that often translates into savings for the employer. The employer doesn't necessarily have an incentive to go elsewhere, he says.
Innes adds that this is especially true given that there are several little-known aspects of advisor compensation. Some insurers offer renewal incentives. They also reward increases with the number of participants. These incentives are monetary or take the form of sponsorships for events organized by the advisor, such as seminars or golf tournaments for a charitable cause, or a contribution to a fundraising campaign for the local hospital, adds Fretwell. He adds that if an advisor asks for 20% when the standard is 7.5%, the insurer will refuse. However, they will agree to discuss it if the claims experience is poor or if industry trends have changed.
Harmful ambiguity?
Advisors should be systematically transparent with employers, as the participants are the ultimate beneficiaries, contends Adam Niman, co-founder of Kibono, a benefits management platform for SMEs. In fact, the current ambiguity greatly benefits his business model.
However, he opposes regulatory mandates for disclosure. He doesn't believe that regulators multiplying rules actually serves or protects consumers. They think that by multiplying rules, they'll create a more honest environment to protect the public. But someone who refuses to comply with the rules will find a way through, he says.