How do you determine the appropriate amount of compensation for your commercial insurance broker and what metrics to you use to evaluate their performance. Do you use different formula or metrics depending on the insurance program, i.e. Casualty, Executive Protection (D&O, Fiduciary, Crime) and Property?
Insurance Broker Compensation & Metrics
Answers
Compensation - Very simple - use the market! Request proposals from about three brokers and compare.
For evaluation purposes, your broker should respond to your phone calls in a timely manner, explain coverage when ask, and engage your carriers to provide ALL of the training programs promised as part of their coverage. i.e. workers compensation safety programs. Also, the broker should have your new program laid out for discussion and changes about six months prior to renewal. Let your broker know that this is your expectations. Also, review if you are over insured. For example, if the building burns down, will you really rebuild, or will you consolidate at another site that has excess capacity. Why use cash flow on a worst case bet?
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In my past life we had a broker that worked on a flat yearly fee. Our company did many acquisitions and was undergoing a major manufacturing realignment to lower cost countries. If your company is complex, growing and moving into new countries you may want to focus on a flat fee and focus on the references. I good broker can be invaluable in my opinion and may be worth more than the "established" market value.
Okay, not a direct answer, but some insight at least: Most firms attach a broker fee on very small programs so that they can cover the costs that are required to manage the insurance policies involved. That is because the commissions we receive from our carriers do not begin to cover the expenses on the small amount of premiums charged.
Once a program gains momentum and grows to the point that the premiums generate sufficient commissions, the broker may back off the fee and rely on commissions alone. That continues until a client grows to the next plateau at which point commissions may be growing at a pace that outstrips the amount of work/expense that a broker is allotting to the insurance program.
At that point in time, there may be a joint agreement to arrange to have the insurance policies issued on a net basis (take any commissions out of the premiums charged) and go to a 100% fee basis. The amount of the fee is based on a detailed agreement that outlines what, exactly, will be provided in terms of broker services, etc.
That said, the fees are negotiated and vary significantly based on how much business you have with a broker and the size of the underlying coverage you are looking at. So there is no hard and fast fee (like 5% on everything). As always, get multiple bids and demand that the broker breaks out their fees and commissions separately so you can compare apples to apples.
I typically use metrics to guage cost of coverage (like $'s of premium per $1K of coverage), but I don't have metrics to evaluate the broker. Good question, though. Naturally i look for great service, availability and response times, and quotes from a variety of sources which means the broker has a strong network which definitely works to your benefit.
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