Broker and Agent Commission Structure to Change

Much has been made of how the new health care regulations will affect different groups of Americans. The one group that hasn’t been mentioned much but is about to become one of the first to feel the effects of the new law are insurance brokers and agents.

Under the new law, insurance companies must use at least 80% of their premiums to cover medical care for patients. This limits profits and administrative costs, which covers sales commissions, to a maximum of 20%.

A recent Senate report found that in 2009 the individual market had an average of 74% of the premium go to medical costs, while in the small and large employer group market, insurers already meet the law’s requirement. Commissions typically run between 4% and 6% of a policy's premium, but can be as high as 30% the first year.

Insurers may increasingly begin to charge a flat fee for each contract sold to curb these costs. The National Association of Health Underwriters predicts that eventually commissions will be by contract sold, rather than percentage-based.

This is nothing new to many of us that have seen many carriers begin to evolve to a flat fee based system over the past few years.  While there is still considerable debate over whether or not these new schedules reduce costs, they do in fact cause different problems for carriers.  If carriers are required to maintain a certain percentage cost structure, then moving to a flat fee is going to create inequities for products based on price.  There will be numerous situations where lower cost policies may be sold where the distribution costs may exceed the required MLR targets just based on the lower cost of the policy.  Alternatively, if commissions remain percentage based, carriers will always have an exact measure of where they “stack up” relative to the amount of money they have left to administer their products. 

The remaining challenge is how carriers can minimize the inflationary effect of commissions as health care costs continue to increase.  The truth is that many small businesses never realize the full impact these cost increases as they work with their brokers and agents to make changes to their plans to keep any increases more reasonable by changing plan benefits. 

There are many unintended consequences in behaviors that may arise from any change in commissions.  Nevertheless, with the many carriers that have already begun to move to a flat fee schedule, we have seen that brokers will ultimately continue to focus on their clients best interests by recommending those products that meet their needs regardless of which commission structure is adopted.