Why one price should cover all

Remuneration in the SME end of commercial insurance is an area of understandable sensitivity and complexity, traditionally offering brokers little flexibility or control.

It’s all very different to large premium commercial cases, where it’s not unusual for the broker and insurer to negotiate on commission. And while some insurers will reward brokers for providing an agreed volume of business or premium growth, many brokers find commission levels on SME business inadequate to cover their costs, and end up having to apply service charges to supplement their earnings.

This can be an added complication; it’s never straightforward to explain to cash-strapped SMEs the need for a service charge on top of their premium. In a time of economic hardship, fierce competition and market instability – for both the broker and policyholder – it is important to be flexible and to provide a competitive price while minimising expenses.

So it seems natural to offer brokers the chance to choose the commission level that they feel is appropriate. Experience shows that when this is available, brokers don’t just maximise their earnings, but use such flexibility to apply a level of commission that reflects the needs of individual clients and market competition.

Variable commission has been available for years in property owners (and, indeed, on larger fleet business). While it might range between 0%-40%, in practice the average level is consistently less than 25%.

Bread-and-butter SME business is the lifeblood of many brokers, but with a hard focus on costs and intensely competitive market conditions, low-premium policies are the order of the day.

A variable commission allows brokers to increase their earnings, while the percentage commission might not be enough to cover their costs.

For example, a shop policy premium of £300 at 20% commission would generate £60 for the broker. It then might apply a service charge or policy fee of £25 to supplement its income. Wouldn’t it be simpler to arrange the policy for £325 premium at 26% commission? This produces the same net premium to the insurer and the same remuneration to the broker, but in one single price and transaction.

From a competitive point of view, if a broker wants to win or retain a particular piece of business, shouldn’t it also have the flexibility to reduce its reward? Insurers should be able to facilitate the need where required and make it simple to operate. It certainly applies in many sectors of industry.

Variable commission helps brokers to compete, without having to account separately for a commission rebate. It also means that they can receive their remuneration via a fee if they prefer – particularly valuable to brokers providing extra services such risk management advice.

The complexity of administration and pricing systems are barriers, but online trading these days enables insurers to build more complex back-office processes and still make it simple for brokers to get a quotation.

The regulatory perspective must be considered too. Brokers have to disclose how much they will earn from any policy sale if a client asks them to, so it is their responsibility to assess the cost of providing the service and, where necessary, to justify their remuneration.

If an option for variable commission is used sensibly and fairly, then this process should hold no fear. Only brokers maximising commission at every opportunity – and not treating their customers fairly – have anything to worry about.

So the concept of variable commission need not be a sensitive issue. It is right for some; maybe not for others. But it can provide an important level of choice, flexibility and clarity that is much appreciated by brokers and clients. IT

Malcolm Smith, commercial lines director, Groupama Insurances