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October 3, 2019We started Innovo Benefits in part to help HR leaders deliver more value to their organizations and employees. To that end, we will publish several articles discussing how brokerages can redefine their role as trusted partners – beginning with this piece that takes a critical look at broker bonuses, and explains why Innovo donates most of our bonuses to charity.
Bonuses: Who Offers Them, Why and Who Pays for Them
Broker bonuses have been in the news recently, with ProPublica and NPR raising questions about their effect on a broker’s ability to offer impartial client guidance.1 We believe these are fair questions to ask since most carriers currently offer some type of formalized bonus structure. These bonuses encourage brokers to sell more of a carrier’s products – a fairly common practice to boost performance in sales organizations. In fact, it’s not unusual for carriers to create broker performance reports, encouraging broker progress toward the next bonus level.
Brokers earn bonuses across virtually all insurance lines. And if you’re wondering who pays for those bonuses, it’s you. While your rates are typically not directly affected by the size of the bonus, you’re paying indirectly through your premiums.
That said, we don’t think bonuses are inherently bad, and feel brokers should be compensated appropriately for their hard work. We do, however, have an issue when bonuses deter brokers from delivering optimal value for clients.
Brokers, by our definition, should be more than salespeople or middlemen. Each has an obligation as an impartial consultant to offer industry knowledge and negotiation expertise. At a minimum, brokers should disclose their compensation structure for every carrier recommendation.
Objectivity Matters
Better transparency could defuse the perception of a conflict-of-interest, or it could simply confirm that one exists. The reason for this is that some carriers offer greater levels of compensation, and if a broker routinely steers you toward the carrier with greater bonuses for them, but not great value for you, objectivity has been compromised.
It’s also worth considering the type of insurance your broker is quoting. Let’s take medical, group life and disability for instance. You may naturally pay closer attention to a broker’s medical insurance selections since plan variables (network, deductibles, etc.) affect day-to-day employee satisfaction and plan navigation. You may be hesitant to take your broker’s first choice if you feel another plan could work better. But what about group life insurance and disability? In this highly commodified market, would you object if your broker recommended one or two options, from top-tier players, but no other compelling choices? Maybe not.
Still, at this point, you may have accepted that bonuses are just a fact of doing business, and if you’re satisfied with your broker’s service, you could ask, what’s the harm?
The Value of Choice
A broker’s most important job is guiding organizations through complex benefit options, recommending the ideal blend of products, and finding the best value. A conscientious broker can help an organization save up to 25% by comparison shopping across a wide spectrum of carriers, as evidenced in the NPR article. But if a broker favors carriers based on generous bonuses, you may not benefit from those savings. You’re paying higher costs and indirectly paying for that bonus that led you there.
We believe that while most brokers have their clients’ best interests in mind, there can be a subconscious lure when a sizable bonus dangles in the balance. A broker who maintains their objectivity is more likely to offer you better choices, which can lead to savings.
A Better Way – How Innovo Maintains Objectivity
Our goal is to find the right policy fit for clients, reviewing all A-rated carriers who we believe meet our clients’ needs (sometimes upwards of 15). This is in stark contrast to those brokers who have a panel of carriers that can be counted on one hand.
To be completely transparent, it’s important to know that we will accept bonuses from carriers who offer them. And given what we’ve said about bonuses, this may surprise you. The reality is that a carrier will not lower a client’s rates if we refuse the bonus.
However, since we’ve deliberately created a selection process that spreads our business across many of these different A-rated carriers, we recommend only those who are able to offer the greatest value for our clients. As a result, we typically receive bonuses totaling about 1% of our annual revenue. Compare this to what we hear from other brokers who may routinely count 20-30% of their annual income from bonuses and you can imagine the influence bonuses can play.
Still, we feel the best approach is to donate most of our bonuses to charity. This is part of our commitment as a Triple Bottom Line company. Triple Bottom Line (TBL) is an accounting practice that allows Innovo Benefits to see its performance as more than simply financial profits and losses. TBL allows us to create better business value by focusing on three bottom lines: social, environmental and financial. As a nimble, independent broker, we actively choose innovative paths that deliver better service and value for our clients, partners, and the world.
Can Panels Provide Real Value?
Some brokers will make a case for offering a limited panel of carriers. They say close relationships with preferred carriers could net you above-and-beyond levels of service when dealing with claims issues, and enhanced plan design and contractual features such as longer rate guarantee and more life insurance without medical questions. This may be true, but ask yourself, at what cost does this service come? We would hope that your broker would be skilled enough to negotiate these benefits with any carrier through competitive market pressures.
Ask Your Broker
In their report, ProPublica and NPR asked 10 of the largest broker agencies about bonuses. Four declined to answer, the rest did not respond. That doesn’t inspire confidence in their transparency especially when you consider that 74% of brokers report that they see moderate to high demand for increased transparency from their clients.
Here’s what you should ask your broker:
- Do you use panels, and if so, how many carriers are in the panel?
- Who makes up the panels for each product line (medical, dental, life, stop loss, disability, etc.)?
- What’s your selection criteria?
- What percentage of your clients are with your top carriers? – This can show just how many (or few) carriers the broker works with.
- What carriers did you include in the marketing? Why?
If you’re not getting answers that you’re comfortable with, this should be a red flag. We’ve made a promise to answer all compensation questions, whether from our clients or any organization curious about how the industry works. We also believe that there are as many solutions available as there are organizations out there. It’s our job to find the right one for you, independently of how we’re compensated.
1 ProPublica and NPR, Insurers Hand Out Cash and Gifts To Sway Brokers Who Sell Employer Health Plans, February 20, 2019
2 Direct Path, Better Broker: What Brokers are Doing to Meet Evolving Employer Needs
3 Direct Path, Strategies & Service Innovations Shaping Brokers’ Transformation from Sales Representatives to Strategic Benefits Consultants