Do you ever wonder if your benefits broker is keeping secrets from you? He or she could be. There are things about your benefit programs that may be more in your broker's interest than in yours, so maybe — just maybe — he's not telling you all you ought to know.
Generally speaking, you and your broker are pretty well aligned when it comes to the goals you want to achieve for your firm. You want the best possible coverage at a competitive price: generally speaking, if your current carrier can't or won't give you the competitive pricing you need (and that you can find elsewhere) your broker will suggest you move.
The benefits broker is an independent, knowledgeable consultant who largely shares your interests and understands that what's good for you is good for him. The broker knows which carriers are best for all your lines of coverage: health, dental, life, disability, long-term care, and voluntary benefits. Generally, he can work with any of them. He can get you quotes from multiple carriers, show you varying plan designs and different risk-sharing ideas. He knows, or should know, each carrier's contractual language and what impact seemingly small changes will have on your plan provisions and costs. He can lay out all your options and help you make the best possible choice.
And lots of times his services are effectively "free" to you if you're a smaller employer. Many states require that the same price be given to an employer whether they buy direct or via a broker, so you save nothing by "do it yourself" efforts. And the commissions from carrier to carrier don't vary all that much, so he can send you where you are best served. So why not take advantage of the broker's knowledge and experience?
Seems perfect, right? Your interests and the broker's are totally congruent and you have a perfect partnership.
Life Isn't Always What It Seems
But the broker is subject to all kinds of conflicting currents, many of which you won't even know about if you have fewer than 100 eligible employees. For that matter, even if you do have more than 100 employees you might not realize what's happening.
But behind the scenes there's another player, and that player really isn't all that interested in your problems. The player? The insurance company who currently has your business. They don't care if you have the best possible deal; all they care about is keeping profitable business on the books.
So the way they go at it is to insert a second way of paying the broker, one that's a lot less obvious than the commissions. They give the broker a bonus.
Unlike commissions, which reward the broker for keeping you happy, servicing your account, resolving your questions, and expediting your claims settlement where necessary, bonus programs have very little to do with your interests and lots to do with the carrier's interests.
While carrier bonus incentive programs vary widely, in general they reward the broker for three things:
- Placing business with the carrier. Bonuses are usually calculated on the broker's number of and total premium from the new cases the broker sold for that carrier this year. The more products sold and the more accounts sold to in a given year, the bigger the broker's bonus.
- Total business with the carrier. The bonus is usually also contingent upon the total business the broker has with that carrier, i.e., the number of cases and the total premium. The more business, the bigger the bonus, both in amount and as a percentage of total premiums. So all else being equal, the broker with six million dollars in premiums with a carrier is paid more than twice the bonus of the broker with three million in premiums.
- Percentage of last year's business renewing with the carrier. The greater the share of a carrier's business the broker renews, the greater his bonus, both in dollars and percentages.
Here's the dilemma that a broker with lots of business with one carrier faces (call it Carrier A). If he moves coverage from Carrier A to Carrier B, his commissions will remain about the same. But he reduces his total business (point 2 above) with Carrier A, and he lowers his renewal percentage with Carrier A (point 3 above).
What's more, the reduction in bonus applies to all of his cases with Carrier A, not just the one he moves. So there's no way he can make up that loss with Carrier B because he's not in a bonus position with them. He could wind up seeing a reduction in his total income even though he didn't lose the case
Real Life Example
Carriers furnish every employer with more than 100 employees with a 5500 Form, which shows both the commissions and bonuses the carrier paid to the broker servicing their account. Unfortunately, many employers pay scant attention to the information in this form, so they never know just how biased their broker might be.
Here's an actual example that nicely illustrates the broker's conflicting interests. The table attached to this story illustrates just how much of an impact the bonus program can have on a broker. The employer in question is a high-tech firm with 185 to 195 employees in the year reported. The group is very young; all lines were fully insured.
Look carefully at the numbers. The overall bonuses equaled 46 percent of the commissions — think that might have an impact? A specific example is the Dental with Carrier A. The bonus was a staggering 124 percent of the commissions. What do you think the chances are that client will ever hear their broker say, "You know, those dental rates seem a bit high. Why don't we shop that?"
Even the bonuses on the health insurance are 57 percent of the commissions. And here's an interesting consideration: I mentioned above that the group is extremely young — I'm guessing the average age is 36 (it's not my account, so I never got a look at the census).
That's a perfect age for self-insuring. Lots of maternities; few, if any, cancers. It's a win-win deal for the employer. Yet the group is fully insured.
I did some digging: Turns out Carrier A doesn't pay a bonus on self-insured plans. Did that have an impact on the broker's recommendation? I don't know, but I can guess.
But What Can You Do?
Are you perhaps being misled, and if so how can you find out? If you have fewer than 100 eligible employees (or even if you're larger), how can you be assured you're not being "steered" inappropriately to a carrier or a coverage that's more expensive than necessary?
There are five specific steps you can take.
Ask your broker this simple question: "What percent of your total income do bonuses, as opposed to commissions, represent for your business?"
What should that number reasonably be? My company's bonuses, for example, account for less than 5 percent of total revenues. That's because we have always encouraged our clients to shop every year and change carriers frequently • we feel we owe them that.
However, it can be disadvantageous for larger accounts to switch carriers too often. So if you're a larger employer (50-100 employees) and your broker mainly serves larger clients, expect bonuses to be larger, as a percentage of total income, than what we've experienced working with somewhat smaller clients.
Look back at how long you've been with your current carriers (for health insurance in particular, but also dental, disability, and life). If it seems like you almost never switch, perhaps the bonus — even if seemingly small — is inappropriately influencing your broker's advice to you.
Keep in mind that a broker moving one or two cases out of his entire book of business, which may be scores of cases, can be enough to impact the entire bonus from that carrier.
Periodically have another broker compete for the business.
It is probably unwise to have multiple brokers quoting every year because that limits your broker's ability to get you price concessions from your current carrier. But every fifth year or so, it's probably worth angering your current broker by bringing in his competition.
If you have more than 100 employees, examine your 5500 Form reports from the last couple of years. Look at both the absolute bonus amount and at its growth trend. If you're insuring fewer than 100 lives, ask your broker what his commissions and overall bonuses were. He won't be able to tell you what the bonuses were on your specific case, but he'll know them for his entire book of business.
You can, at a certain size or larger, opt to compensate your broker directly, via a fee, and request that he quote the plan commission-free. Most carriers don't pay bonuses when there aren't any commissions paid.
This may not always be a money-saver, however. Some carriers, including one of the leading carriers in our area, quote exactly the same rate with or without commissions. So despite paying your broker/consultant a fee, you won't get any plan price reductions to compensate you for your troubles. And you'll short-change your broker without saving any money.
Now that you know the brokerage industry's best-kept secret, you have the tools you need to assure that the carrier you're using and the price you're paying are appropriate. Remember, average health insurance costs are about 10,000 per employee per year in many parts of the country, so a three to five percent difference in cost represents real money.
Jim Edholm is president of Business Benefits Insurance, an employee benefits planning firm based in Andover, Mass. His firm specializes in serving employers with up to 250 employees, and he has served employers on the East Coast for more than 25 years. He can be contacted at (978) 474-4730, via his Web site (www.group-insurance-guide.com) or via e-mail: email@example.com.