After last year’s Quality of Advice Review (QAR) it looked like broker commissions were safe. However, once again, the commissions brokers receive for selling an insurer’s product are a focus of attention for regulators and the government.
The change comes after an ABC-TV Four Corners exposé found serious issues with commissions in the strata sector. There’s also a federal government inquiry considering how these commissions impact insurance affordability.
At this inquiry’s public hearing in Sydney, the Australian Competition and Consumer Commission (ACCC) reiterated its view against insurer commissions for brokers in any insurance line, not just in strata.
“We consider that commissions create an inevitable conflict of interest,” said Michael Eady, the regulator’s general manager of insurance monitoring and financial services. “We think a way to manage that conflict of interest would be for those commissions to be banned.”
Two years ago, in its submission to the QAR, the National Insurance Brokers Association of Australia (NIBA) staunchly defended commissions.
However, now commissions need defending again.
How do brokers see the current situation and what are the arguments against the ACCC’s support of a ban?
“I think a lot of us saw the writing on the wall that this commission debate would come to the forefront, particularly in the strata space which has clearly been under scrutiny recently,” said Schalk Van Der Merwe (pictured above), managing director of Sydney-headquartered Omnisure.
In the strata sector, he said, brokers would definitely encounter commissions and transparency issues.
“Either dealing with brokers who play heavily in that space, or strata managers,” said Van Der Merwe.
His firm operates on a hybrid model and charges a commission or fee depending on the customer.
“Where we might use a fee model for a particular customer, for example, is if they have a large ISR [industrial special risks] or a property program,” said Van Der Merwe.
He said for those businesses, the cost of taxes on top of commissions can make premiums very expensive. Charging a fee brings down the cost and can save the customer many thousands of dollars.
“That’s one way where a fee model is not only helping brokers to retain their profitability in terms of their income but is also then giving a direct benefit to the customer in terms of taxes and charges saved as well,” said Van Der Merwe.
The fee system works in the mid-market sector but for smaller, SME -style firms, brokers often get paid from the commission on the insurance they sell.
One important point he made was that the percentage commission varies more according to product class than the particular insurer.
“Generally speaking, the commissions can be as low as 10% on motor and commercial motor or motor fleet, but commissions can be as high as 25% on some of these negotiated products with the insurers,” said Van Der Merwe. “The vast majority of our business is negotiated directly with the insurers where the average commission rate would be 15% on the base premium.”
Brokers operating more in the SME space with smaller firms tend to rely more on commissions. The Omnisure leader said as his business and clients have grown in size, his firm is relying less on commissions and more on fees.
He said his firm has never had a customer complaint about fees or commissions.
“I think the whole industry is moving toward the transparency model and it’s probably less about what form does that income take, rather, is the way the broker’s earning that income transparent and does the client know about it before they’re able to make the decision?”
One issue raised by the Four Corners programme was how some strata brokers are only presenting the apartment owners and strata manager with a quote from their preferred underwriter or insurer.
Insurance Business asked Van Der Merwe if there is a standard approach to the number of insurer quotes that are presented?
“It really depends,” he said. “If we’re employing a strategy for a claims made basis policy, there are implications from offering those more cost effective quotes on the client’s broader coverage.”
But he said if savings can be made, his brokers look to obtain those quotes and put them in front of customers.
He said the Steadfast technology his firm uses allows them to put about 10 quotes from all the major insurers in front of a customer.
“They will then have that range of pricing in front of them, so they can see the broker has done the job in terms of looking after, not only their best interest in terms of coverage, but also in terms of pricing,” said Van Der Merwe.
Martin Van Rhoon, director of Acacia Insurance & Risk Services, also agreed to answer questions about commission issues.
“It’s a good question,” he said. “Just like any other professional service industry, it makes sense to be remunerated for our services and advice and, importantly, for this remuneration to be transparent for clients.”
Van Rhoon – whose Sydney brokerage is currently merging with Omnisure – said the issue is less about whether a broker charges fees or commissions or a combination.
“As an adviser you should be comfortable disclosing the remuneration you earn for your services to your client – and if you’re not, then you’ve got it wrong,” he said.
He adde, at the end of the day, a broker should be providing advice in the best interests of the client.
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