These are the best of times; these are the worst of times. It depends on your outlook. There is chaos and uncertainty everywhere as brokers wait and watch how the National Association of Insurance Commissioners (NAIC) will determine the medical loss ratio calculation. If the percentage of premiums carriers can spend on administrative costs is limited to 20 percent for individual and small group policies (and 15 percent for large group contracts), broker compensation will, by necessity, be reduced. Health care reform has already caused some carriers to jump early with formal announcements of commission reductions.

Anticipation of the NAIC outcome has prompted one recent argument – that broker commissions not even be included in this calculation. The statement is based upon the fact that commissions do not benefit health insurance companies as they relate to the loss ratio. The carriers are simply providing a service by collecting these dollars and then passing them on to the broker. The argument being made is that carriers are providing an administrative convenience for their members/clients which reduces overall administrative expenses. The thought process is, as with some taxes, those commissions should be outside the ratio. The National Association of Health Underwriters (NAHU) is spearheading this proposal and while it may be a long shot, the effort still has some potential.

What is the reality? Brokers provide value – a lot of value. Yet, why are we afraid to stand up and shout to be heard? Simply put, why are we so dependent on commissions? Why not charge fee for service? Finding the answer is much easier than you think.

When my brokerage firm first developed analytical reporting, which ultimately became our Decision Master® Warehouse tool; I approached several of my clients. I reviewed exactly what we were making in commissions and explained that in order to provide all of our services, I would need to charge additional fees on top of commissions (regulations on this process can vary state to state). When the clients were presented with what we could do for them and what our overall fees were, they agreed to pay the additional monies. This allowed us to highly service the accounts and also retain a profit. �

The bottom line is this: I don’t care if my client pays me in the form of commissions or consulting fees – just pay me! In order to go down the road of fee for service, you, as the broker, must be very confident in the package of services your firm provides. If your goal is simply to place insurance, figure out a new strategy because that game has just about played itself out.
Once you evaluate what your firm can do and accomplish (that is a blog by itself!), assess what will be accepted as payment. The easiest way is to consider what you would have made on a standard commission deal and then charge that as a consulting fee. If you need more, for whatever reason, go for it. Back it up by selling your firm’s value.

I recently met with a broker who did an internal rough profitability analysis to determine what is needed to profitably service clients. His analysis confirmed that the yield is usually 20 to 30 percent less than what the current broker is making. He uses the lower fees as a lever when selling to clients. Personally, I prefer not using lower commissions to get business, but brokers need to be aware that the spotlight is on and focused directly on what they make.

At the end of the day, most parties agree that brokers provide a critical and valuable service. We should not be afraid to explain our worth and receive payments directly from our clients. This will take practice and some initial work. If done correctly, your efforts will create a foundation to build organic growth through 2014 and beyond.