In the insurance business, revenue for agencies and brokerages may be based on fees or percentage commissions. “Small” insurance transactions, such as the majority of personal lines purchases, typically are compensated by a percentage. Insurance transactions involving large premiums may be either a percentage of the premium or a flat fee for all of the services provided.

It is rare for an agency or brokerage to charge a fee for each specific transaction, such as an auto change.

Also, previous responses to producer compensation questions reveal that the role of the producer in the transaction dictates whether a fee or a commission is charged.

If the producer-middleman is representing the insurance company–that is, acting as an insurance agent–a percentage commission is the usual charge for service. However, if the producer-middleman is representing the insured, it is more likely a fee for services will be charged–especially if the premiums involved are significant.

This varies by jurisdiction, as some states do not allow fees to be charged by the producer if the client is purchasing insurance. Other states would allow charging a client both a fee and a commission.

The question for this column asked NU readers what components of agency or brokerage revenue and expenses, if any, ethically should be disclosed to clients. The question assumes that disclosure is required either by law or ethically by agency or brokerage policies or procedures.

The most striking aspect of the responses was that no one mentioned any need to disclose agency or brokerage expenses. It was a non-issue. If disclosure takes place, apparently the ethics of disclosure revolve around revenue, or that which is charged to the insured. This seems to be in keeping with disclosure techniques of other professions.

While the question for this column did not ask about the ethics of whether disclosure was necessary, many respondents weighed in with the belief that only brokers (in the legal sense) should be required to disclose revenues while agents–those representing insurers–ethically need not disclose compensation.

Typical of this type of response was one who wrote: “The auto salesman does not tell me his or his company's cut from the sale of a car. The doctor does tell me what he or she intends to charge. The salesman is working for the dealer. The doctor is working for me.”

Representative of those in favor of disclosure by all was this response: “The producer, if ethical and doing his or her job, should not only be able to explain the basis of the coverage recommendation but also disclose his or her compensation from all quotes to add transparency to the purchase.”

Opinions varied when respondents accepted that disclosure was required. Almost all respondents agreed that for personal lines and “Main Street” commercial accounts, compensation should be based on a percentage of premiums.

“Small independent agencies and most exclusive agents do not charge fees. Disclosure of commission levels should be sufficient,” said one respondent.

Many agents and brokers suggested that for these insurance transactions, the insurer print the specific commission percentage on the declarations page of the contract.

“The economics of an agency are such that the expenses involved in capturing and revealing commissions for thousands of small accounts would be excessive,” said one respondent. “Disclosure can be achieved by having the compensation shown on the declarations page.”

Most responses involved disclosure for commercial accounts with significant premiums. In these cases (almost always a broker account), many of these accounts are fee-based.

“Here is one situation where disclosure is important, especially if the broker is collecting both a fee and additional income from an insurer,” said one respondent. “In such a case, the broker should disclose whether or not he or she has a contract with the insurance company and the nature of the additional compensation to be received.”

A more general ethical disclosure statement was suggested by an association executive for any client where compensation is in any part based on commission: “In addition to regular commissions, we may be eligible to receive compensation based on profit-sharing or volume placed with the company.”

An underwriter, and former producer, agreed: “I do think each agent should disclose to their clients that the agency may receive a profit-sharing bonus from the insurer if all business placed with the insurer is profitable.”

These types of disclosure could be part of the “boiler plate” within a proposal to the client. In addition, an insurance company executive suggested that the insured “be required to sign a statement showing that they have received disclosure of compensation.”

Another producer even suggested using “after the fact” disclosure of any profit-sharing from the previous year's business. “The agency or brokerage would make known that such records were available as a public record and that they could be viewed at the agency or on the Web site of the agency.”

In summary, the differences of opinion over whether disclosure of compensation for agencies and brokerages is ethically required still exist among those in the insurance business. A few believe all forms of production compensation should be disclosed. A few think the idea has no practical or ethical merit. Most would be willing to disclose compensation if asked or required.

Of those who offered opinions as to what to disclose, all agreed that any fee-based system that also involved additional compensation from an insurer ethically must disclose any additional or even potentially additional compensation from the insurer.

Peter R. Kensicki is a professor of insurance at Eastern Kentucky University in Richmond, Ky., as well as a member of the Ethics Committee of the CPCU Society in Malvern, Pa.

“A few believe all forms of production compensation should be disclosed. A few think the idea has no practical or ethical merit. Most would be willing to disclose compensation if asked or required.”

Peter R. Kensicki

What Is The Next

Question Of Ethics?

You have noticed some clearly illegal, and therefore unethical, behavior on the part of one of your competitors. If this act were made known to the insurance regulator, the competitor would probably lose his or her license to sell insurance. What is your ethical obligation?

Please forward your responses to Dr. Peter R. Kensicki at [email protected] or Eastern Kentucky University, 107 Miller Hall, Richmond, Ky. 40475-3101. The identities of all those who respond will be kept confidential.