What lies ahead for agency compensation? Agents could benefit from incentive pay plans replacing contigent income

By | March 12, 2007

Incentive pay plans for agents that some insurers are implementing to replace discontinued contingency compensation could work out better for agents than the programs they are replacing.

A handful of major carriers banned the use of contingent commissions at the beginning of 2007. Travelers and Chubb were among the insurers that announced plans to replace contingent commissions with new supplemental compensations programs in 2007.

At the end of the day, the new compensation programs could work out even better for agents and allow them to know sooner what their year-end bonus might be, according to agent association leaders.

While the changes appear to be positive, these leaders are still urging insurers that have not altered their agent compensation strategies to hold off on doing so, at least for awhile.

“Agents will be able to plan for the future,” said Bob Rusbuldt, chief executive officer of the Independent Insurance Agents and Brokers of America, at the 44th annual Joe Vincent Management Seminar in Austin, Texas in January. “They will know at the beginning of the year what their bonus check will be at the end of the year.”

With many current contingency programs, agents do not know what they will get at year-end because they don’t know if they’ll be profitable.

While some agents seem to think, “so far, so good,” Rusbudlt adds others are maintaining a “wait and see” attitude.

“They want to wait and see what their factors are going to be and see how this is going to work over the course of 2007,” he said.

David VanDelinder, executive director of the Independent Insurance Agents of Texas, said that despite the change in compensation, the new programs from both Travelers and Chubb will continue to compensate agents for “exactly the same performance that they did under the old compensation agreements,” including growth, profitability, retention and other factors. “So there is really no change in the basis of that compensation,” he said. “It’s really a change in the manner in which it’s paid.”

“There still is incentive to this,” Rusbuldt said. “The good agencies, the profitable agencies, will be rewarded.”

Whether other carriers will follow suit and change their compensation structures remains to be seen, Rusbuldt said.

“I’ve received a number of calls from super regionals not involved in any of the investigations,” Rusbuldt said. “I advise them that they should wait and see how this unfolds in the marketplace. … There’s no rush for any of these companies to enter into any new supplemental compensation arrangement, but it may be the right thing to do.”

VanDelinder says agents in Texas are still a bit edgy about the proposals.

“These companies are tampering with a very important part of their compensation,” he said, noting a recent best practices study that found more than 80 percent of pre-tax profit in an average agency is attributable to incentive compensation. “It makes agents very nervous.”

Rusbuldt added that both Travelers and Chubb have done a good job at communicating to their distribution forces about the changes in their compensation programs.

“From what I’ve heard from those agents, from what they know, they believe that these companies have come up with plans that are fair, and plans that could work,” Rusbudlt said. “But again, it’s the fear of the unknown,” he added. “But I will tell you that the agents that I’ve talked to that have studied this are actually pretty positive so far.”

Fair and equitable
Rusbuldt said some carriers discussed plans for their new compensation programs with their larger, more preferred agencies.

“I do commend those companies for checking with some of their agents and really trying to come up with compensation plans that are fair, equitable, and competitive in the marketplace,” Rusbuldt said. “I do know that the CEOs of Travelers and Chubb have said that they want to come up with competitive and fair compensation plans. They truly believe that these plans will be better for agents because they can plan in advance and budget better in their agencies.”

He noted that one of the companies has added $25 million more than it would have planned to pay in contingencies for its new supplemental compensation program. “They added it as sort of a bonus for this transition period of time,” he said. “These companies are independent agency companies and they are going to be successful based on the success of their distribution force and they want to make sure that they are fairly compensated.”

IIAT’s VanDelinder noted it’s to the advantage of carriers to compensate their profitable agencies fairly. “They spent the last 10 or 15 years lowering base commissions and shifting that compensation to the back end of the process,” he said. “Why? Because they want business that’s profitable. … So it’s to their advantage to have a reasonable compensation system that continues to get good business to their carrier. That’s how carriers compete in an agent’s office.”

Disclosure
When it comes to compensation disclosure and transparency, Big “I’s” Rusbuldt says he’s concerned about creating vast inefficiencies and burdens on agents.

“If you have 10 carriers in your agency, with 10 different disclosure requirements, 10 different disclosure forms, it could create incredible inefficiencies and chaos in an independent agency,” he said.

“Plus it’s patently unfair that insurance agents should be singled out to disclose compensation during a sales process which is a sensitive time in dealing with a new customer,” VanDelinder added. “I don’t know of an agent that would deny that information to a consumer who was interested and wanted to know what that agent was making to place that business,” he noted. But the issue of disclosure is not a consumer-driven issue, he said.

Whether the industry will move to full disclosure on all compensation, not just incentive compensation will likely depend on geography.

“It depends on the state you’re in and it depends on your regulator,” Rusbuldt said. California has advocated for full disclosure of actual dollar amounts or percentages of compensation, he noted, but in other states, “this hasn’t even been a blip on the radar screen.”

Rusbuldt reiterated that disclosure has never been a consumer concern. “We’re not hearing that consumers care about what agents make,” he said. “What they care about is the price of the product. …

“Frankly, why don’t we disclose how much Geico spends on advertising if you want to get to the ingredients and the factors of what composes the make up of that policy,” Rusbuldt said. There are many factors that make up the cost of a policy and agent compensation is just one small part of it, he said.

Regulatory help nonexistent
Consumers can turn to their state’s insurance regulator in times of crisis, but agents and brokers have received very little help from the nation’s regulators on agency compensation and disclosure, Rusbuldt maintained.

“The silence from the NAIC (National Association of Insurance Commissioners) has been deafening,” Rusbuldt said. “And frankly, we’re disappointed that the NAIC has not had a more active role on these issues that are of vital importance to independent insurance agents,” he said.

VanDelinder added that while Texas agents have enjoyed a great relationship with their commissioner’s office, the state’s insurance department has not been “out in front” on the issue.

“It’s very difficult for them to get out in front on an issue that’s being adjudicated and is being advanced in the public eye by these attorneys general,” VanDelinder said. “So, it’s a very politically difficult issue for them to take on in each of the states,” he said.

“I don’t know why the NAIC has not been all that engaged on this, but here you should have them advocating to maintain legal incentive compensation systems and standing up to the AGs when they think the AGs are wrong,” Rusbudlt added. “Why haven’t we seen that from the NAIC?” he asked.

What’s next for compensation?
Is there any way to predict what will come next for agency compensation?

“I think this is going to rapidly morph into a pure disclosure issue,” Rusbuldt said. “I think that the issue of incentive compensation will go away in the near future, and the emphasis in the insurance industry will be on transparency and disclosure. That issue is not going away. I think that issue is going to become one of the pre-eminent issues at the state level, and at the federal level, and it’s going to even evolve past just insurance agencies.”

Despite a general fear of the unknown among independent agents everywhere, Rusbuldt says agency compensation, in whatever form, will work out well. “As time goes along, I think the factors are going to be the same and I think this could all work out well for agents at the end of the day,” he said.

To watch the complete video interview with Rusbuldt and VanDelinder visit:

https://www.insurancejournal.com/broadcasts

Topics Carriers Texas Agencies Profit Loss Talent Chubb

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