Insurance agency principals know all too well that income from sales commissions is volatile. Carriers sometimes reduce commission rates in response to financial pressures. Soft markets can deal a severe blow to an agency’s bottom line. A $250,000 account can become a $200,000 account in one renewal. If the agency keeps it, they will do the same amount of work for the client for much less commission.
In order to regain some control over their revenue streams, some agencies are looking at charging their clients fees. Charging fees, however, brings questions about whether the practice is permitted, how high the charges can be, how to structure them, and how clients will respond.
The first question an agency must answer is whether state law permits it to charge fees at all. In many states, the answer depends on the capacity in which the producer is acting. For example, New York permits brokers (who are representing the insured) to charge fees, but forbids agents (representing the carrier) from doing so. Other states, such as Texas, permit both agents and brokers to charge fees. If you are unsure what your state permits, check with the insurance regulator or with your local agents association.
State law may require an agency to document the charge in a form explaining what the charge is for and signed by a representative of the insured. It may also require the agency to maintain a record of the agreement for a period of time such as three years. The California Insurance Department has an example of a broker service fee agreement on its website.
Agencies that charge fees usually do it in one or both of two ways.
General service fees. These are fees not tied to a specific service, or that are charged for the wide variety of services an agency may provide to a client during a policy year. For example, some agencies may charge a client for the work of obtaining coverage from a carrier the agency does not represent. This might be when the agency must access the services of a wholesale broker or when coverage must be obtained from the surplus lines market. Agencies commonly receive reduced commission rates in these situations.
Other agencies may charge for the cost of issuing certificates of insurance, particularly for clients who need hundreds of them issued each year.
Specific service fees. These are charges an agency makes for a defined piece of work or set of services. Examples include consulting fees for reviewing insurance policies, health plans, benefit programs, and others; and third party administration services for workers compensation, medical, and disability insurance programs.
Agencies must decide what services to charge for and in what situations. Bear in mind that regulators may determine that charging different amounts for the same service for similar clients may violate state anti-rebating laws.
Many states require agencies to provide disclosures to their clients about both commission and fee income. Some have adopted laws based on a model act written by the National Conference of Insurance Legislators (NCOIL.) The Independent Insurance Agents & Brokers of America has a table on its website that describes the disclosure requirements in states that have them.
Some states also impose caps on how much a producer can charge. New Jersey, for example, limits all charges per policy per year to $20. New York places no set limit, saying only that charges should be reasonable in relation to the provided services and that they should be consistent for similar insureds. Check with the regulator or agents association in your state to find out the rules that apply to you.
However, even if your state does not limit what you can charge, the marketplace probably will. Prospective clients may be hesitant to tell you what, if anything, their current agents are charging, but conversations with peer agents and clients are probably the best way to find out what the competition is charging.
Another factor to consider when charging fees is that your competition may not be charging fees. If you charge a fee, it’s best to associate a true value-added service with it to justify charging the fee, especially if your competition is not charging a fee. It’s best to be consistent, either charge the fee or don’t. Removing a fee if because your client balks at the rate will make you look bad as it would mean you really didn’t need to charge the fee in the first place. Don’t sacrifice your reputation, it’s really not worth it and words gets around, especially with social media and review sites.
Some agencies may decide that charging fees will alienate clients and therefore are not worth charging. Others may see it as a reasonable way to recoup costs that declining commissions do not cover. Whatever you decide is best for your agency, set your fees in a thoughtful, fair manner that will comply with relevant laws and support your business.