They have to be quietly enjoying themselves in the insurance business this year.
Over in the investment industry, they've been scrambling to implement new disclosure rules requiring firms to show the dollar amount of fees paid for advice, and personalized rates of return. Clients have been empowered with information that will shred some long-standing relationships with investment firms.
Meanwhile, in insurance-land all is serene. Transparency on fees is not up to the standards of the investment industry, and that allows for commission levels that can be strikingly high. This situation infuriates investment industry people and every so often one contacts me to complain. Recently, one such individual did more than that. He also sent a copy of a disclosure statement sent by his property insurance broker.
The statement lists the commission the brokerage receives for each of the 19 companies it works with. Annual commissions for auto insurance range from 10 to 12.5 per cent, although a few firms pay up to 13.5 per cent. Property insurance offers commissions of 20 to 23 per cent. So if you use an insurance broker and pay $1,000 annually to insure your home, upward of $200 a year would be going to the broker.
Brokers may provide statements such as this to clients by mail or make them available online, and insurance companies disclose broker compensation on their websites. The information is out there. But if insurers were held to the same standard as investment firms, every annual policy renewal statement would break out the portion that covers commissions and show it in clear dollar terms.
People might get irritated with an investment advisory firm over fees approaching 2 per cent, an amount that would ideally cover the building and maintenance of a portfolio and financial planning. Over in the insurance biz, they get 20 per cent on a home policy for … what?
Insurance broker David Browne of Martin Merry & Reid Ltd. answers this question by observing that it's common for both commercial and residential buildings to be underinsured. In other words, a policy won't fully cover the full cost of repairs or rebuilding. The reason this happens is that people withhold details about their homes to keep premiums low, or they don't know what they need to report to their insurer.
To address this, Mr. Browne said his firm interviews clients about their homes to get an accurate picture of the coverage required. The firm also does such things as help ensure clients have proper coverage for liability, which protects against damage or injury to others. "The work that we do is more than just order taking," he said.
Might you save money on commissions by dealing with an insurer that sells directly to people and doesn't use a broker network? The investment industry certainly offers this model. You can pay full commissions to investment advisers who manage your portfolio, or pay vastly lower costs to an online broker that acts mainly as an order taker. But with insurers, there is no such differentiation according to level of service.
A year or so ago, I did a detailed comparison of home and auto insurance rates to see how competitive the costs my wife and I pay were. My conclusion was that there's no easy way to identify lower-cost insurers. Some firms using brokers had comparatively inexpensive rates, and some firms that sell direct were pricey. Over all, I was surprised that the costs for the direct insurers weren't a better bargain.
Brokers do offer some benefits over direct insurers, at least in my experience. We had our house and car insurance with one direct insurer and waits on the telephone to ask questions or make changes to our policies were typically about 45 to 60 minutes in length. We've found that answers from a broker, either by e-mail or phone, can be both easier to get and more reliable than what you hear from the order taker at a direct firm.
But even Mr. Browne agrees that service levels at brokers vary a lot. "There are lots of really good brokers, but there are some people who are cruising."
We don't have a lot of ways to fight back against high insurance commissions right now, but dumping a broker who works in cruise mode is definitely a start. Make sure your broker earns that 10 to 20 per cent.