Recently, a friend of mine cornered me at a party to tell me about this weird encounter he had with his agent. I was stunned because it’s rare that anyone comes up to me at a party to talk insurance.
Apparently my friend had been to his insurance agent recently to get a quote on his auto insurance and to purchase a renter’s policy for his 28 year old son who was finally moving out.
After exchanging greetings and asking about each other’s family they got down to business. His agent reviewed the coverage he quoted including some increases and additions of coverage he was recommending. My friend indicated he understood and was fine with the changes and wanted to know the premium.His agent gave him 3 premium quotes with companies will merely call A, B & C.My friend looked at the quotes and noted company B was the least expensive at $990 followed by company A at $1100 and then company C who had the highest premium at $1320. His agent then went on to say that although company B was the least expensive their claims handling was slow and that was partially because they had a habit of “nickel and dime-ing” customers on claims.He also indicated that company C tended to be on the high side when it came to premium but their service and claims handling were exceptional. The agent then informed my friend that company A was a very good value and who he recommended. For the extra $110 over company B their service was excellent and they also offered an account credit for writing his home.
That’s when things got weird! My friend’s agent said there was a pending regulation coming requiring all insurance agents to inform their customers about their compensation. Since it was on the way my friend’s agent indicated he was already making it a practice. He then advised my friend he made a 15% commission on company B’s policy, a 12% commission on company A’s policy and a 15% commission on company C. He told him that he had the opportunity to earn a 3-5% contingent commission on both company B and C and currently was on track for 5% on both. He indicated that company A provided him with a supplementary commission each year based on his prior year’s losses and profitability. Because of a serious loss one of his clients had last year he was not entitled to the additional commission this year.
My friend was flabbergasted! Being a businessman he understands the need to generate income to run your business, train staff and keep up with technology. Based on his agent’s proposal it was quite apparent he could have made more money by selling either company B or C’s policy. Company B’s policy was the lowest premium and had the possibility of generating $198 in commission. Company C’s policy was only $30 higher than my friend’s current premium and my friend would have bought it considering the increased and additional coverage it provided. It had the potential of earning $264 in commission. So his agent recommended a policy generating $118.80 in commission instead of one for $198 or $264. My friend always made purchases based on a value proposition.As long as he felt the cost of a product or service was equal to or greater than the value it provided then it was a worthwhile purchase. After all the time he wasted on the auto quote my friend told his agent to just select the renter’s policy he would recommend and he would buy it.When he found out the premium was less than $150 he was glad he did.
Most consumers appear to make their decision based on the price of a product not how much the provider earns from it. If they get 4 quotes for $1,000 they are more concerned with the quality of advice and service they get from the agent vs. how much he makes on the sale. They realize and are constantly advised to shop around and make their purchase on the price of the insurance and the coverage it provides.
How much the agent makes never comes into the equation.
In the 15+ years I was a retail agent, I can only remember one time when what I earned came up in a conversation with a client. They had a totally unrealistic idea of what I earned and when I told them the accurate amount there were surprised how little it was for what I had to do.
The story about my friend and his agent is fictional, however it could become reality. This type of discussion may apply to every client unless we convince the Insurance Department that mandatory disclosure is not necessary and is definitely not necessary at this level of detail.
These discussions came about as a result of the Spitzer investigations which had nothing to with the average agent or client. These were large corporate buyers of insurance who in most cases had knowledgeable risk managers working to protect them. Those risk managers totally understand insurance and were in a position to require any agent or broker working on a proposal for them to provide information on how they are compensated. It would appear they either got lazy and complacent or were incompetent.
I understand and appreciate the insurance department’s desire to protect consumers. I just don’t think that mandatory disclosure will achieve much if anything. It will however add to the cost of the product and make the buying process longer and more confusing.
