There has been much written about the continued efforts to remove broker compensation from the MLR calculation, and we appreciate the attention to the issue and are hopeful the efforts will be successful.
However, we feel some of the points in support of the effort miss the mark and actually perpetuate some unhealthy beliefs.
NAIFA explains that the MLR calculation does broad-reaching damage to brokers, employees, and the consumers who rely on the brokers. Because brokers provide so many services like analyzing clients’ coverage needs, helping individuals get claims approved, and providing wellness programs, they become the de facto human resources departments for many clients. They’re making the case that brokers cannot continue to offer these services without fair compensation.
To that point we completely agree; nobody can truly work for free. However, the implication that broker compensation has to come in the form of carrier commissions misses the mark.
Here’s the problem
The point of the argument is that all of those services are in jeopardy if agent compensation continues to apply to the MLR calculation. The logic is that as carrier MLR calculations drive reduced commission schedules, then agents will no longer be able to provide those services. And to that point, we don’t agree.
It has never been the carrier’s responsibility to “pay” for the services agents provide to their clients. With their commission schedules, the carriers are paying for agents to distribute their product and assist with the service of that product. Period.
All of these services combined are incredibly valuable to a business owner. Producers just have to believe enough in their value (and they should) to ask to be paid fair compensation for what they are doing.
Reasonable business owners are willing to pay reasonable compensation for real value.
While we want to see the change in the calculation structure, we believe it’s important to also discuss the realities and bigger picture around this issue.
Carrier commissions aren’t coming back
The most obvious reality being that even if agent compensation is removed from the MLR calculation, it won’t matter. The commission genie is out of the bottle, and she ain’t going back in. Agent commissions are a significant expense for the carriers, and like any other business managing expenses, they are going to keep the expense as low as possible. MLR has simply provided them a convenient excuse to do what they always wanted to do.
If you think carriers who have already slashed commissions would come back with open hands and open checkbooks after successful “MLR reform” and say, “Boy we’re really glad the government is now allowing us to pay you more, here’s your old commission schedule,” you’re delusional.
And, you know what? We don’t blame the carriers. As long as they are paying producers fair compensation for the value they deliver in distributing and servicing their product, then they are being reasonable. It’s up to the producers and their agencies to work up to the courage to ask to be paid for the additional value they deliver to their clients. That value is real, it makes a difference, and it’s worth paying for.
In the case where carriers are removing commissions completely, you will have no choice but to substantiate your value and establish your own compensation. As painful as that may be at first, it's much better than leaving your revenue fate in the hands of the carriers as they nickel and dime away your profit margin.
The limitations of the traditional agency business model
Agencies can, and must, continue to provide these services and should be stepping up and providing even more than they ever have in the past. And yes, you can do it regardless of MLR: it should be coming in the form of fees and charging clients for the services and value you deliver rather than limiting your revenue stream to carrier commissions.
Nowhere is it written that agencies must employ a business plan that limits them to simply reselling carrier products as a means to serving their clients. Or short of state-imposed limitations, that all revenue earned by the business must come through carrier commissions. That’s our own industry head trash. And it’s a model that reflects brokers working for the carriers as distributors and servicers of their insurance product, and not as advisers to the actual employers they purport to serve.
This distributor model has been perpetuated because it has “worked” in the past. Agencies have received overly generous commissions from the carriers and have, therefore, not had a need to seek alternative revenue steams.
Sure, there are state regulations to consider when it comes to fees; however, that should not stop you from operating as an independent business that has made a commitment to serve the needs of your clients. Learn the rules of operation within your state and figure out how to remove the handcuffs of being a distributor and re-imagine your business.
In the re-imagination, just look to the arguments being put forth in the MLR discussion for inspiration on the critical role being played by agents: the complex issues you help clients navigate; the valuable advice you provide to your clients; the fact that the agent is often the de facto HR department for those same clients.
Get paid what you’re actually worth – your business depends on it
Every business, especially in our industry at this seminal moment, must be honest about the value they deliver to their true clients. To that point, here’s the litmus test. If you woke up tomorrow and there were no longer any commissions at all and it were up to you to go out and negotiate your compensation from the very first dollar, would you be able to maintain your current revenue? Would you take a serious pay cut? Or, would you be able to get an increase? Because it’s happening right now.
In surveying brokers, NAIFA reports that 75% of agencies have seen decreased commissions since MLR went into effect in 2011, and another 13% are reporting that commission cuts are coming soon.
And sadly, the response to all this commission cutting doesn’t seem to be universally stepping up and finding innovative ways to both help clients and save their own agencies, but instead backing off to “protect” the revenue they do have.
Almost one quarter (23%) of agents who have experienced reduced commissions have, in turn, reduced services for their clients, and 11% have stopped selling and servicing policies for individuals, while 4% have gotten out of the health insurance market altogether. And it goes further than the clients. 13% of these agents have laid off or reduced support staff hours, and 27% say they will be forced to reduce staff if commissions remain depressed.
Here’s the flip side
Nearly half (44%) of the agents surveyed say that they will charge fees for all of the additional services if allowed. This is where we should be focusing our attention.
Instead of fighting to retain a limited growth commission schedule, we should really be focusing our efforts to relax the regulations on brokers’ ability to charge fees. Then we’d be putting the compensation discussion squarely in the hands of each producer and agency, where it really belongs. And at that point, we could all focus on helping agents re-imagine their businesses so they can hire more people instead of thinking about laying off the ones they do have.
Photo by www.stockmonkeys.com.