Is important to understand how brokers get compensated and how much they charge and earn. Under ERISA, disclosure is required but not all compensation is necessarily disclosed all the time. Compensation to a broker, can be received in the way of commissions and/or can come in the form of fees.
When commissions are paid to a broker or an agency, the commissions should be disclosed on Form 5500 as it’s reported by the issuing insurance company. The filing of Form 5500 is not required of the broker – it is the responsibility of the insurance company to provide information to the employer for the various line of coverage in force so that the employer can subsequently file an accurate 5500.
Fees on the other hand are not necessarily disclosed on Form 5500, because there is no insurance company paying these as commissions. Fees may be charged on a flat monthly amount or more commonly on a per employee per month basis. These fees may be paid directly by an employer or can be paid to the broker on behalf of the employer, but through the administrator such as a TPA.
Many brokers have the TPA simply add them into the TPA’s administrative fee and don’t necessarily itemize or disclose them. Brokers may feel embarrassed by disclosing the fee to their client, or they just choose not to have the client know how much they’re making. Some administrators may require that this be disclosed to the client while others may simply add it into their monthly administrative fee and choose not to disclose it.
Brokers can also get compensated on commission overrides. Once a broker exceeds a certain threshold of a book business with an insurance company, the insurance companies may pay additional compensation because the broker’s book of business is so large. Not only does a broker get compensated by commission on each client, but they may also receive a bonus override on their book of business. In some cases, the override may be greater than the actual per client commission. This can tend to limit the brokers desire to reach out to different markets for any given client/prospect because if they choose to work with a different insurance company at renewal, or at the acquisition of a new client they may not research the entire marketplace because they may not get an override. You can clearly see that a broker’s compensation may restrict or limit their ability to objectively go to the marketplace on behalf of their clients and/or prospects.
Another form of compensation can be received from a Pharmacy Benefit Manager (PBM) in the way of administrative fees or rebates. It’s not uncommon for a broker to add a small fee per prescription to the administrative fee charged by the PBM. It could be anywhere from $.10-$.25 per prescription and can amount to a sizable expense to the employer. In many cases this fee is not disclosed either.
Drug rebates can also be received by a broker. Drug manufacturers negotiate rebates with PBM’s and pay a rebate to that PBM based upon specific drugs are purchased by self-funded clients throughout the year. PBM’s may choose to distribute that rebate to various parties including themselves, the employer, or broker. I’ve seen offers whereby the PBM will keep 25% of the rebate, give 25% of the rebate to the broker in an attempt to get the broker to bring more clients to them, and give 50% to the client themselves. The rebates are not typically disclosed.
It is not uncommon for commissions to be added in at 15% of the stop loss premium. Commissions artificially inflate the overall cost of the stop loss premiums unnecessarily because it is added onto state premium tax, margins, underwriting expenses etc. Some stop loss carriers will disclose the commission in the contract or application, while others will not. It’s up to the broker to initially disclose commissions in a proposal.
All of the sources of revenue to a broker can add up to a sizable amount and be unknown to employer as to what they are paying. This can significantly increase the cost of the benefits program to the client. It’s also important to note that when a commission is in place on an insurance product and an employer gets a premium increase, the broker gets an automatic increase in their revenue when in fact, they may not have done anything in the way of additional services to earn a substantial increase.
You should be aware of the amounts of revenue your broker receives on all lines of coverage – whether it’s from fees or commissions. You just might be surprised.
Unfortunately, the brokerage business is one which is overpromised and under delivered. You don’t know what you don’t know.