We encounter some competitors who give our business a bad rep. In general, most insurance brokers work very hard and do the right thing, but some do not. Most brokers earn a 10% (sometimes 15%) commission on the placement of your coverage. That commission is gross revenue for the brokerage. The brokerage then pays its overhead (rent, highly paid employees, and its broker malpractice premiums et al) and that leaves profit, which is not huge.
So if you pay $45,000 for your malpractice insurance coverage, the broker is paid $4500 by the insurance company. I write ‘paid by the insurer,’ since this commission is built into the rates. If you went directly to an insurer to buy your coverage, the insurer would not lower your premium for the broker commission; it would keep the money even if you have no broker.
The next area of compensation for a broker is fees. An insurance broker has to disclose any fee charged to the client by law as broker fees. You will see fees ranging from $350 to $1000. This is extra compensation that a broker charges to cover his/her overhead. Many brokerages cannot make a profit on premiums below $50K or even $100K depending on the type of service they provide, and the expense of the staff providing those services. The only other fees that you will see that are normal and legitimate are premium taxes and a stamping fee (effective 2/1/10 at 3.225% for CA). This money does not go to the broker, but to the state and the 3rd party company who files the tax, respectively.
We encountered a brokerage who charged 30% of the premiums in fees, and 15% in commission so its total compensation was 45%. We will call this broker ABC. It hid these fees in the insurance quote, and called them policy fees, binding fees, underwriting fees et al. This is not ethical, since all these fees should have been called broker fees since that is who these fees are paid to.
If you ever see fees other than a broker fee and premium tax on a quote for your medical malpractice insurance, ask questions. Also if you are financing your premium, make sure you read the fine print on your premium finance quote. Most brokers will arrange financing and will charge a small fee, which slightly increases the interest rate.
But the ABC broker we found, who was charging the 45% compensation was also charging big fees on the financing. So an interest rate that should have been 8% or 9% was in fact 22%, since the broker added another 5% of commission which it buried in the financing. Therefore the total compensation was 50%, unbelievable!
The other sign that you have a non-ethical broker is if he/she pushes you toward a Risk Retention Group or RRG, without offering an “A” rated AM Best insurer. AM Best Rating is an industry rating system for insurance companies, that’s not fool proof but considered good for evaluating the financial strength of medical malpractice insurers. In my opinion, RRG’s are a very legitimate option for malpractice insurance, if the financially rated insurers are unaffordable or they will not cover you for your risk. Brokers like ABC love to recommend RRG’s since they can be cheaper than a normal insurer, because RRG’s charge for reserves like insurers do.
Brokers, like ABC, offer doctors RRG quotes with big savings, and will then add big fees to that cheaper RRG insurance quote. Here are some concerns associated with an RRG, which a broker should explain prior to placing you with one:
Author: William D. Dyer
Source: ezinearticles.com
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