Archive for the ‘Insurance Compliance’ Category

Conflict = Commerce

If you are negotiating an outcome among different parties, Trust is a paramount factor in the negotiations. Try too choose an independent,fair facilitator,rather than entrenching in a position and fighting it out with attorneys. It is not to their advantage to resolve your issue without considerable conflict. This is a lot of the work I do for people. Find a trustworthy facilitator,air both sides of the issue, and FIX IT! Don’t let a whole tribe of people charge you an arm and a leg to do what is (and was) right in the first place. Remember Conflict = Commerce!

Commission Compensation

Commission Compensation

One of my colleagues recently postulated to me, “Maybe a homeowner’s product should be more like life insurance and pay a higher up front commission with a lower renewal commission. Perhaps that would provide an effective incentive for agents to do a better job of initial placement.” My response, “I do not think that will work. Most agents will just take the higher up front commission and still not do the work properly.”

I still remember one of my early consulting projects. This occurred many years ago. A competitor came to me with a non-profit entity and asked me to do a risk assessment and to recommend changes. I said, “Why don’t you do it yourself?” He said, “There is not enough commission to make it worth the time and effort.” If I remember correctly, the risk assessment cost about $ 7,500.00. In the initial part of the process, the agent asked for my hourly rate and I said $ 100 .00 per hour. He raised his eyebrows and said… “Hmmmmmm a hundred dollars an hour?????… Guess I am in the wrong business!” I did a professional risk assessment and generated a comprehensive report, and the agent restructured the program. If I remember correctly, the agent made about $ 12 ,000 .00 in COMMISSIONS, EVERY YEAR! And HE’S in the wrong business??????

In my mind, simpleton though I may be, commission compensation makes almost as much sense as hourly pay! You and I both know that we have employees that we could pay
$ 3.00 an hour and they would be overpaid, we have other employees that we could pay
$ 100.00 an hour and they would still make money for BOTH OF US!

Likewise, we write policies for $ 5,000.00 in PREMIUM and have to issue 300 certificates of insurance. We write other polices where we get $ 50,000.00 in COMMISSION for just submitting an application. I am not so sure this is an appropriate use of a consumer’s premium dollars, or reflects proper compensation for a distribution entity.

If we go to a fee based structure, commissions and fees would likely shrink as we would only get paid for our true effort. It would also force each of us to add value AND make it apparent to the client we are adding value AND illustrate the types of value we add (not so easy)! In fact the commission incentive is often contrary to the interest of the agent, the client, or the insurer. In one case, over a six year period I took a large marine account, who had considerable resources at their disposal, from a fully insured plan to a reasonable retention program saving the client over $ 300,000.00 in annual premium. The process of reducing the client’s overall cost of risk by this amount, reduced my commission income as an agent from over $ 55,000.00 to less than $ 17,000.00 in annual commission. What kind of perverse incentive is that??? Most of us would not endure a fee based structure. We would fold under the increased fee/commission scrutiny by the client.

The real reason most insurance carriers would like to nuke agents (and they would nuke agents If they could figure out a way to do it) is that in the macroeconomic analysis, insurance is an expensive way to finance risk, and agents commissions are a big slice of that expense. Commission compensation is, however, the only way we can find that is efficient and manageable.

I am a zealous proponent of agents. I feel risk bearing is a commodity. However, risk bearing without the benefit of competent, trustworthy and CARING risk management advice, is nearly useless.

I am of the opinion that insurance is one if the few products you can purchase where it is impossible to evaluate your purchase decision until it is too late to do anything to modify your previous decisions. One of my mantras is, “Buying insurance over the internet is like buying an old fire extinguisher at a yard sale and putting it in your kitchen in case you have a fire. You never know if it is going to work until it is too late to re-evaluate.” Flood insurance is the only line of business I have experienced that allows a post-loss evaluation of any of the pre-loss work done on behalf of the client.

So… I think commission compensation is necessary, but the underlying problem is, commissions are in no way linked to agent performance except as to the volume of premium dollars generated by the agent. Contingent commissions are nearly the only form of incentive influencing performance, and contingent commissions have been attacked as creating unfair bias. The inverse relationship of commission compensation to the goal of reducing the cost of risk to consumers generates a clear conflict of interest among the parties… consumer, agent and insurer.

Am I wrong or am I disillusioned?

Is Insurance a Commodity? (7) Final

This discussion of Commodities centers on recent attempts by insurers to circumvent agents and sell insurance products over the internet.    I am convinced that insurance is not a commodity as it is not a product that can be sold in an unmodified state and be used properly.   It would be like purchasing an unassembled, complicated piece of equipment and having no directions for assembly.  It appears to me that is the case with “unbundled” “risk bearing” or to put it another way, the thing Insurance companies sell is a “risk finance” mechanism.    Agents add value to this product by showing purchasers how to use it and by adding their own body of knowledge to the process!


In my quest to determine if I think Insurance is a commodity, I am surprised at my opinion.    I think perhaps “Insurance” is a commodity in that it is a raw product used in the chain of “production” for “protection” of your insured (speaking from an agents standpoint.)

“Risk bearing” (an insurer) is risk finance, but as I pointed out earlier, risk bearing without risk management advice is not really an end user product, as much as some insurers would like to think so.   BOTH the Insurer and the Insured need to advice of the agent to write or use the product effectively.

My opinion turns out to be that risk bearing is a commodity but insurance is not.  No bias intended here… the use of insurance without the benefit of risk management advice is rather foolish. Consumers are not trained in how to use risk management tools, how financial decisions in this area do or do not make sense, consumers do not understand relative pricing nor insurer reputation and consumers do not understand the consequences of making inappropriate decisions that cannot be changed AFTER the loss.


What the consumers  know will not hurt them.

What they do not know will not hurt them, as long as they know they do not know it.

What the consumers do not know, and do not know they don’t know, will create real post loss problems.


The independent advice of your agent is invaluable, both before and after the loss!

A Definition of “Commodities”. Is Insurance a “Commodity” (2)

This discussion of Commodities centers around recent attempts by insurers to circumvent agents and sell insurance products over the internet.    I am convinced that insurance is not a commodity as it is not a product that can be sold in an unmodified state and be used properly.   It would be like purchasing an unassembled, complicated piece of equipment and having no directions for assembly.  It appears to me that is the case with “unbundled” “risk bearing” or to put it another way, the thing Insurance companies sell is a “risk finance” mechanism.    Agents add value to this product by showing purchasers how to use it and by adding their own body of knowledge to the process!


To decide if insurance is a commodity, it is necessary to determine the definition of a “Commodity”.

Source:   Black’s Law Dictionary:


“Those things that are useful or serviceable, particularly articles of merchandise movable in trade.

Goods, wares, and merchandise of any kind; movables; articles of trade or commerce.  Movable articles of value; things that are bought and sold.   This word is a broader term than merchandise, and, in referring to commerce may include almost any article of of movable or personal property.

Staples such as wool, cotton, etc. which are traded on a Commodity Exchange and on which there is a trading in futures.”

Blacks Law Dictionary end of definition.

My beginning comments to this discussion:

“Rick Bearing” or “Risk Finance” may possibly meet the definition of a Commodity.   But that commodity product is has little value unless accompanied by knowledge of risk management.   Thus, insurance without advice is a recipe for post loss disaster.  Our “value” or “power”, as an insurance agent, rests in the asymmetry of knowledge between the client and the agent.

There will be more to follow this post, but we need to realize the reason we exist is that there are certain things a client does not know about how to USE insurance that WE DO know.

The raw product of risk finance may be “somewhat” of a commodity.   “Risk Bearing” or “Risk Finance” as a product may be able to be traded on a futures exchange (like commodities), but the added value of the “body of knowledge” of risk management” and the “body of knowledge of risk finance” as a “tool” of risk management is the added value a quality insurance agent, broker or consultant brings to the table.

This reminds me of what I have discussed with many of my consulting clients:

“What you know, likely won’t hurt you”

“What you don’t know, likely won’t hurt you, if you know you don’t know it.”

“What you don’t know, and you don’t know you don’t know, will hurt you every time!”

So our Value to our clients lies in what know that our client does not know… The “asymmetry” (our knowledge of risk management v. our clients’ lack of knowledge of risk management) is our value to the client.

We will discuss this “commodity” mentality more extensively in the next few days…

Howard Candage, CPCU, CIC, CRM


My Mission… To help Independent Insurance Agents Understand their Value

I have been working on my business planning and I realize that my primary mission is to help Independent Insurance Agents understand the tremendous value they add to the insurance industry. It has been my experience that Independent Insurance Agents are very valuable.  The way our industry is structured, through independent distribution, we are unable to see our value due to the power if insurers. Insurance is an emotionally oriented sale rather than a functionally oriented sale. The “risk bearing” side of your industry (insurance companies) are constantly under pressure to cut expenses from many sources ( A M Best reinsurers, investors…). The insurance companies do not understand the value of agents. As a strategy, they are attempting to cut expenses by attempting to eliminate agency distribution.

They have been unsuccessful in doing so, although certain insurers are successful at attracting “uninformed” clients who do not understand that an insurance company is not an “altruistic” entity dedicated to “looking out for clients” Insurance companies are “profit oriented entities” who make their profits through “bearing risk”.

So… the insurance company’s  goal is NOT to hold the clients hand…  It is their goal to be profitable. It is the AGENTS job to be the facilitator of each and every contact an Insured has with the insurer.  View the insurance relationship as a long term series of events, participate in each of those events (even claims)  add value and become a valued asset to your clients and to your insurer’s clients.

The automobile industry has struggled with the same criticism of distribution and as David Lamarre pointed out in response to one of my last posts, “Case in point, when the auto industry needed the bailout, it wasn’t the dealer body that was falling  into insolvency; the manufacturer’s have long perceived their dealers as “point of sale distribution network”…In the end, the strength of their dealer network had every bit as much to do with their survival as did the bailout. The parallel in our industry glaring.”

We need to get above this paradigm, as agents, and realize, appreciate, showcase and execute added value for our clients. If Insurers could have gotten rid of agents they would have done so years ago.

Howard Candage, CPCU, CIC, CRM