Home / Analysis / Different tack: Trowbridge recommends broker commissions continue
27 September 2021
The topic of broker commissions receives some different treatment in the Trowbridge report released by the Insurance Council of Australia (ICA), compared with other recent reviews that have raised industry hackles.
The report on the affordability and availability of commercial insurance cover says experience shows many SME customers are not willing to pay fees, and commissions mean access to brokers is available in markets where offerings are limited and their advice and expertise are often needed the most.
Replacing commissions with fees for service would also have questionable impacts on total costs paid by the client because of the range of variables involved.
“It may lead in some cases to lower prices but not necessarily to lower total costs to the client,” report author John Trowbridge says. “It also has potential downsides already alluded to: in today’s environment it would almost certainly adversely affect access and availability of advice and insurer choice for some.”
The ICA-commissioned research contrasts with some other recent reports released by inquiries into problems facing consumers and SMEs in gaining cover.
The Australian Small Business and Family Enterprise Ombudsman report released last year recommended conflicted remuneration for brokers be banned with a phased transition period. The report doesn’t define conflicted remuneration, but appears to conflate it generally with commissions.
The Australian Competition and Consumer Commission Northern Australia Insurance Inquiry also recommended extending a ban on conflicted remuneration to brokers as part of action to address affordability problems in cyclone-prone regions.
The remuneration issue gains some more nuance in the ICA-commissioned report, which also recognises that debates over how brokers are paid, and the level of those payments, are incessant.
“Commissions payable by the insurer are embedded in the insurance market place and, in my opinion, for good reason,” Mr Trowbridge says.
“At the same time, however, there is one feature of broker remuneration that is an impediment to open debate and to greater trust of both insurance brokers and insurers. It is the fact that there is a lack of disclosure of commissions in most cases.”
To the extent that remuneration is not transparent and that there may be conflicts associated with volume bonuses, commission overrides, profit shares, undisclosed fees additional to commissions and any other payments that are not fully disclosed, there is a strong case for rectification and elimination of conflicts, the report says.
Mr Trowbridge recommends the practice of insurers paying commissions to brokers continue but brokers disclose on all customer quotes and invoices as part of the premium all commissions and any other payments they will receive from the insurer.
The heat over the commissions issue is set to intensify next year when a Treasury-led review on financial advice, flowing from the Hayne royal commission, gathers momentum.
PSC Insurance Group MD Tony Robinson says it’s often overlooked that broking is about shifting risk away from clients whereas commissions in other financial areas often incentivise in ways that lead to clients becoming more exposed to risk, such as through larger loans or higher-risk, higher-return investments.
Mr Robinson also says he doesn’t believe there’s any gain in disclosing commissions for wholesale clients, and there’s the risk the information could be a barrier to people seeking out good advice.
“I don’t think there’s any gain from disclosing commissions and it is not relevant. I don’t think it helps anyone make a better decision,” he tells insuranceNEWS.com.au.
“My view is that commissions are an appropriate remuneration structure that is particularly appropriate for this industry, and I don’t think disclosure adds anything, and it has risks.”
National Insurance Brokers Association (NIBA) outgoing CEO Dallas Booth, who hands over to Philip Kewin in November, notes that a federal election is due by May, which may push the Treasury commissions review into the second half of next year.
But in the meantime, brokers will be aiming to put their case in front of politicians and decision makers, countering the arguments that were made following the ACCC and the small business ombudsman inquiries.
Neither of those reports established that commissions were a problem in reality or that the community would benefit from their removal, Mr Booth says.
“They have both made those recommendations, I would suggest from positions of principle. There was no fundamental basis or evidence, suggesting significant problems with broker remuneration, either at the royal commission or through the ACCC work, or through the small business ombudsman’s report,” he tells insuranceNEWS.com.au.
Despite the Trowbridge report’s support for continuing commissions, the issue remains as one of the biggest battles ahead for insurance brokers.