Those Broker Agreements….

The cheerful thump of music became louder as Fred Wilson and I walked towards our city’s major league stadium on a warm and sunny Saturday afternoon. My boss Fred, the manager of my insurance company’s downtown branch, threw me a quick smile.

“Pretty nice day for a baseball game, eh, Dave?”

We flashed our tickets, passed inside, and found our way up the staircase to the private boxes on the upper level. We swung open the door to the private box, and walked through the small, enclosed sitting room to the seats that looked out into the stadium, already noisy with the expectant buzz from the crowd. Just like the fielders warming up below us, we were the longest-serving fieldsmen for our team.

“Hello, you two! Grab yourselves something to drink. Food’s on the way.”

The cheerful greeting came from Derek, the president of a specialty insurer that was a leader in unusual and hard-to-place lines. Derek’s company was a part-owner of this private box. He had invited a dozen or so compatible insurance types to this late summer game; my boss Fred Wilson and I had been included.

Fred and I shook hands with several people we knew, then sat down in the comfy box seats beside two of my favourite brokers: Bob Davies, co-owner of a prosperous midtown brokerage and Harry, a cheerful and outspoken suburban broker. Both gave our company a substantial volume of business. I called on them both and knew their operations well.

We had just exchanged greetings when there was a knock on the door. Two uniformed attendants arrived carrying large insulated cases. Within minutes, a tasty spread of pizza, hot dogs, cheese dip, a veggie tray and a large bowl of shrimp had been laid out before us. Then Derek was handed a long invoice; I saw him study it carefully, and then he glanced over at us.

“I’m a great believer in reading what I’m signing for,” he said.

That brought a chuckle from Bob Davies. “Just like a broker agreement, eh?” he said. “The devil’s definitely in the details.”

“Boy, you can say that again!” Harry said. “Most companies have simplified and slimmed down their broker agreements these days. And quite a few of them post their agreements online, along with any necessary explanations.

“Most broker agreements are pretty straightforward and average out at two or three pages. But some insurers are still churning out massive documents riddled with ‘wherefores’ and ‘theretos’ and ‘subject tos’.

“Believe it or not, I’ve seen them run to 45 and 50 pages. That can be pretty intimidating for a new broker just starting out in our business.”

“Luckily, there’s help available,” I chimed in. “Our provincial agents’ and brokers’ association offers a free review service to its members. They’ll check out any broker agreement and vet it for potential pitfalls. It’s really a win-win situation. The broker gets help across unfamiliar ground and companies like the service, too, because they don’t wind up taking the flak for saddling a new broker with a bad agreement.”

Bob Davies nodded. “In the old days, the company’s marketing representative would simply hand a standard agency contract to the new broker, collect his signature, and be on his way. Brokers are much better informed nowadays. Not only that, their brokers’ associations are better staffed and much more proactive than they ever were before. Insurers really seek out the endorsement of the provincial brokers’ groups because it carries a lot of weight.”

That brought a grunt of approval from my boss. “It’s just common sense for companies to work with broker groups on broker agreements,” he said. “After all, the biggest broker association in the country has something like 10,000 members. That’s a lot of clout.”

“Indeed it is,” Derek said in agreement. “Our company actively goes after endorsement by organized broker groups. For us it’s like a Good Housekeeping Seal of Approval, and we certainly take it seriously”

“Likewise!” Fred Wilson interjected emphatically. “We’ll sit down with representatives of the brokers’ associations and discuss all the vital issues: cancellation policy, commission levels, profit-sharing, data entry work and so on. Nobody wants to have an ugly surprise pop up later because of some ambiguity in the contract, or because it was simply never mentioned.”

Harry stabbed a finger in the air. “Hey, I can recall when almost all insurance companies could cancel a broker flat in 60 days,” he said. “I think it’s fair to say it caused a lot of hard feeling, and obviously wasn’t too popular, so the issue was tossed back and forth between insurers and the larger broker associations. Brokers pushed for 180 days, but eventually it was settled at 90 days, which is the average cancellation notice nowadays.”

I looked over at Derek. “What about that tough old chestnut: Who owns the business?”

Derek shrugged his shoulders. “It’s a key issue, Dave, and it should be spelled out in plain language, crystal clear. No ambiguity”

“Isn’t that all the more reason for a broker to run his broker agreement past his own lawyer as well as his local association?” Harry interjected. “That is, if he belongs to one.”

As Harry spoke, Bob Davies held up one finger. “You know, we’ve really come quite a long way,” Bob said. “The big broker associations will even vet agreements for their members as part of the service they offer. They see it as another positive way to convince brokers of the value of association membership.”

At this point, Derek handed each of us a platter laden with pizza, shrimp, and a selection of veggies and dip. We dug into it enthusiastically for a few minutes, and Bob Davies spoke next.

“I don’t know how you handle contingent profit commission in your broker agreement,” Bob said, turning to his host. “But this is still somewhat of a touchy issue — especially after New York Attorney General Eliot Spitzer’s allegations a couple of years ago that certain compensation agreements might not be in the best interests of consumers.”

“Well,” Harry said, putting down his drink. “In recent years, most companies set the threshold for starting to pay contingent profit commission around the $350,000 to $400,000 premium volume mark. It’s negotiable, but of course the higher the volume a broker remits, the sweeter the C.P.C. percentage.”

Derek nodded. “My company, like one or two others that I know of, has taken the premium growth factor right out of the profit-sharing context in our broker agreement. Why? Because we feel the optics of such deals just don’t look good to most insurance buyers.

“People could get suspicious they’re being placed with certain insurance companies not so much for the quality of their coverage or their outstanding service, but rather because the broker is building up volume so he or she can qualify for higher levels of profit-sharing.”

I jumped into the discussion. “Isn’t it more common now for contingent profit commissions to be weighted more towards the profitability of the business a broker sends to a company? That really makes a much more plausible case to consumers on the validity of profit-sharing payments.”

Beside me, my boss murmured in agreement. “So far as contingent profit commission is concerned, the key is transparency. Brokers are being required to provide their clients with details about their insurers’ basic commission structure, as well as to identify companies that recognize the broker’s sales performance with contingency commissions”

“Trouble is,” Harry cut in, “there isn’t any uniformity as to how insurance companies arrive at their brokers’ profit commissions. For some, the expense factor is based on net premiums written; for others, it’s based on net premiums earned. Some others factor in a shock loss element, although I’ve never understood the logic of that! As an independent broker, you have to weigh all these, know which ones apply to the companies you represent — or intend to represent in the future — and approach the broker agreement with some care.”

“In other words,” I sa id quickly, “comparing apples with apples.”

Harry nodded, and I followed up with another question. “Isn’t it becoming more common for insurers to have their broker agreement make specific notations that itemize remuneration for any additional services — to cover some of those necessary steps that brokers are authorized to handle on their behalf?”

Fred nodded his head. “Every company seems to handle that hot potato a little differently,” he said. “And it’s not surprising really: We insurers are reluctant to let too much of the processing out of our hands. We want to check and re-check all the steps because, as we all know, transaction errors can wind up being pretty damn expensive”

A thunderous roar steadily rose in the stadium beyond our box. We jumped to our feet to watch our hometown team trot out, one by one, as they were introduced to the crowd.

“One last thing,” I said. “What about giving a simple checklist for any broker about to face signing a broker agreement?”

Bob Davies answered first. “First, basic commission rates. Then contingent profit commissions, including the specifics of how these are calculated. And service fees, if the company is prepared to pay the broker for performing a range of such services “

“Terms of cancellation,” Harry chimed in. “And of course, whether or not the company is prepared to advance loans to the broker should he or she want to buy another firm, or perhaps the interest of a partner who has decided to retire.”

Across the table, Fred raised a hand. “Don’t forget that important item: the rehabilitation clause. If a broker’s results have suddenly gone downhill, it only makes sense to offer that person a chance to right the ship within a reasonable time. This whole issue should be incorporated into any fair and sensible agency agreement. Same goes for data entry: some insurers make it worthwhile for some of their brokers to do this work.”

“When I’m asked that question,” Derek added, “I always advise any broker to check out broker agreements with his own brokers’ association, and if he has any misgivings at all, to have his own lawyer run through it as well.”

As he finished speaking, we heard the unmistakable crack of a baseball bat meeting a ball. There was a sudden roar from the crowd. “We can chew this over some more after the game,” he said with a smile, “but right now let’s watch and see how our high-priced talent can play.”