In 2012, we were pleased to see four RFPs requiring that at least some specific services be broken out with an accompanying cost for each. Two went so far as to declare group insurance commissions to be school district money (and it really is!) and require that a robust set of HR-related services be provided in exchange for any dollars a broker receives from an insurance company. Most RFPs required that a commission percentage be attached to each line of coverage or that a fixed commission dollar amount be disclosed.
While on the right track, these RFP requirements fail to break through the broker smoke screen. Instead, they seem to have served as a catalyst for brokers to become even stealthier on the compensation front. It’s easy for a broker to disclose a lower fee or commission amount in their official response, then turn around and require the insurance carrier to pay them an "implementation fee" to the tune of tens of thousands of dollars. Is having the carrier make a contribution to the servicing of your business wrong? Not necessarily. But if it’s done behind the scenes and the broker communicates the requirement to the carriers in his bidding process, then the carrier payment just becomes an additional (hidden) cost that gets buried in your (and your employees’) rates and the broker thus obscures a cost that would otherwise be visible – at least to someone who knew where to look. We saw insurance brokers employ some variation of this tactic on every one of the RFP’s mentioned above.
Best Firm Never Chosen!
Besides pushing up your rates, hidden/undisclosed compensation has another huge consequence. In the RFP processes discussed above, the systems did not select the advisor that scored the highest on their technical proposal evaluation! In other words, the firm deemed most capable was never chosen. With the more frequent use of the State purchasing methodology, which works reasonably well when costs can be clearly identified – the points awarded for (artificially) low bids, tipped the scales in favor of a less qualified firm. We all make the cost/value decision every day in our personal and work lives – but if the cost element is not clear, then no process, however disciplined, can make up for it. In this situation, the buyers not only ended up with less capable “partners” -- they likely paid more to a firm that wasn’t deserving of their trust, let alone their business.
With school systems starting to demand that compensation be fully disclosed so that they can ensure value for every dollar they and their employees spend on benefits, brokers have simply moved the shells around to continue to hide their compensation. We’re not saying that compensation is a bad thing. You can’t get great work done without paying for it. We’re just saying you have the right to know exactly what it is. And ideally, your selected advisor is motivated to keep your costs as low as possible. No such motivation is evident in the insurance broker community – especially those working with school systems.
Excessive Compensation in Plain Sight
While this article is largely about how cleverly insurance brokers conceal compensation, let’s not forget about the excessive compensation that is hiding in plain sight. Has your broker installed whole life or universal life products in your benefits program? Cancer insurance? If so, you can anticipate your broker receiving 60-90% commissions on your employees’ contributions. Did your broker put AFLAC or Colonial products in your program? Why? They would never win a competitive bid process, so how were they selected? Think big, undisclosed compensation. These are technically individual policies that require no disclosure whatsoever.
There is no justification for these high-priced, high-commission products in your program.
If you’re planning an RFP in 2013, be aware of the new (and old!) hidden ways insurance brokers find to make money off your district and your employees. Keep in mind that an insurance broker, by definition, makes his money selling insurance for commissions. If you’re content with the limited services they provide, at least make sure you know where all the dollars are so that you can make a legitimate cost/value analysis. Hint: you should either be paying a lot less than you are now, or getting much more from someone who can provide a broader scope of service. You know that benefits are only a piece of the pie in HR—so don’t squander hard-to-find dollars (your system’s or your employees’) on limited or sub-par services.
In an effort to help school systems across Georgia avoid these money-burning pitfalls, we’ve drafted agreements that you can require be signed as part of your RFP process, or to keep your current broker/consultant and carriers honest and transparent. We’ve also included a chart showing the various types of costs buried in your benefits program so you have a better idea of where to look. ClickHere to download this packet and protect your System and your employees from being overcharged!
Posted By: Eric Kiesshauer
Posted By: Eric Kiesshauer