Every insurance company charges fees for the brokerage and servicing of insurance contracts. For this purpose, corresponding commission models are mapped in the commission systems, on the basis of which the calculation and payment of remuneration to the agents takes place.
Nowadays, commission models are typically based on "production data", i.e. on new insurance contracts concluded, as well as on the management of the contract portfolio. The following steps are carried out for an insurance contract to determine a remuneration entitlement:
- Determination of the transaction value (the commission-relevant initial amount), e.g. the premium sum of the contract
- Determination of direct and indirect participants – acquisition agents or portfolio managers and participants from their classification in the sales hierarchy
- Calculation of the remuneration entitlement of each participant, taking into account individual commission conditions
- Determination of the liability and disbursement conditions for each remuneration claim calculated
With the commission models currently found in the market, one-time commissions, acquisition commissions as well as management or portfolio commissions or brokerage fees are paid to insurance agents.
Regulatory requirements for intermediary remuneration
Both in 2002 with the EU Insurance Mediation Directive (IMD) and since February 2018 with the Insurance Distribution Directive (IDD), national regulation of intermediary remuneration has taken place, particularly for the life and health insurance divisions.
For example, a limitation of the acquisition commission for the brokerage of private health insurance policies or the Act to Ensure Stable and Fair Benefits for Life Insurance Policyholders (LVRG) will be defined in the course of this further development.
With the "Act to Cap the Acquisition Commission of Life Insurance Policies and of Residual Debt Insurance Policies" (LVRG II, LV-Provisionsdeckel), commissions are now limited to 25 per thousand of the gross premium sum as acquisition commission or 40 per thousand if certain quality criteria are met. With this "commission cap", insurance intermediaries will have to accept a loss of income for these product groups with the commission cap.
Although the introduction of a legal basis for a changeover to fee-based advisory and brokerage remuneration has been in place since 2018 with the IDD due to the abolition of the ban on accepting fees, this has not yet been able to establish itself on the market. The main reasons for this are
- Low supply of genuine net policies by insurance companies, also because this makes the distribution costs of tied sales or broker sales transparent
- Low acceptance among insurance customers to pay for independent advice
- Effort of the intermediary in the conversion of the remuneration model as well as existing possible liability gaps for consultation
A transparent presentation of the expected brokerage fees already with an offer (commission disclosure) has not yet been regulated by law and is therefore not an obligation for insurance companies and insurance brokers.
However, the legal regulations passed in the last few years are already a sufficient reason to expand the ordering commission models and thus ensure compliance. In many cases, however, no real adjustments or conversions of the commission models have been made, but limits and caps are checked statistically on a dispositive basis.
- If the regulatory thread continues to be thought through consistently, customer satisfaction, transparent disclosure of included cost shares and capping of distribution costs will continue in the future. This would actually be the starting point for a redesign of the commission model. In this context, the following aspects could be implemented as central factors:
- Customer success and customer satisfaction as a central management tool
- Consideration of all parties involved in the success, e.g. consulting experts or claims adjusters
- Clear consideration of the regulatory framework already in the commission model
- From the point of view of the insurance company, an incentive design for defined products / product groups can be correlated
Why is the insurance market struggling?
The redesign of an insurance company's commission model as a strategic tool is a complex issue. The commission model itself specifies the calculation model for the remuneration components and for the liability periods and sums. A typical commission model is the differential commission as deltas between the hierarchy levels of the sales organization.
The sales organization and hierarchy, which change over time as a result of adjustments to the sales strategy, as well as the commission conditions, which are determined by the brokerage contracts, have a significant influence on the commission model.
The basis for the commission calculation is the production data from the management of the respective division. Here, due to the product life cycles, it must be ensured in principle that a statistical change of the contract business transactions (new contract, increase, reduction, cancellation, etc.) is possible in the course of time.
- the actuarially calculated distribution costs and the commissions included therein should not be changed or increased as far as possible,
- the same groups of intermediaries are remunerated as far as possible without any change in their incentives so that, from the point of view of the insurance company, strategic intermediaries continue to have a positive effect on the company and
- the regulatory requirements are fully supported
a complex simulation of the above-mentioned different factors would have to take place in order to design the commission model, taking into account future market and product development (from the product and sales strategy).
Such a simulation is carried out system-supported on the basis of production data from a comparable past period, whereby the strategic future developing parameters of the sales organization, the agent structure, the sales hierarchy as well as the product model can be calculated with different parameter sizes and thus an "approximation" to the previous commission costs per agent / agent group, per product can be achieved.
Conclusion and request
As a result, it must be stated that a redesign of the commission model represents a complex challenge and is associated with strategic risks from the perspective of the insurance company.
Nevertheless, insurance companies should be aware of the above-mentioned risks. In this context, it is important to deal with the current and expected future regulation at an early stage and to develop the strategic basis for a future model of broker remuneration under the aspects of technical expansion (e.g. in-memory calculation, handling of large amounts of data) as well as the lifetime of the current commission system.
If you have any questions or would like to discuss the topic in more detail, please contact our expert Carsten Voigtländer.