Commissions may rank high among the methods insurers use to compensate brokers for placing their products, but they're just one of the tools available to insurers to motivate producers.

“I think if you look across the spectrum of insurance companies, what you're going to find is a wide variety of philosophies on how brokers should be compensated,” said Robert P. Hartwig, president of the New York-based Insurance Information Institute Inc. “I'm not sure you're going to find a consensus in the industry today on what the best approach is.”

“Obviously, commissions have been the traditional way by which folks have been compensated for their role as brokers or agents,” said Rick Berry, director at Deloitte Consulting L.L.P. in New York. But, if the question is whether commissions are the best way to compensate brokers, “I think the answer would be, "It sort of depends,'” Mr. Berry said.

“I think there is a range of compensation methods that need to align with what exactly the role is the broker is playing,” Mr. Berry said. For example, if the broker is being asked to play a significant role as an adviser or consultant, a fee-for-service arrangement might be appropriate.

From the broker's perspective, Mr. Berry said, there are three basic considerations in evaluating an insurer: Does the insurer have the right product for the brokers' clients, is the product competitively priced and will the broker be compensated competitively for its efforts placing the insurer's product?

While commissions are “core” to the compensation of brokers, insurers often use additional incentive payments contingent on factors such as volume, retention, line of business or geography, the Deloitte consultant said.

“Those are sort of at the margins,” Mr. Berry said. “Those can be fairly effective if they're used properly.” But, the insurer has to be sure those other sorts of compensation aren't excessively complex because they won't work in motivating the broker to place business if the broker doesn't understand them.

“I think many companies, when you look at their incentive programs, they're actually fairly flexible,” said Mr. Hartwig. Whatever mix an insurer takes in its approach to broker compensation, though, at its core it will be a program that's going to provide some sort of incentive to provide good business, he said.

Brokers often are willing to show some flexibility.

“If I'm a broker, how much am I being compensated for the amount of work I do?” Mr. Berry asked. If the insurer can provide ways to make the broker more efficient and productive, “I might be willing to give up a little bit of that commission rate,” he said.

Long-running issue

Mr. Hartwig noted that while some approaches to broker compensation are the result of insurers' philosophies or strategies, in some cases the mix still is influenced by the compensation scandals that emerged as a result of investigations spearheaded by then-New York Attorney General Eliot Spitzer.

But Timothy J. Cunningham, a principal at Chicago-based OPTIS Partners L.L.C., said many of the same compensation discussions have taken place in insurers' executive offices before and after Mr. Spitzer.

“From my discussions with insurance company execs, they struggle with, "What can we do with our compensation system to influence behavior?' and that existed pre-Spitzer as well as post-Spitzer,” Mr. Cunningham said.

“In terms of driving results, a commission basis is probably as reasonable a basis as is possible,” Mr. Cunningham said. “First and foremost, an agency/brokerage should be a sales organization and they're the sales arm of an insurance company. If they're going to be your sales arm, you pay them on an eat-what-you-kill basis.”

It's important, though, to look at pure commission compensation vs. contingent commissions and other incentives, he said. “I think it potentially gets caught up in the transparency-and-disclosure debate,” said Mr. Cunningham.

“At what point does any additional bonus compensation create the potential for conflict?” he asked. “Fundamentally, I think most producers want to do the right thing.”

Thomas Buchmueller, Waldo O. Hildebrand professor of risk management and insurance in the University of Michigan's Ross School of Business, noted that without adequate transparency, those sorts of perceptions can develop in any business relying on a commission structure to compensate distributors.

“If you go into an appliance store and the sales guy is pushing you to one product rather than another, you always wonder if it's because the commission structure is better for one than the other,” Mr. Buchmueller said.

However, “the commission in principle is a good incentive; and without it, the broker isn't really going to be hustling,” he said.