Remuneration in the Insurance Brokerage Business

Commissions, the prudent way to compensate the intermediary, or a tool for fraudulent actions
among insurance brokers?

Master (MSc) thesis Business Studies

Matti Vimpeli, BSc
Student number: 6096506
Amsterdam Business School
Faculty of Economics and Business - University of Amsterdam
Date: xxx, 2010
Supervisor: Flore Bridoux, Ph.D.
Second reader: Ilir Haxhi, Ph.D.
Acknowledgements

I want to thank my father Sauli, Lex Geerdes and Karel Boere for giving me the opportunity

to conduct my Master’s Thesis at Aon Risk Services of Rotterdam, The Netherlands. I’d also

like to thank Ilkka Jaakkola, Risto Lintunen, Joost Schuil, Clemens van Der Ent, Marcel Slik,

Marc van Nuland, Erwin Smit, Focko Dorhout Mees, Rene Mandos, Jorden de Boer, Jeroen

Everling, Kees Starrenburg, Hans Stolwijk, Lucas Holleboom and my supervisor Flore

Bridoux for their comments. It was a wonderful experience and I appreciate it a great deal.

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Declaration

I hereby solemnly declare that I have written this thesis by myself and without support from

any other person or source, that I have used only the materials and sources indicated in the

references, that I have actually used all materials listed therein, that I have cited all sources

from which I have drawn intellectual input in any form whatsoever, and placed in “quotation

marks” all words, phrases or passages taken from such sources verbatim which are not in

common use and neither I myself nor any other person in the present or similar form to any

other institution for a degree or for publication.

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Abstract

After decades of debates about the impact of incentives on agents’ behavior, opinions are still

divided. This thesis aims at shedding new light on the question 'What is the impact of

commissions on agents' behaviors?' by studying the case of insurance brokers. This is an

interesting case in relation to the impact of incentives because information asymmetries

between an agent and principal can arise in the insurance brokerage business as brokers are

collecting bids from the market of insurance companies, and intermediating policies for

clients. Brokers mediate the information of the insured to the insurers in order to get an

optimal policy for their clients. Essential aspect in this process is the remuneration structures

and their effect(s) on intermediary’s service for their clients. This research strives to provide

an extensive analysis as focusing on the outcomes when placing commissions in the market

as one form of remuneration for the broker, and do they, as widely argued, cause

intermediaries to act unethically to steer clients to insurers with the highest payoff schemes?

In this research, analysis of agency theory will be used as basis to comprehend issues behind

principal-agent relationship, and this will be utilized to practice from a standpoint of

insurance brokers. Finland has introduced a regime where intermediaries are banned to

receive commissions from the insurers, and the effects of this regulation will be analyzed and

compared to Netherlands where commissions are a typical form of compensation. Also, a

level of trust is a critical aspect for intermediary’s success, as they endeavor to build long

lasting relationships with both the client and the insurance company. It has been argued that

commissions from the insurer to the broker have created a state to the industry, in which

brokers are placing their own interest before the ones of seeking the policy. This thesis

studies the case of insurance broker remuneration, and results are based on the findings at

Aon Risk Services in Rotterdam, the Netherlands and Aon in Helsinki, Finland.

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Table of Contents

Acknowledgements ........................................................................................................................ 2

Declaration ........................................................................................................................................ 3

Abstract .............................................................................................................................................. 4

1. Introduction ................................................................................................................................. 7

2. Literature Review.....................................................................................................................16

2.1 Agency Theory & Incentives .............................................................................................................16

2.2 Contingent Commissions ...................................................................................................................24

2.3. Corporate Social Responsibility (CSR)...........................................................................................30

2.4. Research Questions ............................................................................................................................31

3. Research Design........................................................................................................................33

3.1. Qualitative Research ..........................................................................................................................33

Sample...................................................................................................................................................................... 34

Procedure................................................................................................................................................................ 35

3.2. Case Study Research ..........................................................................................................................35

4. Results ..........................................................................................................................................38

4.1. Conflict of Interest ..............................................................................................................................38

4.2. Insurance Broker vs. Insurance Agent...........................................................................................42

4.3. Spitzer Case and Contingent Commissions...................................................................................45

4.4. Level Playing Field..............................................................................................................................48

4.5. Banning of Commissions in Finland ...............................................................................................49

4.5.1. The Effects of Ban on Commissions................................................................................................. 51

4.5.2. Foreign Insurers and Brokers............................................................................................................ 53

5. Discussion ...................................................................................................................................56

5.1. Conflict of Interest ..............................................................................................................................56

5.2. Contingent Commissions ..................................................................................................................58

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 5.3. Ban on Commissions and its Consequences.................................................................................59

5.4. Implications for Practice...................................................................................................................61

5.5. Limitations of the Present Study.....................................................................................................62

5.6. Suggestions for Further Research...................................................................................................63

6. Conclusion...................................................................................................................................65

Appendices ......................................................................................................................................66

Appendix 1: Aon Service Agreement .....................................................................................................66

Appendix 2: Interview Transcripts ........................................................................................................69

References .................................................................................................................................... 113

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1. Introduction

For the past years it has been a hot topic in the insurance intermediary business (Bloomberg,

2010), whether insurance brokers should be allowed to receive remuneration from insurance

companies. Currently in the Netherlands, as in most of the countries world wide, insurance

brokers do receive remuneration from the insurers in a form of commissions, and what has

been the political and social criticism are the issues such as independence, transparency,

integrity and commissions in the intermediary business. For example in Finland insurance

brokers are banned to receive commissions from the insurers due to government regulation

(Vedl, 2005).

Insurance brokers work as intermediaries between the client and the insurance

company. Purpose of a broker is to help its client to find a best possible insurance policy

from the market of insurance companies (Bipar, 2010). Brokers act as independent

intermediaries and are in no contractual relationship with any insurance company (Schwarcz,

2007). The aim of a broker is to collect bids from insurance companies according to the

clients risk levels and present these policies to the client, and the client makes the decision on

which insurance policy to choose from (Bipar, 2010). “Brokers obtain quotes from various

insurers and guide clients in determining the adequate policy from a range of products. While

most, if not all, brokers are active in commercial lines, some are also insurance

intermediaries for personal lines policies” (Bipar, 2010).

Insurance agents are not, technically employed by the insurance companies, but do

work on behalf of them to sell insurance products. Agents are used as a channel to distribute

insurance products. Agents can be e.g. banks and car dealerships. They work directly for the

insurer(s) and they have the right to sell their products. The main distinction between an

insurance broker and an insurance agent is that a broker is an independent contributor at the

market, which is not in a contractual relationship to any insurance company (Vedl., 2005).

7
Direct writers on the other hand are employees of an insurance company and sell only their

employers’ products (Cheng et al., 2007 and Kim et al., 1996).

The market of intermediaries can be basically divided into three different segments.

Small brokers and agents are niche and regional intermediaries whom play an important part

on the market as they commonly concentrate on some certain areas of business, e.g. oil

companies (Cummins & Doherty, 2005). The largest risks are usually placed on the top

global brokers in the market, as can be seen from figure 1 below (Cummins & Doherty,

2005). The number of global players in the intermediary business is fairly small and thus

makes competition in the market place severe. “Competition between a few large firms can

be fierce. Indeed, this market structure is usually described as a “prisoners dilemma” in

which cooperation between suppliers is inherently unstable and as a result, competition

usually prevails” (Cummins & Doherty, 2005. p. 11). Figure 1 below highlights effective

competition by the size of risk.

Figure 1: Effective Competition By Size of Risk

Source: Cummins & Doherty 2005

One of the main distinctions that must be highlighted, that one must understand the

difference between an insurance broker and insurance agent. Both parties work as

8
intermediaries and intermediate same insurance products to the market. First, brokers work

mainly with commercial insurance products as agents operate in commercial insurance as

well in personal lines market (Carson et al. 2006). Secondly, brokers usually work on larger

and more complex accounts compared to agents. In general independent agents are

commonly smaller than brokers and their service is towards small business and clients in

local markets, as brokers provide services for complicated business and insurance needs

(Cummins & Doherty, 2005). “The third and perhaps most important distinction here

between the broker and the agent is the legal relationship that the broker has with the

consumer. While the agent contractually represents the insurer in the marketplace, the broker

represents the consumer/buyer” (Carson et al. 2006. p. 7). What must be emphasized is the

fact that agent’s work directly for an insurer(s) and broker is an independent intermediary in

the market. “Independent agents are vested with authority to perform certain acts for the

insurer and are paid commissions by the insurer based upon agreements with particular

insurers” (Beh & Willis, 2008). As discussed earlier conflict of interest to favor certain

carriers for an intermediary seems to be much higher for an agent than for a broker. Let us

here compare tangible goods to intangible goods. When buying tangible goods, like house or

a car, rarely the buyer is interested in the nature of social or economic institutions that

‘created’ this product, and many times there is no need to do so (Carson et al. 2006). But,

when acquiring intangible goods, e.g. services of lawyers, doctors or brokers, the main

interest on this is directed towards the qualifications of the service provider and not so much

to the actual service (Carson et al. 2006).

The services agents and brokers offer, often include the following: client risk

analysis, shopping for appropriate coverage, policy administration and issuance, premium

collection and claims administration (Carson et al. 2006. p. 9). But, as can be seen, even

though agents are intermediaries, they do have the right to sell only certain insurer(s)

9
products where as broker is an independent player collecting bids from carriers. Figure 2

below highlights the basic need of a broker. Under a simple policy, in this case car insurance

for one individual vehicle, it is wiser for the consumer not to use the services of the broker.

Lets assume brokers fee would be 15% and the price of a policy (premium) is 100. There is

no sense to have a broker in this transaction because the services of the broker would in

reality far exceed the cost of the premium. “The role of the intermediary is to scan the

market, match buyers with insurers who have the skill, capacity, risk appetite, and financial

strength to underwrite the risk, and then help their client select from competing offers”

(Cummins & Doherty, 2005. p. 1)

In a more complex case, the insurance purchaser needs a policy e.g. for 2000 cars.

This increases the risk level of the client, and as there is more coverage needed, it is common

that in such a risk, several carriers would cover the policy (Interview 7.). In such a case the

role of an intermediary is essential. Without the help of an intermediary the insurance buyer

would not be able to negotiate these policies with insurers on their own (Cummins &

Doherty, 2005). And without the service of an intermediary, clients are not expected to

receive as good pricing in the policy if working directly with an insurer. As Beh & Willis

(2008) discuss, the reason why intermediaries exist in the first place lies in the fact that

insurance products are so complex and inexplicable. Even insurance purchasers whom are

well educated must use the service of an intermediary to understand what they are buying.

“Clients often use an independent adviser to ensure that they buy insurance solutions at the

right price and on the right conditions” (Hjortlund, 2008). For clients, price plays a pivotal

role in the process, but usually isn’t the only aspect that affects insurance purchasers

decision. Another critical aspects, which clients use when choosing the policy, are things

such as “the breadth of coverage by competing insurers, the risk management services

provided, the insurer’s reputation for claims settlement and financial strength, and other

10
factors. It is common for the coverage not be placed with the low bidder” (Cummins &

Doherty, 2005. p. 5).

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Figure 2.

Small coverage vs. Large coverage

Risk Broker Insurer

Consumer
100 Euros/Premium
15% ~ 15 Euro
1 car

Insurer
Risk

Consumer Broker Insurer

2000 cars 100 mil/Premium

15% ~ 15 mil.

Insurer
 It has been argued in recent years that insurance brokers independency has suffered

(e.g. The Dutch Association of Insurers, 2010 & Vedl., 2005). But, as they work as an

independent intermediary in the market place as compared to agent or a direct writer whom

are in a contractual relationship working directly for the carrier(s), Eckardt (2006) found that

agents whom are “dependent from insurance companies has a negative impact both on the

information quality provided and on the contract conclusion rate” (p. 19). On the contrary

Cummins & Doherty (2005) argue that insurance purchasers relies on the relationship of the

intermediary and the insurer. “An intermediary without strong working relationships with

insurers will find it difficult to place business, at least on advantageous terms” (p. 7).

Whether you are a broker, agent or direct writer, there is always some level of relationship

between insurers and the intermediary. But, it needs to be remembered that agents and

especially direct writers are “insurer’s own sales force” (Beh & Willis, 2008. p. 575).

Eckardt (2002) states “…on average consumers will get more detailed information on

insurance products and companies as well as better suited recommendations from insurance

brokers…insurance brokers have higher success rates, i.e. a higher proportion of their

consultations leads to a contract conclusion compared to the success rates of insurance

agents” (p. 13) As intermediaries search policies for buyers across insurers, and as direct

writers and agents distribute only one or few insurer(s) products, it can be expected that

insurance brokers are the most independent form of intermediary services in the business.

In 2004, in the United States, top brokerage firms were facing legal investigations on

whether they have acted unethically in the market to collect commissions, thus deceiving

their clients. These allegations were based on findings where some firm(s) in the market were

steering their clients to certain insurance companies, motivated by high commissions from

the insurers (Regan & Kleffner, 2010). Especially contingent commissions were the issue in

this case. Contingent commissions are based on value or profit. For example, if a broker can
bring $10 million of business to an insurer in a year, and at the end of the year the broker

could receive a contingent commission if he has met these goals (Sebok, 2004). This has

created a situation, where the broker’s interest might shift from providing a professional

service to the client on steering clients to insurance companies that they have lucrative payoff

agreements with (Regan & Kleffner, 2010).

After these allegations, brokers’ remuneration has received much more attention, and

issues such as transparency and integrity has been brought into the discussion. In Finland in

2005, a new law came into effect, which banned insurance brokers to collect any form of

commissions from insurance companies, and there was a three-year transition period for

brokers and their clients to get accustomed to this new compensation structure. After the

transition period ended on September 1st, 2008 brokers could collect remuneration only from

the client (Vedl, 2005). By banning commissions in Finland, the purpose has been to ensure

that brokers could not steer clients to insurers with the highest payoffs, and also, the

distinction between the broker and the agent wanted to be made more transparent for the

client (Vedl, 2005). The opponents of commissions in the insurance brokerage business have

argued that there is a need for more transparency on remuneration, because many times it has

been a case that the client didn’t know that there were commissions involved in the

transaction (Kapiainen-Heiskanen, 2008). The banning of commissions by the legislation in

Finland is applicable only to insurance brokers, and not to insurance agents (Vedl, 2005).

In the Netherlands, the Dutch Association of Insurers has conducted a position paper

(2010) where they make recommendations on the intermediary system. The main emphasis

of these recommendations made by the Dutch Association of Insurers is to ensure the client’s

interest is at the centre of the insurance brokerage business. They have proposed a new

model, referred to as the CAR-model (Customer Agreed Remuneration). “The current

‘double’ system, where by both traditional commission (commission as a non-transparent

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component of the premium) and CAR are possible, will be changed towards CAR as the only

possible remuneration system” (the Dutch Association of Insurers, 2010). The main

discussion has been on the intermediary compensation, and the position paper (2010)

highlights the issue of the potential conflict of interest for a broker to steer clients to insurers

with the best payoff schemes.

Seemingly, there are discussions in the Netherlands on whether the intermediary

remuneration system should see some changes to ensure that consumer’s interests are in the

center of the broker’s ideology in the market place. This thesis sheds light on the situation in

Finland, and on the effects of the legislation on brokerage business. It also tries to

demonstrate the aspects of commissions and their effects on intermediaries’ behavior, and

what can be learn from previous mishaps in the market, and what could be some possible

recommendations to the industry.

Remaining of this paper is as follows: chapter two of this thesis will cover the

relevant scientific literature, while identifying the gaps. Third chapter will go into providing

the conceptual model of this study and hypotheses will be provided as well. In chapter four, I

will describe the research method used in this research, and in chapter five I will present the

main findings of the results. Chapter six will be devoted for discussion of the results and

previous research findings. Chapter seven will conclude.

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2. Literature Review

2.1 Agency Theory & Incentives

The origin of agency theory is drawn from the 1960s and the 1970s when economists (e.g.

Arrow 1971, Wilson 1968) studied the issue of risk sharing on individuals and groups.

Agency theory points out the aspects of a relationship between two parties, namely principal

and agent. The principal assigns tasks to the agent who performs that work (Eisenhardt, 1989.

p. 58). This situation applies here as follows; a principal can be considered as a client (a party

who hires the broker as a representative) and an agent as the insurance broker/insurance

agent. The attention in agency theory is focused on the contracts in the principal-agent

relationship, namely the most efficient form of contract is tried to address for every situation

(Jensen, 1994).

There might be conflicts involved, due to the fact that humans can be self-interested,

boundedly rational and risk-averse. In agency theory there are mainly two problems that can

occur. First, the goals of the principal and the agent can conflict, and second, the principal

cannot tell precisely what the agent is doing; it is either too difficult or too expensive to

determine (Eisenhardt, 1989. p. 58). The information asymmetry arises, and states that one

partner in the relationship has more information, and it can be concluded that the information

asymmetry is in favor of the service provider (e.g. broker) (Singh & Sirdeshmukh, 2000.

p.151). Also, there might be situations where the actions of the principal and agent differ

because both parties have different risk preferences (Eisenhardt, 1989. p. 58). This creates a

situation in the market called as adverse selection (Cummins & Doherty, 2005). It refers to a

situation where the buyers (clients) have more information about their risk preferences than

does the insurance companies. In order to set the policies accordingly, intermediary services

provided by the broker(s) will reduce adverse selection. Brokers usually have better

information about their clients compared to insurers, and this information may be distributed

16
to insurers if trust exists in this relationship (Cummins & Doherty, 2005). “With the

information transmitted by intermediaries, insurers can compete more vigorously for business

and can price more competitively and fairly. In this way, intermediaries assist the flow of

information in the insurance market and enhance the efficiency of the market to the benefit of

all players” (Cummins & Doherty, 2005. p. 2).

As any organization has uncertain futures, risk implications need to be also mentioned

here (Eisenhardt, 1989. p. 65). The members of the organization only limitedly control the

future of the company, it might be successful, might result as a bankrupt or anything in

between. For example environmental effects can have an effect on outcomes; such as

government regulation, or new competitors enter the market. For example in Finland the

brokers are not allowed to receive commissions from insurance companies anymore, due to

government regulation (Vedl, 2005).

The main question in agency theory, as Eisenhardt (1989) discusses: is a behavior-

oriented contract (e.g., salaries, hierarchical governance) more efficient than an outcome-

oriented contracts (e.g., commissions, stock options, transfer of property rights, market

governance)? The form of contracts will be one of the main interests in this paper, as the

insurance brokerage business has faced social pressure to make adjustments to their incentive

structures. On top of premium-based commissions, brokers and agents have commonly

received contingent commissions from insurers, which are usually dependent on profit or

volume that the broker is able to bring to the insurance company (Cummins & Doherty, 2005

and Beh & Willis, 2008). There has been a wide range of argumentation in the market in

recent years whether contingent commissions should be allowed or banned. The

argumentation has been that there is an incentive for the broker to steer clients to carriers,

which they have contingent commission agreements with (e.g. Carson et al. 2006). When the

principal (client) hires an agent (broker/insurance agent) the issue of incentives stands out as

17
a dilemma to principal-agent relationship. As Brennan (1994) states, “economic man will

never perform without incentives” (p. 34) This statement is true in the setting where the client

(principal) hires the broker (agent) to provide him/her the expertise to work with insurance

companies to acquire the client with the best possible insurance policy. The broker carries out

the work on behalf of his client, thus leading to a situation where the client pays for the

broker’s services. Under a condition where the broker seeks for a policy for its client, the

broker (agent) ‘brings’ a customer for the insurer. Whether the insurer should pay

commission to the broker, lies in the heart of the agency problem in this study.

Eisenhardt (1989) also identifies two different streams: positivist agency theory and

principal-agent research. In positivist agency theory, as Jensen (1983) puts it: “why certain

contractual relations arise?” (p. 326). It is expected that outcome based contracts restrain

agents opportunism. Because the rewards for both parties depends on the same action, the

principal and agent should act accordingly, which leads to reduced conflict of interest. It is

also proposed that correct information systems could restrain agent’s opportunism

(Eisenhardt, 1989). If it would be possible for the principal to clearly see what the agent is

doing, conflict of self-interest could decline and the agent’s possibility to deceive the

principal should decrease (brokers negotiating with insurers). As said before, brokers are

argued to favor carriers who offer the highest remuneration (Carson et al. 2006). First, one

needs to understand that insurance products can be very complex, and insurance buyers need

an intermediary to purchase insurance (Carson et al. 2006). “It is costly for an insurance

purchaser to negotiate prices with several insurance companies simultaneously, the customer

may use an intermediary that can provide a number of prices at the same time” (Hilliard &

Ghosh, 2006. p. 2). As Jensen (1994) puts it, “the issue of incentives goes to the heart of what

it means to maximize or optimize, indeed to the very core of what it means to choose.

Rational individuals always choose the option that makes them better off as they see it” (p.

18
2). As one of the problems in agency theory is the moral hazard, incentives are used to solve

this problem (Kurland, 1996). Moral hazard is a situation where the agent demonstrates lack

of effort; the agent does not contribute as been agreed to. For example insurance broker could

work on projects that he/she would see more interesting, thus devoting less time for other

possible insurance purchasers. By this she means, as one party acts on his/her own best

interest, at the same time will also act on the best interest of another party. For example when

the broker ‘hunts’ for a policy for its client, it is in the broker’s best interest to demonstrate

high quality assessment, leading to an increase of trust and the broker can collect fee from the

client.

The positivist theory and principal agent theory are complementary to each other.

Positivist theory highlights contract alternatives and principal agent theory identifies the most

efficient contract that could be formed under a specific situation. Eisenhardt (1989) also

discusses about the possibility for moral hazard and adverse selection. “Adverse selection

occurs when the principal does not know the skills and capabilities of the agent at the time of

hiring and during the relationship. It is implicit that there is heterogeneity in the quality and

configuration of services offered by different agents—some provide high quality, while

others are low quality providers. However, this heterogeneity is not transparent to the

principal because of informational deficiencies” (Singh & Sirdeshmukh, 2000. p.151). For

example when a client hires a broker to help providing the best possible insurance policy, the

client at hand does not know all the skills and capabilities of the broker, a risk that the

principal (client) will always take when hiring a representative. But, as the relationship

evolves during time, it would seem reasonable to believe the principal will learn more about

the agent. “…In a long term relationship, it is likely that the principal will learn about the

agent and so will be able to assess behavior more readily” (Eisenhardt, 1989. p. 62).

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 As the client and broker will build a relationship, it is believed the moral hazard for

the broker will decline as both parties learn each other’s behavior; the same applies to the

broker-insurer relationship. In a short-term relationship, outcome based contract would seem

more reasonable, as the client and broker do not know each other’s behavior. Even though if

a broker has a strong relationship with its client(s), it has been argued that (e.g. Cheng et al.,

2007) when going back to the discussion of contingent commissions, “if contingent

commissions represent a significant portion of broker’s profits, the broker will be tempted to

ensure that business goes to the insurer who pays the highest fees” (Cheng et al., 2007. p. 5).

Even though they might be tempting for a broker, insurance purchasers could actually benefit

from having contingent commissions in the market (e.g. Cheng et al., 2007, Schwarcz, 2007,

Cummins & Doherty, 2005, Fitzpatrick, 2006). The question here arises whether monetary

incentives work as an effective motivator or not? Baker et al. (1987) mention that money can

actually lower motivation, by reducing intrinsic rewards (p. 596). Kohn (1988) and Jensen

(1994) are defending the same point of view for three reasons. First, rewards can invite

people to concentrate only poorly to the task and to do it as quickly as possible and to take

fewer risks. They also state that these extrinsic rewards can erode intrinsic interest, and

thirdly, people will become controlled by rewards. A reason why monetary rewards are so

widely used, is because it is not always easy to measure performance, and money has been

used as a tool for solving the issue (Kohn, 1988). Though, Jensen (1994) concludes that

where monetary incentives are required, “people are motivated by things other than money”

(p. 3). This comment suits this paper for two reasons. First, in the insurance brokerage

business, the brokers are interested in finding a policy for its client. If the client is pleased

with the broker’s performance, the client will choose the broker as their representative, and

agreeing to pay for the broker’s services. Second, it is in the broker’s best interest to carry out

20
his/her duties professionally, thus promoting trust and integrity, resulted in enhanced

reputation.

Even though there are an extensive number of studies, which highlight that monetary

incentives do not improve performance, self-efficacy theory tries to explain that e.g. an agent

can perform in a certain way to reach the desired goals. “Self-efficacy is thought to help

people regulate their effort direction, effort duration, effort intensity, and strategy

development” (Bonner & Sprinkle, 2002. p. 309). The idea here is that incentives can result

in a higher interest on the task, thus leading to higher effort. As the effort of an agent (broker)

increases, the performance of his/her duties increases, leading to a state where greater skills

can be obtained, and also resulting in an increase in self-efficacy. In the case of insurance

brokerage business, the principal (client) makes the final decision on which agent (broker) he

or she is going to hire as a representative and which policy to choose from. Without a

thorough and professional conduct of work, the agent could loose the possible client.

Incentives can work beneficially, and also need to keep in mind that if there are no incentives

available, “too little money can irritate and de-motivate” (Kohn, 1993. p. 58).

Brokers whom have been in the business for a longer period of time and have

developed relationships with insurers and clients, and firstly, broker who has built a strong

relationship with a certain insurance company is more easily able to offer desirable policies

to its clients. It is in the interest of the insurer, broker and the client for this to take place.

Second, when the broker is able to receive better policies from a certain insurance company,

this does not mean that the client’s interests are not thoroughly analyzed. Because the broker

has been able to build such a strong relationship, it is beneficial for all the members in the

transaction. And also what needs to be kept in mind is that the client is the one that makes the

decision about which policy to choose.

21
 Trust between the agent and the principal is an important part of the relationship and

cannot be left out. Without trust the principal-agent relationship is not expected to be seen as

a long-term commitment. As Singh & Sirdeshmukh (2000) argue, it would be in the self-

interest of the intermediary to act in a way that will make them look as a confident and a

reliable partner. This would promote integrity, thus supporting the length of the relationship.

Table 1 below highlights the main aspects of the agency theory. One could argue that as

brokers collect bids from insurers, the broker could try to steer the client’s decision towards

policies, which would pay the highest commission for the broker. And as Baker et al. (1987)

claim, pay for performance motivates people to do exactly what they are told to (p. 597). In

the case of insurance brokers, this statement might not be effective in this setting. Brokers are

required to collect bids from several insurance companies, to give the client several

possibilities to choose from. As said before, it is the broker’s best interest to deliver good

policies as to demonstrate professionalism in the market (trust, integrity, etc.). “High-quality

information and advisory services are provided if the relevant information is given in a way

that enables the consumer to choose from the range of products those that serve best and at

least costs his or her subjective preferences and needs” (Eckardt, 2002. p. 6) Also, Kohn

(1993) writes that rewards are not the right tool to create long-term commitment; they

temporarily change what we do. Again, this argument does not fit into insurance brokerage

business. One has to understand that insurance brokers task is not to bring in as much

commissions as possible per se, but to serve the market as a provider for companies or

private entities with an insurance solution. If concentrating on collecting the biggest pay off,

decrease in effort and performance is an expected outcome (Bonner & Sprinkle, 2002. p.

305).

As monetary incentives are expected to have a negative implication on one’s

performance, anyways it could be that rewards motivate people to get rewards (Kohn, 1993.

22
p. 62), but some researches have shown (e.g. Tetlock, 1983. Brief et al. 1991) that

professional accreditation can lead to a setting where the agent has an interest to provide a

highly professional service for the principal and demonstrating ethical behavior. The studies

have shown that “…when individuals are held accountable, they tend to reflect the value

system of those to whom they are accountable” (Kurland, 1996. p. 57). Kurland (1996) also

mentions that as one has adopted the value system of his/her profession, and as one knows

the values of whom he/she is accountable for, it is likely that one will act more accordingly to

the values of the principal (client). Brokers are accountable for their work to their client, and

are insured under liability in case anything goes wrong with the process. Table 1 below

highlights the main aspects of agency theory.

Table 1: Agency Theory overview

Key idea Principal-agent relationship should reflect

efficient organization of information and
risk-bearing costs
Unit of analysis Contract between principal and agent
Human assumptions Self-interest
Bounded rationality
Risk aversion
Organization assumptions Partial goal conflict among participants
Efficiency as the effectiveness criterion
Information asymmetry between principal
and agent
Information assumption Information as a purchasable commodity
Contracting problems Agency (moral hazard and adverse selection)
Risk sharing
Problem domain Relationships in which the principal and
agent have partly differing goals and risk
preferences (e.g., compensation, regulation,
leadership, impression management, whistle-
blowing, vertical integration, transfer pricing)

Source: Eisenhardt, 1989. p. 59

23
2.2 Contingent Commissions

Contingent commissions are additional payments from insurers’ to intermediaries on top of

premium-based commissions, which can be derived from volume or profitability that the

intermediary is bringing to the insurer (Regan & Kleffner, 2010). Under volume based

contingent commissions, insurers can “achieve economies of scale by increasing the

concentration of business from a particular agent or brokerage” (Hillard & Gosh, 2006. p. 5).

Contingent commissions derived from insurers profitability; in this setting brokers and agents

can receive this extra remuneration if they are able to meet the profit targets when placing

business with the insurance company(s) (Wilder, 2004). “For example, if an agent or broker

sells a policy for $1,000 and the losses resulting that policy, along with sales and

underwriting expenses do not exceed $1,000, then the policy is profitable from the insurer’s

perspective” (Hillard & Gosh, 2006. p. 5). To clarify, standard commissions are drawn from

the policy premium as a percentage to the broker. Usually this varies from five to twenty

percent (Fitzpatrick, 2006). Contingent commissions on the other hand are additional

payments from carrier(s) to an intermediary. These are “calculated as a percentage of a

producer’s entire book of business with a particular carrier (normally ranging from one

percent to two percent) and paid by the carrier at year end based on the producers meeting

overall production and profitability goals” (Fitzpatrick, 2006. p. 3056).

The history of contingent commissions can be drawn back to 1970’s when insurance

brokers started to ask for these additional payments from insurance companies (Wade, 2005).

“The intermediary receives a commission based on reaching certain volumes; or they may be

profit based, i.e., the intermediary receives a commission based on factors such as claims

filed on a policy” (Beh & Willis, 2008. p. 592). The issue with contingent commissions is the

fact as the opponents argue, that it creates a conflict of interest for the intermediary (brokers

and agents) to place business at a carrier(s), which offers the highest compensation, and many

24
times clients have not been informed that such remuneration was available for intermediaries

(Regan & Kleffner, 2009).

As of November of 2004, New York’s Attorney General Eliot Spitzer went after an

insurance broker company Marsh & McLennan, charging them of defrauding their clients by

accepting contingent commissions (Schwarcz, 2007). Spitzer believed in his investigation

that no matter what benefits it might create, there is still the temptation for an intermediary to

steer its clients to insurers, which have the highest payoff schemes for the broker/agent

(Sebok, 2004). But, for intermediaries the main concern is to provide good services to their

clients, as there is the risk of losing them to competitors. “A typical agent or broker is

therefore extremely unlikely to act in a such a way that it will risk losing a customer and the

long term income stream it represents, whatever immediate benefit it might derive in

contingent compensation” (Fitzpatrick, 2006. p. 3062).

Insurance buyers have not been aware that contingent commissions are being paid to

the intermediary for providing business to carriers, which could enable intermediary to have a

conflict of interest for steering (Cheng et al., 2007).

On the other hand, it has been widely argued in the scientific literature that contingent

commissions enables brokers to deliver more accurate policies to their clients than under a

setting where contingent commissions are not part of the intermediary’s remuneration (e.g.

Cummins & Doherty, 2005, Schwartz, 2007, Cheng et al. 2007, Fitzpatrick, 2006, Regan &

Kleffner, 2009, etc.). Cummins & Doherty (2005) argue that contingent commissions will

resolve adverse selection and benefit policyholders. Their reasoning is based on the article of

Rothschild and Stiglitz (1976) where they demonstrated that “when policyholders know their

own level of risk, but the insurer does not, market failure will occur if the insurer tries to

offer insurance at the average price to both high risk and low risks”

25
 Figure 3 below clarifies this setting. The horizontal axis represents percentage of risk

insured and the vertical line shows the price of the premium. The high price line shows the

price of a premium for different levels of coverage for high-risk clients, and low price line

represents the price of a premium for different levels of coverage for low-risk clients. Line

Lh is the indifference curve for high risks, as line IL is the indifference curve for low risks.

The indifference curve shows different combinations of price and coverage that deliver the

same level of satisfaction to a person (Cummins & Doherty, 2005). E.g. “if the high risk

person could get a combination of premium and coverage below this line (more coverage at a

lower premium) he would be better off. Equivalently, any combination above the curve (less

coverage at a higher premium) makes the high risk worse off” (Cummins & Doherty, 2005.

p. 34).

If insurers would be able to identify these high risk and low risk insurance purchaser,

they could offer policies H and L2. These points represent a policy, which would offer full

coverage to every client at a price, which is a fair price for each individual’s risks. But, if the

insurers were not able to identify these different types (risk levels), it would not be able to

know which type would require a low priced policy. Now, suppose that the insurer would

only offer policies between H and L. Both of them lie on the high-risk indifference curve,

meaning that for the high-risk it would not make big difference on which policy to buy. And

if point L would be drawn above this high-risk indifference curve, high-risks would choose

H. As one can notice, the low risk indifference curve is not as steep as the high-risk

indifference curve. The reason for this is because these low-risk types know they have a

lower chance of a loss, and they would prefer L over H. “The snag is that the low risk does

not obtain full insurance. This solution requires that low risks “signal” their risk status by

being willing to accept lower coverage” (Cummins & Doherty, 2005. p. 34).

26
 This system does reduce adverse selection but it does not remove it. “Adverse

selection, a highly theorized problem in insurance markets, which occurs when high-risk

insured’s purchase more insurance than low-risk insured’s, potentially causing premiums to

spiral upward as “good” risks forego insurance altogether” (Schwarcz, 2007. p. 293). There is

still lack of full information, which insurance buyers pay a price on, and specifically the low

risk types would not be able to get an appropriate coverage at a price that demonstrates their

risk status. (Cummins & Doherty, 2005). “This can be seen in the diagram; the low risks

would be clearly better of if there was no information problem and they could get policy L2

which is preferred to L”(Cummins & Doherty, 2005. p. 34).

Figure 3.

Contingent commissions

Source: Cummins & Doherty, 2005.

If contingent commissions would be introduced to this setting (Figure 4 below)

adverse selection could be reduced and insurance buyers would be better off. Now, as the

intermediary is able to receive contingent commission from the carrier, he would now have

an incentive to provide the insurer with appropriate information on policyholders risk levels

27
(Schwarcz, 2007). Cummins & Doherty (2005) argue that even though if contingent

commissions are used in price increases, insured’s are still able to receive accurate policies

because the market is not expected to fail and one group of policyholders can benefit as the

other group would not be worse off. In the diagram, the high + means that the insurer can

offer those insured’s the policy H1 and low + the policy L1. This reasoning shows that the

high risks would not have to choose an intermediary with contingent commissions, and this

way choose the policy H. “On the other hand, low risks are clearly better off with the

contingent commission and policy L1 as compared with policy L, although still not as well

off as if they could buy the optimal policy, L2” (Cummins & Doherty, 2005. p. 35).

Figure 4

Contingent commissions

Source: Cummins & Doherty, 2005.

This setting is based on the assumption that there is full transparency available, as

generally in economics, markets are expected to work most efficiently “when there is

complete information available to all market participants” (Cummins & Doherty, 2005. p.

22). Thus, it would be better for the insurance buyers if disclosure of remuneration would be

28
transparent, and would lead to more efficient insurance markets. “Intermediaries do compete

in the variety and quality of services they offer and in the success of the insurance programs

they implement for their clients. In such an environment, intermediaries are competing with

each other to design programs that add value. In order to retain clients, intermediaries face a

burden of proof that they have delivered value to their clients” (Cummins & Doherty, 2005.

p. 22).

Thus, if such incentive structures would be available for insurance intermediaries, this

could create a problem, which has been the main topic for the past years in services provided

by insurance intermediaries; “since almost all commissions are paid by insurers and not

insured parties, we would expect insurance agents/brokers to work on behalf of the insurers

and to respond to commission-paying insurers rather than customers” (Hillard & Gosh, 2006.

p. 9). One problem this setting might create, as the diagrams highlight, it is not a necessity for

the high-risk client to have an intermediary who accepts contingent commissions. High-risk

insurance buyers would still be able to receive an adequate policy, but as the example

demonstrates, low risk insured’s would clearly be better off if the intermediary would work

with an insurer whom pays contingent commissions. This could create an incentive for the

intermediary to steer low risk clients to insurers whom pay contingent commissions.

Insurance intermediaries might be tempted to try to get as much low risk business to the

carrier and not providing services to all risk types. Also, “insurance purchasers who

understand the risk of contingent commissions may rationally choose a market outcome that

is inconsistent with their true policy preferences in order to signal to insurers that they are

low-risk” (Schwarcz, 2007. p. 325).

29
2.3. Corporate Social Responsibility (CSR)

In today’s world companies are facing pressure from the society to be socially responsible

through its activities to its community. Firms are expected to comply with dimensions such

as legal, economic, ethical and philanthropic (e.g. Carroll, 1991). There are a number of

researches that all discuss the same aspect, namely firm’s responsibilities to society. There

are many definitions of CSR, such as; behavior which enables the employees of the firm to

obtain a decent living, behavior which does not harm the environment or the health of the

community (Campbell, 2007), corporations have social obligations beyond the limits of their

shareholders (Doh & Guay, 2006), or as Davis and Blomstrom (1975) writes “the managerial

obligation to take action to protect and improve both the welfare of society as a whole and

the interest of organizations” (p. 6).

Corporations should fulfill at least two elements to be viewed as socially responsible.

First, a firm must not knowingly to do anything that could hurt its stakeholders, such as

employees, customers, and suppliers. Second, if the firm’s actions causes harm to any actor

in the society, the firm must identify its wrong doings and act on it (Campbell, 2007). Even

though if a company is trying to fix its harmful actions, in the eye of the society it might

obtain such a dislike that the value of the company could decrease tremendously, e.g.

recently British Petrol.

When do companies then act socially responsible ways and when don’t? It has been

argued that firms that are financially doing well, are expected to devote more to corporate

social responsibility than those whom are not performing that well, because firms with

weaker financial situation have fewer resources at hand to devote to CSR (Campbell, 2007).

When facing the issue on whether the firm should utilize its resources on corporate

social responsibility, can CSR help firms to reach a sustainable competitive advantage? One

could say that by being solely socially responsible does not lead to remarkable advantages in

30
the market. Firms could only induce abnormal returns if it can make sure the competitors are

not imitating its strategy (McWilliams et al. 2005). Since CSR is transparent with close to

zero causal ambiguity, it is highly unlike that a firm would be able to gain a sustainable

competitive advantage in competitive markets.

In his 1991 article, Carroll identifies four main characteristics, which the company

should take into consideration to contribute as socially responsible. Firms have four

responsibilities, (a) economic responsibilities, (b) legal responsibilities, (c) ethical

responsibilities, and (d) philanthropic responsibilities. (a) Firms primary role is to produce

demanded goods to the market and make profits. In the insurance brokerage business, the

firms provide representative services to the market and on which the brokers collect rents

from. (b) Insurance brokerage firms must practice their profession within the framework of

the law. (c) Ethical responsibilities include the standards, norms or expectations that the

market is expecting for. Therefore, brokers must act on the interest of the client. (d)

“Philanthropy encompasses those corporate actions that are in response to society’s

expectation that businesses be good corporate citizens” (Carroll, 1991. p. 229). Such actions

include promoting human welfare or goodwill. These would include activities like e.g.

contributions to arts, education or the community (Carroll, 1991).

2.4. Research Questions

This thesis aims to provide answers for the following research questions:

Research question 1: Do commissions lead brokers to act against their clients’ interest?

Research question 2: Do contingent commissions provide a mechanism for brokers to steer

clients’ to insurers with highest payoffs?

31
Research question 3: What are the consequences of banning commissions for brokerage

business?

32
3. Research Design

In this chapter the research design of this thesis will be explained.

3.1. Qualitative Research

In qualitative studies, as in this research, the main idea is to make interpretations of the

findings. The idea is to observe the case, and objectively to conclude what is happening in the

case and on top of that to observe it’s meaning, and one must refine and verify those

meanings (Stake, 1995). In this study research questions one and two (Do commissions lead

brokers to act against their clients’ interest? and Do contingent commissions provide a

mechanism for brokers to steer clients’ to insurers with highest payoffs?) are qualitative

studies in which data is collected through interviews.

Interview questions were conducted as semi-structured open-ended questions. “An

open ended question establishes the territory to be explored while allowing the participant to

take any direction he or she wants. It does not presume an answer” (Seidman, 2005. p. 69).

Open-ended questions have many benefits. First, they are flexible in nature to allow the

interviewer to go more in depth and to ask clarifying questions to clear any

misunderstandings (Cohen et al. 2007). Second, open-ended questions test the knowledge of

the interviewed and helps to derive what the respondent really believes. And thirdly, open-

ended questions can also result in unexpected answers and viewpoints, which might not have

been thought earlier by the interviewer (Cohen et al. 2007). As Seidman (2005) writes it is

important to understand the respondent’s subjective experience, which can clarify meanings

of theories and bring something new, which might not been found from literature.

The questions for this study were semi-structured open-ended questions, such as:

What do you think is the benefit for the client to use insurance agents over brokers? Or could

it be possible that the proposed practice (only remuneration from the client) would reduce
the number of brokers in the market? Why? The essence of these interviews was to provide

respondents with questions that are essential in the research and “which cannot be answered

satisfactorily in any other way” (Gillham, 2000. p. 66). The questions asked in interviews,

more over the answers derived from these interviews, are dependent on the person you are

interviewing and are highly unpredictable (Gillham, 2000). This makes the discovery of

something new a possibility in interviews. “You are asking the interviewee to tell you: and

they may do so at some length, not all of it on the topic. Being able to move people on when

they have said what is to the point is a key skill in interviewing” (Gillham, 2000. p. 66). As

managing the interviews, many times the respondents answered more thoroughly than the

question demanded at first place. And it was important to make sure the respondents stick to

the question at hand, in order to gain as much as possible from the interviews. A beneficial

aspect that can be derived from the interviews, as having open-ended questions, it was

possible to gain a lot of new knowledge, knowledge that was not available at the time of

making the questions or cannot be found from scientific literature.

Sample

A total of 8 interviews were conducted at Aon Risk Services, at Rotterdam, Netherlands.

Interviewed people were from top management positions at Aon, varying from board

members of Aon Risk Services to directors of different account management/client segments,

such as industrial, marine & logistics, construction, and trade & automotive.

Before the interview took place, the guideline for the interview was sent to the

respondents. The guideline included all the questions and topics that would be covered during

the interview. This method helped the respondents to prepare for the interview, thus ensuring

the interviews would be conducted more efficiently than in a setting where the respondents

don’t have time to prepare for the interview.

34
 The number of interviews, 8, enabled to get a thorough understanding of the topic, as

respondents were from the manager positions, and from several client segments. What must

be notified though, is the fact that this study includes standpoints only from the view of one

insurance brokerage firm, results could be biased. There is no clear answer on what should be

the correct sample size and always depends on the case at hand (Cohen et al., 2007).

“Generally speaking, the larger the sample, the better, as this not only gives greater reliability

but also enables more sophisticated statistics to be used” (Cohen et al., 2007. p. 101).

Procedure

During the interviews, participants were asked questions, which were centered upon

intermediary remuneration, moreover commissions and their possible effect(s) on the

intermediary’s service towards their clients. The interviews also tried to establish a body on

how compensation is constructed in the market, and what are the requirements of the parties

in the process. The guideline for interviews was constructed as the beginning of discussion

concentrated on transparency of insurance brokers towards their clients, what could be some

possible improvements in the business, and how different compensation structures (fee,

commission, contingent commissions) could affect the market and the services brokers

deliver for their clients.

3.2. Case Study Research

“A case study is expected to catch the complexity of a single case” (Stake, 1995. p. 6). With

the help of a case study, one can study the specialties and complexity of a single case, and

should help to demonstrate and identify an activity under special circumstances. Research

question three: What are the consequences of banning commissions for brokerage business?,

is a case study in which information and data in this thesis will be derived about the effects to

brokerage business in Finland after the ban on commissions.

35
 What needs to be clarified is that case studies are not “sampling research” (Stake,

1995. p. 4). In a case study one does not try to study a case by comparing it to other cases, the

case at hand is off more important to understand. One of the most important criterions is to

concentrate on the case and to make particular aspects of that case available, and not to make

general assumptions from that single case (Stake, 1995). “We take a particular case and come

to know it well, not primarily as to how it is different from others but what it is, what it does.

There is emphasis on uniqueness, and that implies knowledge of others that the case is

different from, but the first emphasis is to understand the case itself ” (Stake, 1995. p. 8).

Case studies have a number of benefits, which can give the research more credence.

Data drawn from case studies is usually believed to be more ‘stronger in reality’ compared to

other researches were data can be more ‘weaker in reality’ (Cohen et al., 2007). Also, case

studies can help to demonstrate something new or supportive on the arguments on that

specific topic. “Case studies present research or evaluation data in more publicly accessible

form than other kind of research report” (Cohen et al., 2007. p. 256). Case studies can help

reader(s) to understand unstated implicit assumptions, and thus allows readers to make their

own justifications based on the facts presented by case study approach (Cohen et al., 2007).

Some of the strengths that case studies have over other form of studies are the facts that these

studies have the tendency to be understood more easily and the facts presented are strong in

reality (Cohen et al., 2007). Case studies can also provide useful information, which can give

insights to other similar cases, and also as Cohen et al. (2007) state: “they can embrace and

build in unanticipated events and uncontrolled variables” (p. 256). Though, as a negative

implication, it can be mentioned that case studies may not be generalized due to their unique

situation. And, results can be compared to where the other readers or researchers see their

applicability (Cohen et al., 2007).

36
 This case study is conducted at Aon Risk Services, in Rotterdam, Netherlands. Aon

Corporation is one of the leading providers of risk management services, insurance

and reinsurance brokerage, and human capital consulting. Approximately 37,000 employees

work at Aon, in more than 500 offices in over 120 countries (Aon, 2010). In 2007, Aon was

voted by A.M. as number one global insurance brokerage firm based on brokerage revenues

(Aon, 2010). “Globalization demanded two capabilities: gather the best thinking from around

the world and then deliver solutions locally. With worldwide distribution, a vast base of

intellectual capital, and leading technology, we have built a professional services company to

achieve these important goals—all focused on areas increasingly in demand: insurance

brokerage, risk management, and human capital consulting” (Aon, 2010).

First, this research included a period (one week) of studying the remuneration of

insurance brokers in Finland. During this phase, data was collected at Aon Risk Services in

Helsinki, Finland, to help understand the conditions at the Finnish market of insurance

intermediaries after the introduction of ban on commissions in 2008. The remaining period

(three months) was spent at Aon in Rotterdam the Netherlands to study the aspects of

business in insurance brokerage. This period included conducting interviews at Aon to gain

information on the aspects of insurance brokerage business, concentrating on remuneration,

and its possible effects on broker’s behavior in the market.

37
4. Results

In this chapter, the results of this study will be presented. The findings of the situation in

Finland will be revealed, and the results from interviews conducted in Aon, Rotterdam will

add a standpoint from the perspective of the Dutch insurance brokers.

4.1. Conflict of Interest

In Finland (Jaakkola, 2010) and as in the Netherlands (Interview 3) brokers have been

transparent all along and never had any problems. Insurance brokers have been in the market

place for some 350 years, and haven’t had problems with the system (Interview 6). For

example in the Netherlands, the Dutch Association of Insurers (2010) has proposed a new

system called as the CAR-model (Customer agreed remuneration) and they state that “if

remuneration is based on agreements with the client this implies full transparency”. As stated

earlier this has been the case in Finland since the law on intermediation in 1994 and also in

the Netherlands brokers are transparent about the remuneration. The agreements brokers do

with the clients provide full transparency, and if they want to know e.g. the amounts brokers

receive, we just tell them (Interviews 1-8).

In the Appendix 1 is an example of a service agreement on what Aon is already

providing to their clients. The service agreement highlights the phases the broker has done in

order to get an adequate policy for their client(s), e.g. “Approaching one or more (re)insurers

to obtain a quote or quotations; where more than one quotation is involved, comparing them

and advising (clients name) accordingly” (Aon service agreement, 2010).

There is a wide discussion in public that brokers have a tendency to steer clients. But,

as all the respondents in interviews stated that “we cannot afford to try trick our client, there

is so much competition that eventually the market will find out and you would lose your

client”. And as De Boer added: “there is no steering happening, if you steer it might benefit

38
you in the short-term but the market will find it out, we are anxious not to steer” (Interview

6). But, when comparing the market of insurance brokers in Finland and in the Netherlands,

Finnish brokers do not have the power to fight back on the regulation, as “here in the

Netherlands, we are strong participants in the field and can have an impact” (Interview 3).

In the Netherlands, e.g. Aon has a lot of clients working already on a fee basis, “most

of our clients from industrial segment already are a fee clients, our clients are getting more

and more professional in industry sector” (Interview 6). Figure 5 below demonstrates how the

intermediary service is built in the Netherlands for contracts based on fee and commission;

same also applies in Finland exception of the commissions (banned). Under the commission-

based model, the client pays the gross-premium to the broker, who then takes his fee

(commonly 15%), and the rest 85 (premium) is passed on the carrier. Under the fee-based

model (bottom part of the table), as more transparency is involved, the premium and the fee

for broker are highlighted by separate agreements. Also, needs to be mentioned that in larger

contracts clients usually transfer the money directly to the insurer and not through client, and

only fee comes from the client (in Finland). Even though the amounts are made more

transparent, but it creates more administrable work. “Reducing a broker’s worth to a fee is

self-defeating and undermines the complex mechanism geared to serve the client. Take away

the incentive and eventually the cost of risk will increase in the one area where costs are

controllable: uninsured losses” (Clark, 1990).

Under the commission based remuneration, the commission broker receives is a

market standard commission which is set by the insurers and brokers. And under the fee-

based compensation, brokers negotiate their remuneration with the client. As the broker

negotiates his/her compensation with the client, clients might not be willing to pay e.g. 15

and they could demand to pay only 10. As competition exists in the market, brokers need to

accept smaller compensation in order to keep their clients, and as has been seen, especially

39
smaller brokerage firms might not survive. When brokers remuneration is on a fee basis,

expenses for client are expected to go up, because insurance companies are not willing to

lower premiums on the level where brokers commission is deducted (FIBA, 2008).

When discussing in the interviews about transparency and more in so about the part of

commissions, it became clear that in many cases clients are not interested whether the broker

receives commissions or not. For example “for a lot of clients it is not important for them

how much the broker makes, they are mostly interested about the total costs” (Interview 5)

Majority of the clients are not interested about brokers remuneration, mainly only smaller

clients (Interview 2). Commonly larger clients are interested on the percentages we might get

from our intermediary services (Interview 3), because bigger clients, they are usually more

insurance oriented people than smaller clients and what needs to be understood that

transparency is not always about the amount of compensation (Interview 8). And as

mentioned earlier, many of the clients do not care about brokers remuneration, “this business

is based on trust…in the Dutch market there is so much competition that it is easy for the

client to go for another broker” (Interview 2).

40
Figure 5
Comparison Table: Commission vs. Fee

Commission:
E.g. Gross-premium 100
Broker receives 15%

Client Broker Insurer

Client pays Broker pays
Broker 100 Insurer 85
(Gross-premium) Broker
keeps 15

_______________________________________________________________________________________
Fee:
E.g. Net-premium 85
Broker receives e.g. 10

Client Broker Insurer

Client pays Broker 85 Broker pays

(Net-premium) Insurer 85
Client pays Broker 10 Broker
(Service agreement) Keeps 10
4.2. Insurance Broker vs. Insurance Agent

This section will discuss the effect of the new Finnish regulation on insurance brokers and

insurance agents and explain the consequences for the clients. Insurance brokers work as

intermediaries in between the client and the insurance company. Purpose of a broker is to

help its client to find the best possible insurance policy from the market of insurance

companies. Brokers act as independent intermediaries and are in no contractual relationship

with any insurance company (Schwarcz, 2007). Insurance agents are not, technically

employed by the insurance companies, but do work on behalf of them to sell insurance

products. Agents can also act as independent agents, which work for several insurance

companies. They work directly for the insurer(s) and they have the right to sell their products.

The main distinction between an insurance broker and an insurance agent is that a broker is

an independent contributor at the market, which is not an employee of any insurance

company (Vedl., 2005).

One of the biggest problems for insurance brokers is their value viewed by their

clients. As Jorden de Boer mentioned in the interview: “clients do not seem to understand our

value in the market, and that is something we really have to work on”. Also, as Everling

mentioned (interview 7): “We need to have experienced employees because they are better

able to explain to clients the value we are offering for them”. “Compared to being an

insurance broker, being an exclusive or independent agent and, thus more dependent from

insurance companies has a negative impact both on the information quality provided and on

the contract conclusion rate” (Eckardt, 2006. p. 19). As the ban on commission does not

apply to insurance agents, “there needs to be the level playing field for this business…client

should be able to understand the difference between a broker and an agent” (Interview 4).

Also, the qualifications that are required between a broker and an agent differ

dramatically in Finland. “The law states that there are no educational or practical experience
requirements for insurance agents, practically the insurer can determine who will be capable

of conducting a work of an agent” (Vedl, 2005. p. 6). On the other hand the law requires the

following from brokers: “it is required for brokers to have an adequate education and

practical experience… insurance authorities demand that a proper education means a

university degree with proper insurance studies” (Vedl, 2005. p. 10). Also, “agents and

brokers disclosure of information will be improved. Especially brokers, as a starting point has

to give more precise information on what basis they are suggesting a policy to the client. This

information would be stated in a fair analysis. As a result, this change will improve clients

potential to evaluate brokers actions” (Vedl, 2005. p. 16). The law clearly makes the demands

for brokers much stricter than for agents, and the question rises that is it in the best interest of

the client, and as Starrenburg (2010) mentioned; “same rules should apply to all players in

the market, it don’t make sense to have different rules for players in the same market who

distribute the same product?” The new law also puts Finnish brokers in an inferior position in

the Finnish market compared to foreign brokers. The educational requirements for Finnish

brokers means it will take approximately two years before they can start working as brokers.

At the same time, brokers whom are registered in some other country in the European

Economic Area, can start working in the Finnish market without any educational

requirements (Vedl, 2005). In 2004, the Finnish Competition Authority conducted a study on

whether clients in the market have been receiving prudent services from insurance brokers.

“Over 30 clients responded to the survey. According to the statements made by clients,

brokers have been able to deliver clear cost savings and also the terms and scope of policies

has been much better, owing to the work done by brokers. Companies are also able to have

cost savings because their own people do not have to devote time on insurance related issues”

(FCA, 2004).

43
 According to these findings the law is likely to be unfair towards insurance brokers as

improving the position of insurance agents. Table 3 below will highlight the market of life

insurances in Finland. As can be concluded from the table, the intermediary law is not

applicable for 93% of participants in the life insurance market; hence it is prudent to argue

that the law is placing insurance brokers in an unfair position.

Table 3. Life insurance channels in Finland

1. Banks 42 % No obligation to disclose

remuneration
2. Insurance Companies + Insurance 51% No obligation to disclose
agents remuneration
3. Insurance Brokers 7% Required to disclose
remuneration

Companies intermediating/selling life insurances

Source: Toikka (2009)

44
4.3. Spitzer Case and Contingent Commissions

In 2004, New York Attorney General Elliot Spitzer filed a lawsuit against Marsh Inc., a unit

of Marsh & Mclennan Companies. “The complaint, filed in New York State Supreme Court

alleges that Marsh steered unsuspecting commercial clients to insurers with which it had

lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts”

(Bradford, 2004. p. 1).

Marsh was allegedly steering clients to certain insurance companies in return for a

reward, and these contingent commissions were called as “a compensation for market

services” (Borrelli, 2008). E.g. the insurance company could pay the broker, as Sebok (2004)

calls them “success commissions”. If for example the broker is able to bring over $10 million

of business to the insurer in one year, or if 50% of the clients who is covered with insurance

never files a claim. The allocations against Marsh had significant dimensions due to the fact

that e.g. in 2003, $800 million of Marsh’s $1.5 billion net income came from contingent

commissions (Wharton, 2005).

Brokers must collect several competing bids from insurers and the client makes the

choice. And as the broker discloses information on all the commissions he/she will receive,

the client makes the final decision on whether to hire the client or not (Beh & Willis, 2009).

But, does this entail the client is able to receive a good price on its policy? One of the

allegations in the lawsuit was that Marsh also collected ‘fake’ bids from some insurers to help

to steer the client’s decision on certain insurers (Regan & Kleffner, 2009). In the following

quotation an example of how Marsh was able to affect the client’s choice of the insurer on a

school renovation project in Greenville, South Carolina. “Marsh allegedly steered the

contract to one insurer, Zurich, in exchange for a contingent commission. In order to

persuade Greenville that Zurich had the best price, it allegedly arranged with another insurer,

CNA, that CNA would produce a dummy bid which would be guaranteed to lose, but which
would make the Zurich bid look good. Of course, Greenville opted for the lower, Zurich bid”

(Sebok, 2004). If such allegations are true, the client here is deceived as insurers and brokers

created such mechanisms for deception, and the reputation of the industry is at stake and such

actions should not be lightly taken.

But, in their 2004 article, Insurance Journal writes that according to Aon, these

compensation agreements (contingent commissions) between the brokers and insurers had

been a common practice in the industry for a long period of time. If contingent commissions

are used in the agreement, this information is disclosed to the client, in invoices and also in

the company website. According to this statement, there has been full transparency all along,

but collecting ‘fake’ bids is clearly generating a state where the client is not able to tell

whether the best policy is actually received or not. Such arrangements between the insurance

companies and brokers are restricting competition thus promoting unfair positioning.

Due to the lawsuit by Spitzer, three major insurance brokerage firms (Marsh, Aon

Corp. and Willis Group Holdings Inc.) were banned to collect contingent commissions from

insurance companies. Marsh settled to pay $850 million, Aon agreed to pay $190 million and

Willis agreed to pay $50 million to put end to Spitzer case. Regardless of that, the ban was

recently (February 2010) disposed. According to regulators, the ban on contingent

commissions “created inherent conflicts” (Bloomberg, 2010). These three companies are now

required to disclose all the information to its clients. The ban was lifted after the New York

insurance regulators stated they have a desire to help consumers by “providing a level

playing field for insurance intermediaries on which they can easily be compared” (Martin,

2010). Under the ban, it has been difficult for these three companies to operate compared to

other brokerage firms, thus creating an environment for customers where it is difficult for

them to compare remunerations in the field.

46
 After the lift on the ban on collecting contingent commissions, Willis stated that, even

though it would be allowed, they would no longer collect contingent commissions from

insurers. “Willis also will continue to refuse to accept contingent commissions from carriers

in our retail brokerage business. Willis is proud of the position we have taken with regard to

contingent commissions that we believe is squarely in the best interest of our retail clients”

(Martin, 2010). After the ban was removed, it has created a level playing field for the market

in the United States, and now all the intermediary services are obliged to follow the same

regulations. This promotes transparency in the field and the client(s) has an equal opportunity

for disclosure from all the providers of intermediary services. This seems to be a prudent step

taken by the officials, ensuring the industry promotes clients interest and the insurance

brokerage business enhances its reputation in the eye of the society.

As the case from the United States demonstrates, the issue has not been the contingent

commissions itself, Marsh created a system around it to ensure they were able to receive

these lucrative payments. Contingent commissions can create an incentive for a broker to

steer clients to insurers whom pay these extra commissions, if they are not transparent to the

client(s). “There is nothing wrong with contingent commissions if it is transparent for all the

members in the market” (Interview 8).

As the example demonstrated in chapter 3.4, contingent commissions could actually

benefit policyholders, but the advantage, as was concluded, was mainly on clients with

smaller risk levels. After having discussions with several professionals at Aon about the

model presented in chapter 3.4, the model is true under assumption that contingent

commissions would be based on profits, but in reality, contingent commissions are nowadays

based on volume, and not on profit (Boere, 2010). “If contingent commissions are based on

profits of the insurer, the broker is then clearly working in the interest of the carrier, as they

are tempted to bring as much low risk business as possible to the insurer”.

47
4.4. Level Playing Field

At the end of 2009, the number or registered brokers in Finland were 211, as compared to

insurance agents, which before the law in 2005 were predicted to be around 10,000-12,000

(Vedl, 2005). The number of insurance agents cannot be known exactly due to the fact that

there are no data available on these intermediaries (Vedl, 2005). The law on insurance

intermediation states: “Insurance broker can receive remuneration only from his principal.

Therefore, remuneration will be paid by the party, which the broker represents. This requires

independency from insurance companies” (Vedl, 2005. p. 38).

What must be notified from the law on intermediation is the fact that these same

requirements are not directed towards insurance agents, which represent one or more

insurance company. As Rannanpää (2004) highlights in his article: “brokers distribute exactly

the same products as insurance agents do…so why the other distribution channel has to

bargain for their income as the other channel does not have to?” And as can be drawn from

the interviews it came clear that the rules for all the participants in this market should be the

same (Interviews 1-8, 2010).

As this new law is expected to promote the interest of the client(s), these transparency

requirements were also expected to promote healthier markets and increase competition. In a

statement by a lawyer from the Finnish Confederation of Professionals, in her letter she states

the following: “the Finnish Confederation of Professionals does not see it necessary to

change the current law on concerning insurance brokers remuneration…for the experience so

far the law has been effective and benefited the field…current model has improved

transparency tremendously” (Puura, 2010). When discussing in the interviews about the

effects of banning commissions from insurer to broker, e.g. Jorden de Boer mentions, “This

ban could possibly reduce the number of brokers in the market, and would actually limit

competition” and as Rene Mandos mentioned “this would reduce the number of players in the

48
market and would be bad especially for smaller brokerage firms”. Goel (2006) demonstrated

in his study that “results show that an increase in the number of intermediaries prompts the

insurance provider to revert to the old flat fee contracts. On the other hand, if tougher

regulation results in a decrease in the number of intermediaries, then cost plus contracts are

likely to be used” (p. 214). Mr. Smit (2010) also mentioned in an interview about this issue

stating that “with high governmental regulation there will always be a lot less competition”.

4.5. Banning of Commissions in Finland

In 2005, Finland became the first country where commissions from insurers to brokers were

banned (Vedl, 2005). It is important to notify that during the 1980’s brokers in the Nordic

region took a step to operate as independent advisors, away from being staff of insurance

companies (Hjortlund, 2008). The main reason commissions were banned, was the

allegations towards insurance brokers in the United States. The purpose was to make sure that

brokers would truly act as an independent provider in the market (Vedl, 2005).

As Hjortlund argues (2008) this ban on commissions may actually “lead to an

increase in costs if a client appoints and pays for a broker and the insurer does not reduce the

premium by a commensurate amount. Banning commissions may therefore reduce

competition in the market as some clients may not be willing to spend additional amounts on

independent advices” (p. 22). The legislation has created a situation where brokers in Finland

have shifted to work as agents, especially in the life and pension markets (Hjortlund, 2008).

The main goal of the legislation was to make the market more transparent, but as some of the

brokers have become agents, it seems questionable that the legislation has fulfilled its

purpose. When brokers move to working as agents, this has created a situation where agents

gain market share on the expense of independent insurance brokers (Hjortlund, 2008).

Interestingly this ban on commission is demanded only from insurance brokers and not from

49
agents or direct writers (Vedl, 2005), as the example demonstrates, transparency has not

improved, quite the contrary has happened. Also, as one would think that as lower

commissions has led to a situation where brokers compensation has reduced, premiums

would be also be lower, but “it has not reduced costs for insurance” (Hjortlund, 2008. p. 24).

As mentioned earlier, this ban on commissions is only applicable to insurance brokers

(Vedl, 2005). It would seem reasonable to argue that, as the purpose of the legislation was to

promote transparency and client’s interest, the number of brokers has reduced thus restricting

competition, and arguably it is not in the clients interest if brokers move to work as insurance

agents. Also, it remains debatable that intermediaries (brokers and agents) that distribute

exactly the same insurance products in the market have different rules to follow.

The purpose of an insurance broker is to act as a link between insurance companies

and insurance purchasers in commercial insurance markets (Goel, 2006). For a consumer it

can be difficult to determine on what sort of coverage they would need from the market of

insurance products. Insurance products can be complex and the lack of knowledge on these

products by consumers increases the need for having an intermediary at their service (Carson

et al. 2006). Without the service of an intermediary it is not only the knowledge of insurance

products, which would be helpful for insurance purchasers; they also would need to know the

market of insurance companies. “Most insurance consumers have no idea which insurers

have a proper reputation for claims management or use insurance policies that are narrower

that the standardized coverage forms. Indeed, it is precisely for these reasons that consumers

choose to rely on independent insurance intermediaries” (Schwarcz, 2007. p. 315).

As the Federation of Finnish Financial Services (FFFS) (2009) argues, the main

purpose to ban commissions for insurance brokers was to ensure, that insurance brokers

would truly be an independent intermediary and working only for the best interest of the

client. This shift was expected to ensure that brokers would not be able to steer client(s) to a

50
carrier with the highest payoff for the broker. In their 2008 letter to the European

Commission, Ministry of Social Affairs and Health (MSAH) has the same standpoint, as does

FFFS. “Relations between the insurance undertaking and the broker, which restrict the

freedom of choice of the broker, are against the interests of the client” (MSAH, 2008). Also,

the Financial Supervisory Authority (FSA) of Finland (2006) stands behind the legislation as

it is expected to ensure client’s interest will be in the center of the insurance brokers interest.

According to Jaakkola (2010) the 1994 law on insurance intermediaries has already

been effective in the sense of transparency. The law from 1994 required insurance brokers to

have a written contract with their client. Also, it was required to state the duties of the broker,

aspects behind remuneration and the party who pays remuneration, either client or the

insurer. Brokers were also obliged to report to their clients all the compensation from insurer

to the broker. Also, Jaakkola (2010) points out that brokers in Finland have never been

charged or convicted on steering clients to insurer(s) with highest payoff schemes. This is one

of the main issues in this case. One of the biggest drivers for banning brokers commissions

were the mishaps in the United States in 2004. As Katriina Lehtipuro mentions (assistant

head of ministry of social affairs and health) “transparency will improve as the broker will

directly agree with its client the remuneration of the broker. As were preparing the law we

took into consideration the mishaps in the United States where brokers were setting

remuneration(s) against the interest of the client” (Tammilehto, 2004). As mentioned before

the previous law from 1994 already required brokers to be transparent about their

remuneration, and in this sense it might be that the law has not been effective.

4.5.1. The Effects of Ban on Commissions

As what has happened in Finland, after the ban on commissions the number of

brokers has decreased. In 2004, 296 registered brokers were in the Finnish market, but due to

51
the ban on commissions number of brokers has decreased close to 200 (211 at the end of

2009) (FSA, 2010). This ban on commissions has been especially bad for smaller insurance

brokerage companies. As an example here, one brokerage firm from Finland will be used as

an example. RVM Inc. a small brokerage firm, revenues between 10/2007-9/2008 were

2,564,638,83 Euros and the number of employees were 44. Need to remember there was a

three-year transition period until September 1st, 2008 after when collecting commissions for

brokers were totally banned (Vedl, 2005). Revenues for RVM Inc. between 10/2008-9/2009

were 120,632,54 and the number of employees had decreased to one (RVM Inc., 2009). As

can be seen from the example, the effects of banning commissions have been considerably

devastating for this small brokerage firm, and the huge decrease in income took place only

within a year. As a conclusion it can be stated that the law has not improved the market of

intermediary services, oppositely it has decreased competition. As the regulation by law

prohibits brokers to collect commissions, this ban could actually increase adverse selection,

as in the first place the goal was to improve it (Goel, 2006). “A decrease in the number of

intermediaries also has the potential drawback of less coverage being offered. Therefore,

reforms involving stricter screening of insurance brokers have the potential to leave some

ventures without insurance coverage” (Goel, 2006. p. 214). Table 2 below demonstrates the

development of broker’s remuneration in Finland.

Table 2: Brokers Remuneration in Finland 2004-2009

2004 2005 2006 2007 2008 2009

From Insurance 17,8 11,6 10,6 11,3 7,5 -

Companies
From Insurance 17,6 20,0 23,4 25,1 26,3 30
buyers
35,5 31,6 34,0 36,4 33,8 30
Total
Source: Financial Supervisory Authority/Statistics

52
4.5.2. Foreign Insurers and Brokers

As brokers are the most independent form of an intermediary in the market, it is

questionable whether this law has been effective in sense of what it is accused to be, interest

of the client more thoroughly evaluated. Also, from a standpoint of foreign companies, it is

expected that their entry to Finnish market will be more complicated. “Brokerage channel is

extremely important for the entry of foreign companies to Finnish markets. If the law would

make it more difficult for foreign insurers to enter the market, purpose of the law is not

fulfilled” (Jaakkola, 2008). The market share of foreign insurance companies in the Finnish

market in non-life insurance is approximately 4% and on life insurances 9% (Toikka, 2009).

As the directive is making it more difficult for foreign insurers to enter the market, the law is

likely to favor national insurers of Finland.

In 2009, the Congress of Women Entrepreneurs (CWE) delivered a statement to the

Parliament of Finland to give their standpoint to the case. E.g. they highlight that after the

ban on commissions, information on insurance products will continue to be in smaller

number of operators, and in Finland there is already an oligopoly, three largest insurers cover

over 80% of the market (CWE, 2009). In 2007, The Market Court of Helsinki declared that

the Federation of Finnish Insurance Companies (now Federation of Finnish Financial

services) “have violated the Act on Competition Restrictions and committed forbidden abuse

of dominant position, price cartel” (Lintunen, 2008). As it seems inevitable, brokers are

disappearing from the market, and as insurers having such strong handle on power, benefits

for the consumer cannot be expected to improve. “Therefore, the law decreases competition

and deteriorates consumer protection” (CWE, 2009). It is also expected that independent and

professional comparison of insurance products for consumer and small and medium sized

companies will end, as brokers would not be able continue their profession due to decrease in

income, and foreign brokers are in much better position than their Finnish colleagues (CWE,

53
2009). By the time this statement was made (16.01.2010), brokerage market in Finland had

decreased by 25% due to ban on commissions (CWE, 2009).

Earlier this year the Competition Authorities delivered their statement to the

Parliament of Finland, which states the following:

The competition authority views that the ban on commissions for brokers can be seem

to have a negative impact on competition, because the ban is hampering the enter of

foreign insurers to the Finnish market. Functioning brokerage channel is expected to

have a positive effect for foreign insurance companies to enter the Finnish market,

because foreign insurers are expected to use the brokerage firms as a selling channel.

The ban on commissions has complicated the operations of brokerage firms; it is also

expected to have a negative effect on foreign insurers entering the market that would

create more competition in Finnish insurance markets (Juuti, 2010).

Also the Finnish Insurance Broker Association made a remark concerning the effects

for foreign insurance companies in the Finnish market.

Insurance brokers are the only players in the market that are able to distribute

foreign insurance products and thus maintaining the adequate level of supply and

competition between insurers. Competition between insurance companies and

adequate level of insurance supply enhances the capabilities of Finnish companies

and also in the long run improves Finnish insurance companies international

competitiveness (FIBA, 2005).

Also the European Commission has notified the Finnish government stated as

follows:

A reduction in the number of brokers may very well have implications in terms of EU

market integration. In this respect we refer to the Communication from the

Commission or the inquiry into the European business insurance sector pursuant to

54
 Article 17 of Regulation 1/2003, which recognizes that the absence of a strong

independent brokerage network available at the national level may be a barrier to

entry into the market for distributors of insurance products (especially for foreign

insurers) (Van Hulle, 2009).

Another important aspect that has took place after the ban on commissions, not only

has the number of brokers decreased in the market, but brokers have shifted from being

independent intermediaries to operate as insurance agents (Jaakkola, 2010). And as

mentioned in an earlier chapter “Insurance agents act as a distribution channel for the

insurer(s) they represent” (Cummins & Doherty, 2005. p. 6). One could argue that as the

number of brokers has decreased, and as insurance companies own selling channel has

improved, the ban on commissions has not increased client’s interest or transparency in the

market. “The new law is aiming to shift brokers to act as agents, and it can’t be accepted. As

brokers are transferring from representing the client to represent the insurance company, this

does not improve customers chances to receive adequate policies” (Pukkila & Kiviniemi,

2009). And on top of that, this ban on commissions is against the principles of the Directive

2002/92/EC on insurance mediation and against the contractual freedom of the Finnish

Constitution (Jaakkola, 2010). And as agents are not required to be transparent with

disclosure (Vedl, 2005), how is this supposed to improve transparency and enhance insurance

buyers rights to receive adequate policies (E.g. Interviews 5 and 7, 2010)

55
5. Discussion

The purpose of this research was to investigate the arguments whether insurance brokers have

a conflict of interest to steer their clients to insurers with biggest payoffs, are contingent

commissions adequate compensation structure to ensure better policies to insurance

purchasers or mainly benefiting insurance companies, and what have been the consequences

for brokerage business in the Finnish market after the introduction on ban on commissions.

This section will interpret the results in the context of the extant theory and evaluate the

contributions to the theory about the topic, and finishes with limitations and proposes

recommendations for further research.

5.1. Conflict of Interest

As Etgar (1976) concluded in his study, independent agents provide generally better quality

of service when compared to exclusive agents. As the literature (e.g. Beh et al. 2008, Bonner

et al. 2002, Eckardt, 2002) and findings pointed out, without the service of an intermediary it

is not only the knowledge of insurance products, which insurance purchasers would have to

know; they also would need to know the market of insurance companies. For a consumer it

can be difficult to determine on what sort of coverage they would need from the market of

insurance products. Insurance products can be complex and the lack of knowledge on these

products by consumers increases the need for having an intermediary at their service (Carson

et al. 2006). Especially larger companies do have a lot of knowledge on insurance products

but they don’t have the access on all the information that insurance brokers possess

(Interview 2).

It became clear from both the literature and findings that brokers and agents provide

services on same insurance products, but from a different perspective. Insurance brokers are

the most independent form of an intermediary in the market, as agents can represent one or

56
several insurance companies. Brokers are independent intermediaries whom are not working

under insurers, but operating as middleman to provide clients with correctly set policies as

negotiating with insurers to receive adequate policies based on each clients risk preferences.

Without the help of an intermediary the insurance buyer would not be able to negotiate these

policies with insurers on their own (Cummins & Doherty, 2005). In some cases, insurance

products would be so complex that the client needs the service of a broker. For companies

brokers are essential, e.g. if Phillips would not use the services of an broker, they would

require to have their own department only concentrating on insurances, which would

expected to be more expensive than letting professional brokers to provide that work on

behalf of them (Interview 6). And as Regan (1997) proposed in her research, as the more

uncertain environment or the more complex the product is the more likely it is that brokers

are able to provide superior service. And if working directly with an insurer it is unlikely for

client to receive policies at the right price and at the right conditions (Hjortlund, 2008),

therefore brokers play a pivotal role in the market.

As in agency theory (e.g., Eisenhardt 1989) the main discussion revolves around

which form of compensation would be the most effective in broker client relationship. It

became clear from the findings that the main interest of the broker is to build trust between

their clients and insurers, and not to search for biggest payoffs. If a broker would concentrate

on collecting highest remuneration as possible, as literature pointed out; professional

accreditation (e.g. Tetlock, 1983. Brief et al. 1991) and from interviews; clients would

eventually find out, it is not worth of the risk for the broker to act in such a way (e.g.

Interview 7). It seems evitable from the findings that brokers’ should have the obligation and

integrity to make sure insurance purchasers have the possibility to receive policies according

to their risk preferences, but what seems to be forgotten from discussion is the clients role, in

sense that they are the party who makes the final decision on which policy they will choose.

57
“Our society rightfully protects consumers against fraud and misleading behavior by

companies. However, consumer protection sometimes seems to overlook the fact that every

decision in life entails a certain degree of risk and that the person who makes an informed

decision should also bear (a part of) this risk. If the consumer were to bear (a part of) the

risks, he/ she would probably develop a preference for long-term security versus short-term

returns. In order to guarantee this positive effect, financial services must be highly

transparent so that it is possible to make informed decisions. Transparency consists of, among

other things, comprehensible information on distribution costs, risk and yield of the product”

(BCG, 2009)

5.2. Contingent Commissions

Back in 2004, contingent commission issues in the Unites States started the discussions on

taking a closer look on insurance brokers quality of service (Carson et al., 2006). This was

the starting point for quickly introducing a new intermediation law in Finland (Vedl, 2005).

Regardless of that, in the United States the ban was recently (February 2010) disposed.

According to regulators, the ban on contingent commissions “created inherent conflicts”

(Bloomberg, 2010). The level playing field wasn’t equal for all the players as only top three

brokerage firms were banned to collect contingent commissions. It wasn’t a fair situation for

the brokerage firms and neither for insurance buyers in the market (Bloomberg, 2010).

The results highlighted that contingent commissions could be beneficial for insurance

purchasers to receive accurately priced policies (Schwarcz, 2007), but the incentive for the

broker to steer clients on insurers with highest payoff is not expected to be in the best interest

of the market. As Stolwijk (2010) mentioned in the interview, contingent commissions

should be allowed, but “should be based on the work you do for insurers and not based on

volume or profit, that is not in the best interest of the client”. For example, Aon in Finland

58
(2010) discussed with some national insurers on the price differences for the policy whether a

client would go directly for the insurer or use the services of the broker. Insurers stated that it

would be on average 10%-20% more expensive for the client to go directly for the insurer.

This would create more workload for the insurer, which brings the prices up, and the service

will not be independent. Brokers do a lot of work on behalf of the insurers, e.g. claims

handling (Interview 7). These tasks done on behalf of the insurer might be a possibility for

contingent compensation, but even then there would still be the risk of steering towards

carriers with highest payoffs.

As the literature (e.g. Schwarcz, 2007, Fitzpatrick, 2006) made a distinction between

a profit and volume based contingent commissions and highlighted that they could actually

benefit the policyholder (e.g., Cummins & Doherty, 2005), in reality such form of

compensation has been mainly profit based and not being used by brokerage firms at all,

especially since the Spitzer investigation in the United States. Also, as literature pointed out

(e.g., Cheng et al., 2007) clients have not been aware that these payments existed, and the

broker can have a conflict of interest, especially if based on volume, as broker(s) would steer

as much business as possible to certain carriers.

5.3. Ban on Commissions and its Consequences

As Hjortlund argued (2008) the ban on commissions may actually “lead to an increase in

costs if a client appoints and pays for a broker and the insurer does not reduce the premium

by a commensurate amount. Banning commissions may therefore reduce competition in the

market as some clients may not be willing to spend additional amounts on independent

advices” (p. 22). As has been seen number of brokers has decreased, leaving less independent

services to insurance buyers. It is also questionable, why the smallest number of intermediary

services and the most independent of them (insurance brokers) has to follow such strict

59
regulations, and insurance agents do not, who work directly for one or many insurers,

therefore their own sales force. It cannot be argued that this ban on commissions has

improved the market, and especially the lot of insurance buyers.

Eckardt (2006) found that agents whom are “dependent from insurance companies has

a negative impact both on the information quality provided and on the contract conclusion

rate”. As insurance agents have the right to distribute one or several insurers products they

are expected to provide less superior services compared to insurance brokers. As in Finland

brokers are banned to receive commissions, transparency has increased in a sense that now

brokers remuneration will be negotiated directly with the client. But, overall transparency in

the intermediary services had declined As the brokerage market in Finland had decreased by

25% due to ban on commissions (CWE, 2009) and another important aspect that has took

place after the ban on commissions, not only has the number of brokers decreased in the

market, but brokers have shifted from being independent intermediaries to operate as

insurance agents (Jaakkola, 2010).

The intermediation law has improved the position of insurance agents, thus increased

the sale force of insurance companies. Lea Mäntyniemi, head of insurance legislation at the

Federation of Finnish Financial Services commented in 2008 that she believes the law is not

going to decrease number of brokers and unbiased services in the market. She also points out:

“Quite the contrary. The products of insurance companies become more and more

sophisticated, insurance policies are difficult to compare and the insurance market becomes

increasingly international, so insurance broker services have even more demand among both

business and consumer as well as the public sector” (Kapiainen-Heiskanen, 2008). She

acknowledges the importance of insurance brokers, but the arguments for the effects of the

law are unlikely to be true, as by 2009 the brokerage business had already decreased by 25%.

Before the law was introduced in 2005, Vice-CEO of a Finnish insurance company Tapiola,

60
Antti Calonius made a comment that the new law is good because it makes roles clearer and

improves transparency (Tammilehto, 2004). As the results have revealed, none of these

statements are likely to be true.

In Finland, as the intermediation law has forbidden brokers to receive commissions

(Vedl, 2005), market power of brokers has decreased as the number of brokers has gone

down considerably. The ban has set Finnish brokers on an unfair position compared to agents

(FIBA, 2005). The ban on commissions should be lifted and rules made equal to all

participants (Insurance brokers, insurance agents, direct writers) in the intermediary services.

Information asymmetry (Singh & Sirdeshmukh, 2000) has increased in the Finnish market as

fewer brokers are operating in the market and some of them shifted to work as agents

(Jaakkola, 2010). As table 3 demonstrated, the law is effective only towards a narrow number

of players and favoring insurance selling institutions, which is unlikely to be in the best

interest of insurance buyers. As Eckardt (2006) stated in her study “…on average consumers

will get more detailed information on insurance products and companies as well as better

suited recommendations from insurance brokers…insurance brokers have higher success

rates, i.e. a higher proportion of their consultations leads to a contract conclusion compared to

the success rates of insurance agents” (p. 13)

5.4. Implications for Practice

The findings of this study and the suggestions of literature, it came obvious that insurance

brokers are the most independent providers of intermediary services in insurance business. It

does not seem fair that insurance brokers are banned to collect commissions (in Finland) as

agents can continue to carry their activities with no restrictions on their remuneration. It

would seem reasonable that for clients to receive the most adequate policies, they should

prefer brokers to insurance agents (insurers own sales force).

61
 Contingent commissions have been in the headlines in recent years, as conflicts have

been around them. Even though the ban on contingent commissions have been lifted for top

brokerage firms in the Unites States (Bloomberg, 2010), they seem to create a state where

there is a chance for their misuse against insurance buyers. These forms of commissions

should be more carefully studied and either banned or some form of new rules build around

it.

And as in Finland the number of brokers have decreased and the number of agents has

increased, it cannot be argued that transparency has improved. For clients this has created a

situation where they have a smaller choice of brokers, thus decreasing the number of

independent services offered, and has actually benefited insurance companies as their own

sales force has improved. Also, this ban favors the national insurers of Finland as the chance

for foreign insurers to enter the market has weakened (as brokers are disappearing), insurance

purchasers chances of getting adequate policies will continue to deteriorate. This ban has

created a situation, where already Finnish insurers have a strong position; they can improve

their market shares, thus decreasing competition. Therefore the ban on commissions in

Finland should be lifted and the rules of the game made equal to all the participants who

intermediate the same products.

5.5. Limitations of the Present Study

The results and findings of this research include a number of limitations. First, this thesis

only studied the aspect of insurance brokerage remuneration from the view of one company,

Aon, also the interviews were conducted in one country, the Netherlands. For example

interviews with brokers from different countries/cultures could have been given a wider

perspective on the aspects of insurance brokers remuneration. The fact that interviews are

based on the standpoint of one-company, results might be biased. To get a thorough analysis

on the standpoint of insurance brokers, conducting interviews for example on top three

62
brokerage firms, this thesis would of gain a better perspective on how brokers view the issues

on remuneration, and also what would be the differences/similarities between competing

brokerage firms. No interviews were conducted at insurance companies, which could have

brought another viewpoint for this on going debate of brokerage remuneration. The results

could have been more prudent if there had been interviews conducted at insurance

companies, especially on the situation on Finland it would have been valuable to gain

responses from Finnish insurers to add more value to this study. Also, very important aspect

in this issue plays the government. Interviews with government authorities would have added

a third party to the discussion, leading to conclusions which could have been more profound

as they now are. Given the time period of three months, this study was limited to study

brokerage remuneration only from the standpoint of one brokerage firm.

5.6. Suggestions for Further Research

If taking this study further, it would be interesting to study the intermediary markets in

different countries to really understand the divergence of cultural effects. For example as

contingent commissions in the United States were the problem; those issues were expected to

be the case in Europe also, even though cultural differences might play a role. Hofstede’s

(1983) cultural dimensions study could add a cultural perspective on how differently people

form different cultures react e.g. on incentives. “However, prior research has not examined

whether differences in these attributes actually lead individuals to respond differently to

monetary incentives. Such research is particularly important since some (shared) dimensions

of culture would could yield opposing predictions regarding the effects of monetary

incentives, and it is theoretically unclear whether differences in cultural background will lead

to differential effort responses under monetary incentives” (Chow et al., 1999).

It would be highly recommended to study how different brokerage firms operate and

deal with remuneration with their clients. It could be expected that different firms have

63
different compensation structures with their clients, which would help to make better

conclusions and suggestions on compensation. Also to get e.g. interviews with government

authorities from different countries could add a tremendous value and ideas how

compensation could be structured in different countries.

64
6. Conclusion

This thesis studied the aspects of insurance brokers’ remuneration, and more so whether

brokers’ are tempted to steer their clients towards insurers with the biggest payoffs for the

insurance brokers’. The findings suggest that brokers’ are not and should not try to lure their

clients to choose policies, which would bring the highest compensation for the broker.

Competition e.g. in the Netherlands is so fierce that brokers’ cannot do this because the high

possibility for losing the client(s). Therefore, the highest interest for brokers is to conduct

thorough and professional work to collect good policies for their clients. Opinions on

contingent commissions are still divided and whether this form of remuneration should be

used requires more discussions in this topic, but it seems that many would like to ban their

use. As back in 2004, in the United States, the misuse on this form of compensation started

the discussions on insurance brokers independence, though it can be concluded that

contingent commissions itself were not the problem, a system was built around it to bring as

much profits as possible for insurance brokers, which was not in the best interest of the

clients. These issues led Finland to be the first country to introduce a law, which prohibits

brokers to collect any form of compensation from insurers. As the findings from the Finnish

market revealed and the interviews in Aon in the Netherlands, this law has caused to have a

negative impact on insurance broker business and more so to decrease the chances for clients

to receive independent intermediary services in the market. This ban has also ensured that

international competition has decreased and the state of national insurers has improved.

Studying this topic has given a standpoint of only one company, Aon, but it has

revealed the aspects of how this business is built in two different countries. Finland, highly

regulated brokerage business where competition is in minimum, mainly benefiting the

insurance companies, and the Netherlands in which a high level of competition is the

preferred model, thus promoting the interests of the insurance purchasers.

65
Appendices

Appendix 1: Aon Service Agreement

66
67
68
Appendix 2: Interview Transcripts

Interview 1.
22.07.2010
10.00am-11.00am
Erwin H.G. Smit (Managing Director)
 Board member of risk solutions and dealing with large corporations (global
business)

1) Currently insurance companies are allowed to compensate the broker; what do you think

are the positive aspects of this model?

- When I started in this business in 1997, from the beginning I always

wondered that isn’t it funny that insurance companies are paying
brokers commissions.
- As of now as insurers pay commissions, tasks are easy to handle and
clients can get what they ask for.

2) If a client wants to receive information about the commission from the insurer, is this

possible under the current model and has there been any case where the client does not want

to know the commission? And from the client’s perspective, is it relevant for the client to

know the amount of compensation from the insurer to the broker? Why? Examples?

- If a client wants to know the commission from the insurance company

to the broker, we will tell them
- One client even demanded there should be commission in the deal.
- To my opinion there should be a market where there would be a certain
level of commissions. Meaning that there should be the same level
playing field for commissions, same commission from every insurance
company.

3) It is argued that more transparency is required to ensure that the client’s interest is taken

into account. What do you think are the aspect(s) in the brokerage business that are already

69
transparent, and is there anything that should be improved to make sure the client can receive

the best possible solution? Why? Examples?

- What needs to be understood is that insurance brokers do not look after

their own interest; we are working solely on the interest of the client.
- There is transparency already in this business, not only on
remuneration, applies to everything.
- There really isn’t anything that should be improved.
- In Netherlands, there is not too much of government regulation. In case
of high government regulation there would be a lot less competition. In
the Dutch market there is a lot of competition, so brokers have to work
solely on the interest of the client otherwise you wont survive.
4) E.g. in Finland insurance brokers are required to present the compensation they receive but

it does not apply to insurance agents/direct writers. Do you think this should apply to

insurance agents/direct writers as well and should there be changes made to it? And what is

the situation in the Netherlands? Why? Examples?

- There should be the same level playing field for all the parties involved
in the business.
- What strike out mostly are the comments of Dutch insurance
association. They state that there should be a high level of transparency
but this does not apply to insurance agents/direct writers, which is not
fair at all.

5) 5) In Finland, brokers have never been charged or convicted on malpractice concerning

about double cash channel on steering clients towards certain insurers. Has this ever been an

issue in Netherlands and if so could you tell me an example(s)?

- There has never been any cases where a broker would of have steered
clients to certain insurance companies.
- There will be commission if agreed with the client.

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6) What do you think is the benefit for the client to use insurance agents/direct writers over

brokers?

- By using an agent/direct writer it will be cheaper than using brokerage

services.
- But, as the insurance agent/direct writer works for an insurance
company, they are working for their own interest.
- When using an agent, the client is not getting the brokers knowledge
that has the overview of the whole market.
- And in some cases, the process would be impossible without the
broker’s services.

7) It is said that under the double cash channel system, the broker could have a conflict of
interest to favor certain insurers. What do you think would be an effective management on
this issue to make sure this would not happen? Why? Examples?
- The current system is working as client’s interest is being taken into
account.
- The Dutch market is very competitive; you have to work for the
interest of the market. Otherwise your client will move if you try to
benefit your own interest.

8) If the insurance company would no longer pay commissions to the broker, what kind of

effects you think this shift would have on the market? Could it promote healthier markets or

could it restrict competition? Why? How?

- If the whole system would shift to fee based system, a lot of brokers
will disappear because they wont survive.
- Ok, it might be transparent but maybe not healthier.
- Clients need to know what they are paying for.

9) Could it be possible that there would be a system in place where the intermediary could act

both as an insurance agent/direct writer and as a broker, as long as the client knows his/her

role? In Finland what has been discussed, that brokers could shift to work as insurance

71
consultants, both as an agent and as a broker, as long as the client knows the role. What do

you think about this model and could it bring anything new?

- No not a good idea. Does not make any difference.

- Brokers are fully independent and the client’s interest is the number
one priority.
- E.g. in Japan, there are basically no brokers, but I believe that wont
exist anymore in 50 years, change is taking place.

10) E.g. in Finland, brokers have much stricter rules over insurance agents/direct writers.
What do you think would be the appropriate requirements on knowledge and ability for
insurance intermediaries and for insurance agents/direct writers? Same/different
requirements? What would be appropriate from client’s perspective? What are the
requirements in the Netherlands?
- Well, these insurance agents/direct writers should not be called as that
name.
- They are working for insurance companies therefore they should be
called insurance company. Since they are not independent as brokers
are, why are they called insurance agents/direct writers?
- It would be clearer for the customer and it is not in the client’s best
interest to use insurance agents/direct writers.

11) What do you think would be the benefits of receiving remuneration only from the client?

(Brokers view)

- The client will appreciate as no commission from insurance

companies.
- The client will know what he is paying for, as there is a direct link with
the client.

12) What would be the negative aspects of receiving remuneration only from the client?

(Brokers view)

72
 - It would be a more expensive system itself, need to negotiate about
everything.

13) Under the proposed model brokers are expected to provide better information on what

basis they are suggesting an insurer (e.g. in Finland). What do you think is the difference

from the Dutch model and is there room for improvements?

- Everything is transparent and brokers are working for the best interest
of the client.
- Those who try not act by “ethical” standards, they will be punished at
some point anyways, e.g. Spitzer case.

14) Could it be possible that the new system (only remuneration from the client) would

discourage people to become brokers and possibly reduce the number of brokers in the

market? Why?

- Certainly yes.
- Those brokers whom are new to the business and not that qualified
compared to their senior colleagues, they wont be able to survive.

15) What is your opinion on what would happen to the prices? In theory, if there would be

no remuneration from the insurer, the price of an insurance policy to the client should

decrease the amount of the commission that the broker would normally receive. Why?

- Premium changed from gross to net.

- General: net premium, plus operating and miscellaneous expenses,
and agent's commissions.
Life insurance: premium before dividends are subtracted.

16) If no commission from the insurer. Should it be allowed or disallowed for brokers to

receive remuneration from foreign insurance companies? (E.g. in Finland, brokers are not

73
allowed to receive commissions from foreign insurers anymore) Why? By a foreign insurer I

mean which is not domiciled or established by a branch in the given country.

- If brokers want to do business, why shouldn’t they be allowed to do

so?
- Dutch economy is very liberal, which means there is a lot of
competition, which therefore leads to healthier markets.

17) Is it valid to say that insurance brokers are one form of supplier for insurance companies

to contract customers?

- Yes

18) When no remuneration from insurers, what do you think could be the effect on smaller

brokerage firms? How? Why?

- It would be a disaster.
- If there is a lot of a regulation, it is not in the client’s interest. More
regulation is definitely worse for clients.

06.08.2010

Interview 2.

09.00am-10.30am

René Mandos (Chief Operations Officer)

 On the board of Dutch Association of Insurance Brokers.

 Focus on the Netherlands and the Nordics

1) Currently insurance companies are allowed to compensate the broker; what do you think

are the positive aspects of this model?

- It is easy for the client

74
 - Cross premium
 Easy to compare the cost to client
- Clients are used to the commission based structure
- The whole system is commission based
 Insurance is typically a low interest product for the consumer

2) If a client wants to receive information about the commission from the insurer, is this

possible under the current model and has there been any case where the client does not want

to know the commission? And from the client’s perspective, is it relevant for the client to

know the amount of compensation from the insurer to the broker? Why? Examples?

- Small clients (individuals)

 Generally not interested on knowing about the amount of
commission.
 In theory client is interested about it but not in practice.
 E.g. if a policy is 1000 Euros, they just pay it and don’t care
about the commission.
- Large clients (companies)
 They are interested on the commissions, due to the fact that a
lot of money is involved in larger policies.
- About 60% use brokers and the rest 40% Internet.
- Majority of the clients not interested in the amount of commissions
paid to the broker.

3) It is argued that more transparency is required to ensure that the client’s interest is taken

into account. What do you think are the aspect(s) in the brokerage business that are already

transparent, and is there anything that should be improved to make sure the client can receive

the best possible solution? Why? Examples?

- This business is based on trust and we try to build it all the time.
- Dutch market
 A lot of competition

75
  Easy for client to go for another broker, therefore need to build
good relationships with the clients.
 Compensation is transparent, if a client wants to know the
amount of commissions, we will just tell them.

4) E.g. in Finland insurance brokers are required to present the compensation they receive but

it does not apply to insurance agents/direct writers. Do you think this ban on commissions

should also apply to insurance agents/direct writers? And what is the situation in the

Netherlands? Why? Examples?

- There should be a level playing field for this business.

- Same rules should apply to all actors in the market.
 There is a proposal at work
 CAR-model (Customer Agreed Remuneration)
 But it is only for brokers.
 Not fair

5) In Finland, brokers have never been charged or convicted on malpractice concerning about

double cash channel (remuneration from both the client and the insurer) on steering clients

towards certain insurers. Has this ever been an issue in the Netherlands and if so could you

tell me an example(s)?

- Life insurance
 Previously there was provision miss selling.
 These were products, which were not in the interest of the
client.
- Non life insurance
 No problems

6) What do you think is the benefit for the client to use insurance agents/direct writers over

brokers?

76
 - For standard products, might be a bit cheaper.
- Price difference very small when comparing the use of an agent and a
broker.
- E.g. large companies have a lot of knowledge on insurances, but they
don’t have the access to all the information available.
 Need brokers services
- E.g. $300 car insurance. (Standard premium on the market)
 Broker bids for policies
 Broker will try to get a policy for less than $300
 You get the independent service of the broker.

7) It is said that under the double cash channel system the broker could have a conflict of
interest to favor certain insurers. What do you think would be an effective management on
this issue to make sure this would not happen? Why? Examples?
- It is very transparent already.
- But, more transparency could be used on which carriers we place our
business with.
 Clients could see that the company is working together with
several insurers.
8) If the insurance company would no longer pay commissions to the broker, what kind of

effects you think this shift would have on the market? Could it promote healthier markets or

could it restrict competition? Why? How?

- Consumer market
 Client pays more
 Bad for consumer markets
 Brokers wont earn enough
- Number of brokers will decrease as competition decreases.

9) Could it be possible that there would be a system in place where the intermediary could act
both as an insurance agent/direct writer and as a broker, as long as the client knows his/her
role? In Finland what has been discussed, that brokers could shift to work as insurance
consultants, both as an agent and as a broker, as long as the client knows the role. What do
you think about this model and could it bring anything new?

77
 - Could be possible
- Most clients would probably accept it.
- E.g. for a standard product
 Lets say the premium in the market is around 900-1100 and the
market analysis costs 200, no point to bid for policies.
 Broker could each year decide on which carrier I would choose
to have the policy with.
10) E.g. in Finland, brokers have much stricter rules over insurance agents/direct writers.
What do you think would be the appropriate requirements on knowledge and ability for
insurance intermediaries and for insurance agents/direct writers? Same/different
requirements? What would be appropriate from client’s perspective? What are the
requirements in the Netherlands?
- Same conditions and qualifications for everyone.
- Everyone should have same educational qualifications

11) What do you think would be the benefits of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

- Client
 Would respect, very transparent, and gives the client the
opportunity to negotiate.
- Broker
 Would demonstrate independency from carriers.
 More time would be spent on to negotiating with clients on
processes etc.
- They would love it
 Price competition shifting to brokers.
- Overall, quality would decrease and costs would increase.

12) What would be the negative aspects of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

78
 - Client
 Relationship in pressure with broker
 Total cost in the chain may rise
 Paid by the client
- Broker
 Costs go up
- Insurer
 Has to start doing the work brokers used to do.
 If no commission, why would brokers do part of the work
insurers then?
- Relationship between the broker and the carrier would be less intense
and brokers will be even more independent, and this would create a
problem for the carrier to give incentive to sell their product.

13) Under the proposed model brokers are expected to provide better information on what
basis they are suggesting an insurer (e.g. in Finland). What do you think is the difference
from the Dutch model and is there room for improvements?

- We do not provide a lot of information

 There is a high state of trust
 Like said before, for consumer segment don’t make sense
(simple policies)
- In large segments
 The client wants to know also the policies offered from other
carriers (a lot of money involved)

14) Could it be possible that the proposed practice (only remuneration from the client) would
discourage people to become brokers and possibly reduce the number of brokers in the
market? Why?

- The number of brokers will decrease.

15) What is your opinion on what would happen to the prices? In theory, if there would be no
remuneration from the insurer, the price of an insurance policy to the client should decrease
the amount of the commission that the broker would normally receive. Why? Examples?

79
 - Net premium should be the gross premium – commission.
- Cost for smaller policies will increase
- For bigger policies the cost might decrease.
- Total costs would increase
- In theory the price shouldn’t change
- Carriers could add additional risk to the price of the premium

16) If no commission from the insurer, should it be allowed or disallowed for brokers to
receive remuneration from foreign insurance companies? (E.g. in Finland, brokers are not
allowed to receive commissions from foreign insurers anymore) Why? By a foreign insurer I
mean which is not domiciled or established by a branch in the given country.

- Again, there should be the level playing field for the business.
- Doesn’t make sense to put such restrictions.
- “Don’t understand why EU has accepted this”

17) Is it valid to say that insurance brokers are one form of supply channel for insurance
companies to contract customers?

- Yes, it’s true.

- If only getting paid by client
 The broker creates value to client and to insurers as well, so
brokers should be compensated for this.

18) When no remuneration from insurers, what do you think could be the effect on smaller
brokerage firms? Why? How?

- They would disappear.

19) What is your standpoint on contingent commissions? Should they be allowed or banned?
What could be some pros and cons of contingent commissions? Why? Examples?

- Has a potential conflict of interest

- Rationale?
 Why another bonus?

80
20) From the perspective of a policyholder (the client), contingent commissions could enable
the client to receive more accurate pricing, terms and conditions, as well as better services
provided by insurance brokers and insurance companies, (assuming a setting where
disclosure is fully transparent). Do you agree with this statement? Why? Examples?

- Hmmm not necessarily

13.08.2010
Interview 3.
10.00am-11.00am
Focko Dorhout Mees (Vice Chairman)
- Management committee
- Global marine manager
- Benelux board

1) Currently insurance companies are allowed to compensate the broker; what do you think

are the positive aspects of this model?

- Cash advantage for the broker

- Creates level playing field for the market
- Independent broker
 Commissions needed.
- Future
 Shift to internet

2) If a client wants to receive information about the commission from the insurer, is this

possible under the current model and has there been any case(s) where the client does not

want to know the commission? And from the client’s perspective, is it relevant for the client

to know the amount of compensation from the insurer to the broker? Why? Examples?

- If it is asked, we will tell the clients the amount of commission we

receive.

81
 - Big clients always ask
 They are comparing the total costs
- We are in a position of an advisor
 We never own the product

3) It is argued that more transparency is required to ensure that the client’s interest is taken

into account. What do you think are the aspect(s) in the brokerage business that are already

transparent, and is there anything that should be improved to make sure the client can receive

the best possible solution? Why? Examples?

- Does being transparent really mean that there would be some kind of
change to the current position?
- This system has always worked really well.

4) E.g. in Finland insurance brokers are required to present the compensation they receive but

it does not apply to insurance agents/direct writers. Do you think this ban on commissions

should also apply to insurance agents/direct writers? And what is the situation in the

Netherlands? Why? Examples?

- The has to be the same level playing field

5) In Finland, brokers have never been charged or convicted on malpractice concerning about

double cash channel (remuneration from both the client and the insurer) on steering clients

towards certain insurers. Has this ever been an issue in the Netherlands and if so could you

tell me an example(s)?

- No examples
- No problems

82
6) What do you think is the benefit for the client to use insurance agents/direct writers over

brokers?

- There are no benefits for using an agent over a broker.

- Agent works directly for an insurer.

7) It is said that under the double cash channel system the broker could have a conflict of
interest to favor certain insurers. What do you think would be an effective management on
this issue to make sure this would not happen? Why? Examples?
- We have asked clients why they have chosen Aon.
 Aon is such a strong player, that we can get good policies.
- Is it better to have 1000 policies available or 100 strong ones?
 As we have these relationships with insurers and we are an
powerful organization, we can get good policies for our client.

8) If the insurance company would no longer pay commissions to the broker, what kind of

effects you think this shift would have on the market? Could it promote healthier markets or

could it restrict competition? Why? How?

- If commissions would be banned, people will come up with clever

ideas to go around them, industry is usually smarter than laws.
- Dutch market is highly competitive, and we have one of the lowest
premiums in Europe.

9) Could it be possible that there would be a system in place where the intermediary could act
both as an insurance agent/direct writer and as a broker, as long as the client knows his/her
role? In Finland what has been discussed, that brokers could shift to work as insurance
consultants, both as an agent and as a broker, as long as the client knows the role. What do
you think about this model and could it bring anything new?
- Yeah, could work.

83
 - As long as you tell the client what your role is and they accept it, no
problems.

10) E.g. in Finland, brokers have much stricter rules over insurance agents/direct writers.
What do you think would be the appropriate requirements on knowledge and ability for
insurance intermediaries and for insurance agents/direct writers? Same/different
requirements? What would be appropriate from client’s perspective? What are the
requirements in the Netherlands?
- All the parties involved in the market should have the same rules.

11) What do you think would be the benefits of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

12) What would be the negative aspects of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

- Hours spend on insurers work would be stopped.

- This all is based on the popular belief that everything would get better:
this is rubbish.

13) Under the proposed model brokers are expected to provide better information on what
basis they are suggesting an insurer (e.g. in Finland). What do you think is the difference
from the Dutch model and is there room for improvements?

- This business is transparent already.

- If banning commissions, we could also start selling 100 euro car
insurances, and if that would happen, insurance companies would
really suffer from it.

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14) Could it be possible that the proposed practice (only remuneration from the client) would
reduce the number of brokers in the market? Why?

- Dramatically.
- Finland
 The brokerage business is so small in Finland that they don’t
have the power to fight back.
- Netherlands
 Such a huge industry
 We have the power to fight back and a lot of people would lose
their jobs if commissions would be banned.

15) What is your opinion on what would happen to the prices? In theory, if there would be no
remuneration from the insurer, the price of an insurance policy to the client should decrease
the amount of the commission that the broker would normally receive. Why? Examples?
Which would be more expensive for the client, to use a broker or to go directly to the insurer?

- In short term premiums would be lower.

- In long term we could see higher premiums.
- Cheaper for the client to use a broker than go directly to insurer.

16) If no commission from the insurer, should it be allowed or disallowed for brokers to
receive remuneration from foreign insurance companies? (E.g. in Finland, brokers are not
allowed to receive commissions from foreign insurers anymore) Why? By a foreign insurer I
mean which is not domiciled or established by a branch in the given country.

- Level playing field.

- Finnish brokers do not have the power to fight back.
- These are international markets, Finland cant control it.

17) Is it valid to say that insurance brokers are one form of supply channel for insurance
companies to contract customers?

- Yeah, true.

85
18) When no remuneration from insurers, what do you think could be the effect on smaller
brokerage firms? Why? How?

- They would all disappear.

19) What is your standpoint on contingent commissions? Should they be allowed or banned?
What could be some pros and cons of contingent commissions? Why? Examples?

- They should be banned

- Conflict of interest to favor insurers.
- Nothing good about contingent commissions.
- Only area of our business where I would have moral problems.

20) From the perspective of a policyholder (the client), contingent commissions could enable
the client to receive more accurate pricing, terms and conditions, as well as better services
provided by insurance brokers and insurance companies, (assuming a setting where
disclosure is fully transparent). Do you agree with this statement? Why? Examples?

- I do not agree, NO.

21) Is it prudent to say that by allowing commissions, clients would receive better policies
than in a situation where commissions would not be allowed? Why?

- When government tries to restrict markets, it will fail.

- Driving the interest of the insurers.

86
13.08.2010
Interview 4.
10.00am-11.00am
Marc van Nuland (Chief Commercial Director)
- Advisory activities

1) Currently insurance companies are allowed to compensate the broker; what do you think

are the positive aspects of this model?

- Need to be transparent to the client

- Not fair for clients
 If premiums go up
 Why commissions go up as well?
- Clients should pay for your service
- And insurers should pay for the intermediary service that is provided
for them by the brokers.

2) If a client wants to receive information about the commission from the insurer, is this

possible under the current model and has there been any case(s) where the client does not

want to know the commission? And from the client’s perspective, is it relevant for the client

to know the amount of compensation from the insurer to the broker? Why? Examples?

- Most of the times, clients do not even care.

- Corporate clients do care about the amounts, because they are
comparing the total costs.

3) It is argued that more transparency is required to ensure that the client’s interest is taken

into account. What do you think are the aspect(s) in the brokerage business that are already

transparent, and is there anything that should be improved to make sure the client can receive

the best possible solution? Why? Examples?

87
 - Already transparent.

4) E.g. in Finland insurance brokers are required to present the compensation they receive but

it does not apply to insurance agents/direct writers. Do you think this ban on commissions

should also apply to insurance agents/direct writers? And what is the situation in the

Netherlands? Why? Examples?

- The distinction of brokers and agents needs to be more transparent.

5) In Finland, brokers have never been charged or convicted on malpractice concerning about

double cash channel (remuneration from both the client and the insurer) on steering clients

towards certain insurers. Has this ever been an issue in the Netherlands and if so could you

tell me an example(s)?

- No public cases, but I’m sure it has happened.

 Smaller brokers do it

6) What do you think is the benefit for the client to use insurance agents/direct writers over

brokers?

- There is no benefit
 Broker is independent

7) It is said that under the double cash channel system the broker could have a conflict of
interest to favor certain insurers. What do you think would be an effective management on
this issue to make sure this would not happen? Why? Examples?
- If it would be stated by the law
 No difference
- There is never 100% trust
 Maybe necessary to have full transparency

88
 - Better on long term.

8) If the insurance company would no longer pay commissions to the broker, what kind of

effects you think this shift would have on the market? Could it promote healthier markets or

could it restrict competition? Why? How?

- Number of brokers will decrease

- E.g. if I buy a car from the dealer, I don’t care how much the dealer is
making.
- In this market, the client buys two products, the policy and the service.

9) Could it be possible that there would be a system in place where the intermediary could act
both as an insurance agent/direct writer and as a broker, as long as the client knows his/her
role? In Finland what has been discussed, that brokers could shift to work as insurance
consultants, both as an agent and as a broker, as long as the client knows the role. What do
you think about this model and could it bring anything new?
- Would kill the idea of transparency
- Consultants:
 Need to know the clients risks and need to know the market.
 Brokers know the market but agents do not know that well.

10) E.g. in Finland, brokers have much stricter rules over insurance agents/direct writers.
What do you think would be the appropriate requirements on knowledge and ability for
insurance intermediaries and for insurance agents/direct writers? Same/different
requirements? What would be appropriate from client’s perspective? What are the
requirements in the Netherlands?
- There should be same level playing field.
- Would benefit the broker if there would be the same level playing
field.
- Clients should be able to understand the difference between broker and
agent.

89
11) What do you think would be the benefits of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

- Would not be fair for the broker.

- This would allow the insurers to have a free distribution model.

12) What would be the negative aspects of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

- If less large brokers

 Bad for markets.
- But price wont go down.

13) Under the proposed model brokers are expected to provide better information on what
basis they are suggesting an insurer (e.g. in Finland). What do you think is the difference
from the Dutch model and is there room for improvements?

- There is a lot of competition in the Dutch market; you cannot try to

trick your client.

14) Could it be possible that the proposed practice (only remuneration from the client) would
reduce the number of brokers in the market? Why?

- Yes, it would reduce.

90
15) What is your opinion on what would happen to the prices? In theory, if there would be no
remuneration from the insurer, the price of an insurance policy to the client should decrease
the amount of the commission that the broker would normally receive. Why? Examples?

- No difference, maybe more expensive to go directly to insurer than

using a broker.
- Brokers are able to get better policies
- 2 causes
 The cost of distribution
 If no broker
 The client has no power to negotiate

16) If no commission from the insurer, should it be allowed or disallowed for brokers to
receive remuneration from foreign insurance companies? (E.g. in Finland, brokers are not
allowed to receive commissions from foreign insurers anymore) Why? By a foreign insurer I
mean which is not domiciled or established by a branch in the given country.

- Yes, of course

17) Is it valid to say that insurance brokers are one form of supply channel for insurance
companies to contract customers?

- Yes

18) When no remuneration from insurers, what do you think could be the effect on smaller
brokerage firms? Why? How?

- They would disappear

19) What is your standpoint on contingent commissions? Should they be allowed or banned?
What could be some pros and cons of contingent commissions? Why? Examples?

- These should be banned.

- Conflict of interest a possibility
- Insurers should pay for the distribution of their products.

91
20) From the perspective of a policyholder (the client), contingent commissions could enable
the client to receive more accurate pricing, terms and conditions, as well as better services
provided by insurance brokers and insurance companies, (assuming a setting where
disclosure is fully transparent). Do you agree with this statement? Why? Examples?

- Sometimes I tell clients that please build a long-term relationship with

this insurer, because they are a good company.

21) Is it prudent to say that by allowing commissions, clients would receive better policies
than in a situation where commissions would not be allowed? Why?

17.08.2010
Interview 5.
11.15-12.15
Hans Stolwijk (Head of construction department)
- Amsterdam & Rotterdam
- Income mainly coming from commissions
- Clients include e.g. 15 largest construction companies in the
Netherlands.

1) Currently insurance companies are allowed to compensate the broker; what do you think

are the positive aspects of this model?

- Earnings by fee are a pretty new structure

- This business has always been commission based
 Most of the construction companies use commission based
remuneration
 We split the commissions with the client. They see exactly how
much we make and as we share the commission with them,
they are able to make profit.

92
2) If a client wants to receive information about the commission from the insurer, is this

possible under the current model and has there been any case(s) where the client does not

want to know the commission? And from the client’s perspective, is it relevant for the client

to know the amount of compensation from the insurer to the broker? Why? Examples?

- A lot of clients don’t have interest on the amount of compensation we

receive.
- They are more interested on the entire amount of cost of the risk.
- Not important for client to know how much brokers are making.
- Sometimes commissions are so big that we share them with the client.

3) It is argued that more transparency is required to ensure that the client’s interest is taken

into account. What do you think are the aspect(s) in the brokerage business that are already

transparent, and is there anything that should be improved to make sure the client can receive

the best possible solution? Why? Examples?

- This business is very transparent already

- If a client wants to know all the aspects of compensation, we will tell.

4) E.g. in Finland insurance brokers are required to present the compensation they receive but

it does not apply to insurance agents/direct writers. Do you think this ban on commissions

should also apply to insurance agents/direct writers? And what is the situation in the

Netherlands? Why? Examples?

- Should be same level playing field for everyone.

5) In Finland, brokers have never been charged or convicted on malpractice concerning about

double cash channel (remuneration from both the client and the insurer) on steering clients

towards certain insurers. Has this ever been an issue in the Netherlands and if so could you

tell me an example(s)?

93
 - Never been an issue in Netherlands.
- I don’t know any cases where this would have been an issue.

6) What do you think is the benefit for the client to use insurance agents/direct writers over

brokers?

- Broker is more expensive

- For the client we offer kinds or services.
- E.g. if buying a car insurance, no point to use a broker.
- But if you need insurance on e.g. 100 cars, then you need a broker.
7) It is said that under the double cash channel system the broker could have a conflict of
interest to favor certain insurers. What do you think would be an effective management on
this issue to make sure this would not happen? Why? Examples?
- Spitzer opened the eyes on this business.
- If transparent with commissions, and client makes the choice, what is
bad about that?
- A lot of competition in the market; you cant try to trick your client.

8) If the insurance company would no longer pay commissions to the broker, what kind of

effects you think this shift would have on the market? Could it promote healthier markets or

could it restrict competition? Why? How?

- Will bring a lot of discussions

- Not much difference for the client.
- Will be bad for smaller brokerage firms.
- For smaller policies, no relevance for the client how much the broker is
making.

9) Could it be possible that there would be a system in place where the intermediary could act
both as an insurance agent/direct writer and as a broker, as long as the client knows his/her
role? In Finland what has been discussed, that brokers could shift to work as insurance
consultants, both as an agent and as a broker, as long as the client knows the role. What do
you think about this model and could it bring anything new?

94
 - No sense

10) E.g. in Finland, brokers have much stricter rules over insurance agents/direct writers.
What do you think would be the appropriate requirements on knowledge and ability for
insurance intermediaries and for insurance agents/direct writers? Same/different
requirements? What would be appropriate from client’s perspective? What are the
requirements in the Netherlands?

11) What do you think would be the benefits of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)
- Would make brokers more independent
 Steering would not be a possibility
 Service more important
- Will make brokers income dependent on the premium.
 “Lower income will make me more independent”
- Insurers say that we, brokers, work for the client, why should be pay
you.
 But brokers actually work for both parties to bring them
together.
 And brokers do a lot of work of the insurer, administrative
work etc.

12) What would be the negative aspects of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

13) Under the proposed model brokers are expected to provide better information on what
basis they are suggesting an insurer (e.g. in Finland). What do you think is the difference
from the Dutch model and is there room for improvements?

95
14) Could it be possible that the proposed practice (only remuneration from the client) would
reduce the number of brokers in the market? Why?

- We wont like it.

- Small brokers will disappear.

15) What is your opinion on what would happen to the prices? In theory, if there would be no
remuneration from the insurer, the price of an insurance policy to the client should decrease
the amount of the commission that the broker would normally receive. Why? Examples?

- Premiums will go down.

16) Which would be more expensive for the client, to use an insurance broker or to go
directly to the insurer? Why?

- By using a broker, more expensive

- But, smaller premium if using a broker.

17) If no commission from the insurer, should it be allowed or disallowed for brokers to
receive remuneration from foreign insurance companies? (E.g. in Finland, brokers are not
allowed to receive commissions from foreign insurers anymore) Why? By a foreign insurer I
mean which is not domiciled or established by a branch in the given country.

- There should be same rules for everyone.

18) Is it valid to say that insurance brokers are one form of supply channel for insurance
companies to contract customers?

19) When no remuneration from insurers, what do you think could be the effect on smaller
brokerage firms? Why? How?

- They would disappear.

-

96
20) What is your standpoint on contingent commissions? Should they be allowed or banned?
What could be some pros and cons of contingent commissions? Why? Examples?

- Contingent commissions should be allowed.

 We do work for insurers, should be paid for that.
- Yes, there is a conflict of interest
 But, contingent commission should be based on the work you
do for the insurer
 Should not be based on volume or profit.
- No benefit for the client

21) Is it prudent to say that by allowing commissions, clients would receive better policies
than in a situation where commissions would not be allowed? Why?

- There would be no difference on the quality of work.

- In the end, no difference for the client.

97
18.08.2010
Interview 6.
10.00-11.00
Jorden de Boer (Board member)
- CBO for Benelux

1) Currently insurance companies are allowed to compensate the broker; what do you think

are the positive aspects of this model?

- Historical thing
- 1687 first brokers
- Agents have always sold products of carriers
- We are developed as independent brokers
- In a basic sense nothing wrong with the current system
- Client pays everything

2) If a client wants to receive information about the commission from the insurer, is this

possible under the current model and has there been any case(s) where the client does not

want to know the amount of commission? And from the client’s perspective, is it relevant for

the client to know the amount of compensation from the insurer to the broker? Why?

Examples?

- We just tell our clients if they want to know.

- A lot of times commissions are shared (e.g. construction clients)
 So basically working with a fee system
- Big players care about
 They look at the total cost
- In recent years people have become more knowledgeable (financial
crisis)

98
3) It is argued that more transparency is required to ensure that the client’s interest is taken

into account. What do you think are the aspect(s) in the brokerage business that are already

transparent, and is there anything that should be improved to make sure the client can receive

the best possible solution? Why? Examples?

- Transparent already
- Is it my responsibility to tell a client the amount of commission I
receive they don’t ask?

5) In Finland, brokers have never been charged or convicted on malpractice concerning about

double cash channel (remuneration from both the client and the insurer) on steering clients

towards certain insurers. Has this ever been an issue in the Netherlands and if so could you

tell me an example(s)?

- Not that I can’t think of.

- You cant afford to trick your client
 So much competition, you will lose the client.
- In addition to our national insurers, we have a lot of foreign insurers as
well.

6) What do you think is the benefit for the client to use insurance agents/direct writers over

brokers?

- They do not have the same level of service as we can offer clients.
They work for one or few insurers directly
- I don’t see any benefits
- We are able to take the whole view of the market, where as the agent
e.g. sells directly policies of one insurer.

99
7) It is said that under the double cash channel system the broker could have a conflict of
interest to favor certain insurers. What do you think would be an effective management on
this issue to make sure this would not happen? Why? Examples?
- There is not steering taking place
 Market is setup in a way that you cannot afford to do it.
- If you steer
 Only short-term success
 Market will find out.
- We are anxious to not to steer, otherwise we would loose our clients.

8) If the insurance company would no longer pay commissions to the broker, what kind of

effects you think this shift would have on the market? Could it promote healthier markets or

could it restrict competition? Why? How?

- In individual client level it don’t matter

- With commission
 Not a fixed amount (depends on the amount of the premium)

9) In Finland what has been discussed, that brokers could shift to work as insurance
consultants, both as an agent and as a broker, as long as the client knows the role. What do
you think about this model and could it bring anything new?
- What needs to be understood is that our role is always described to the
client
 And our remuneration also
- We also show how we came to the conclusion to present these policies
to the client.

100
11) What do you think would be the benefits of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

- I have 80 people here doing the work for an insurer (separate service agreement)

14) Could it be possible that the proposed practice (only remuneration from the client) would
reduce the number of brokers in the market? Why?

- Yes definitely
- Actually will limit competition.
- Small brokerage firms will not survive
- And we also re-negotiate with insurers whose policy at first wasn’t the
most appropriate to the client.
 Really working in the interest of the clients.
- Insurance is a much more complex business than e.g. selling chairs.

15) What is your opinion on what would happen to the prices? In theory, if there would be no
remuneration from the insurer, the price of an insurance policy to the client should decrease
the amount of the commission that the broker would normally receive. Why? Examples?

- Doesn’t mean that price would decrease.

- Actually, competition will be reduced and that is not in the interest of
the client.

101
16) Which would be more expensive for the client, to use an insurance broker or to go
directly to the insurer? Why?

- Would result in a higher price

 More work for the client and the broker.
- On a small business would not make a big difference.
- On bigger accounts more costs to judge what carriers are offering to
them.
 E.g. Phillips
 If they wouldn’t use brokers services, they would need
a whole department for dealing with insurances
 They would need a fulltime staff on their payroll to set
up their insurances.

 Much more expensive

19) What is your standpoint on contingent commissions? Should they be allowed or banned?
What could be some pros and cons of contingent commissions? Why? Examples?

- They should be banned

 Creates a situation where there is a conflict of interest to favor
carriers.

102
19.08.2010
Interview 7.
10.00-11.00
Jeroen Everling (Responsible for industry account manager)

1) Currently insurance companies are allowed to compensate the broker; what do you think

are the positive aspects of this model?

- Main reason
 We need compensation
 We do work behalf of the insurer
- This system has been in place for some 350 years, and no problems
with it.
- For bigger policies you need the service of the broker

2) If a client wants to receive information about the commission from the insurer, is this

possible under the current model and has there been any case(s) where the client does not

want to know the amount of commission? And from the client’s perspective, is it relevant for

the client to know the amount of compensation from the insurer to the broker? Why?

Examples?

- We tell the client if they want to know the amounts.

- Some 30,000 brokers in Netherlands.
- Smaller brokers are not as transparent as bigger players.

3) It is argued that more transparency is required to ensure that the client’s interest is taken

into account. What do you think are the aspect(s) in the brokerage business that are already

transparent, and is there anything that should be improved to make sure the client can receive

the best possible solution? Why? Examples?

- We are transparent already

- Huge competition in the Dutch market

103
 - Cant try to trick your clients
 You will lose them.

4) E.g. in Finland insurance brokers are required to present the compensation they receive but

it does not apply to insurance agents/direct writers. And if banning brokers to receive

commissions, should it also apply to insurance agents/direct writers? Why?

- No difference in the service level we provide to our clients.

- We are already transparent
- Smaller brokers aren’t as transparent.
- Would be good if mandatory by law, then all the players in the market
place would have to follow same requirements
 Level playing field.

5) In Finland, brokers have never been charged or convicted on malpractice concerning about

double cash channel (remuneration from both the client and the insurer) on steering clients

towards certain insurers. Has this ever been an issue in the Netherlands and if so could you

tell me an example(s)?

- We are not steering clients

6) What do you think is the benefit for the client to use insurance agents/direct writers over

brokers?

- Depends on the policy

 Smaller policies no sense to use a broker
- Agents do not have the same level of the service as brokers do have,
and agents work directly for carrier(s).
-

104
7) It is said that under the double cash channel system the broker could have a conflict of
interest to favor certain insurers. What do you think would be an effective management on
this issue to make sure this would not happen? Why? Examples?
- We have a lot of policies for example with Chartis.
 Doesn’t mean we are steering clients to one carrier
 We are able to get great policies for our clients
 Strong relationship with the carrier
 Beneficial for the client
8) If the insurance company would no longer pay commissions to the broker, what kind of

effects you think this shift would have on the market? Could it promote healthier markets or

could it restrict competition? Why? How?

- The client is paying for the broker

 The client always pays

9) In Finland what has been discussed, that brokers could shift to work as insurance
consultants, both as an agent and as a broker, as long as the client knows the role. What do
you think about this model and could it bring anything new?
- I don’t think it would be possible.
-

10) E.g. in Finland, brokers have much stricter rules over insurance agents/direct writers.
What do you think would be the appropriate requirements on knowledge and ability for
insurance intermediaries and for insurance agents/direct writers? Same/different
requirements? What would be appropriate from client’s perspective? What are the
requirements in the Netherlands?
- There has to be some requirements, because the service level always
has to be guaranteed.
- Our clients are getting more professional in the industry sector.

105
11) What do you think would be the benefits of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

- Client
 Takes away the conflict of interest for broker.
- Broker
 The problem is that we are not making enough for the work we
do.
 Especially in the industry sector, most of our clients are already
in the fee system.
 Brokers really have to work on showing the true value of our
service to clients.

14) Could it be possible that the proposed practice (only remuneration from the client) would
reduce the number of brokers in the market? Why?

- Yes, fully
 Income will get very low.

15) What is your opinion on what would happen to the prices? In theory, if there would be no
remuneration from the insurer, the price of an insurance policy to the client should decrease
the amount of the commission that the broker would normally receive. Why? Examples?

- Net premium will not change

 Will go only higher.

16) Which would be more expensive for the client, to use an insurance broker or to go
directly to the insurer? Why?

- Cheaper to use a broker

- Not in the best interest of the client if working directly with the carrier.

18) Is it valid to say that insurance brokers are one form of supply channel for insurance
companies to contract customers?

106
 - Yes, they are
 Why not getting paid?

19) What is your standpoint on contingent commissions? Should they be allowed or banned?
What could be some pros and cons of contingent commissions? Why? Examples?

- Should be allowed
 Needs to be fully transparent.
 Spitzer-case
 Nothing wrong with contingent commissions, they just
created a system around it to use them wrongly.
20) How would banning of commissions affect brokers performance on providing services to

the clients? Negative/positive implications? Why?

- Negative of course
- Broker can’t earn enough for the work we do.
- We are having a hard time to show our value to our clients.
 We need to have experienced employees because they are able
to explain to the clients the value we are offering for them
compared to junior brokers whom do not have that experience
in the market.

107
20.08.2010

Interview 8.

09.00-10.00

Kees Starrenburg (Executive Director)

- Marine & Logistics

 Shipping companies
 Container terminals etc.

1) Currently insurance companies are allowed to compensate the broker; what do you think

are the positive aspects of this model?

- Classic compensation system.

- Involvement for the client based on how much you earn.

2) If a client wants to receive information about the commission from the insurer, is this

possible under the current model and has there been any case(s) where the client does not

want to know the amount of commission? And from the client’s perspective, is it relevant for

the client to know the amount of compensation from the insurer to the broker? Why?

Examples?

- Bigger clients
 Insurance oriented people
- Smaller clients
 Don’t care

3) It is argued that more transparency is required to ensure that the client’s interest is taken

into account. What do you think are the aspect(s) in the brokerage business that are already

108
transparent, and is there anything that should be improved to make sure the client can receive

the best possible solution? Why? Examples?

- Very old way of compensation

- Have to show the client what you have really done for them. Not just
show one policy, here’s what I got for you. You really need to show
the work you have done on collecting bids from carriers.
- Transparency is not always about the amount of compensation.

4) E.g. in Finland insurance brokers are required to present the compensation they receive but

it does not apply to insurance agents/direct writers. And if banning brokers to receive

commissions, should it also apply to insurance agents/direct writers? Why?

- Why the rules have to be different

 Same rules should apply to all the players in the market.
- We don’t gain from fees
 Not enough income.
- Service agreements with carriers
-

5) In Finland, brokers have never been charged or convicted on malpractice concerning about

double cash channel (remuneration from both the client and the insurer) on steering clients

towards certain insurers. Has this ever been an issue in the Netherlands and if so could you

tell me an example(s)?

- Never had problems, and this compensation system has been in this
business for over 300 years.
-

6) What do you think is the benefit for the client to use insurance agents/direct writers over

brokers?

109
 - The broker is client’s advisor and working for the client.
- If you don’t have an broker and in a case of an claim, you would be
alone against the insurer to settle your claim, e.g. defending your own
case in court without an attorney.

7) It is said that under the double cash channel system the broker could have a conflict of
interest to favor certain insurers. What do you think would be an effective management on
this issue to make sure this would not happen? Why? Examples?
- We shouldn’t steer which is not in the interest of the client.
-

8) If the insurance company would no longer pay commissions to the broker, what kind of

effects you think this shift would have on the market? Could it promote healthier markets or

could it restrict competition? Why? How?

- Number of brokers would go down.

- If we have to negotiate our income with the client, our income will go
down.
- The value of brokers really low in the eye of the society.
-
9) E.g. in Finland, brokers have much stricter rules over insurance agents/direct writers. What
do you think would be the appropriate requirements on knowledge and ability for insurance
intermediaries and for insurance agents/direct writers? Same/different requirements? What
would be appropriate from client’s perspective? What are the requirements in the
Netherlands?
- It should be made very transparent what role the advisor has.
- Clients don’t always know whom the insurance agent is really working
for.

10) What do you think would be the benefits of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

110
 - Broker
 Forces broker to think and evaluate what we do exactly for the
client
 Brokers really need to work for the client.
- Insurer
 No difference for the insurer.

11) What would be the negative aspects of receiving remuneration only from the client?
(How would the participants in this market view it? Clients standpoint, brokers standpoint,
and the insurers standpoint?)

- Client
 May perceive it as an increasing cost
- Broker
 Remuneration will go down

13) Could it be possible that the proposed practice (only remuneration from the client) would
reduce the number of brokers in the market? Why?

- It could reduce the number of brokers

- Insurance would go down
 General income would go down.
- Smaller firms will go out of business
-

14) What is your opinion on what would happen to the prices? In theory, if there would be no
remuneration from the insurer, the price of an insurance policy to the client should decrease
the amount of the commission that the broker would normally receive. Why? Examples?

- Premiums would have to go down to the level of net premiums

- Our fee would be less.

15) Which would be more expensive for the client, to use an insurance broker or to go
directly to the insurer? Why?

- More expensive to go directly to the carrier

111
  More administrative work for them.

16) If no commission from the insurer, should it be allowed or disallowed for brokers to
receive remuneration from foreign insurance companies? (E.g. in Finland, brokers are not
allowed to receive commissions from foreign insurers anymore) Why? By a foreign insurer I
mean which is not domiciled or established by a branch in the given country.

- Same rules for everyone.

-

17) Is it valid to say that insurance brokers are one form of supply channel for insurance
companies to contract customers?

- Yes
- We do help insurers to contract customers so in a way we are a
‘supplier’ for carriers to get new business.

18) What is your standpoint on contingent commissions? Should they be allowed or banned?
What could be some pros and cons of contingent commissions? Why? Examples?

- Nothing wrong with it, as long you are transparent about it.
-

19) How would banning of commissions affect brokers performance on providing services to
the clients? Negative/positive implications? Why?

- What is the real value of the broker will be clearer to the client.

112
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