Individual/SME PMI: PMI commission clubs

Small brokerage firms who want to start selling private medical insurance (PMI) are often frustrated by the low levels of commission and lack of support offered to them by insurers. In the past, many of these brokers would have decided that developing a PMI proposition was simply not worth it, causing clients to miss out on independent advice. This has now changed with the advent of PMI commission clubs.

Commission clubs have been around for several years as a way for directly authorised brokers to enjoy enhanced commission and better agency terms when selling PMI. The clubs are run by large specialist health insurance firms which, because of the high volume of business they generate, are paid commission rates that are 50% greater or even double those paid to small firms. For most brokers it is a no brainer to join a club and take advantage of these improved terms, particularly given the extra costs being born by intermediaries as the burden of regulation increases.

Kevin Amphlett, managing director of Network Protect, a commission club which is part of Chase Templeton Group, says: “Smaller players in the PMI specialist arena are unable to negotiate enhanced commission terms with providers as enhancements are usually only granted in return for volume production. By committing to volume production smaller brokers run the risk of tainting the advice process in order to meet the targets set – risky in our regulated world with the scrutiny placed on firms under the (FSA) Financial Services Authority’s Treating Customers Fairly (TCF) regime. Joining a network enables the smaller broker to enjoy enhanced terms across a range of providers without attracting such risks or committing to volume production.”

MEMBERSHIP

Network Protect is the largest commission club in the PMI market with 45 member firms. As well as offering higher commission rates across a range of health insurance products, it also gives access to protection products at enhanced terms, compliance guidance and audit facilities, training sessions and assistance with disputes with insurers. The Premier Choice Group also offers a commission club called Healthcare in a Box, which has 10 members made up of large IFAs and general brokers; specialist PMI brokers are not allowed to join. Members can gain access to special plans from insurers which are usually only available to large brokers.

July 2009 saw the introduction of The Health Insurance Specialists commission club, which is part of PMI broker Right to Health. The Health Insurance Specialists has 15 member firms as well as a partnership with compliance and business support services company SimplyBiz. The partnership was launched in January for advisers who are active in the PMI market, advisers who want to become active in the market, and those who do not want to be active but who want to offer their clients access to medical insurance. Firms can either introduce a prospect to the club or make the sale themselves.

Gary Marney, co-founder of The Health Insurance Specialists and director at Right to Health, says: “We have been in talks with SimplyBiz for a number of months to create an opportunity for all of their members to put all of their existing PMI sales through our collective, and to promote and stimulate new business in a product area they are not pursuing fully at the moment, along with their compliance package on offer. This will enable appointed representative firms to make the change to become directly regulated. It is a massive opportunity for everyone concerned and we hope it will create a new era for firms who are maybe not exploring this largely ignored income stream.”

QUALITY OF ADVICE

Despite the obvious benefits for small intermediary firms, commission clubs are not without their critics. One of the biggest concerns is that brokers might be tempted to sell a product through the club purely because of the high commission available, rather than choosing the product that is most suitable for their client. Mike Izzard, chairman of the Association of Medical Insurance Intermediaries (AMII) and managing director of Premier Choice Group, says it is human nature that the intermediary will choose the product with the higher commission.

“This has the potential to skew the market. The industry has to become more observant to commission levels and brokers have to prove they are giving best advice to clients,” he says.

Charlie MacEwan, corporate communications director at insurer WPA, believes commission clubs are essentially override commission “in cuddly clothing” whereby the more business an adviser places with an insurer the higher their payment.

“WPA does not offer enhanced commissions in return for enhanced volumes of business, be it from one broker or a network of brokers. Transparency and trust are key. Brokers are professionals being paid for a service. In the customer-insurer-broker relationship they need to add value which the majority do and this explains why they are so successful. It is for the customer to decide if the commission that a broker earns is adding value, otherwise they can deal direct with the insurer,” says MacEwan.

INSURER SCRUTINY

Another concern is that when the club is made up of members who specialise in PMI, insurers are often paying more money for business that they could get anyway. The result is that insurers have less money to spend on things like training and broker support. There are some who believe the end customer will ultimately suffer.

Iain McMillan, managing director of The Health Insurance Group, the advisory and distributor business owned by Bluefin Group, says: “I do not think commission clubs are of any benefit to the market. Small brokers get a higher commission rate and someone has to pay for that. The costs will ultimately be passed onto customers through higher premiums.”

Izzard says the majority of insurers currently accept the situation but there are signs that clubs are coming under scrutiny – one large insurer is already questioning their value.

“The system is like a pack of cards which could come crashing down,” says Izzard. “Why should an insurer pay 50% more commission to a club when they could get the business direct for 10% commission? Insurers have to cover their costs and rebuild their balance sheets after a tough couple of years. They are looking at every aspect of their portfolio to save money and commission adds up to a large percentage of their costs. All we need is for one insurer to break ranks and the others will follow suit.”

This is part of the reason why Premier Choice’s commission club does not allow specialist PMI brokers to join. Izzard claims that by only allowing in non-specialists such as IFAs and general brokers, insurers get business they would not otherwise get and the club contributes to growing the PMI market.

“In a way our club acts like a nursery. Some member firms have joined AMII and some have become self-sufficient in PMI and gone their own way. Ian Sawyer of Assured Futures was our first member and he stayed with us for 18 months until the firm was big enough to survive on its own. It is one of our great successes,” says Izzard.

MARKETING

Network Protect’s Amphlett argues that commission clubs are beneficial for insurers because they enable them to deliver their message and ramp up sales in a more cost-effective manner. Being able to contact a large number of intermediaries under one roof is a lot easier than travelling around the UK talking to one man bands.

“Additionally, by supporting Network Protect we allow insurers to have their products included on our individual PMI quote engine [called Prognosis] which is now used as the proof of research tool by the 45 member firms of Network Protect plus the 50 consultants and 30 appointed representatives operating under the Chase Templeton banner,” adds Amphlett.

Any potential threat to commission clubs is, at the very least, a long way off. Most insurers still view clubs as an important way of encouraging small brokers to sell more PMI policies. Nick Jones, brand and marketing manager at Exeter Friendly, points out that a lot of intermediaries do not have PMI on their radar – either they do not think it is for them, they do not think it is for their customers or they do not think it pays enough commission to make it worthwhile.

“While traditionally PMI has been sold direct, the complex nature of many policies in the market means that advice will often be invaluable to many consumers. As insurers it is our job to make sure that we support intermediaries to make sure they can properly service their clients. An important element of this support is in making sure they’re properly remunerated for their advice,” says Jones.