Sins of Omission, Sins of Commission

Jan 11, 2024

A verdict on price-fixing and hidden costs threatens to disrupt the real estate industry.
And why it’s going to happen to the insurance industry.

In a recent groundbreaking verdict, a federal jury ruled that the National Association of Realtors (NAR), and many residential real estate brokerages, engaged in illegal price-fixing by colluding to inflate commissions. This is yet another example of an industry failing to adapt by better aligning itself with its customers’ best interests.

If the verdict holds, the real estate industry—and the commission-based compensation model it has traditionally relied upon—will never be the same.

The next industry in line to take a similar fall could (and probably should) be the insurance business. There has always been a clear conflict of interest between insurance buyers and the agents and brokers they depend upon.

While insurance buyers look to contain or reduce their risk-related expenses, insurance agents and brokers collect commissions of 10%-20% of the premiums buyers pay, and thus have every incentive to see premiums stay the same or increase.

To make matters worse, there is absolutely no connection between the premium an insurer charges for the risk it takes (the basis for the commission received by the agent or broker), and the value that an agent or broker provides to the customer. Furthermore, the commissions embedded in the premium the customer pays are negotiated between the agent/broker and the insurer. The client has no say in the matter.

Which is why it’s long past time to once and for all eliminate commission from every insurance transaction and terminate the conflict of interest inherent in it.

Instead of taking commission, agents and brokers should charge a reasonable fee for the services they provide, regardless of how much or how little premium the customer pays. This will allow clients to finally get the leverage, transparency, and objectivity they deserve, inevitably leading to better overall outcomes and lower risk and insurance-related expenses.

When commissions are eliminated, what’s in it for insurers? Two things. First, commission is insurers’ second largest expense behind paid losses. In addition to eliminating that expense from their books, insurers will also benefit both in the short and long terms by presenting their pricing to the end customer without padding it with the significant frictional cost of commission built in.

Some may point out that many agents and brokers already charge fees in lieu of taking commission. That’s true. The idea of fees for service in the insurance business first appeared in the early 1960s when oil companies decided they were big enough to leverage brokers into eliminating commission and providing their services on a fixed fee.

But the fact is that traditional commission-driven brokers usually agree to fees instead of commissions on their largest accounts. And even then, only when the client issues the ultimatum that the broker moves them to a fee, or else they’ll switch to another broker who will. Moreover, most fees charged by traditional brokers amount to nothing more than a reduced de facto commission that is still based on how much premium a client pays and has no direct tie to the value they are providing to the client.

No doubt, insurance agents and brokers can provide great value to customers, but they can’t do so when their income depends on collecting commission. It’s time for agents and brokers to truly align their interests with those of their customers—and to be rewarded by how well they serve their customers, not by how much insurance they can sell them.

Leading by example since 1997.

Disruption is a founding principle for Altus.

We began with a mission to eliminate commissions—and the inherent conflict of interest they create—by becoming the first 100% commission-free, fee-based corporate insurance broker in America.

Nearly thirty years later, we remain the first and only one of our kind.

With our unique, fee-based approach, we are free to act as unbiased advisors and advocates for our clients, constantly alert to their changing needs and business conditions. Not just at renewal time—all the time. And at the moment that matters most, when a claim arises, we act as their steadfast advocate every step of the way, doing everything we can do to help get the claim resolved fairly and timely.

Though regulators, insurers, and competitors have fought us in our mission to provide the same no-commission, conflict-free approach to the individuals and families we serve as we do for our Corporate Risk clients, we continue to chip away at their defense of an outdated status quo and look forward to the day when we have finally eliminated commissions altogether.