The Commission Conundrum

By Heather & Trevor Garbers

For this article we would like to focus on the concept of heaped commissions – are they necessary (or even ethical) in the industry today? As with any hot topic, it is important to think about the stakeholders on both sides before making a judgement.

To bring us to a common understanding, Heaped Commissions are when there is a high 1st year commission, with a lower flat renewal – for instance a 60% commission in year 1, with a 10% renewal available thereafter. This type of structure is common with Accident, Hospital Indemnity, Critical Illness, and Permanent Life Insurance; and is compared to the level 10%, 15%, 20% commission commonly paid for other employee benefits such as dental, vision, and term life insurance.

Heaped commissions were created to pay for the cost of marketing and enrolling individual policies on a payroll deducted basis – the establishment of worksite benefits. For years, heaped commissions were really the only option and it was common in our business for cases to move carrier to carrier every (2) years as the sales representative sought to replicate high 60-75% (or higher) commissions year after year, or BOR’s changed hands. At this time, “worksite” products were typically on an individual chassis, which often had commissions that were vested for the life of the policy, and would remain with the writing agent even after a BOR.

From a purely revenue standpoint, how long does it take to earn the same or more on a level commission basis, as compared to heaped commissions?

Using the example of 20% level commission and 60%/10% heaped commission, with $100,000 in annualized sold premium - you would need to keep the coverage with the same carrier for at least 5 years for the level commission payout to equal what you would have earned in the same amount of time on a heaped commission schedule.

Note: This example does simplify the issue quite a bit as it doesn’t take into account if the group is case level or policyholder heaped, or if annual premium is growing year after year with new hires or increased participation. We are creating our projection based on premium written in year 1 only.

With the employee benefits industry more competitive than ever, more clients are holding their Brokers/Agents accountable for ROI and utilization. We’ve all heard of clients who have changed BOR’s simply because another Broker presented the client with their Form 5500 (which is public data) reporting large revenue on these lines and the client was shocked to see how much their (now prior) Broker was making. So how do you justify the revenue that is paid in the first year of a heaped commission arrangement vs a level commission payout?

The question of ethics becomes, are heaped commissions necessary and in the best interest of the client and policyholder in the Voluntary Benefits world today? To answer this, we should consider the perspectives of different stakeholders in our industry.

Brokers: are incentivized based on commissions paid to their firm and so they often prefer level commissions which they can build on year after year, instead of having to replicate large bumps in revenue each year. Replacing VB carriers is also costly from a time standpoint both on their team and the benefits manager at the client and so they may want to minimize their workload to maintain the relationship with the client and keep their client management team happy. At the same time however, some Brokers may be trying to meet a sales goal, maximize an earnout or have a high turnover client that they actively re-enroll every year, which makes heaped commissions enticing for them. They may also be reinvesting a portion of their commissions into implementation fees or value add services for the client.

Consultants: are typically paid a flat consulting fee or fee based on billable hours from the client and so oftentimes will offer VB on a net-of-commission basis (0% commission) because the cost for their time is billed directly to the client. There may also be situations where Consultants offset their fee based on the placement of Voluntary Benefits (making up the difference in VB commission) – in these cases, they may prefer level commissions to maintain a level fee over time.

Career Agents: these are Agents typically representing a single carrier that are bonused and compensated based on annual premium sold and heaped commissions. Because they traditionally enroll employees onsite face-to-face, sales through this channel are predominately based on a heaped commission schedule and Agents are encouraged to re-enroll the group throughout the year to catch new hires and sell additional lines.

Members: with most Carriers, 60/10% in heaped commission equates to the same rate load as level 20% and so there is not a cost differential unless the Broker/Consultant/Agent is taking more or less than 20% in level commission.

Voluntary Benefit Carriers: When heaped commissions were our only option, premiums were also quite a bit higher. Today, heaped commissions leave the carrier at higher risk of replacement after year 2 and makes new cases unprofitable in the first year (at a time when carriers are also being squeezed on premium, marketing & tech fees, and technology overrides).

Carriers typically prefer a level commission structure, but at the same time, they want to write new business and so they almost always have a heaped commission option available in order to meet the needs of their distribution partners. We may see movement on the side of the carriers in the near future towards lower first year heaped commissions or even higher premiums for heaped commissions, as they take into account the cost of higher lapse rates where heaped commissions have been paid.

Enrollment Firms: this is the stakeholder to really consider when it comes to heaped commissions, and so we’ve interviewed Dave Hurlock and Tomas Flores with PES for their input. According to Dave & Tomas, heaped commissions are necessary in their side of the industry due to the higher costs associated with services to support an enrollment including: benefit counselors, account managers, implementation teams, communication resources, travel (if applicable), and technology.

As we are starting to see more carriers trying to transition to a standard of level commissions, we also asked them if enrollment partners are adapting to the concept of a level commission structure. Dave & Tomas said that they are open to this in situations where they can still cover their costs such as: cases with low turnover and certain industries. However, the risk of not recouping the initial capital expenditures are greater with level commissions and so the revenue share (commission split) would have to be adjusted accordingly. Adjusting to level commission also likely includes relying more on technology than on live resources, and depending on the employers’ objectives regarding benefits education for their employees this may lead to a lower level of benefits comprehension with employees.

A common issue in partnering with enrollment firms over the years has been that some provide their services the first year when they receive heaped commissions, but are unable to provide the same services at subsequent enrollments because there isn’t enough revenue available on that case without a carrier change. According to Dave & Thomas, Each case should be properly underwritten to determine if the funding is adequate to support the same level ongoing support. There are numerous factors that are considered when underwriting an enrollment including: industry, employee turnover, growth of the organization, enrollment format (onsite, virtual, hybrid, call center), new hires, planned acquisitions, product mix and scope of services. With that being said, a best practice is that there should not be a reduction of support simply because an enrollment firm did not plan properly. Adding additional products in subsequent years could also be an effective method to allow continued resources to be available for the employees.

If ethically, we should do what is in the best interest of the client and member, is flipping carriers every (2) years for new heaped commissions in their best interest? Does that conversation change when an enrollment firm is engaged and we know the additional value they bring to the client in terms of decreased administrative burden during the enrollment process and increased benefits comprehension and engagement among their employees?

The last item to consider here is that the choice of heaped vs level commissions may not be at the discretion of the distribution partner forever. With some states enacting higher loss ratios, they may ultimately be making the choice for us, accelerating the adoption of level commissions and even lowering the level commission amounts available (Example: Washington state).

The reality of the matter today is that, while there is a movement towards widescale adoption of level commission structures as more brokers and consultants engage, and it tends to be the preferred structure of the carriers (with some newer vendors in the marketplace only offering level schedules); there are still situations in our industry where heaped commissions reign supreme and provide funding for valuable communication services for the benefit of the member. As Clients hold their VB distribution partners accountable for the revenue they earn on their account, VB distribution partners should be mindful that they are providing services and value to justify those revenue numbers and the products that they are marketing to employees.