The Wall Street Journal recently quoted Dick Poppa, president and CEO of IIABNY, in an article on the new commission disclosure regulations in New York (“Insurance Fees, Revealed
,” March 30). The newspaper was correct to interview Poppa—he called the new rule a “solution in search of a problem”—but frankly, the story ignored his point. The article was confusing at best and focused primarily on the commission aspect of the insurance transaction.
A more informative discussion would differentiate better between the unique aspects of annuities, life insurance and property-casualty insurance. It would also include all expenses of an insurance transaction, not just agent commissions.
Fortunately, some views expressed about the story in the online comments section shed some needed light on the matter. While no one focused on the elemental differences between annuities, life and p-c, some of the feedback posted included some real pearls:
- “What's critical for the consumer to know is bottom-line price, payment terms, cancellation terms, service standards, etc.”
- “As a retired life insurance agent, I would have had no problems with revealing what my commission was to a client. Of course, I would expect the lawyers, CPAs, dentists and physicians I do business with to provide me with a copy of their most recent federal income tax returns.”
- “Why would a consumer want to know how much the agent is making? They have a right to shop. If the purpose is to lower agent compensation, you will soon not have agents. Then you will have no advice or service. Be careful what you ask for, you just might get it.”
The issue I focused on as I read the article was highlighted in the comments section by an agent and another industry employee. In fairness to both, they were clear what their biases might be; one commenter said he was an Esurance employee and another identified himself as an independent agent.
The Esurance worker commented that “transparency is the coin of the realm.” In response, the independent agent noted that one should include salaries and benefits of insurance company employees that are substituted for independent agents. He also pointed out the huge dollars spent by companies on advertising expenses.
On average, it costs about $30 per automobile or home to benefit from the advice, feedback, claims support and interaction of an agency writer versus a direct writer, according to an analysis of A.M. Best data. Direct writers include Internet, captive agents, direct response and affinity group marketing. Agency writers include independent agencies, brokers, general agents and career agents.
To make the comparison, A.M. Best data by distribution model was used and broke down what it means per the item being insured. For automobiles, the calculation used total registered vehicles in 2009 and assumed 20% are uninsured via the typical private passenger insurance market. For homes, the comparison used 2000 census data for single-family homes (detached and attached) and mobile homes; added 25% of the total one to four family units; and adjusted the total by average growth rate in existing homes. It was also assumed that 5% are uninsured.
Expense Ratios of Agency and Direct Writers
So a fairer look at expenses clearly shows the difference in frictional costs of insurance is not that large between agency writers and direct writers: About the cost of seven to eight gallons of gas or the cost to have the lawn mowed.
Of course, some might argue these are averages and some companies may have much lower and much higher expense ratios. To that, I would agree and note the price and value proposition of the distribution will vary; the consumer can easily shop and choose. After all, does a dinner cost more with a waiter than without one? Can you create a last will and testament cheaper by yourself instead of with the counsel of an attorney?
If I were to counter with one question for a reader of the article, I would ask: Would you value 10% of your premium dollar spent on an agent to advise you, or the same 10% spent on TV commercials? I think that is the better, albeit equally simplistic, question.