A Positive Outlook For Broker Commissions
Since the Medical Loss Ratio was defined last week, brokers across the country fear that broker commissions will be largely cut by insurers so that they can meet the new required MLRs.
Think about this...if premiums double, then half the commission rate that you receive will be the exact same amount of commission. Also, if the amount of customers looking to purchase medical insurance doubles, and you only have to do half of the work normally involved in submitting applications because plans will be guaranteed issue, and your commission rate is halved, then isn't that the same amount of income?
Reducing broker's commissions is a risky business for insurers. While they will indeed be reduced, the danger for insurers is the decision they must make to determine by how much they will be reduced. If one insurance company drastically cuts their broker commissions compared to another, then their sales will suffer because of it. Insurance companies cannot afford to give up fresh new customers and be left with a risk pool that's aging. It could be very likely that commissions will be cut to their deepest levels, but they may later rise because of the economic realities that set in.
The same thing happened when group insurance commissions were reduced from 10% to 4%-7%, when the HIPAA laws with Portability and Guarantee Issue for groups came into effect. Premiums rose so high, commission percentages were lowered, but after the initial drop in income, it all leveled out to equal the same amount of income.
Another thing insurers must contemplate is what they would do to service clients if brokers went out of business. Several NAIC commissioners have said that their consumer complaint departments would see their workload triple, without brokers to address client issues. For insurers, they too will have a strain on their customer service departments if brokers went out of business. If this happened, insurers would have to pay for the administrative costs associated with their customer service departments, all while meeting the 80% MLR. A larger customer service department has to be as costly as dishing out broker commissions...and they both affect the MLR.
Another thing insurers must face is their ability to remain competitive. Imagine this...if an insurance company can't compete based on creative benefit structures, underwriting, or premiums that are outside the government controlled specified range, then doesn't their customer service become even more vital in order to remain competitive? Insurers will have to face the fact that the money that they spend on customer service departments and administration will be tightened by the MLR requirement. Will we begin seeing insurers' customer service departments being based out of the Philippines or India? Their need for brokers is bigger now than ever. To maintain a successful customer service department, insurers will have to pay even more for fixed expenses such as benefits, office space, taxes, overhead and wages. Don't you think that if insurers had the ability to replace brokers and agents with larger in-house customer service departments, they would have done so a long time ago? The truth of the matter is that brokers and agents are a lot less expensive.