On service fees, brokers should follow the example of banks

Cedric Stephens, Contributor

Question: I own a 10-year-old Toyota motor car. It is insured comprehensively for J$1.2 million. The policy expires later this month. Last year, my premium, inclusive of GCT, amounted to J$45,503.50. The 2011 renewal premium including tax, according to my insurer, is J$44,424.40. The broker's renewal notice indicates that the "premium payable" is J$46,224.40. The discrepancy between the insurer's and the broker's premium was due to a "service fee" of J$1,800 imposed by the intermediary. Aren't brokers usually paid commissions on the premiums that they place? What should I do?

- E.M.S, Kingston 8.

Help-Line: When I am forced to use the services of banks, I have to struggle hard to remain detached. The same thing happens when I write about them. My reaction has tended to become visceral. None of this has anything to do with the meltdown in the mid-1990s. I was not among those who were "finsac'ed".

In spite of the apparent bias, your questions had me visiting the websites of two leading local banks. Could they help me to answer your questions?

Banks are experts in the art and science of getting their customers to pay fees. They earn billions of dollars each year from these business activities. That income stream has become more important as interest rates decline.

The banks are, surprisingly, transparent or up-front about the many charges that they make for providing services to customers. Earnings derived from fees, and commissions are shown separately from net interest income in their income statements.

Customers, shareholders, and others have access to that information. One company even explains how customers can avoid or reduce the amount of fees that are paid. That page begins: "Knowledge is an important part of banking."

The same entity also describes its service standards. Presumably, customers should know in advance the type of service that they can expect in exchange for the fees.

Ignorance on the part of the consumer, the lack of openness, and the absence of clarity on the part of the broker are features of the transaction that you have described.

The renewal premium charged by your insurer has been misstated. Further, the broker has tried to disguise the service fee.

What is stated on the renewal notice as the premium payable is in fact the renewal premium inclusive of GCT, plus the broker's service fee. Brokers normally earn commissions on the premiums, excluding GCT, paid by consumers.

In your case, the broker will have two sources of income, commissions paid by the insurer, plus the service fee.

The misstatement of fact and lack of transparency are inconsistent with the traditions of 'the utmost good faith' on which insurance contracts are founded. In all probability, the actions of your broker are unethical.

Insurers squeeze commissions that brokers earn in attempts to reduce their operating costs. This is true in the case of motor insurance where companies are struggling to reduce their costs in the face of losses and lower investment returns.

On the other side of the coin, however, premiums keep rising. Even though the rate of commission is lower, brokers may see little or no reduction in their dollar earnings. To be fair to brokers, there may well be justification to impose or increase service fees given the state of the economy. Doing so by stealth is, however, an entirely different matter.

Questions

What have your brokers done to justify his employment? Were you given information that showed you were getting a very good deal to stay with your existing insurer? Have you been provided with any value-added advice or add-ons to your contract? Has any information been furnished to help you save money? Whose interest appears to be receiving priority - yours or the broker's? These are some of the questions that you need to answer before deciding what to do.

Your brokers appear to be unable to justify the J$1,800 service fee on objective grounds. They have tried to create the impression that the "minimal increase" in your premium during this year was due to the actions of your insurers and not as a result of theirs.

Were I in your position, I would deal directly with the insurer. Much as I regret to say it: your brokers need to be more open and follow the example of the banks!

Cedric E. Stephens provides independent information and free advice about the management of risks and insurance.aegis@cwjamaica.comSMS/text message to 812-7233