Compline Calls For Change
State Fund Blows Off Broker /Client Ownership
September 03, 2010
Broker of record letters (BOR) are a standard operating procedure in the California workers’ comp market for moving ownership and commissions of an account from one broker to another. State Compensation Insurance Fund will not honor ownership and commissions in BOR letters for its direct business: A broker can take over servicing an account, but that broker can never own the account or collect a commission.
And now, in the interests of its thousands of member brokers, Compline is calling upon State Fund’s president and board to change what it terms an unfair business practice and conform to industry standards. It a missive emailed to its members yesterday, Compline promises legislation in the absence of action by State Fund. A link to the Compline member message is at the bottom of this article.
“What’s good for the goose is good for the gander, except at State Fund. They seem to think ‘What’s yours is ours and what’s ours is ours,’” says Dale Debber, president of Compline. Debber is also publisher of Workers’ Comp Executive.
The practice places both California small employers and brokers at a disadvantage. Brokers tend to avoid the business, given that they have less control over the account and no commission if they keep the account with State Fund. Employers don’t have control over their own business, and miss out on all of the extra things good brokers provide. Although they can leave State Fund, without the guidance of a broker, it may be difficult to ascertain the advantages even if there is a better carrier.
Employers with direct accounts are further disadvantaged because they receive no price break even though no commission is paid, brokers say. Because there is no discount on the premium side, State Fund pockets up to a 10% commission, amounts that Compline says subsidize larger employers who get premium discounts.
And it’s a sizeable piece of the book. According to a State Fund spokeswoman, State Fund’s direct book of business accounts for some 91,000 policies and roughly $474,619,755 in premium. State Fund’s direct premium written for the quarter ending December 31, 2009 is $1.3 billion, according to financial statements filed with the California Department of Insurance. That means that approximately 35% of its business is commission-free, an estimated $47 million.
“That’s $47 million that belongs either in the hands of brokers or as discounts to employers,” Debber says. “Compline would like to see State Fund, like other agency carriers, be a true agency company with no direct writing. It needs to make the choice to be honest with and trust its brokers.”
Insurance Brokers and Agents of the West, representing 612 organizations, has done little or nothing to discourage State Fund from this practice, which is rather ironic. IBA West prepared a policy paper several years ago entitled Broker—Agent of Record: A Policy Statement, observing that different procedures and practices by carriers cause a lack of uniformity. It reads in pertinent part:
“The hallmark of the American Agency System is that insurance brokers and independent agents own their expirations, and that property right—subject to the desire of the policyholders to change producers or of insurers to offer different contractual terms to brokers and agents—should be recognized.”
The paper goes on to suggest uniform standards for the BOR process itself, which most carriers seem to follow, according to brokers. State Fund does follow the criteria for its non-direct business.
“We’ve talked about this with State Fund and their leadership over time and State Fund told us that they’re going to continue to look at it. We hope that they continue to look at it in order to resolve it. I agree with the question being asked,” says Clark Payan, executive officer of IBA West.
“But,” Debber says “This is a case of small businesses getting beaten up and having their choices limited by a Government agency – in this case State Fund. Our 3,500 member organizations - most of whom are brokers and therefore consumer advocates for their clients - feel they must act to stop these unfair practices, and not just talk and wait for something to happen.”
A State Fund spokeswoman could not say how much business has been moved to other carriers, nor would she provide information concerning how much direct business has been retained or moved.
Debber disagrees with IBAWest’s points about X-Dates being the end all be all to account ownership and makes what he says is an important legal distinction. He maintains that ownership is of the account, not the X-Date. The X-Date is sometimes a public record and sometimes just out there because the insured has provided it to so many competing brokers or lead generation outfits. “Owning the account means owning the commissions and the responsibility for service and analysis,” he says. “With the ownership goes the responsibility and this is where State Fund totally fails us. It’s willing to give us the responsibility but no ownership.”
State Fund Policy
State Fund’s policy on the broker of record is very clear, saying that the broker may be [bold type by State Fund] paid a commission. Its policy goes on to say in pertinent part:
"With respect to direct business, ownership of the renewal will belong to State Fund. Direct business shall mean a policy of insurance that is written directly by State Fund and:
1. Is in effect; or
2. If cancelled for any reason, is reinstated or rewritten by State Fund within one year after the effective date of such cancellation.
Its policy on broker of service for direct accounts states in pertinent part: “[T]he ownership of direct accounts belongs to State Fund. As a result, State Fund is not paying a commission to brokers working in this capacity on existing State Fund direct accounts or on direct accounts insured by State Fund within the past 12 months.”
If a broker manages to move an account to another carrier and it goes back to State Fund after one year, only then can the broker collect a commission. A link to State Fund’s policy can be found at the bottom of this article.
According to State Fund, it has 4,821 appointed brokers and no agents. Of those, 4,122 have policies in force with State Fund.
Brokers tell Workers’ Comp Executive that SCIF’s rules differ from other carriers that routinely use broker of record letters (BORs) to transfer ownership of business.
“You can have the account [as a service broker] for one or 10 years, and you’ll never get a commission,” says Greg Osorio, president of Osorio Insurance Company, also known as Compleader. Osorio says that for this reason a lot of brokers stay away from the direct business.
“As an employer, you’re losing because you don’t have any advocacy for claims. You’re acting as your own broker,” Osorio says.
Brokers and agents response to Compline’s call for action has been overwhelmingly positive. There was widespread response according to the Compline helpdesk and “our members are saying it’s about time something was done.”
“Thank you for taking this issue on. I'm experiencing difficulties with this process right now with a large potential client who wants me to take over their business with State Fund, in exchange for my advice and broker services,” says Brad Pickett, vp of property casualty sales and services at Pickett and Associates Insurance Agency. “But, because they were originally written directly with State Fund we are all out of luck!”
Says Patrick McRae of McRae Insurance Services in Anaheim: “SCIF can’t afford to give up that commission on those 90,000 accounts, because they need that money to lavish upon their new President (and past President), and to pay out these exorbitant and unjustified lifetime pensions to all of their thousands of time card punchers. If they want to be like an insurance company why don’t they treat us the way other insurance companies do?”
Importance of Brokers
Brokers bring access to multiple markets as well as packaged deals for coverage, but more important, they bring a host of pre and post-loss services and expert advice. Don Way, chairman of the board at Thoits Insurance Agency, says ergonomics is one of many key components.
“Because we’ve moved more to an information type [of society], more employees are sitting at desks,” Way says. “Post-loss is when accidents happen. What do you do? If that happens to one of your people, the first thing you do is triage. Have one of your people get in a car and go with the [injured worker] to the hospital. Check up on them.”
He adds that showing the importance of getting injured workers back is essential to the bottom line. “The broker explains why you do this. It’s a huge cost difference, [and] much better for morale.”
Osorio says his agency offers a suite of services that run the gamut from loss prevention to claims control. He says the idea of prompt service for some producers is a quick return phone call and an emphasis on price, but that’s not the way he operates
“Our first process [is] to set up an interview-type appointment. If you’ve got tunnel vision and it’s just cost, why do business with us?” he says. “If we don’t get the broker of record letter, we’re not in the bidding.”
Osorio adds that he won’t vigorously pursue an account unless he has something the other broker can’t offer.
In response to Compline’s call for action, brokers point out that State Fund’s policy serves only to hurt California’s small employers by denying them the resources they need.
“Go Compline!” says Madeline Chapman, a certified workers’ comp advisor with Easy Truck Insurance Services. She says non-profits are one of those market segments hardest hit by SCIF’s policy.
“They’ve been direct for years. They’re handcuffed to State Fund. They have X-Mods in excess of 200, and they can’t get help with claims or safety to lower their X-Mods,” Chapman says. “Non-profits have to leave and come back in order to be represented [by a broker],” she says, adding that no one else will take them because of the experience.
Uniform Approach
The BOR process is fairly uniform across all carriers, with some standard variations. Osorio’s agency places business with numerous carriers, and he explains how it works:
Typically, an incumbent broker has the account and another broker takes it. The new broker submits a BOR to the carrier on behalf of the insured on the insured’s letterhead, signed by an officer of the company. The carrier then informs the incumbent broker and gives 10 days to send a countermanding letter asking for the request to be rescinded.
Brokers say State Fund follows that convention, until it comes to the unfair exception of its direct business.
Depending on the agency, BOR requests can range from just a few every year to several hundred.
“That’s it in a nutshell, but there can be many variations,” says Dennis White, vice chair for White Sutton & Company Insurance Services. “Ten days is the standard response time for the broker of record to respond with a countermanding letter, but there can be different criteria. The original broker gets the commission until the renewal, but that also varies depending on the carrier.”
But servicing of the account changes hands. “The new guy works for free [but only until the renewal date].” White says.
White says that he personally doesn’t deal with State Fund’s direct business, given that it doesn’t afford a broker much leverage.
“I think it’s a matter of control. You can fee it for servicing and make a little money, but you can’t [take it over], so there’s not really a whole lot that can be done with it,” he says.
A Few Nuances
There is no “official” industry standard on acceptance of BORs but there are normal industry conventions. Liberty Mutual Insurance Company, formerly a direct writer - now an agency company, keeps it relatively simple for employers. On its website, it says: “Working with your broker, fax a written request, on company letterhead and signed by the insured or an officer of the company, along with any state-specific request form.”
According to Jerry Dunn with Owen/Dunn, and other brokers, Travelers will not make a BOR effective midterm but will renew the account to the new broker/owner.
Way says that brokers will take over the servicing of some direct business from State Fund in hopes of getting it moved at renewal. It’s the cost of doing business. He adds that he hasn’t taken any direct business from State Fund and continued servicing the account and getting a commission in a long time.
“Hooray for Compline,” says Tom McAuliffe, a consultant with Aon Risk Services. “Not only is the State Fund business model unfair but I'm sure they have lost thousands of dollars of direct commission income because the only way to get commissions from a client's workers’ comp insurance is to take the business away from the State Fund. In many cases that would not be necessary if the State Fund paid a commission for service.”
Debber says he and several Compline members are prepared to meet with State Fund management on behalf of brokers at any time. And that in the absence of a productive dialogue or change Compline intends to have legislation introduced in the next session – The State Compensation Insurance Fund Employer Fairness Act – to accomplish this goal.
http://www.compline.com/SCIF-Broker-Policy-Unfair-to-Brokers-and-Employers.aspx
http://www.statefundca.com/broker/TipsBOR.asp
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