An Override By Any Other Name...

[From time to time, we’re privileged here at IB to publish posts by esteemed “guest bloggers.” This post, by a gentleman who prefers to remain anonymous, details a disturbing trend in the insurance industry. While we usually prefer not to rely on “anonymous sources,” I can personally vouch for the integrity and inside knowledge that this gentleman brings to the table. Where relevant, I’ve also included links to previous IB items in which he’s had a hand. HGS]

Everyone in the health insurance business has had the subject of overrides come up during their career. Either they have taken part in them, wish they could have, or declined to be part of this monetary form of bribery. Agents and brokers who did “partake” enjoyed extensive additional compensation based on how much business they placed with a certain carrier. They built huge agencies, enjoyed huge lifestyles and grew huge egos. And they steered business to companies that paid the most, keeping out of competition those companies that paid them the least. Some of that compensation is believed to be 2, 3 or even 4 times the regular commission being paid. No one knew what was being paid and it was never disclosed to the customers. This was the equivalent of the Wild Wild West!

In the last two years the Ohio Department of Insurance has investigated this practice in Columbus and other areas (yet to be announced), solicited agreements from Anthem and United HealthCare on the subject, and has recommended the suspensions of agents who have misled their clients regarding compensation. Now Anthem has publicly said they pay “no overrides” of any kind to any agent, just “regular commissions” and any bonus due. While this remains true for the most part, how would a certain local agency pay a starting account manager $70,000 a year, expand and open 2 new offices in Columbus and Cincinnati, continue to hire non-sales personnel and remodel their palatial headquarters every few months with lots of bling? And pay their producers 50% of the standard commissions to boot?

By way of comparison, most large agencies pay their “producers” (that is, the agents who actually write the business) 30 to 40 percent of the commission, and little (if any) of any overrides or bonuses. If a “mega-agency” can afford to pay its producers 20 to 25% more commissions on a given piece of business, it seems likely that it’s making more than “the normal” compensation.

Welcome to the world of “Expense Reimbursement.” This flies under the radar of the dreaded 5500 (industry standard disclosure form). What keeps XYZ Mutual from paying a portion of an agency’s monthly payroll and other expenses? A well-known insurance agents advocacy organization, The “Big I,” recently published an article on this issue as it pertained to our Property & Casualty brethren. In an email exchange with the article’s author, I asked if he’d heard of such a thing on the group side of the business. He replied:

“With regard to the national HMOs my understanding is that volume "bonus" schedules are fairly commonplace for larger producers. I also believe this applies to the traditional group dental/disability/life carriers. However, some of the national carriers are pressing for disclosure of incentive compensation. There has been a feeling that since the Schedule A attachment to the Form 5500 discloses commissions, disclosure is less of an issue. But, some carriers are reviewing incentives such as Expense Reimbursement Allowances because these are undisclosed payments and won't show up on the 5500.”

Pretty amazing if this is going on! Is this another Marsh situation? Is this a level playing field for all? Will competition be eliminated even further? And will the smaller agent be gobbled up by the big agent?

Inquiring minds want to know.