Why broker commissions are going down

Broker commissions in Canada’s property and casualty insurance industry were down by about 5% to 7% in personal lines last year, as noted in the Canadian Council of Insurance Regulators’ 2022 Annual Statement on Market Conduct Public Report.

In personal auto lines, brokers received an average commission from insurers of 7.85% on auto policy sales in 2022, down from 12.64% in 2021 and 11.28% in 2020.

In personal property (homeowner) lines, brokers made 11.42% commission last year, down from 18.25% in 2021 and 16.93% in 2020.

CCIR’s report, released in Dec. 2023, does not include commission rates for commercial lines of insurance, nor does it offer explanations for the commission reductions. The commission ratio is calculated as the total amount of commissions paid relative to the total direct written premiums for a particular insurance class.

The downward trend comes as no surprise to brokers. Some raised the matter last October during a CEO panel discussion at the Insurance Brokers of Ontario Association (IBAO)’s annual general meeting held in Toronto.

IBAO president and CEO Colin Simpson, who moderated the CEO panel, fielded one question from the audience regarding broker commissions.

“When brokers have to step up, and they continually have to evolve their business models to look at spending more time, more effort, servicing consumers, maybe doing things differently, do you feel they make reasonable commissions for that work, or do you see an increase in the future?” the questioner asked the panel.

“The thing is…the values of your [brokerage] businesses are a pure reflection of the revenues you’re collecting, and there is nothing, nothing more valuable right now in the financial sector than the broker distribution business,” replied Intact president Louis Gagnon.

But while brokers’ profit margins are doing well, insurers’ margins are starting to decline; hence, the lower commission ratios.

The insurers’ return on equity — a figure used to measure profitability — has been dropping over the past year. Once at a record high between 17% and 18% in 2021, the number dropped to 14% last year. Traditionally, the industry’s ROE runs around 10%.

And yet, despite the industry’s high ROE average, there’s an old saying the statistician drowned in a river running an average of five feet deep. ROE numbers in 2022 varied among insurers across the industry, noted Grant Kelly, chief economist and vice president of financial and regulatory affairs at the Property and Casualty Insurance Compensation Corporation.

“Our industry remains highly competitive,” Kelly wrote in Solvency Matters last year. “In 2021, 14% of insurers reported negative net income, despite it being the industry’s most profitable year on record. In 2022, that figure rose to 27.8%. The latter figure is more in line with the industry’s long-run average, and is not yet a significant source of concern.”

Paul MacDonald, executive vice president of personal insurance and digital channels at Definity, picked up on Gagnon’s point at the CEO panel.

“When you look at ROEs and margins, brokers make far more money than insurance companies,” MacDonald said to the broker audience. “You may not feel that, but when we’re asked every quarter by analysts, ‘Why are you acquiring brokers?’ we have to explain the financials. That is undeniably the truth…

“I think the real debate is: a) how can we work together more effectively to reduce our collective costs, so that both you [brokerages] and the insurance companies can earn more margin?

“And secondly, how do we get that across to the marketplace? Because when people realize how low some of the [profit] margins are for insurance companies, compared to the banks or other financial institutions, they’re a bit shocked, honestly. If you’re an investor and you get a 5% return here and a 15% return there, where are you going to put your money?

“We’re an incredibly important part of the financial traffic of this world, and yet we constantly have to justify why we deserve an income at the end of the day. Because, like you [at brokerages], we [at insurance companies] have staff. They need to get paid. They want increases at the end of the year. Cost of living goes up, cost of goods goes up.

“I don’t think the debate is about, ‘You should pay us more,’ or ‘You should take less from us.’ The debate is how to drive costs and inefficiencies out of the system so we can focus on the things that are very important, and we can afford to pay our staff the wages they deserve.”


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