We believe that employers are increasingly bothered by irreconcilable conflicts-of-interest between their insurance brokers and insurance companies.  The evidence supporting this belief includes the personal experiences of our principals as well as trends observed in the market.

Valhalla Business Advisors is uniquely positioned to serve clients in an unconflicted manner through its Independent Advisor Agreement.  This unique model enables a client to understand that Valhalla will earn no supplemental or contingent commissions from insurers as a consequence of vendor placements.

What is the problem with conflicts-of-interest?

Conflicts occur, to the detriment of clients, because insurance brokers traditionally accept “extra” commissions and fees, known in the industry as “contingents and supps,” in exchange for directing clients towards certain products and accomplishing various insurer goals.  This compensation, which has historically averaged ~7% of insurance agency revenue, is often excluded from producer sales commissions, and is essentially pure profit. When you capitalize this incremental cash flow, it drives a considerable proportion of insurance agency enterprise value!

As consolidation continues amongst insurance agencies, the power held by brokers (read: distributors) over the insurers (read: product manufacturers) increases. The consequence of this increased power is leverage to capture more of each transaction’s value, which is typically memorialized as a “contingent and/or supplemental commission and fee agreement.”

Don’t take Valhalla’s word for it!

If you wonder whether these arrangements create irreconcilable conflicts-of-interest, one need look no further than the public disclosures of risk to shareholders in annual reports of publicly held brokers.

"MDI creates various risks.  Intermediaries in many markets have a duty to act in the best interest of their clients and payments from carriers can incentivize intermediaries to put carriers' or their own interests ahead of their clients.  Accordingly, MDI may be subject to scrutiny by various regulators under conflict-of-interest, anti-trust, unfair competition, and anti-bribery laws and regulations."  [Bold and underline added by Valhalla for emphasis.]

The choice of words here is striking. This article from ProPublica provides some shocking examples of these issues. Michael Thompson, president of the National Alliance of Healthcare Purchaser Coalitions, is referenced:

Employers rely on brokers to be a “trusted adviser,” he added. “Sometimes that trust is warranted and sometimes it’s not.”

https://www.propublica.org/article/health-insurance-brokers-cost-commissions-bonuses

The ProPublica article is worth reading. You may wonder, how do I determine if my broker is participating in such behavior?

Artifacts of contingents and supps

The bad news is that finding clear evidence of all such conflicted relationships can be difficult. The good news is there are a handful of steps you can take to evaluate the conflicts in place with your insurance broker and their relationships. If you are not able to review an SEC Form 10-K, as above, many brokers provide a compensation disclosure on their website which may disclose, in the agency’s own words, whether arrangements exist to support insurer growth and/or profitability.

In employee benefits, some lines of business may have disclosure. One recent example is included below (de-identified) via Form 5500 Schedule A. In this instance, this client’s insurer supplemented a $79,268 commission with an extra $118,908 bonus, described as “NY Group Volume Bonus.” Do you wonder if this was known and approved by the client prior to the placement? (Trust your instincts!)

Unfortunately, some commissions are never disclosed; Incentives for medical stop-loss and carve-out PBM contracts stand out as problematic. You are also unlikely to find the breakout of such incentives within your broker’s financial statements (though there are exceptions, such as the one we analyzed below.)

Valhalla Independent Advisor Agreement

Valhalla Business Advisors is willing to provide clients in the target market (~100+ employees in most markets) an “Independent Advisor Agreement” stipulating an explicit removal of all contingent and supplemental commissions from the client relationship.

If you would like to discuss how Valhalla can eliminate these conflicts of interest while still providing brokerage and consulting services, please reach out to either Stuart or Jens to discuss further!