There is no doubt that the COVID-19 pandemic has impacted collegiate athletics- particularly your finances. With 2021 around the corner, it is going to be important to be financially resourceful and keep an open mind to new ideas. How your athletic insurance broker is compensated is one of those ways.
The standard method of broker compensation in the accident insurance space is by way of the carrier paying a percentage of the premium directly to the broker after the institution pays the premium. The exact percentage varies by type of policy, size of policy and carrier, but a broker typically earns around 10% on accident medical insurance.
Let’s take a closer look at how an insurance carrier underwrites your annual premium. First, the underwriter considers your paid claims totals for the last four years. They adjust each of those dollar amounts to account for medical inflation (compounded annually) and completion (meaning how much growth is still expected based on the benefit period of the policy). Then they weigh each year appropriately to account for any changes that have taken place within your athletic department policies, injury prevention/procedures and sports census- the goal being to compute an average annual claims basis ($) for your institution as a predictor of where your upcoming year’s claims will finalize. From that dollar amount, the carrier then applies their target loss ratio (TLR). This is a percentage that varies by carrier and differs year to year depending on the carrier’s appetite for growth and how their book of business is running. Included in the target loss ratio is first and foremost, carrier profit. Yes, insurance companies need to profit in order to stay in business. A carrier may work in, as an example, 20% profit margin into their target loss ratio. The carrier also needs to include compensation to the third-party administrator for handling the day-to-day claims for the carrier as well as compensation to the broker for handling the sales and service part of the process. These items, combined, may total 40% of the premium which would put the carrier’s target loss ratio (amount of the premium they expect to go towards payment of claims), at 60%. The target loss ratio is then applied to the average annual claims total, explained above, resulting in the carrier’s proposed premium for the upcoming year.
For example, if your institution’s average annual claims total is $100,000 and the carrier’s target loss ratio is 60%, their premium offer to you would be $166,666 ($100,000/.60). This example shows that they expect your claims for the year to be around $100,000 and the remaining $66,666 of your premium will go towards carrier profit, third-party administration and the broker.
Now that you understand HOW an insurance premium is calculated, you may begin to see how you could be paying a ‘premium’ to compensate your broker if incorporated as a percentage of the premium. The alternative is to pay your athletic insurance broker outside of the annual premium, directly, as a fee for service. This can be done by keeping your broker’s commission the same, but simply extracting it from the carrier’s premium. Here is a breakdown of what that would look like and the potential impact/savings that can be realized with this simple change.
Premium quote (including broker comp via the carrier): $166,666
Broker compensation: $16,666
Premium quote (with 0% commission in the premium): $142,857
Broker compensation by carrier: $0
Broker compensation as a separate fee from the school: $16,666
Total Annual cost to school: $159,523
Savings to school: $7,143
As you can see, the broker is still compensated the same, but extracting their compensation from the premium allows you to bring down your total annual cost substantially. As you engage with your partner regarding your renewal this year, be sure to pose this philosophy and see what their response is 🙂
THE ATHLETIC INSURANCE GUY 