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Study: Insurance Consumers Often Don't Get What They Pay For

March 1, 2005
It's hardly surprising but a Consumer Federation of America study finds that insurance companies that pay higher commissions to agents and brokers tend to have higher premiums.

CFA also found that higher prices for insurance do not translate into better service for consumers.

"This study shows that consumers should shop very carefully for insurance," said J. Robert Hunter, CFA's Director of Insurance. "The good news is there are insurance companies that pay minimal or no commissions, offer low prices and have great consumer service."

"However, we also found plenty of companies where high commissions translate into lofty rates, with no gain in service quality," he said. "Great rates and service can be found if consumers take the time to comparison shop."

Findings

CFA reviewed commission data from the 20 leading writers of insurance for both private passenger auto and homeowners insurance. This total commission data combined regular commissions (flat rates paid at the time of sale and built into the price of the policy) and contingent commissions (paid after policies are sold and based on special sales or profitability goals).

The report compared total commissions with price, insurer profitability and service quality as measured by complaint data and consumer satisfaction indices. CFA found that:

1. Insurers with lower commissions tend to have lower rates. This is not always the case, so consumers must shop carefully.

Analyzing rate data for 30 territories around the country, CFA found an average commission of 3.9 percent for those insurers with personal auto insurance rates below the average rate. The average commission paid by the insurers with above average rates was 7.7 percent. In home insurance, the average commission for those insurers with below average homeowners insurance rates was 0.3 percent. The average commission paid by the insurers with above average rates was 11.4 percent.

For example, the average commission for personal auto insurers with far fewer complaints than average (less than 50 percent of the average complaint ratio) was 5.6 percent. Among other insurers with complaint ratios below the national average, the average commission was 8.4 percent. Among insurers with complaint ratios that exceeded the national average, commissions averaged 7.1 percent.

3. Some insurers offer particularly good deals. Others have rates that are consistently high.

United Services Auto (USAA) is a consistently low-rate insurer with excellent service ratings. Military personnel and their families who qualify for USAA insurance should be sure to get a quote from USAA, CFA said.

By contrast, Nationwide tends to have high rates. Traditionally, State Farm has offered very competitive rates but it now appears that State Farm is offering rates overall that are slightly above average. CFA has observed large State Farm price hikes during the last few years. This finding is surprising since State Farm has been known for its competitive pricing for decades. State Farm policyholders may want to shop around now if their rates have significantly increased over the last few years.

"In less competitive markets, some insurers may be tempted to attract market share by offering higher commissions to agents or brokers along with higher prices and, often, higher profits for the insurer," said Hunter. "Credit insurance is one area where this kind of 'reverse competition' is particularly common."

Tips for Consumers

CFA offered a number of tips for consumers when shopping for insurance:

1. Shop around! This study found that premium charges tend to rise with commissions, but this is not always true. Consumers should be sure to get quotes from some of the lowest premium insurance companies, including the direct writers of insurance that typically do not pay commissions

2. Consumers do not have to pay more to get excellent service. Some of the companies with the best service records have low prices and low or even no commissions. It pays to shop among the companies with the lowest prices and the highest consumer satisfaction/lowest complaint ratios.

3. For information on insurance rates, check state price information guides. Most states have these guides. Typically, consumers can download them from the state's insurance department website.

4. For complaint information on insurance companies, check with the National Association of Insurance Commissioners' web site -- www.naic.org.

5. Beware of going to just one agent or broker for insurance, even if that producer represents several insurance companies. Consumers should be aware that some producers representing more than one insurer could place the consumer in a higher priced insurer with larger commissions even when the consumer qualifies for a lower price. States do not require agents or brokers to place the applicant with the best policy for the customer.

6. Ask agents and brokers the right questions:

• Do you represent me or do you represent the insurance company you are suggesting I use?
• What commission are you earning as a percentage of the cost of the policy you are suggesting I purchase?
• Am I receiving the lowest price among all the insurance companies that you represent for which I qualify?
• What other insurance companies do I qualify for that you represent? What are the prices I would pay at those insurers and what commission would you get with each company?
• Do you have a contingency commission arrangement with the insurer you are recommending? Please fully explain that arrangement to me.
• If I have a claim, do you represent me or the insurer in the claim process? Is your compensation in any way related to claims filed by me and other clients of yours?

The complete text of the studey is available on the CFA Web site (Adobe Acrobat required).

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