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Nigel Payne's Blog

Nigel Payne Friday, 25 February 2011

Nigel Payne

Indemnity or non-indemnity?

Nigel Payne is managing director of Assurant Intermediary


Many insurers offer a choice to brokers as to the way they would like their commission to be paid. The most typical choice is between indemnity (all the first year commission upfront) or non-indemnity (paid monthly).


In recent years there have been a number of other options tried by insurers. Halifax a few years ago tried Triple indemnity (three years upfront) but it is safe to say that it wasn’t commercially beneficial and didn’t last long. Double indemnity has been around for a number of years but again only provided by a few insurers.


So which is the best choice for the broker?  Well only you can decide that but make sure you understand why you are making the choice and what the cost of that choice is.


Typically there will be a cost for taking more upfront - after all, the insurer is providing you with cash flow. Firstly ask yourself if you need the money in indemnity form or would you prefer a regular cash flow? If it is beneficial to take it on indemnity then do you really need more than usual on the first year’s policy sales? If the answer to that is yes then you need to be very careful to work out the cost to you over a three to five year period.


For example, the difference between taking year one indemnity on standard commission terms or more than that may make up to a 10% difference in the amount of income you receive over a three year period. If you extend that out to five years (and the industry standard shows that in excess of 40% of your clients will stay with you for five years) then that difference in income amounts to a potential 30% less.


In these harder times it may be very tempting to receive extra cash flow on non-bank terms but the reality is that there will be a price to pay and that could amount to in excess of 30% less income over five years.


One of the benefits of GI renewal income is that it greatly enhances the value of your business should you come to sell it. However, if you have already sold your future income for a few extra pounds now then that will directly impact the future value of your business.


One of the wider issues in financial services businesses is that indemnity commission can become addictive and businesses can find it very hard to wean themselves off. Be aware that once you have started down the indemnity route it may be hard for your business to change back to non-indemnity.


So choose your commission structure carefully, work out the costs to you over a three and five year period and make sure you understand the potential consequences further down the line.