There are two costs to outsourcing your employee insurance benefits: the cost of the benefits themselves and the cost of administering them. Insurance brokers make their money through commissions (usually 4 percent to 7 percent), which are set by the insurance companies.
Because of the way brokers’ commissions are regulated, the cost of procuring benefits shouldn’t vary much. However, a given policy won’t cost you any less if you buy it directly from the insurance company. The commission is already included in the premium rates, which are required to be filed with most state insurance commissions. (Some states require that the commission percentages be filed as well.)
By state law, these rates apply to the policy no matter who sells it. So the price for the same policy with the exact same provisions (such as deductibles and copays) from the same insurance company in the same state should cost the same no matter who sells it.
Why doesn’t the commission rate vary? Virtually all of the states prohibit a practice called “rebating,” which is when a broker lowers his commission and passes the savings on to you. But that doesn’t mean that brokers don’t continue this practice, and state insurance commissions don’t have the enforcement resources to hunt for violators.
It’s rare that a broker would offer to lower his commission to a company with fewer than 50 employees because his commission is already small on such deals. But as you get more employees, you’re more likely to run into brokers who may offer to cut their commission. Although it may be tempting because it could save you thousands of dollars, it’s probably not a good idea to use a broker that rebates. First, it is against the law, and do you really want to do business with someone who is breaking the law? Second, the amount of money rebated to you is taxable income and your business would have to declare it as such.
Check with your state insurance commission to see which laws apply to broker commissions and fees. In Maryland, for example, an insurance provider is not allowed to charge any additional fee on top of commission for services it typically provides with an insurance policy. However, the provider can charge extra fees for such additional services as risk management and Web portals.