How transparent are private exchange fees? Respected online publication Employee Benefits News recently answered that question in an article of the same name dated June 17, 2015. Author Brian Kalish states, “HR departments lack a clear understanding of fees and commissions attached to private exchanges, with many early exchange adopters uncovering fees once they start using the model.”
We couldn’t agree more. Fees and commissions in traditional insurance arrangements in and of themselves have been difficult to understand. In addition to direct compensation (which is often times a percentage of premium, so rate increases each year equal a raise for the broker), there are volume, retention and new business bonuses that are paid out on top.
It isn’t surprising that fees and compensation are just as difficult to understand, if not more difficult, in private exchanges. Due to the black box nature of private exchanges and the complexity involved in wrapping many different benefits and services into one system, there are more hiding places for additional fees and commissions.
Kalish’s article states, “If you ask the right questions, you will get a straight answer. But if you simply ask what our fees are, you may not fully understand how that business model is supported.” This clearly screams at the need for a third party that has industry expertise to help you ask these right questions.
Many CFOs are brilliant and are very analytical in their thinking and believe they can learn about private exchanges on their own. This puts their company at risk because they don’t know what they don’t know.
For example, a little-known fact is that voluntary benefits are 100 percent employee-paid and are extremely profitable for brokers and insurance companies (premium collected for these policies are significantly higher than claims paid). This generates additional money for the exchange and these commissions are often used to offset the system cost. Some exchanges can be tailored to use these commissions to offset the system cost, while others do not have this flexibility.
So you can see that it’s often imperative to have a savvy advisor to help you and your company shine a light into that black box called the private exchange to exact the right answers.