L Squared does not charge a policy fee on any admitted insurance policy product. The only fees that it does charge are on surplus lines accounts for filing fees. Unfortunately, L Squared has to pass along the policy fees, Risk Purchasing Group (RPG) fees and Risk Retention Group (RRG) fees that many of the insurance providers that L Squared works with charge. In addition, many of L Square’s retail competitors also charge fees for their insurance services in addition to the commissions that they earn. These insurance entities that are charging fees are “double dipping” the insurance consumer.
L Squared firmly believes that these fees are discriminatory to the smaller firms that it works with. If an agency or managing general agency charges a fee, they are required to charge the same flat fee to all insureds that purchase their product. So assuming a $100 fee on a $1000 policy adds 10% more cost to the insurance policy, making the total cost $1100 to the firm. Whereas with a larger firm, a $10,000 policy the $100 fee only adds 1% to the total policy cost for a total of $10,100.
In 1981 Congress enacted the Products Liability Risk Retention Act that allowed the formation of groups to be formed to purchase liability insurance on a group basis. The law does not specify the type of entity that an RPG or RRG needs to be. Over time large Managing General Agencies (MGAs) have used this Federal Law to increase their bottom lines by forming RPG or RRG to collect fees in addition to the commissions they also collect for the risk with little to no benefit to the insured.
Retail insurance agencies have also started charging fees on the purchase of insurance policies adding to the “double dipping”.
The problem is that he insurer does not receive any portion of the fees. The fees are not used to help pay claims. If the policy is cancelled the fees are fully earned and a portion is not returned to the insured. But these fees must be paid in order to purchase the insurance coverage.
Over time the charging of these fees contributes to the overall increase in the cost of the insurance. The carrier’s loss ratio and expense ratios are distorted because these fees do not go into the calculations as to what premiums an insurance carrier needs to charge to cover claims and expense costs.
As with anything else the greed to enrich a few catches up. The agencies, managing general agencies, and brokers who are charging these fees, need to remember the phrase that “Fat Pigs get Slaughtered”.