Cedric Stephens, Columnist

Question: I buy motor insurance through a broker. I have done so for at least 10 years. The company has now started to charge a 'service fee' of $1,000 (plus GCT) to handle my account. This practice is unfair. Are brokers not earning a commission off the premiums that customers pay them? What is your take on this issue?

G.B., Kingston 9.

Answer: Jamaica Observer columnist Anthony Gomes has dubbed the practice a 'penny-pinching trend'. Its aim, he says, is to "exploit consumers" and create a greater profit yield without improving the quality of the service offered.

Banks, utilities, bill payment agencies, other financial service companies, respected doctors and some insurance brokers use 'the nickel-and-dime technique'. Schools and public hospitals got in the act years ago. They, like other providers of goods and services, squeeze customers to increase their incomes. By that measure, you have lots of company!

steeped in argument

How brokers get paid has always been steeped in argument. To many, the system of payment is shrouded in great secrecy - like the Trafigura deal. On one side, some say brokers should be paid a fee. It is wrong for insurers to pay them a commission. In law, brokers represent the interests of clients, unlike insurance agents.

Others feel that there is nothing wrong with brokers, like agents, earning a commission off the client's premiums.

These two views have, in my opinion, led to a situation where some local brokers - like their overseas counterparts - feel that they should collect with both hands.

Broker service charges are now the norm, according to one source. The rationale for the charge, or fee, is simple. It is to recover some of the costs of handling personal accounts. Commissions on these transactions are said to be too low to cover the cost of handling them.

Brokers typically earn commission of 10-12.5 per cent on motor premiums. This amounts to $2,000 and $2,500 for a premium of $20,000. When a service fee of, say $1,000, is added to the commission, earnings are barely enough to cover costs.

Over half of the average broker's total income is paid out as salaries and wages.

Commission rates for non-motor insurances generally exceed 10 per cent. They can be as high as 20-25 per cent of the premium, depending on the insurer. Brokers can also earn other kinds of commission or fee income. This is based on insurers' pre-set income targets or if the total claims paid on policies fall below a certain limit.

In other cases, some brokers charge a fee for handling certain kinds of claims. It is not known whether those sources of revenue plus the interest income that brokers earn - which most consumers do not know about are taken in account when brokers try to justify their service charges like the banks that consistently report record profits.

Treating Consumers Fairly (TCF) is a doctrine that is at the heart of financial services regulation in the United Kingdom.

clear information to consumers

Providers are required to give clear information to consumers at the start of the business relationship. Those principles imply that clients are kept advised during and after the point of sale. Client advice should be customised. Products or services should perform as customers are led to expect. If the actions of the local entities that have imposed service charges were guided by the main beliefs of TCF, some of them would not be as eager to 'try a ting' under the guise of providing a service.

Buyers do not have to suck up to brokers who charge service fees to do their jobs. They can buy directly from the supplier. Some insurers have organised themselves to compete directly with brokers for personal lines business, though they will not admit it. Another option is to find a broker that does not charge extra for doing what it is supposed to do. There are 36 intermediaries registered by the Financial Services Commission (website: http://www.fscjamaica.org). Not all of the 25 brokers are using the 'nickel-and-dime' technique to boost their income.

For free insurance advice, email: aegis@cwjamaica.com.