With the continued growth of the professional employer organization and human resources outsourcing companies, it's no surprise that more and more agents are considering working with this industry.
The reasons to do so are legion: partnering with a PEO increases retention of clients, introduces a new revenue stream to the agent (with increased commissions), differentiates the agent from other producers, positions the agent as a truly trusted advisor for their clients, expands the agency's universe of prospects, and brings a solution to true business problems of companies. In fact, more and more agents are competing for clients by taking advantage of this growing industry relationship.
But how do you protect yourself as an agent? How do you make sure the interests of your clients, in addition to your own vested interests, are protected?
For the answers to these questions, we first need to look at some of the history behind these growing industries.
Human resource outsourcing covers a broad category of businesses that provide single or multiple functions for client firms. This can range from payroll companies to firms that handle virtually all HR requirements. HROs, which handle multiple HR functions, can be broken down further to firms that handle only administrative services and PEOs, which deliver such services by acting as a coemployer to the client firm's employees and providing payroll under the PEO's employer ID number.
Coemployment allows PEOs to deliver services more efficiently, as the PEO acts as a single source to aggregate many HR functions. Further, the PEO can gather many forms of insurance under master policies, which can also reduce administrative expenses.
PEOs and insurance agents have traditionally been competitors. When a PEO engaged with a client company, the agent would typically lose the workers' compensation, employment practices liability coverage, health insurance and 401(k) business. In the late 1990s, this traditional competition between insurance agents and PEOs began to change when a small number of PEOs recognized that insurance agents were a cost-efficient marketing channel.
The trend of PEOs contracting with insurance agents has accelerated in the last several years. Commission arrangements and contract terms continue to differ greatly. Agents looking to contract with a PEO should be aware that most PEOs do not understand the culture of the agency system. As a result, PEOs and insurance agents often fail to communicate, as each party attaches different meanings to contract terms and policy statements.
Points to consider before executing a contract and referring clients to a PEO:
1. Is the PEO ESAC accredited? There are more than 700 PEOs in the United States. They range from small mom-and-pop offices to large, publicly traded firms. Before referring a client to a PEO, the insurance agent needs to find out if the PEO is financially sound. Although there is no rating system of PEOs, Employers Security Assurance Corp. is an accreditation agency that imposes higher financial, auditing and operating standards than any state requirements. ESAC also provides financial guarantee surety bonds to all the clients of its accredited PEOs. Verification of a PEO's accreditation can be obtained at the ESAC website, http://www.esacorp.org. There has never been a failure of any ESAC-accredited PEOs. There are currently 23 accredited PEOs in the United States.
2. Does the PEO provide E&O coverage for an insurance agent? Some PEOs do. It's an important point to research.
3. Does the insurance agent make the sale or does a representative of the PEO? If the insurance agent makes the sale, the liability exposure increases greatly.
4. Are commissions vested? What is the definition of the word "vested" in the contract? The commissions are only vested for one year in some contracts. In others, they are vested as long as the client remains with the PEO.
5. Are the commission rates guaranteed? Some contracts contain no assurance that the commission rate will remain for any period of time. Other contracts guarantee the commission rate forever. Commission rate guarantees should be viewed with the vesting schedules. If the PEO can change the commission rate at will, the vesting schedule is of little value. Conversely, if the commission is not vested, the PEO does not have to pay the commission after a period of time, and the guarantee is of little value.
6. Is the payment of commissions by the PEO contingent upon anything other than the client remaining with the PEO? Some contracts require the insurance agent to maintain a given production level to continue to receive commissions. Others contain a non-compete provision, which penalizes the agent if the agent moves an account to a competing PEO ent.
7. Does the PEO work only with insurance agents, or does it have a sales force that calls on prospects directly? If the PEO has its own sales force, the insurance agent needs to know whether the PEO will permit its sales force to call upon the insurance agent's clients without the agent's permission and whether commissions will be paid to the agent on those direct sales.
8. What is the broker of record policy? Some PEOs do not recognize BORs after the sale has been made. Some recognize BORs on in-force clients. An appropriate concern is that PEOs could use the BOR to eliminate commissions. Agents should look for contract provisions that do not recognize BORs on in-force clients.
9. What does the PEO do if a client the agent had placed with a PEO refers another client to the PEO? Does the PEO provide commissions to the insurance agent on the referred account? PEOs vary widely on this issue.
10. Does the PEO offer a guaranty that it will not sponsor any competing insurance to the account referred by the insurance agent?
11. Does the PEO have a written policy that governs what happens when two insurance agents are soliciting the same account for the PEO? Does the PEO simply recognize the first agent, or does it use a broker-of-record policy?
12. Does the PEO have a consistent commitment to working with insurance agents? How long has is contracted with insurance agents? What insurance agent references does it have? If working with agents is something new to the PEO, it is likely to change very quickly.
13. Are the PEO's management and ownership subject to change? Management change can lead to a change in commitment to the insurance agency channel.
When working with agencies, not all PEOs are created equal. Some just dabble in it, resulting in inconsistent and ever-changing policies, while others base their entire business plan around this relationship. Partnering with the right PEO brings benefits to the agent that makes the necessary research well worth the effort.