By Ken Leibow
Published in NAILBA Now Newsletter
Commission Accounting Systems have been around since the mid-1980s. They are usually found as a standalone system, and having three main purposes:
- Commission Reconciliation (Did you get paid as expected?)
- Tracking Payables (Track out-of-house deals with top producers on modal premium)
- Know your score card (Report on your income by line of business, carrier, and top producers)
There are two challenges with commission accounting systems. The first challenge is setting up carrier commission schedules, assigning those contracts to agents and then building hierarchies. In the Life Brokerage General Agency (BGA) channel for example, the average BGA is writing business with 20 + carriers and each carrier has several Life and Annuity products. Each product has rules like commission banding by year (first year & renewals), banding by age, target and excess premium commission rates on UL products etc. Carriers offer BGAs several commission levels that a BGA can use for their hierarchy downlines. Setting up these commission schedules is a lot of manual work. Even if a system offers tools and resources to build and maintain these commission schedules, there is no process that validates they were even setup correctly.
The second challenge with commission accounting systems is to process commissions received on each case on modal premium. If a BGA, for example, writes a large block of business, then to manually process each commission statement is cost prohibitive. Therefore; a carrier’s commission data feed into a commission accounting system is critical. The problem is that even if the carrier uses a data standard, the commission data feeds are not consistent or complete from every carrier, making it difficult to accurately reconcile commissions. Many distributors will still go to visit 20 + carrier websites or even lookup paper commission statements to verify they have been paid correctly.
There are several solutions to the challenges of commission accounting systems. A carrier, for example, could electronically send their commission schedules in a data standard that could automatically update the distributor’s commission accounting system. This would eliminate all the manual setup of commission schedules for a distributor. Commission data aggregators could build a verification process that rejects bad or incomplete commission data files, thus only delivering clean data to a distributor.
A new innovative solution is that a carrier and distributor together could use Blockchain technology. The carrier commission schedules could be programmed into “Smart Contracts” that are used by both the carrier to calculate to pay commissions and used by the distributors commission accounting system to reconcile commissions. The commission schedules only need to be created once. The beauty of the Blockchain is that each party of a commission contract must approve the contract prior to it being available on a Blockchain for use. These parties connected to the contract essentially build an agent hierarchy and each participant in the hierarchy has a private key with access to the contract and the commission detail in the commission statement. This type of solution can offer privacy and security, thus enabling trust, accuracy and simplicity across the business.