AREA Commission Protection Insurance Video - CLICK HERE
AREA Members have voted in favour of the question:
Do you favour AREA investing a portion of your existing annual member dues to protect REALTOR® commissions for all members?
Roll out planning will now commence. Please contact firstname.lastname@example.org if you are interested in being part of that process.
Commission Protection Insurance
Currently REALTOR® commissions are not protected. If your brokerage ceases operations while you are owed commissions, your broker may not be able to pay you. Currently, the only recourse for associates is legal action.
In 2015, two large Calgary brokerages collapsed, which left many REALTORS® without their anticipated hard-earned money, drawing attention to this gap in coverage. Elsewhere in the country, B.C. and Ontario REALTORS® receive protection against possible losses through insurance programs.
AREA’s operational efficiencies and improvements, implemented since 2015, put us in position of being able to offer commission protection insurance to all 10,500+ AREA members, within existing membership fees.
The AREA Board of Directors is asking for member input by vote, which will be open October 1-3, 2018.
Please keep an eye out for further details in the coming weeks.
What will this cost me?
AREA members will not incur additional costs. The cost will be included within existing AREA membership dues and AREA’s contribution to upfront costs will be covered through a long-term loan from AREA reserves.
The AREA Board directed staff to build an operational budget around the assumption that AREA would cover the premiums, estimated at $50 annually per member. With this work completed, the AREA Board is confident that it can provide this additional protection to members, at no additional cost.
Can I opt out?
In order for the insurance program to be viable and sustainable, all 10,500+ AREA members must participate. Without full participation, the insurance product would be too unstable and costly to maintain. This is why the AREA Board of Directors is asking members to vote on whether to create an insurance program.
Who will provide the insurance product?
AREA has been working closely with REIX – your errors and omissions insurer – to examine the viability of a commission protection insurance product in Alberta and conduct preliminary actuarial analysis. Both AREA and REIX are confident we can tailor an insurance solution to protect commissions. If members elect to proceed, those discussions and research would be used to implement an insurance program administered by REIX and AREA.
Why does AREA think we need this insurance?
The two large brokerages which collapsed in 2015 left around 700 REALTORS® looking for a new broker and too many of them without their hard-earned commissions. While brokerages have closed suddenly before and since, this was a large-scale event that prompted industry action.
In 2016, AREA formed the At-Risk Commission Working Group, with representatives from RECA, REIX and local Boards, which worked toward possible solutions for industry. RECA informed the working group that a regulatory solution was not feasible in Alberta without changes to the Real Estate Act. There is no perfect solution, but other provinces, such as B.C. and Ontario, have insurance programs in place that limit the risk to REALTORS®.
Working off the example of other provinces, AREA and REIX worked through the viability of the simplest solution: Commission Protection Insurance. Commission Protection Insurance would provide financial assistance to AREA members who lose commissions due to the collapse of their brokerage.
How do commissions work?
Commission money belongs to the brokerage. When money is released from a consumer deposit trust account it goes into a general brokerage account. From there, the broker manages the flow of money and disperses the commissions. Some brokers place funds designated for commission into a separate commission account, others leave it in a general account for disbursement.
Whether your broker holds your commissions in a general or separate commission account, currently commissions are not protected under the Real Estate Act or Rules, nor are they audited.
What will be covered?
As with any insurance product, there will be limits and exclusions. The specific details will be determined by insurance experts with industry advisors, but there will be responsibilities for both brokers and associates, such as reporting delays in commission payment within a set time limit.
Who can make a claim?
Associates would be insured under this program.
We are asking AREA members to consider this idea seriously and to submit written questions to email@example.com . AREA and REIX will do their best to respond to these questions in writing and will also be hosting a town hall to answer additional questions that may arise before the vote.
How will the vote work?
The vote will be open for three days, from October 1-3, 2018. It will have a dedicated page on the AREA website and will require members to log in to participate. AREA will assess the results based on a simple majority – 50 per cent plus one.
Updates as of 09/18
Would there be an insurance deductible?
The insurance product would cover the full loss of all qualifying associate claims.
Would the insurance product be mandatory or optional?
All AREA members would be registered in the program, which is one of the reasons AREA is conducting a vote.
What will brokers be required to do to maintain insurance coverage for their associates?
If the insurance is approved by members, AREA will work out the particulars in consultation with brokers. Brokers will need to submit proof of financial soundness annually, likely by providing a copy of their annual accounting statements.
If an associate responsibility will be reporting delays in commission payments within a set time limit, what would the time limit be?
Based on the actuarial analysis, this reporting duty is expected to be triggered by payments delayed by over 30 days.
Will the insurance have the same coverage limits for all subscribers, or can members apply for extra insurance?
The plan is to provide one coverage level – complete coverage – for all AREA members.
What is the cost to AREA to provide this coverage to members?
Actuarial analysis has outlined an expected premium of $4.17 per month, per subscriber.
Who will make money off this insurance product?
The benefit to AREA, as a non-profit professional association, delivering an insurance product is that AREA can ensure the product is structured to provide maximum benefit to members at the best price possible, rather than structuring it to maximize profit, like a for-profit business.
What will happen if massive surpluses or deficits occur within the insurance plan?
The actuarial analysis used research and complex algorithms to project the premium and reduce the risk of deficits significantly. If massive surpluses or deficits were to occur it would, like other insurance companies, affect the insurance premiums.
Where will the money to cover the set-up costs of the insurance come from?
The AREA and REIX Boards have agreed to fund the set-up through loans to the insurance product, if it is approved by members. AREA would loan $1 million from its reserves, while REIX would loan $2 million from its reserves. These loans will backstop the insurance while it gets off the ground.
If approved, will there be an opportunity for insurance providers to bid on this product?
Yes, AREA is open to evaluating options beyond REIX as the underwriter for a commission protection insurance product.
Is this program really sustainable within existing dues?
Yes. Based on the research done, AREA is confident it can offer this product within the dues structure.
If members vote this insurance product down, will the money set aside for it be returned to AREA members?
Based on the vote outcomes, the AREA Board will make budgetary decisions for the 2018/9 fiscal year, which – if the insurance is voted down – may include reallocating those funds into other member services programs or reviewing dues levels.
How often do brokerages collapse?
Collapses are rare, but they do happen and the effect when they do collapse can be devasting for those involved.
How much in commissions was owing when the approximately 700 associates were left brokerless?
The losses to associates were in the millions.
Would brokers be more tempted to walk away from their responsibilities with a product like this in place?
AREA has faith in the hard work of brokers, and knows they intend – just like associates – to keep their businesses operating properly. An insurance product is a way to assist victims of bad circumstances or bad actors. There would be no benefit to brokers making bad business decisions. In the same way home insurance doesn’t normally encourage people to burn down their house, it is unlikely that an insurance product would encourage brokers to collapse.
Why doesn’t AREA just mandate that brokerages are required to payout the associate upon each deal closing?
AREA is not the regulator, and RECA has elected not to proceed with rules to manage at risk commissions under the current legislation. This is an insurance product to protect associates on those occasions where a broker is unable to fulfill their commitments.
Why aren’t brokerages required to provide this insurance for their associates?
Insurance products are usually structured to be paid for by the person receiving the insurance. If a solution was mandated by a regulator or Boards/Associations, brokers would still pass the cost on to the agents.