Grossing up is a practice whereby the gross premium (ie including commission) agreed between broker and insurer (or reinsurer) is less than the premium which the broker notifies the proposed policyholder is payable. The difference between the two amounts remains in the hands of the broker and the proposed policyholder is left unaware that they are paying a greater sum than has been agreed by the broker on their behalf with the insurer (or reinsurer).
Such a practice, without the informed consent of the proposed policyholder, is wholly unacceptable and is a breach of the agency duties which the broker owes the policyholder as its principal.
In certain cases, slips have contained wordings which have allowed the broker to adjust the gross premium while the underwriter receives the same net premium (for example, contracts with an “or net equivalent” clause).
In view of the concerns that can arise from “grossing up” and the difficulties in ensuring that there is appropriate policyholder consent, managing agents should not include clauses in contracts where the commission is expressed as a net equivalent and may be varied by the broker, unless the commission appearing on the slip is expressed as a specific sum or maximum amount which can only be reduced.
Performance Management – Supplemental Requirements and Guidance, pages 22-23