As a practical matter broker (agent) compensation falls into one of three categories: commission, contingency payments and fees. In some circumstances, broker compensation may be a combination of commission and fee based revenue.
The principal source of revenue for most insurance brokers result from a commission paid by insurance carriers based on the type of coverage and amount of premium. Commission expense is built into the premium charged by the carrier and paid by an insured. Whether premiums are remitted directly to the carrier or to the broker, who in turn remits a net payment to the carrier, the earned commission is a specific percentage of premium. Agreements between brokers and carriers vary so certain brokers may earn a higher rate of commission than others.
Often referred to as “contingencies” or “profit sharing” these fees are based on the performance of the broker’s “book of business” with the carrier during any given year. Year-end reconciliation takes into account premium growth and retention with loss experience (not of a single client but the book of business overall) often being the most sensitive factor in determining the amount of contingent (profit sharing) compensation. Such agreements are fairly commonplace among agents & brokers.
Some agencies bill service fees in addition to commission income where permitted. As an alternative to commission compensation, fee based agreements negotiated between the insured and broker are becoming more commonplace. Fees associated exclusively with non-commission service items such as loss control and claims analysis are also routine.
Carrier paid commission is the principal source of revenue, accounting each year for approximately 85% of agency operating income. Contingency fees (profit sharing agreements) vary from year to year but generally account for about 10% of agency revenue. Consulting and miscellaneous fees make up the balance.
If you have any questions or if you would like additional information about any aspect of the compensation we earn on your account, please contact us.
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