Finding an insurance broker that fits your benefits needs can be a challenge. It is common to inquire about compensation differences in insurance brokers. Many people wonder how they are compensated and if each agency charges differently. In this article, we will break down how insurance brokers are paid. After that, we will also point out the questions you need to ask to find the best fit for your business.
How are brokers paid?
Firstly, there are a few ways that insurance brokers get paid for doing the consultative work you hire them to do. Compensation differences in insurance brokers usually come down to two ways. The most common is through commissions or service fees. There are pros and cons to each method of compensation.
Compensation by commission
Commissions are typically a pre-set percentage based on your monthly premium, paid to the broker monthly. For example, for a medical plan, you see percentages that range typically from 3% – 5%. In addition, for dental and other ancillary policies, the standard is usually 10%.
The benefits of commission
The benefit of commission is the amount is prebuilt into the rate that you pay to the insurance carrier each month. They then take out that percentage or dollar amount and send that directly to the broker. You only have to pay one entity – the carrier – and they do all the rest. This makes it easy to budget those premiums as the amount you pay each month doesn’t change (based on enrollment). The disadvantage to this is that sometimes, the commission portion gets forgotten about. Some brokers use this as an avenue to make more money than they are providing work for.
Compensation by service fee
Service fees are flat dollar amounts that you (the client) would pay directly, and separately, to the broker. This amount is not included in the premiums that you pay to the insurance carrier. You do have to remit a separate payment each year to the broker. Often, this amount is forgotten to be captured through deductions or budget worksheets. It is necessary to include it when you do your annual budgeting process.
The benefits of service fees
The benefit of paying a service fee is that the broker cannot sneak in unaccounted for charges. In addition, it also provides an opportunity to speak candidly with them each year about the amount they are being paid.
The downside of service fees
However, with that being said, the downside to compensation paid in this way is that it isn’t tracked by the normal measures such as 5500s. Even though you may be aware of what you are paying your broker, if it is not tracked, it’s hard to benchmark that with what other companies are paying to know if you are paying too much or too little for the service you are receiving.
Things to remember about compensation
Here are some things you should talk to your broker about when it comes to compensation differences in insurance brokers:
How much are they getting paid
– Ask how much they are getting paid and in what format for your business – commissions, overrides, service fees, etc. If your group is over 100 employees, then by law they must report the amount that is paid to them through commissions on 5500s. If it is a fee for service, that is not required to be reported, but you should have a contract in place.
Quantify the value
– Ask them to quantify the value that their service brings in regard to the amount they are being compensated. Are there more things that they could be offering you? Just remember, many brokers do offer some services at “no-cost”. So while you may not be paying directly for them, you are still helping to pay for those services through your commissions – and that is fair. As the Society for Human Resource Management states, “Optimizing benefits isn’t just about shopping for coverage from carriers. It involves a holistic approach to your overall company strategy, budgets, benefit plan design, HR strategy, and even IT concerns. If you are hiring a broker only to shop your plans, you probably aren’t maximizing the broad spectrum of results top brokers deliver to employers.”
Update your contract
– See if you need to update your contract to include specific terms such as annual reviews and cost of living adjustments. You need to pay brokers for what they do and the knowledge they bring. Similar to any other employees, they deserve raises as well for a job well done.
Check underwriting worksheets
– Ask how the compensation is accounted for in your underwriting worksheets. If you are a small employer, it is just part of the premium that is billed to you by the insurance carrier. There is no negotiating it, unfortunately. For larger employers, especially self-funded employers, make sure that compensation is a line item on your budget. This will ensure that it is properly be accounted for.
In conclusion, it is important to remember, if your broker is working for you, they deserve to be paid. It is beneficial for both parties to have a yearly conversation so that you are in agreement about what is being given and services received. To get more information about Diversified Insurance Group, go here.