When a business is securing insurance coverage, they usually work through a broker. The broker then finds them the best insurance coverages to fit their specific needs. There can be confusion on how insurance brokers are compensated. We are going to try to explain the various ways an insurance broker is compensated in the following article.
Essentially, the client is paying the insurance broker to guide them through the insurance buying process. The broker’s job is to ensure they get the best coverage that fits their budget. Studies show that many people end up choosing a less than optimal insurance plan when they solely rely on their own judgment.
Insurance brokers are essentially paid one of two ways:
- Fee only
- Commission only
We will explain the differences below.
Compensation by commissions
The most common way for insurance brokers to be compensated is by commission. A standard commission is a percentage of the premium set at the time of the purchase, renewal, placement or servicing of a particular insurance policy. Standard commissions generally range from 5-15% and are dependent on the type of insurance policy placed and the volume that an agent has with the insurance carrier. Commissions are built into the policy premiums and are only rarely quoted separately by the insurance carrier. Good insurance agents will communicate to the client what the commissions are for policy placements.
Compensation on a Fee Basis
Insurance brokers are sometimes compensated on a fee basis. The fee will be paid annually at time of placement or binding of insurance coverages. If a client chooses to pay on a fee basis, policies are written net of commission by the insurance carrier and the client pays a separate yearly fee for service. Most brokers are agnostic to the method of compensation and believe the key for the client is transparency. There are advantages and disadvantages to both methods of payment. It is always up to the client as to how they prefer the compensation to be structured.
What are the services that fees and commissions cover?
The broker’s goal is to drive down the total cost of risk by giving clients the best value for the overall premium, while still earning fair compensation.
Fees and commissions for services include all Brokerage and Risk Management Services including, but not limited to, the following:
- Perform coverage analysis and advise on program structure
- Provide limits analysis and peer benchmarking
- Provide assistance in risk exposure identification
- Advise client on existing policy language or proposed coverage modifications
- Develop underwriting information and prepare underwriting specifications
- Market insurance coverage and negotiate with insurance underwriters
- Prepare and present written proposals of coverage options, including pricing, coverage, and service specifics
- Design and negotiate specific policy language
- Review insurance policies for accuracy
- Issue certificates of insurance as required
- Monitor insurance programs and providers with respect to cost, coverage, and services
- Process endorsement requests
- Respond promptly to questions and provide research or advice, as needed
- Monitor insurance carrier loss control services, claims services & insurer financial strength
- Perform periodic claim reviews and provide claim support
- Pay for services of a workers’ compensation claim coordinator for up to 15 hours per week
However, if there is a material change in the scope of work required during the year, additional compensation may be considered and negotiated. This fee is fully earned at the time policies are bound by the insurance broker. That is to say, all efforts will be made to negotiate insurance placements on a net of commission basis, however, when that is not possible or advisable to do so, the annual fee will be adjusted to compensate for any commissions received. All commissions received should be fully disclosed.
In short, we hope this article takes some of the mystery out of the question, “How are insurance brokers compensated?”. Most importantly, an insurance broker should always clearly communicate how they are being compensated to the client. Transparency is of the utmost importance. If you would like more information about Diversified Insurance Group, go here.