For most insurance and employee benefits needs, employers must carefully weigh the value of their plan against the needs of their workforce. To do so, employers must turn to an insurance broker for guidance. So, how do you pay an insurance broker for their services, and how much do they make?
In most cases, you do not directly pay an insurance broker. Brokers are typically paid commissions by the insurer based on your policy, and the commission is included as a retention item in your premium cost. This is the case with fully insured coverages.
For any employer needing guidance to select insurance options for your employees, you should know how brokers are compensated for their services. This involves understanding commissions and fees.
In this post, we explain how an insurance broker is paid, differences in fees between brokers and consultants, and what to expect when you hire one.
Before you select an insurance broker, you should know how they are paid. Typically, brokers provide policy information, quotes and enrollment/renewal assistance at no direct billable fee to you.
Insurance brokers are typically paid through commissions based on insurance policies sold.
Commissions are typically based on a percentage of your premium payment. These may include base commissions and supplemental (or contingent) commissions.
Commissions usually fall between 7% and 15%, but can vary depending upon the type of coverage and complexity of your policy. Usually, brokers receive level commissions or graded commissions based on premium thresholds. In addition, they may receive an override commission for a block of business with a particular carrier. This override will typically also include a small percentage for persistency. The higher the persistency with that carrier, the higher the percentage.
Some brokers are paid solely through commissions for policy purchases and renewals, but some include other fees for additional services, such as voluntary benefits enrollment.
Sometimes, brokers will also charge fees as they take on consultant (or advisor) roles, providing ongoing services to help determine if policies should change, assist you with compliance, and help submit claims and receive benefits.
As brokers take on more consulting and advising responsibilities, fee-based broker compensation has become a more common payment method. Usually called a “fee for service agreement,” these fees are paid by insurance companies or may be directly billed to the client.
Even with commissions and fees a broker can add value and be lower cost than not utilizing a broker.
Independent insurance agents work with (and are paid by) multiple insurers, with contracts limiting them to sell certain policies. Brokers and consultants (also called advisors), meanwhile, are not limited to certain policies and can solicit price quotes from multiple insurers.
Insurance brokers and insurance consultants perform similar functions, are licensed, and have a fiduciary duty to you as the insurance buyer. But there are some differences between the two.
The main differences between an insurance broker and a consultant/advisor are their fee structures and how involved they are with a client beyond insurance purchases and renewals.
Traditionally, an insurance consultant works on a fee for service, and an insurance broker works for commission based on the policy’s premium. Consultants usually charge fees instead of, or in addition to, a commission that’s included in your premium payment. This is in the form of direct invoice of billable hours or a direct offset billable hours with commissions received.
As opposed to brokers, consultants often forgo commissions from the insurance company, which means they must charge a consultant’s fee. Unless of course, the client prefers them to receive commissions and offset their billable hours or fees in that way.
It all depends on your state, your size, and what type of insurance you need, but average consulting fees are 15% of the policy premium. The higher the premium, the lower the percentage.
Many modern insurance brokers’ services have evolved, and work more like consultants/advisors, working with you throughout the year and not just when you need to spend money on insurance. You should know what services your broker or consultant provides, if they charge fees, and what those fees are, before allowing them to search for insurance policies on your behalf.
Thus, the difference isn’t always straight forward. It is always in your best interest to define the relationship and expectations of the services expected.
With a broker, you get industry knowledge and experience. They understand the language of the insurance industry, and are best equipped to negotiate and service your needs with insurers.
As your business grows and changes, you should expect your insurance broker to provide decision support. To earn their payment, brokers and consultants should be involved in your plan several times per year, helping make decisions that complement your overall business objectives.
When evaluating insurance brokers, be sure to explore online ratings and benchmarking studies that show who is in your market.
The best way to find good insurance and benefits is through a broker, consultant, or advisor who knows the industry, has the partnerships, knows your needs and can deliver on the procurement process.
But, how do you know who to hire? With seemingly endless options, you feel under pressure to choose the right one. We believe that transparency, information, and choice leads to better hiring decisions.
It's why we created Mployer Advisor, a free broker marketplace that allows employers to compare brokers, consultants, and advisors in one place.
To get started, get matched with a short-list of qualified brokers.Looking for more exclusive content? Check out what’s trending on the Mployer Advisor blog, or read "Can an Insurance Broker Save My Company Money?" for more information on this topic.
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