While brokers can save you time and money, they are compensated for their services. Not all brokers are made the same, and the commissions or fees they collect may be different.
Insurance brokers typically are compensated a commission fee based on a percentage of the policy premium. The commissions are usually paid by the insurance company, not the buyer.
In this post, we explain fees and commissions for insurance brokers, how they get paid, and how much you can expect to pay for brokerage services.
How do you pay an insurance broker?
An insurance broker typically makes money from agreed-upon commissions when your company buys and renews policies from insurance companies.
In most cases, commissions are paid by the insurance company that the employer chooses. It is usually a percentage of the premium for the policy, and may or may not be already built into the retention component of the premium cost.
Payments to your insurance broker could include both base commissions and supplemental or override commissions.
Most commissions fall between 2% and 8% of premiums, according to Investopedia.
Negotiating fees and commissions for your business insurance broker may be possible, and is dependent on the size of your company along with the internal incentive policies of your insurance provider.
Some brokers are contracted for several years, so you might need to pay broker fees through the contract term, regardless of policy changes, unless the broker violated your contract. Your policy could also contain a "short-rate cancellation fee," by which you would owe your insurance company money for cancelling your policy midterm. It is important to know the terms of your agreement.
Insurance brokers do not sell insurance, but they can find insurance companies and coverage policies that align with your business. To finalize and initiate a business insurance policy, your broker will need an insurance agent or insurance carrier.
Some brokers are paid solely through commissions for policy purchases and renewals, and some include other fees. Some states have restrictions on these non-commission payments but broker fees rarely eclipse more than 15% of the premium.
Broker fees can be combined with a commission structure, and should be disclosed to you upfront.
Sometimes, brokers will 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. You should know if your broker or agent charges fees, and what those fees are, before they start searching for insurance policies on your behalf.
The fee may be a similar amount to the commission they could have earned, and unlike commissions, it doesn't come from the insurer.
Broker fees are usually non-refundable, so you will still have to pay if you cancel your policy mid-term, unless your insurance broker violated your contract. Again, it is important to know your contract fees and terms.
Even with commissions and fees, a good broker adds significant value.
Do insurance brokers have my best interest?
You might wonder if insurance brokers have your best interest at heart. In most cases, they do.
When you hire an insurance broker, they work directly for you – not the insurance companies.
Brokers also rely on repeat and referral business, so they are financially motivated to choose coverage that your company will keep renewing for a long time. Insurance companies often offer incentives to brokers for policy renewals as well, so they should work in your best interests to find satisfactory insurance plans.
On the other hand, since they are paid by commissions based on premium costs, brokers could be incentivized to add unnecessary coverages.
You should be able to trust that your broker is finding appropriate coverage for your company. If they are not attentive, do not provide valuable advice, or only appear when renewals are coming up, it may be time to browse other options.
There are very good professional brokers in your market. With that said, broker relationships do change. If you are not satisfied, know that more than 40% of businesses do not feel satisfied with their current broker, and 21% have changed brokers in the past three years, according to Zywave.
In general, you can switch to any broker licensed in your state without additional fees. Plus, it is possible to switch insurance advisors without changing your current policy. Changing to more knowledgeable brokers or advisers could provide a more personalized plan with similar costs.
How do I understand the fees and commissions my insurance broker is paid?
Insurance buyers should compare brokers and consultants based on professionalism, demonstrated knowledge in insurance, understanding of your industry, transparency and cost.
To avoid unexpected costs, you should know fees upfront, examine your broker’s relationship with insurers, and understand the difference between insurance brokers and insurance agents.
Employers should know how their brokers are paid, but insurance policies are seldom simple, so you will need to ask about every potential fee or commission. These include contingent and supplemental or override type commissions. Good brokers have no issue with transparency.
When evaluating and choosing insurance brokers, be sure to explore benchmarking studies that give you an understanding of who is out there and how much you should pay. Mployer Advisor’s proprietary M-Score can show you how different brokers rate in terms of industry expertise, transparency and cost.