Understanding How Your Insurance Broker Is Paid
Knowing exactly how your insurance broker is being compensated for their services adds transparency to the process, which can lead to a more productive and open relationship to both party’s mutual benefit. For smaller employers, you may often hear, “I get a fixed commission, it does not matter to me who you pick,” but that is only part of the story.
Broker Compensation Overview
Whether you’re evaluating potential brokers with which you’re considering working for the first time or whether you’ve had the same broker for years and are simply seeking more information, the easiest way to determine how your business insurance broker is being compensated is simply to ask, and know the right questions to ask.
Because of disclosure requirements in many states, your broker is likely to be forthright about the potentially varying means by which they are compensated for their work. More importantly, any broker’s unwillingness or inability to provide a direct response to such a query ought to be a waving red flag.
For smaller and mid-sized companies with fewer than 50 to 100 employees, broker compensation arrangements tend to be a fixed fee or commission which is then multiplied by the number of full-time employees for any given client. That said, even in the case of such fixed fee contracts for smaller companies/clients, brokers are likely to receive some form of additional compensation similar to year end bonuses common in any number of other industries. An insurance company will pay these additional bonuses to brokers based on the number of new clients that broker brings to the insurance company, total number or new employees covered (across multiple clients), or some other factor can vary by broker and provider may vary on a case-by-case basis.
For larger companies, there may be more room to negotiate the broker’s per-employee fee rate. As the number of employees grows for any given company/client, these fee-based arrangements trend toward fees on a per-client basis rather than fees on a per-employee basis. In such situations, there is often still a per-employee commission included for the broker, but again, the only way to know for any given broker or carrier is to ask.
Additional Broker & Payer Compensation Arrangements
In addition to fee-based commissions, there are several other different types of compensation brokers may be able to earn that clients ought to be aware of. As mentioned above, for example, something akin to a year end bonus may be available to many brokers, but knowing how such bonuses are earned and what triggers them can provide further insight into the incentive structure that may be motivating a broker’s decisions and/or recommendations.
Contingent Commissions: As the name implies, a broker’s ability to earn this particular type of commission is contingent upon some qualifying event happening or a qualifying condition being met. Beyond a simple year end bonus derived from hitting some client or covered-employee benchmark (which is also a form of contingent commission), contingent commissions can be triggered by a wide variety of (often less easily calculated) conditions, such as actual profitability of a given broker’s client pool based on the measurable value of the policies maintained vs. claims paid out.
Supplemental Commissions: While contingent commissions must be assessed and paid to the broker after the contingency has been met(usually at the end of the year or whatever applicable term) in one lump sum, supplemental commissions can be accumulated and paid out in real time whenever they apply. For example, a broker might receive supplemental commissions whenever they sign up a specific type of policy for a new client that the provider is particularly interested in pushing – like a broker who receives an immediate bonus (or greater commission percentage) any time dental insurance is coupled with medical for a client.
Incentive Compensation: While more abstract than contingent or supplemental commissions, incentive compensation is a broader category by which brokers can be rewarded for their effort. Whereas contingent commissions are awarded after-the-fact when long-term fixed benchmarks or other contingencies are met, and supplemental commissions are awarded anytime that a short-term goal is met, both are typically applied on a company-wide basis in order to incentivize applicable brokers to pursue certain goals that are in line with the provider’s larger strategy. In this sense, both contingent commissions and supplemental commissions are forms of incentive compensation – though the term ‘incentive compensation’ itself is often more specifically applied in situations where the benchmarks, contingencies, and goals that a given broker or agent is being incentivized to meet are not necessarily company-wide, but are instead specific to a given broker. In practice, what this means is that brokers working with the same provider may at times be incentivized with different goals and benchmarks from which their non-commission-based compensation is derived. For example, based on their performance over the previous term, one broker may be incentivized by a given provider to push additional workers’ compensation coverage, while another broker may be incentivized by the same provider to issue more policies with psychiatric care upsells. With these kinds of incentive arrangements, a provider can essentially highlight and further incentivize any area the provider sees specific room for improvement for a given broker.
Broker Compensation in Sum
For smaller and mid-sized companies, it is unlikely that you will be able to affect the ways by which your broker (or a broker you are considering working with as your broker) is compensated. While there is some room for negotiation among larger companies in terms of commission percentages or fee rates, the parameters of negotiation are relatively narrow regardless, and it is unlikely that even a large company will affect a given broker’s compensation package in a meaningful way.
That said, just because companies may not regularly affect those compensation packages does not nullify the importance of understanding the specifics of how those compensation packages are calculated. Knowing how your broker is compensated, from base commission to any other incentive and commission offerings that may be in place, is the key to deciphering your broker’s potential motivation for any and all recommendations they make, and that transparency is in turn key to establishing a productive and effective working relationship.
When in doubt – just ask! And if you’re looking for a new broker or just want to compare how your current broker’s compensation packages compare to other similarly-situated brokers, search for brokers near you on Mployer Advisor. You’ll find a searchable database of relevant brokers and agents who are prepared to answer all your questions about compensation or any other insurance-related issues you may have.
About Mployer Advisor
At Mployer Advisor, our focus is creating transparency in the insurance and insurance broker, consultant and advisor space to the advantage of the employer. Analytics is our core and we will bring to light new information, tools and resources to aid employers in making more cost-effective decisions. As a phase I, we are here to help employers find the right broker or consultant and the right insurance company for them. Giving choice and initial transparency is a first step in creating an employer centric insurance marketplace.