Perhaps you find the insurance transaction to be a bit of a mystery. You may wonder what happens to the money you pay in premium and how the agent who services you gets compensated for his or her time.
Insurance agencies are normally compensated in the form of commissions received from the insurance company (or sometimes subtracted from the premium the agency forwards to the carrier). In Home & Auto insurance, this is usually a percentage of the premium, most often in the range of eight to fifteen percent. In Health insurance, commission is usually a set dollar amount per policy per month. Either way, this commission compensates the agency for its marketing costs, for assisting its clients in purchasing coverage and for providing continued service to the customer.
Beyond commission, the other common form of compensation is profit sharing. Profit sharing is basically an agreement between the insurance company and the agency that if the agency does a good job of screening and discretion in what policies it places with the carrier and if this performance leads to the insurance company turning a profit on the agency’s business in a given year, the insurance carrier will share some of this profit with its agency partner, recognizing and rewarding the agency’s role in creating this profit. Quite often there is a minimum amount of business that the agency must have with the carrier and there may also be growth requirements attached. Not all insurance companies pay profit sharing.
Some agencies are also paid via fees billed directly to the customer. These fees could be instead of commission or in addition to it, and they could be a set dollar amount for certain services or could be a percentage of premium paid. Fee assessment is probably more common in larger insurance agencies and brokerages than it is in local agencies. We don’t charge customers any fees at Pine Country Insurance.
Here’s an example of how an agency is paid and where premium dollars go. Let’s say that in January Kala purchases Auto insurance from First Street Agency and signs up for auto-pay. First Street Agency places her insurance with Gopher Mutual. Gopher Mutual takes $83 a month out of Susie’s checking account and pays First Street Agency $12 per month (14 percent) in commission.
At the end of the year, Kala had paid $1000 in premium to Gopher Mutual. Good news! It was a good year; there weren’t any major storms in the state and Gopher Mutual’s customers didn’t have too many major accidents. So, out of the $1000 Kala paid for the year, Gopher only had to use $430 to pay customer’s claims. It did also use $260 to pay its operating costs and it paid $140 to First Street Agency in commission. This left $170 in profit. Gopher shared $20 of this profit with First Street Agency and much of the rest it placed in reserve in case there are more storms or accidents next year.
While your actual insurance transactions will be different from the example above, I hope this post adds some transparency to the process of agency compensation and where your insurance premium dollar actually goes. I welcome any questions you might have!
Ken Cobb is owner of Pine Country Insurance and has been active in the insurance industry for over 15 years. Meet Ken.
Coverage descriptions found in this blog are summaries provided for general educational purposes and cannot fully detail the terms, conditions, limitations or exclusions of a specific insurance policy. Please read your policy carefully.