When buying business insurance, it is always a good idea to get quotes from multiple insurers. Although anyone can compare rates online, it is best to speak with an experienced insurance broker who can guide the client through their options and offer recommendations based on pricing and needs.
An insurance broker is a professional from whom a business owner can purchase insurance. Brokers do not work for insurance companies, and instead, shop around for the best insurance policies at the best prices on behalf of their clients.
Brokers earn a commission on the policies they sell. After a client has purchased a policy, the insurance company pays the broker a commission for bringing them business. This commission is typically based on the premium amount and can go as high as 20 percent, depending on the type of insurance.
It can sometimes be difficult to understand how broker compensation really works. Learn more about why a business may want to work with a broker and how brokers are paid.
Why Should A Business Work With An Insurance Broker?
With so many insurance options available, it can be challenging for clients to choose a policy that fits their budget and provides adequate coverage. Insurance brokers are trained and experienced in many types of insurance, as well as risk management. Some brokers even specialize in certain niches or industries.
An insurance broker represents their clients as they search for policies that will best fit their unique needs. The process generally begins with a consultation in which the broker will listen and understand the client’s coverage requirements. The broker will then search the insurance marketplace to find a policy that meets these requirements.
Insurance brokers often deliver objective and impartial advice on the insurance coverage that is appropriate for the client’s needs. They can also help clients better understand all aspects of the policy, including exclusions. Brokers will also be transparent when it comes to insurance costs and the claims process.
Why Is It Important To Understand Broker Compensation?
Many business owners rely on insurance brokers to help them make smart insurance purchases. However, it is not always clear how much brokers are paid and who is responsible for this payment. Here are some of the reasons why businesses should become familiar with broker compensation.
1. Some Brokers Charge On A Fee Basis
Not all insurance brokers handle payments the same way. Some are compensated on a fee basis. Clients who are charged a fee are typically required to make the payment on an annual basis at the time of placement or when binding the insurance coverages.
Under this type of arrangement, insurance policies are written net of commission by the carrier and the client is responsible for paying a separate annual fee for services. There are many reasons why some brokers choose to charge on a fee basis, but it is primarily done to maintain transparency between the client and broker.
Charging on a fee basis can have its benefits; clients know exactly what they can expect to receive and at what price. There are no hidden fees and clients can choose services that fit their budget and needs.
2. Some Brokers Are Compensated By Commissions
The most common way for insurance brokers to get paid is through a commission arrangement. Brokers typically charge a percentage of the premium that is set at the time of the purchase, placement, renewal or servicing of an insurance policy.
A standard commission for an insurance broker typically ranges from 5 to 15 percent, depending on the type of insurance policy and the total volume that the broker has with the insurance carrier. It is important to note that commissions are often built into an insurance policy’s premiums and not quoted separately by the insurance carrier.
3. Fees And Commissions Cover Specific Services
Before making a large financial decision, clients typically want to know exactly what they are paying for to determine if they are receiving value for their money. Some of the most common services offered by insurance brokers that are covered by fees or commissions include the following:
- Assist prospective clients with completing forms, finding the best plans and negotiating deals
- Share client information with insurance carriers to determine what products to recommend
- Provide information about different policies and communicate effectively with clients
- Serve as a liaison between clients and insurers
- Deliver up-to-date market information based on research of insurance trends, products and policies
- Prepare reports for insurance underwriters
4. Brokers May Offer Consultative And Advisory Services
Insurance brokers may also offer services that are outside of recommending insurance policies. Many offer consultative and advisory services for an additional fee. Some brokers may charge transaction fees based on the service, such as a fee for helping a client file a claim or initiate changes.
The state in which the insurance broker operates governs how and when a broker can charge fees. These fees must also meet certain criteria to be considered legal, such as being reasonable and agreed upon by both the broker and client.
Insurers may offer incentives to insurance brokers who perform well over time by offering increased commissions or bonuses. However, brokers do not represent a specific company which ensures the client’s best interests.
5. Insurance Companies May Pay Supplemental Commissions
Recently, insurance companies have begun to replace contingent commissions with a different type of commission known as a supplemental commission. This type of commission is established as a fixed amount each year in advance, based on a broker’s historical performance.
The criteria used to measure performance is comparable to how contingent commissions are typically calculated. This type of commission is referred to as guaranteed supplemental commission (GSC).
Speak With Our Business Insurance Division Today
Determining what types of insurance policies are best for a business is not always easy. Working with an experienced insurance broker can help streamline the process and ensure that businesses choose the best and most budget-friendly policies for their organizations. For more information about how broker compensation works, or to speak with an insurance expert, request a consultation with the Business Benefits Group.