Who Pays the Commission to an Insurance Broker?

If you work with an insurance broker to purchase a policy, you may wonder – who actually pays their commission? Is it baked into what you pay as a policyholder? Or does it come directly from the insurance company?

The short answer is that insurance companies pay commissions to brokers. But let’s break it down further:

Insurance Companies Pay Broker Commissions

Insurance brokers make money by receiving commissions from insurance carriers. These commissions are a percentage of the total premiums paid on policies the broker sells.

For example, if a broker sells a policy with annual premiums of $1000, and the carrier pays a 10% commission, the broker would receive $100.

The commission percentages vary by insurance company and line of business, but usually fall in the range of 5-20% of premiums.

Commissions Are Included in Policyholder Premiums

Though insurers pay the commissions, they bake the broker commission costs into the premiums policyholders pay.

For instance, if a policy’s pure premium cost is $800 (based on risk factors), and the broker commission is 10% ($80), the insurer will charge the total $880 to the policyholder.

So the total premium you pay as a policyholder indirectly covers the broker’s commission. But you aren’t paying anything additional or separate.

How it Works

Here is the typical process of how broker commissions get paid:

• A policyholder purchases insurance through a broker. The annual premium is $1000.

• The carrier has agreed to pay the broker a 15% commission on policies sold.

• On this policy, 15% of $1000 is $150. This will be the total commission amount.

• The policyholder pays the $1000 premium to the insurer.

• The insurer then pays out the $150 commission to the broker as compensation for selling the policy.

• The broker receives the commission check/payment from the insurance company on a monthly, quarterly, or annual basis depending on their agreement.

So the insurance company ultimately pays the broker’s commission directly, but factors it into the total premium costs paid by policyholders.

Commission Types

There are a few different types of commissions brokers can earn:

• New business commission – Paid when the broker sells a brand new policy to a client. Usually the highest commission rate.

• Renewal commission – Paid when an existing client renews their policy for another term. Lower rate than new business.

• Service fees – Smaller commissions for policy changes and other services for existing clients.

• Contingent/trail commissions – Ongoing residual payouts as long as the sold policy remains in force.

Benefits of Commission Model

There are a few advantages to the traditional insurance broker commission model:

• Alignment of interests – Brokers are incentivized to sell policies and keep clients, which benefits insurers.

• Little upfront cost – Carriers only pay commissions if brokers generate new policies, so there is little risk.

• Predictable revenue stream – Carriers can easily budget for commission payouts.

• Motivates growth – Commission model rewards brokers for generating more business.

Broker Fees in Addition to Commissions

Some brokers may charge service fees directly to clients in addition to receiving their regular commissions from insurers. These broker fees help cover the broker’s overhead expenses and services like:

• Researching policy options
• Providing guidance on coverage
• Handling renewals and ongoing service

Common broker fees include:

• Placement fees when securing a new policy
• Service fees for policy changes and renewals
• Consulting fees for more complex coverage analysis

Broker fees are regulated at the state level and must be reasonable and explicitly agreed upon by the client.

Key Takeaways

• Insurance carriers pay commissions to brokers as a percentage of premiums on sold policies.

• Broker commissions are baked into the premium costs paid by policyholders.

• Insurers pay commissions to incentivize brokers to generate new business for them.

• Some brokers may charge additional service fees directly to clients.

• The traditional commission model helps align brokers’ and insurers’ financial interests.

So while policyholders ultimately pay the cost of broker commissions through their premiums, the commission payouts themselves come directly from the insurance companies. This system rewards brokers for bringing on new clients and policies that benefit the carriers.

Frequently Asked Questions

Do I pay brokers out of pocket for commissions?

No, you won’t pay any separate commissions to a broker directly. The insurance company covers commission costs through the premiums you pay.

If I buy direct, will it be cheaper?

No, premium costs will be the same buying direct or via broker. Insurance companies factor commission costs into all premium pricing.

Can I negotiate lower commissions?

Not typically. Commission rates are fixed agreements between brokers and insurance carriers. Policyholders generally can’t impact commission amounts.

Do broker fees come from insurers too?

No, any broker fees are paid directly by clients for additional services, not covered by the insurer. But these fees are always explicitly agreed upon.

What if my state bans broker fees?

Some states prohibit brokers from charging service fees. Brokers there can only earn commissions from insurance companies.

What is the average commission percentage?

Commission rates vary widely based on line of business, but 10% of premiums is a common baseline commission for many policies.

The Bottom Line

While you as a policyholder ultimately pay premiums that cover a broker’s commissions, the commission payments themselves come directly from insurance carriers as an incentive for brokers to sell policies and bring in revenue. This traditional compensation model helps align insurers’ and brokers’ financial interests.