How Do Independent Insurance Agents Make Money?

If money wasn’t important, it wouldn’t be the first thing we think about when making life-changing decisions. Unfortunately, as insurance agents continue to make the transition from the captive insurance channel to independent, or, when just starting in the industry, oftentimes they don’t understand the numbers. Our goal here is to help explain “all” of the compensation available to an independent agent and as important, how their commissions are calculated.

Show me the commissions

No two carriers have the same agent compensation model. Some carriers will pay 10% new and renewal commissions, some will pay 13% and there are hybrids that may pay higher new business commissions while reducing the renewal commissions (example for personal lines not commercial lines which can be >20%). Unlike a captive agent that will often have a set rate on every product sold, the independent agent can achieve higher commissions based on profitability, size and placing business with the right carrier. As an Alliance of insurance agents with 300+ insurance markets and over 100,000 clients, we estimate the average commissions to be 12%.

The following table illustrates what this means for the agent in terms of total commissions. Additionally, it shows the value of diversifying your portfolio with auto, home and commercial to increase your commission percentages and ultimately your agencies profitability.


As most experienced agents are aware, this is only half the story on commissions. Where agents make their money is on client retention. In most cases, independent carriers pay the same renewal commission that was paid to transact the new policy. If the agent retains their clients, they will continue to receive renewal commissions every year while the client is maintained. For insurance agents, longevity in the business and high client retention can turn a stream of money into a river of money. Average client retention is typically around 85% with some agents well into the 90% range. If you have 1,000 policies and you lose 15% a year, the math shows you will need to replace 150 policies before you will continue to grow. Therefore, retention is just as important and often more important than generating new business dependent upon the stage of growth your agency is in.

That’s the basics of the new and renewal commissions, however, if that was the agent’s only source, they would be leaving a lot of money on the table. Whether you have your own independent appointments or you have aligned with an aggregator, alliance, or cluster, there are additional opportunities for compensation available which we will outline below:


Profit Sharing

Profit sharing is a carrier incentive typically reserved for their largest independent agencies. Agencies and their carriers will identify growth and profitability objectives and when those thresholds are obtained, the carrier will provide the agency the incentive. These incentives are in addition to the commissions discussed above. For example, an insurance carrier may provide a 2% bonus if an agencies annual policy in force increases by 10+% and loss ratios remain below 55%. For a $10M book of business, the profit sharing could be substantial at $200K. Of course, many agencies may not qualify due to the size required to participate. In this case, agents aligned with the “right” alliance that shares profit sharing with agents at dollar one can be a beneficial option. If you should choose this model, make sure your alliance discloses this profit-sharing opportunity. For agents starting their own independent agency, profit sharing opportunities will become more prevalent as they place higher levels of premium with a single carrier.

Negotiated/Enhanced Compensation

As agencies grow and place larger amounts of premium with a carrier, more opportunities will arise to receive enhanced carrier compensation. Often the additional 1-5%, or more dependent upon the carrier, is an incentive to drive traffic to the carrier and their specific product line. Agents receiving enhanced compensation from a carrier most likely have a sizable book and an established partnership with the carrier. If you choose to pursue an agency relationship with an aggregator or alliance this additional compensation can be immediate if the organization is able to negotiate it, they disclose the arrangement to their agents, and pay out the enhanced commissions as intended.


Incentives and Bonuses

For larger agencies and alliances carriers will frequently offer per policy bonuses for lines of business sold. This happens often when a carrier is attempting to grow a specific product line, introducing a product into a new market, or merely trying to obtain market share. These can be $50-$100+ for each policy sold as an incentive, they could be a monthly bonus for hitting a target, or they may be a spin-the-wheel for money event. They are used by the carriers to drive agent behavior and can be a welcome addition to your monthly revenues.

Summary

As an independent agent there are multiple opportunities to increase your compensation well beyond your carrier commission percentages. If you build your own independent agency you will need to have a sizable book of business with each carrier before you will see these options materialize, but they will happen with time and agency growth. For agents considering joining an alliance or aggregator these additional areas of compensation can be immediate. As an agent considering an aggregator or alliance relationship, you will want to discuss upfront how you will participate in these incentives. All alliances and groups are not the same and you will want to know how the additional compensation negotiated with carriers will pass through to your agency. Ask the questions – your compensation depends on it!


Pacific Crest Services is an Alliance of insurance agents operating in 28 states. We provide a proven path for agents to grow their agencies beyond their expectations. With over 300+ markets, industry leading compensation, commercial and specialty risk training, our agents compete and win against the competition. Want to learn more about Pacific Crest Services or have a confidential, no obligation discussion? Contact us here: https://www.pacificcrestservices.com/becomeanagent


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