How do health insurance agents make money?
Agents are in the business of selling policies for insurers, whereas brokers focus on buying policies from insurance companies for consumers. Agents can be captive and work for one only one insurer, or they can be independent and sell policies for a number of insurers.
In order to find the policy and insurer that fits best, consumers should have some understanding of how insurance agents actually make money.
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Agents Work with Insurance Companies
Think of the agent as an extension of the insurer, working to sell insurance products behalf of the insurer. In order to sell products for an insurer, agents need to have an appointment with the company, defined as contract terms outlining which items the agency may sell. The appointment defines what commissions the agency will receive for each product sold as well.
The appointment also establishes the binding authority, providing the agency with the authority to initiate policies on the behalf of an insurer. Agents may be permitted to bind certain types of coverage and not others. In addition, agents are often offered base commissions and contingent commissions as well.
Agents, Commissions and Insurance Companies
While most agents traditionally rely on commissions, there are a number of captive agents who are paid a salary by the insurer. Sometimes, the agent receives an initial payment at the start of the policy, and as much as 50 percent for the second and subsequent years if the member remains enrolled.
The commissions paid to agents are taken from the premiums charged to customers by insurers.
Agents and Base Commissions
Base commissions may be described as the normal commissions paid to agents, calculated as a percentage of the premium sold, dependent on the type of coverage.
Agents typically earn a specific percentage for one type of coverage, like worker’s compensation, and a different percentage for another type of coverage, such as general liability. When the customer pays the premium on their policy, the agent collects their commission from the payment and sends the remainder onto the insurer.
Agents are expected to provide customers with a full disclosure of the commissions and compensation package provided to them by the insurer. The base commissions paid to agents may also come from the service charged to customers and they may be paid a fixed amount based on a set schedule.
For many of the leading insurers, base commissions may account approximately 80 percent of the funds paid out to agents.
Often times, agents will get paid higher commissions for selling new policies than on referrals. Agents might get paid 10 percent for signing new general liabilities policies and then 9 percent when the policy is renewed. Agents with larger cases typically have more negotiating power with insurers over their commissions.
Incentivizing Agents with Commissions
Agents are often offered an additional percentage of the premiums sold if they help sell a specific type of coverage within a limited period of time. Insurers offer agents contingent commissions in an effort to incentivize them to help meet specific sales, volume, profitability, retention or growth goals set by management. The renewal commissions may carry over with certain types of contingent commissions programs.
Other Compensation Options for Agents
Agents may be compensated for their services by either the issuing consumer or the customer. Many of the major insurance companies pay agents base commissions on their sales as long as the customer remains a policyholder.
Insurance agents typically receive base commissions, bonuses, and the benefits of non-cash programs for helping insurers sell, renew and service the products offered by insurance companies.
Some agents may charge a fee while still receiving commissions, while others may accept a simple fee-for-service with no commission involved. Consulting fee-based cases are often designed for customers who prefer to pay their insurance agent directly.
When the agent does not receive commissions for a sale, the transaction may be referred to as a consulting fee-based case or non-commissionable case.
ACA Effect on Agents’ Commissions
The implementation of the Affordable Care Act served as a substantial headwind to the commission-based compensation package already established as the industry standard.
The financial pressure exuded by the ACA onto private insurers made many of the leading brands hesitant to continue paying out commissions to agents for selling individual policies.
Losses taken in the individual insurance market has now prompted a number of prominent insurers to reduce the commissions being offered to agents and brokers.
Tight Margins for Insurers and Agents
Many insurers have opted to drop commissions paid to agents in an attempt to lower rates for consumers. Some insurers have stopped paying agents commissions on individual and family policies altogether. he ACA requires insurers to spend 85 percent of premiums from customers on medical care, which leaves only 15 percent left for commissions and other overhead expenses needed to sustain profitability.
The ACA requires insurers to spend 85 percent of premiums from customers on medical care, which leaves only 15 percent left for commissions and other overhead expenses needed to sustain profitability.
Agents Earnings Going Forward
In recent years, a number of states have taken action against insurers in an attempt to pass legislation or a motion requiring the companies to provide more time before changing commissions, prohibited them from eliminating commissions or providing a cap on how much thy can be reduced.
With no commissions available, more agencies are charging fees for their time and the services provided each month. Going forward, many insurers will have to master collecting fees from customers throughout the year as they are typically billed separately.
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