I am considering starting an independent agency (am now a captive agent), and wondering how the contingencies work.
Are they based on premium written, loss ratio, etc?
What kind of money are we talking about on a yearly basis. (I know it depends on the size of your book, etc), but just some thoughts or examples would be helpful.
Thanks
Question about Contingency Commissions
Moderators: Josh, independent guy
-
thundercove
- Insurance Journal Fan
- Posts: 2
- Joined: Sat Dec 30, 2006 6:07 pm
- Location: Florida
-
doyourhomework
- Insurance Journal Addict
- Posts: 44
- Joined: Tue Apr 25, 2006 11:05 am
- Location: Orange County in SoCal
Have you heard of Elliot Spitzer ??
I am not certain however, I would think that contingencies today are based on not volume [there's Spitzer again] but on profitability over a set number of years.
Frankly, I doubt that a new agency starting from ground zero would even be offered a contingency opportunity.
Do you intend to underwrite for carriers or just produce?
Which lines of coverage?
Which carriers are you contemplating?
Have you discussed this with them? If not, I think you have the cart before the horse.
Frankly, I doubt that a new agency starting from ground zero would even be offered a contingency opportunity.
Do you intend to underwrite for carriers or just produce?
Which lines of coverage?
Which carriers are you contemplating?
Have you discussed this with them? If not, I think you have the cart before the horse.
The whole issue of contingency commissions is an issue that could take months to explain and then you may not get it all. The main issues to keep in mind are the carriers control the contacts which are basically unilateral contracts. You will not find any two companies with the same set of tables, % or loss ratios. They define things differently as well. One may call it contingency commissions, another bonus, still another profit sharing. Most have a production component as well as a loss ratio component, with the loss ratio the most important one. They are will in-cent you to have low loss rations, writer more premium in the current year than in the previous year, retain current premiums at a specific level or higher and then tier all of these. I have seen contracts with as few as one level and as many as 7 different levels in order to qualify for additional compensation. You have to have an engineering degree to really figure these out. Then many have a minimum amount of premium produced before you even can even qualify for a contingency. Don't waste your time on these, they will drive you nuts. You have more important things to consider and worry about with a start up agency. They will come as your agency grows. Few are any better than others is what we have found out over the years. Most insurance companies try to keep thier additional compensation to agencies below an average of 2% of thier written/earned premium in any given year.
-
jctwindad
- Insurance Journal Addict
- Posts: 49
- Joined: Mon Nov 28, 2005 8:09 am
- Location: East Tennessee
Most carrier contracts will require a minimum premium volume of at least $100,000 and many will be in the $250,000 to $500,000 range before you will be eligible for Profit Sharing/Contingency payments. In general, once you reach that level (usually in Earned Premium not Written) you become eligible, and your payout is based on your Loss Ratio. Normally, if your loss ratio exceeds 55% you get nothing. Then it is on a sliding scale below that. Typically a loss ratio of 30-35% will get you around 2% additional and the best loss ratio 0-15% will usually get you around 4% additional. These monies are normally paid out in February or March the following year.
Many companies will let you select a loss limit (for example cap any one claim at $100,000 for about a 15% reduction in your profit sharing payment). Some will allow you to take the highest amount of whichever payment is greater, either your year end number, or the number you have at the end of September. Some have growth bonuses built into their contracts. Some require growth in order to be eligible for Profit sharing.
Many companies also base profit sharing on a 3 year average, rather than on the results of one year.
With the Spitzer agreements recently, several national carriers (Zurich, AIG, Travelers, and a few others) have stopped paying profit sharing on Personal Lines. Most regional carriers are committed to continuing profit sharing.
The more premium volume you have with a carrier, the better your chances at having a decent loss ratio, and a good profit sharing payout. I have found that it usually takes at least $1,000,000 premium volume before profit sharing payments can be significant and earned year after year.
Good Luck.
Many companies will let you select a loss limit (for example cap any one claim at $100,000 for about a 15% reduction in your profit sharing payment). Some will allow you to take the highest amount of whichever payment is greater, either your year end number, or the number you have at the end of September. Some have growth bonuses built into their contracts. Some require growth in order to be eligible for Profit sharing.
Many companies also base profit sharing on a 3 year average, rather than on the results of one year.
With the Spitzer agreements recently, several national carriers (Zurich, AIG, Travelers, and a few others) have stopped paying profit sharing on Personal Lines. Most regional carriers are committed to continuing profit sharing.
The more premium volume you have with a carrier, the better your chances at having a decent loss ratio, and a good profit sharing payout. I have found that it usually takes at least $1,000,000 premium volume before profit sharing payments can be significant and earned year after year.
Good Luck.
I'd like to second jctwindad, and add a few points.
If you are starting a new agency, concentrate on business fundamentals and worry about gravy later. If you sell hard, take care of your customers, and build a strong book the contingents will come. If you're an independent, worry about which carriers meet the needs of your clients with competitive rates and good forms. If you deal with reputable companies and bring them clients for the right reasons it's hard to go wrong. Start from a solid base, and the rest will come.
If you can't keep your doors open, what good does some mythological contingent do for you? Worry about making good business decisions now to build your future. The flip-side to "no contingents early" is that it forces you to build a reputable agency with a decent book in order to stay in business. Once you do that, the contingents will flow. They may be called by some other name, or calculated in different ways, but they'll come.
Remember- if you don't take care of the client, nobody is going to pay you anything because 2% of zero is zero.
If you are starting a new agency, concentrate on business fundamentals and worry about gravy later. If you sell hard, take care of your customers, and build a strong book the contingents will come. If you're an independent, worry about which carriers meet the needs of your clients with competitive rates and good forms. If you deal with reputable companies and bring them clients for the right reasons it's hard to go wrong. Start from a solid base, and the rest will come.
If you can't keep your doors open, what good does some mythological contingent do for you? Worry about making good business decisions now to build your future. The flip-side to "no contingents early" is that it forces you to build a reputable agency with a decent book in order to stay in business. Once you do that, the contingents will flow. They may be called by some other name, or calculated in different ways, but they'll come.
Remember- if you don't take care of the client, nobody is going to pay you anything because 2% of zero is zero.
Oooohhh... fire hot!!!
-
thundercove
- Insurance Journal Fan
- Posts: 2
- Joined: Sat Dec 30, 2006 6:07 pm
- Location: Florida
Thanks to all who have contributed!
I am not counting on any contigency commissions/profit sharing when working on my business plan, I was just curious on how it worked.
I am going into it thinking, if it does happen, great, a nice bonus for my employees, if not, I'll survive just fine.
I spent most of the past weekend reading through the forums and learned more here than in any other format. Unfortunately, I haven't found a good Starting An Insurance Agency For Dummies Book yet!
Thanks Again
I am going into it thinking, if it does happen, great, a nice bonus for my employees, if not, I'll survive just fine.
I spent most of the past weekend reading through the forums and learned more here than in any other format. Unfortunately, I haven't found a good Starting An Insurance Agency For Dummies Book yet!
Thanks Again
All interesting explanations of contingency bonus'. Short & sweet - here's how I used to explain to my agents when I was in marketing.
Bonus (or profit sharing) is figured on a percentage (usually 2% at the low end and upwards of 10% at the high end) of written premium and loss ratio.
Each carrier has their own peramaters for minimum volume & loss ratio to become eligable for bonus - this is spelled out in each contract (some companies don't have bonus' at all).
let's say that company has the following minimum requirements - $100,000 written premium (calendar year) minus any return premiums by 12/31 and loss ratio under 40% (3 year average). Now let say that your agency hits $100,000 written premium with loss ratio of 15% (which would put you at the bottom of the dollar requirement but in the best range for loss ratio) - if the rate is 2% you could expect a check in the amount of $2,000.
This is the basics of how they work. However don't choose a company based on their contingency bonus structure because many things affect payments that are out of your control. You can hit the volume but if the carrier has a bad year they can increase reserves and there goes your loss ratio.
Bonus (or profit sharing) is figured on a percentage (usually 2% at the low end and upwards of 10% at the high end) of written premium and loss ratio.
Each carrier has their own peramaters for minimum volume & loss ratio to become eligable for bonus - this is spelled out in each contract (some companies don't have bonus' at all).
let's say that company has the following minimum requirements - $100,000 written premium (calendar year) minus any return premiums by 12/31 and loss ratio under 40% (3 year average). Now let say that your agency hits $100,000 written premium with loss ratio of 15% (which would put you at the bottom of the dollar requirement but in the best range for loss ratio) - if the rate is 2% you could expect a check in the amount of $2,000.
This is the basics of how they work. However don't choose a company based on their contingency bonus structure because many things affect payments that are out of your control. You can hit the volume but if the carrier has a bad year they can increase reserves and there goes your loss ratio.