Every day, scores of consumers visit local insurance agents, putting their trust in them in the hopes of saving some hard-earned money. What they ask is simple. Find the lowest rate with the best coverage. Not too difficult, right? Well, you may be surprised to find out how your agent chooses the insurer they place your coverage with. It all starts with how insurance agents make their money.
If your agent is a captive agent, like State Farm, Allstate, or Farmers, they don’t have many options. They write your insurance policy with the company they work for and get their commission. It’s pretty simple, as the agent doesn’t have any choices other than their own company’s offerings.
So, how much money does an agent make for selling you a policy; usually somewhere between 15% and 20% of your policy premium. If your policy costs $500, they get $100 when you sign on the dotted line. Don’t forget, they get paid when your policy renews as well, but I will cover that later.
It gets a little trickier when you use an independent agent, who may represent several companies that don’t sell directly to the public. These agents can “shop” your rate with an unlimited number of insurers to make sure you get the best deal. But this is where the disconnect between serving your best interests and theirs may become a bit of a problem for your checking account.
In order for independent agents to be able to sell insurance for multiple companies, they must make volume commitments to those insurers. For example, an agent may promise to write $500,000 worth of insurance per year with Insurer A to ensure that company does business with him or her. Similar commitments must be made to Insurer B, Insurer C; and so on…you get the picture. Obviously, this situation can put the agent at odds with your best interests.
Imagine this: Insurer A has only received half of what was promised to them this year because their rates are too high in the agent’s area of business. The agent may want to keep the insurer happy and simply start writing policies with them, regardless of whether it’s the best coverage for you. After all, the agent stands to lose more business by dropping the contract with the insurer than by placing a few policies with them if you are none the wiser. But wait, it can get ever more complicated than that.
Your agent is paid a percentage of your overall premium when he or she places your policy with an insurer. We’ve got that so far. What we need to be sure of is that the agent is actually quoting us with all of the insurers they represent. Insurers often pay different commission percentages to agents, so you may only receive offers from the highest-paying insurers. In addition, your agent may be part of a profit sharing agreement with an insurer, or may get “a little extra” bonus for each policy they write with a particular insurer.
All of these situations may work against you as the insurance purchaser, because they tend to skew the agent’s priorities. Often times, the insurer offering the lowest rate and best coverage for your individual policy may not be the same insurer that is offering a year end bonus to your agent for hitting his or her production goals.