How does an insurance broker earn money?

  • Tim Neary | December 12, 2019
How does an insurance broker earn money?

An insurance broker makes money by earning commission from selling insurance to individuals or businesses. 

Most commissions are between 2 and 8 per cent of the premium, according to Investopedia, selling all types of insurance including health, homeowner, accident and life insurance. 

“A broker understands the client’s situation, needs and requirements of the clients to find them the best insurance policy within their budget.

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“The broker also helps determine if policies should be changed, assists with compliance, and helps to submit claims and receiving benefits.”

Income and liability

Once earned the premium is income for the insurance company, but it's also a liability. 

“It also represents a liability, as the insurer must provide coverage for claims being made against the policy,” explains Investopedia. 

“Insurers use premiums to cover liabilities associated with the policies they underwrite. They may also invest the premium to generate higher returns and offset some of the costs of providing the insurance coverage, which can help an insurer keep prices competitive.

“Insurers invest the premiums in assets with varying levels of liquidity and returns, but they are required to maintain a certain level of liquidity. State insurance regulators set the number of liquid assets required to ensure insurers can pay claims.”

Interests

The broker is required to represent their clients' best interests.

“Part of the broker's duty is to understand the situation, needs and requirements of the clients to find them the best insurance policy within their budget. Choosing the right insurance plan is quite complicated, and studies show that many people end up choosing a less than optimal plan when they solely rely on their own judgment.”

Equally, brokers should not show favoritism towards any specific company. 

“For this reason, brokers are paid a commission, rather than receiving payment from insurance companies, which could create negative incentives that damage trust between the broker and client.”

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