A Discussion About Your Insurance Agency's Revenues
The Leavitt Group agency with which you do business is part of
the American Independent Agency system (Independent Agents),
which consists of some 40,000 insurance agencies nationwide.
Most small and medium sized businesses in the United States
purchase insurance through independent agents. In addition,
around 35% of personal insurance in the United States is placed
through independent agents.
Each Leavitt Group agency owes duties to and seeks to well serve
the insurers we represent, the wholesalers through which we place
business, and the agency's employees, shareholders and regulators.
In addition, each agency has a duty to be fair, honest and
professional in dealing with its customers. We earnestly seek to
serve these various duties. We will typically place coverage first
with an insurer for which we are agent, and go to the wholesale
market as a broker only when coverage cannot be reasonably obtained
through one of the companies we represent.
Independent agents represent several, sometimes numerous,
insurance companies, none with exactly identical compensation
arrangements. We want our clients to understand how we earn our
revenue, and the sources of that revenue. We believe this knowledge
helps customers make sound insurance buying decisions, and helps assure
we have the same expectations and assumptions as do our customers. We
will swiftly answer any question you might have as to our agency's
compensation on your transaction.
Most revenue comes from regular commissions paid on policies
placed through the agency. Varying by product and insurer, these
commissions range from 5% to 20% of each policy period's premium
as to products other than life insurance and surety bonds.
Policies with larger premiums tend to have a smaller commission
percentage. Policies that are particularly expensive to administer
tend to have higher commission rates. Surety bonds typically
generate a commission of 20% to 30% of premium. Life insurance
commissions vary greatly, but are typically between 55% and 80%
of first year's premium, with residuals, if any, of typically 2%
in subsequent policy years. This agency's average commission rate
on all business it writes for insurers it represents as an agent
is approximately 12.5% of total premiums.
Most of the insurers that our agency represents also grant the agency
the opportunity to earn an annual contingent commission. Unlike regular
commissions, these annual contingent commissions are not tied to a
specific policy, but rather are tied to results realized by the
insurers we represent on the total business we place with those
insurers during the prior year. These contingent commissions are
typically based on the agency's collective volume of business with the
insurer, and also upon the loss experience (profitability) the
insurance carrier had on the business placed by the agency.
Essentially, most insurance companies do not pay independent agents
their full compensation at the time of sale, but pay part of the
compensation only if the agent produces policies which in total are
profitable for the insurer. The insurer uses contingent commissions as
incentive for independent agents to be honest and accurate in
submitting applications for insurance, and skillful in helping the
insurer select good risks. Failure to earn a contingent commission is a
typical consequence if an agent's business does not meet the insurer's
quality or quantity expectations. Our agency has no contingent
commission arrangements with insurance companies with which it does not
have a direct agency relationship. Also, as is typical in many
industries, insurers have incentive based contests where they reward
agencies for achieving sales objectives. Typical of these rewards are
invitations to the company's sales convention or other incentive trip.
Some insurance companies also provide agencies with modest sales
support services such as marketing leads, marketing materials, etc.
In a minority of circumstances, usually with larger or difficult to
place risks, insurers provide a policy quote that does not include
agent's commissions. In these instances, a separate fee is negotiated
with the insured. In such instances, fees are disclosed and itemized on
billings to the insured. In some instances, where the commission paid
by the insurer is inadequate to cover the cost for the service, a
separate disclosed and itemized fee is charged. In such instances, our
agency will itemize and disclose the revenue it receives via policy
commissions, and that portion it receives via itemized fees. Also, our
agency charges and is paid fees for services other than policy
placement. These other services include risk management, engineering,
or premium financing. Premium financing fees are typically paid
directly by the premium finance company. Other such fees are separately
itemized and billed to the customer.
Interest and Countersignature Income:
In instances where customers pay for insurance policies through the
agency (instead of by direct payment to the insurer which issued the
policy), the agency may receive a modest amount of income from interest
accruing on amounts held for payment to insurers. In addition, the
agency charges interest on past-due receivables from these agency-bill
customers. In increasingly rare instances, state law requires a
resident agent to receive a commission for countersigning a policy
issued by an agent from another state.
Our agency is a member of Leavitt Group Agency Association (LGAA).
LGAA provides a variety of services to its member agencies, such as
automation, training, payroll, accounting, and website services. In
addition, LGAA owns facilities to assist member agencies in placing
insurance coverage on behalf of clients. LGAA owns a premium finance
company that assists in the financing of commercial insurance policies
issued through member agencies. The profits or losses of LGAA are
allocated among member agencies on an equitable basis as outlined in
the LGAA Operating Agreement. In addition, some LGAA member agencies
own an interest in PacWest Captive Insurance Company (PacWest). PacWest
is an Arizona-domiciled reinsurer of selected workers compensation
policies issued by The Hartford Insurance Company. The Hartford's
standard rate structure applies as to business PacWest reinsures.
Independent agents, including our agency, operate in highly
competitive environments. Independent agents and other sellers of
insurance compete with each other based on price, product, service,
and the financial stability of the underlying insurance carrier.
We work hard to serve our customers. We hope that providing this
information is helpful. Thank you for your business, and please
let us know whenever we can be of service.