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What does $1 of fixed commissions buy you?

Is it a race to the bottom or one to the top? Is the investment worth it? Many carriers are quick to answer that the less you pay the better, but Pythia’s data shows this is not such a clear-cut case.

For example, for every $1 of extra fixed commissions carriers pay in New Jersey Admitted General Liability – a market of $2.3 billion in direct premiums written – they gain approximately $2.5 in loss reduction. That’s a whopping 150% return on their investment.

 

But for a similarly sized market, like California’s Admitted Inland Marine ($2.7 billion in
DPW), every $1 dollar in incremental fixed commissions yielded $0.6 in loss reduction,
on average – not much of a “deal,” if you can call it so.

 

The big question for carriers and brokers is: “When does it make economic sense for carriers to change their fixed commissions rates?” So far, industry players have mostly relied on intuition when building their strategies, leaving fixed commissions rates flat over the past 3 years and, largely, both sides frustrated.

Data comes again to the rescue. There are two ways to look at commission strategies:

    1. When paying “one additional dollar” in fixed commissions, what savings – if any – do carriers secure in direct losses. Any savings of less than a dollar make the strategy ROI negative.
    2. Also, when paying “one additional dollar” in fixed commissions, how many incremental dollars of premium can carriers expect.

An analysis of regulatory data by Pythia has uncovered which markets bring the most bang for the buck called fixed commissions.

Take a growth-oriented example: investing in New Jersey’s Excess & Surplus market in
General Liability – a $1.2B DPW market – is net positive for carriers. Specifically, 1
percentage point of extra fixed commissions yields an expected ~1 percentage point
incremental DPW “clean” organic growth. That is growth due to new client acquisition,
after changes in rates, limits and insured exposures.

On the opposite end, fixed commissions are less likely to “buy” growth for carriers in California’s Admitted Inland Marine market. Pythia found that 1 percentage point of extra fixed commissions yields an expected 0.6 percentage points incremental DPW growth due to new client acquisition.

In conclusion, for independent agents who bring clear value to their carrier partners, getting proportionally compensated for their contributions is only fair. And for carriers who want to make sure that every dollar counts and that their capacity is not wasted, identifying the right partners and markets is paramount. But to achieve this combo, only data can provide the right answer.

 

For the full analysis of more than 2,000+ market niches, reach out to us for the right
data to build your commissions strategy.