Profit-sharing bonuses can be a major contributor to annual revenue for an insurance agency. At the end of the year, our organization takes a close look at where we stand with each one of our partner carriers when it comes to bonuses.
Here’s a glimpse of what profit-sharing bonuses are and how carriers calculate them so you can understand how they work and why they matter.
What is a Profit-Sharing Bonus?
Most established insurance carriers have some type of bonus program for their appointed agencies. This bonus comes as a check and is almost always a factor of two major book components evaluated at the end of each calendar year (Dec. 31):
Growth: Carriers want to partner with growing agencies. Each year, they will look at growth from a premium standpoint AND possibly a Policies in Force, or PIF, perspective. Positive growth is obviously the big key here, but carriers will reward higher percentage growth with higher percentage bonuses.
Profitability: Contrary to popular belief, insurance carriers DON’T make money on every book of business. There are a few different components of loss ratio, but the most basic is the one that applies when looking at bonuses: Total Losses / Written Premium x 100 = Loss Ratio %. Most carriers require an agency to fall under 55% to earn a bonus.
How is a Profit-Sharing Bonus Calculated?
Once an agency has achieved these goals, the carrier awards a percentage of either written or earned premium as a bonus. Most carriers use a ‘grid’ system where the lower the loss ratio and the higher the growth, the greater the percentage bonus! In most cases, this percentage falls somewhere between 1.5-3.0%.
Example: If an agency maintains a $1,000,000 book of Progressive business, falls under 55% Loss Ratio, and achieves 20% annual growth, they would receive a 2.0% bonus on all written premiums which equates to a $20,000 bonus.
How does an Agency Qualify to Participate in Profit-Sharing Bonuses?
Most carriers require a minimum premium threshold to participate in a profit-sharing bonus program. This process ensures the carriers are spending time and money with those agencies that want to build a long term relationship and maintain a quality book of business. Usually, this premium number is somewhere between $250-$500k before an agency meets qualification requirements. Reaching this level of business can be a tall task for some smaller agencies that don’t belong to an agency “group” but certainly achievable.
Not All Agency Groups Share Bonuses
At ISG United, we share 75% of profit-sharing bonuses awarded to the group. This type of bonus structure is NOT the case for all organizations, so be careful which group you join, and don’t be afraid to ask questions if the answers are not clear.
I hope this helps paint a more clear picture of what profit-sharing truly looks like, and good luck in hitting big numbers for your agency!