Definition:Commission

💵 Commission is the compensation paid to an insurance agent, broker, or other intermediary for placing or servicing an insurance policy. It is typically expressed as a percentage of the premium and is either deducted by the intermediary before remitting premium to the carrier or paid by the carrier after the policy is bound. Commission structures vary widely by class of business, distribution channel, and market conditions, and they represent one of the largest components of an insurer's acquisition costs.

🔄 Several variations exist. A flat commission pays a fixed percentage regardless of performance, while a contingent commission — sometimes called a profit-sharing commission — rewards the intermediary when the book of business meets profitability or growth targets. Overriding commissions may be layered on top of base rates to compensate a managing general agent or wholesale broker that oversees a network of producing agents. In reinsurance, the ceding commission paid by the reinsurer to the ceding company offsets the originating insurer's acquisition and administrative expenses.

⚖️ How commissions are structured shapes behavior across the distribution chain. Generous upfront commissions incentivize volume but can strain an insurer's combined ratio if loss experience does not keep pace. Contingent arrangements better align the intermediary's interests with long-term profitability, though they have attracted regulatory scrutiny over potential conflicts of interest. For carriers, striking the right commission balance is both a financial calculation and a strategic one — the terms must be attractive enough to win quality distribution partners while preserving margins that sustain the business.

Related concepts

• Definition:Contingent commission
• Definition:Ceding commission
• Definition:Overriding commission
• Definition:Acquisition cost
• Definition:Insurance broker
• Definition:Expense ratio