The hard property-casualty insurance markets of the past two years and less product availability have made it difficult for independent insurance agencies to serve clients. In addition, agents have faced another threat – reduced commission rates.
Statistics on how many insurance carriers lowered P&C insurance sales commissions after 2022 are unavailable. However, the outcry from agents indicated that the number was sizable. Some carriers reduced renewal commissions, others reduced them for new and renewals, while others reduced them for unprofitable lines of coverage. Several lowered them on some policies from 15% to 12%, a 20% reduction. One carrier attempting to exit a state’s personal auto insurance market slashed commissions to 1% until regulators ordered them to reverse the decision.
Travis Schenck, marketing strategist with Dark Horse Insurance Brokers based in Arizona, saw the impact primarily in personal lines. He said that the legacy carriers’ actions were similar to each other. However, “The technology based carriers seemed to be the most drastic,” he said. “Commercial stayed somewhat stable.”
Agency network Smart Choice was able to hold aggregate commissions steady. Chief Marketing Officer Dan Bruck said that, while some carriers reduced commissions on specific product lines, “Likely due to our position in the market and the high volume of business we generate, our commission levels have remained consistent in the past few years across virtually all our carrier partners.” This is the advantage of being an agency network as these groups are in a power position to negotiate given the combined size of their agencies.
Why have carriers reduced commission levels? Likely for a combination of two reasons.
Underwriting profitability pressures. Industry combined ratios ranged between 98.8% and 103.85% from 2016 to 2023. Four of those years were above the breakeven 100% level. The combined ratio for personal auto in 2023 was 104.9% – a seven point improvement from the 2022 result. The 2024 homeowners insurance combined ratio dropped to under 100 for the first time in five years. Commercial auto net combined ratios have been over the 100 mark every year but one since 2019.
Because they could. Less competition gives remaining competitors more leverage. When competitors watch one player reduce commissions with no adverse consequences, they are tempted to follow suit. This permits them to bolster their bottom lines without increasing prices.
These actions hurt agency revenues and make operating profitably more challenging. Agencies cannot operate at a loss for long. Without profits, they cannot invest in their future growth or provide high service levels. Meanwhile, state insurance regulators insist that agents should offer the lowest price products to their clients regardless of their compensation.
However, the lowest-price option is not always the best. A higher priced policy may provide higher limits, broader coverage, lower deductibles, or fewer exclusions. Low-cost policies can leave significant coverage gaps. Choosing insurance providers based solely on price makes no more sense than choosing health care providers, attorneys, or financial advisors that way.
This also applies to commissions; if agencies cannot make a profit when offered a very low commission, they should seek other options, as low commissions may not cover all expenses to run an agency. However, coverage should never be compromised when placing business with a carrier with higher commissions. Choosing the best commission structure that works for yourr agency is the marketplace in action, it’s fair game for agencies to reject low commission, and this is how the free market works best.
Agents’ associations have pushed back on the commission cut trend. The Independent Insurance Agents & Brokers of America adopted a policy statement in January 2024 calling the practice “rash and misguided.” The statement listed the many valuable services agents provide to carriers and declared that compensation should fairly reflect the value agents provide.
Carriers may start offering raising commissions as competition increases. Bruck said that Smart Choice is already starting to see carriers do this and he expects it to continue in 2026. Schenck at Dark Horse also expects a gradual return to “normal levels” of commission.
Some believe that the commission system is outmoded. Tony Caldwell of One Agents Alliance, an Oklahoma based network that is a member of SIAA, wrote that commissions are anti-competitive and should be replaced with agency fees.
While the commission system may not disappear anytime soon, the hard market has clearly placed it and the agencies that rely on it under stress. Commission levels may rebound, but agents’ memories of their compensation falling at the whim of carrier executives will linger.
