Basics first – Client is the insured person or who gets himself, his property or vehicle insured by the insurance company. Insurance company is also known as Insurance Carrier or insurer. And there is insurance agency that acts as interface between Client and Carrier to make it easy for Client to understand policy details and to bring more clients to the Carrier for which insurance agency gets commission.
The client who gets insured, will get billed for the policy premium. Who collects the premium from Client (Agency or Carrier) and it goes into whose bank account?
The answer to this question is it depends if the billing is direct or agency billing? If billing to the insured is direct, that means it is the Carrier who has issued the bill and Carrier is going to get the money directly into their bank account. If instead it is Agency Billing, that means the premium bill is issued by the Agency and they will collect the premium from Client on behalf of Carrier and later on pay to the Carrier.
That raises some more questions – How does Agency assure that eventually the Carrier is paid the premium and policy is confirmed? How does Agency receive commission in both the cases? How does accounting work for Agency in both the cases to calculate their revenue and profit?
Let’s address first 2 questions in this post and the last one will be addressed in a new post in few days.
According to law insurance agencies need to set up a trust account to temporarily hold the funds they receive from the client as premium. This account is not directly owned by Agency, which means they cannot withdraw the funds without following the protocol. The protocol typically is to deposit entire amount received from Client into this account, then transfer Carrier’s amount from this account into Carrier’s account and finally withdraw the remaining funds as Agency commission. Like if premium paid by Client to Agency is US $1500 and Agency will get 12% commission then $1320 will be paid to the Carrier and $180 will be withdrawn by Insurance Agency as commission. That way everything is done in the proper way.
The other method (direct billing) in which premium is paid directly to the Carrier, commission to the Insurance Agency comes later on (typically monthly). Monthly commission statements are issued by Carrier to the Agency that gives detail of every commission earning by the agency.
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