Author: VU Faculty

You're a small agency with a lot of big business connections, but you don't have the markets or the staff to sell and service these types of major commercial accounts. One possibility is to broker them through a larger agency. While there are a number of contractual, E&O, and other issues (and pitfalls) to consider, let's focus on compensation. How much should you get for placing, referring, servicing, etc. such accounts? Let our agency management gurus give you some tips....

Here's a question recently received by our "Ask an Expert" service:

I have a very small P & C agency in rural Ohio and do not have access to markets or enough expertise to handle the needs of large commercial accounts. I have made contact with a larger agency 40 miles away that has an excellent reputation for working with these situations. The larger agency has the ability to handle the employee benefits as well as the P&C side.

Using my contacts in the local community, we are in the process of starting to quote 2-3 accounts that could generate over $100,000 in P&C premium and put them in a good position to quote the benefit programs for these companies as well. Before we go any further, we need to iron out the details of how we will share this income. We are meeting next week to discuss a compensation agreement between the two agencies.

My question...what is a fair value for these referrals? Is a renewal commission ever paid on referrals? I prefer to build a long term relationship with this agency. I also think that since most of the referrals are business owners that I have known for many years, and the other agency is quite a distance away, it may make sense for me to be involved with some of the servicing. I don't see them referring any business back to me, so the only benefit to me will be through some type of commission.

We ran this scenario by some of our agency management faculty, including Chris Burand, Howard Candage, Al Diamond, and Judi Newman, and got the following suggestions.


Most of these deals are worked out in a way satisfactory to both parties with the result being something unique and not necessarily logical.

On a logical basis, if the referring party is doing none of the servicing or renewal work, they really should not receive a renewal commission. In some cases, a renewal commission might be paid in the second year but that would be it. The new commission rate is usually around 50% but if nothing is paid on renewal, it can go as high as 75%. If the referring agency does all the service and renewal work, renewal commissions are usually 40%-50%. If they do part of the work, the renewal commission depends on how much work they do.

The wild card is the value of the relationship and whether a premium should be paid in recognition of the relationship between the two agencies.


I would suggest that it would be appropriate to be paid in a similar manner to a producer for the agency. With their support staff, etc., they could afford to pay about 25% of the commission to a producer. Thus, if you do part of the work, you deserve a commission and a renewal commission. If the producer has to do considerable work, then you deserve less. At any rate, you deserve new and renewal commission, in my opinion. If you get perhaps 25% up front and 20% on renewal, I think the other agency would be doing well enough, as you, at this point do not own any of the expirations, which have a great deal of intrinsic value.

Bottom line for your thinking, the agency spends about 55% to 60% to pay the overhead. That leaves the rest for producer income, owner income and profit. You deserve a piece of that income. How much is subject to the perception of the parties involved, unless you can quantify your contribution as well as their expenses.


As usual, the answer is "It depends!"

If the customer is in the control of the smaller agent (that is the larger agent would not have the opportunity to write the account if the smaller agent didn't provide the relationship), then a standard producer commission scale (the same that the larger agency pays its other producers), both new and renewal, should be provided AND the ownership of the accounts should be with the smaller agent who has the relationship.

If, on the other hand, the only thing the smaller agent does is provide the lead and the larger agent sends its producers to "sell" the account, then the smaller agent should achieve a "finder's fee" one time and the business belongs to the larger agent.


Generally when an agent works with another agency under this type of scenario, we would look at it as an independent contractor/producer arrangement. Because the producing agent (independent contractor) brings the business on the books and is generally involved in servicing the account, we suggest a new and renewal commission arrangement.

The agency did not have any expense involved in procuring the account and does not have any employee expense with the producing agent. Usually we see a new and renewal arrangement of anywhere from 40-50% of the commission. If the account can be placed through a standard market, the agency can use the accounts towards meeting production requirements and possibly qualifying for bonuses. The independent contractor would not be eligible to share in any additional bonus payments the agency might receive.

Do you have an opinion? Has your agency brokered business through a larger agency or have you accepted business from a smaller agency? If you have any thoughts on the matter, feel free to email them to Bill.Wilson@iiaba.net and we'll post them here:

I was associated with a captive company and still maintain contact with some of my former coworkers. I don't get the best referrals from them that they can write with their employer, so what I get are the problem cases. I pay a 25% referral fee with no renewals. I have a relationship with another agency locally. I do all of the underwriting and service work. Our agreement is that I receive 50% of new and renewal commissions. I have subproducers who operate from their own offices. They receive 50% of both new and renewal. Because they do the underwriting and service, I cap my per policy commission at $100 annually, which I believe compensates me for the work that I do. I don't believe that just because I have the company contract, that I deserve 50% of a sizeable commercial or even personal account. Thanks for listening. -- Mike Matzke