23% Premium Increase = 15% Commission

By Spencer Smith

It’s time to put your thinking cap on…Should you build commission into your employer’s stop loss premium or work off a direct consulting fee? That’s for you to answer, not me, but here is the math…

How you calculate Gross Premium 👇

Net Premium/(1-Expense Load) = Gross Premium.

What the hell does that mean?!

Net Premium is how much estimated premium is needed to pay claims.

Expense Load is how much of gross (overall) premium is needed to cover carrier expenses like overhead, premium taxes, underwriting fees, overrides, profits, etc.

Here is an example of how the math works with a 20% expense load:

$500k/(1-.20) = $625k in Gross Premium

The carrier needs $500k in net premium to cover claims, and about $125k to cover expenses (20%), so they charge $625k of gross premium.

So what happens when we load 10% Commission into that same quote?

Let’s see…

$500k/(1-(.20+.10))= $714k

$714k/$625k = +14% Increase! – NOT 10%

Simple math would make you think it was just $625k * 1.1 = $687k, right?

However, that is not how it is calculated, so the client actually pays about $27k more in gross premium when you load in 10% commission than if you quoted it net of commission and added a direct PEPM fee equivalent to 10% of gross premium.

What happens when it is 15% Commission?

$500k/(1-(.20+.15))= $769k

$769k/$625k = +23%! NOT 15%!!!

So instead of $625k * 1.15 = $719k, it is actually $50k more than if you quoted it net of commission and billed the client a PEPM equivalent of 15% of gross premium.

So, when you build in commission to stop loss, you actually cost your client additional money than JUST your fee.

Plus, the MORE commission you load in the MORE you cost them!

Next time you ask for a quote for your client, see if the carrier will give you a quote with your commission built in, and then with your commission carved out and test the math side by side!

Now, some variables to consider:

– Each carrier/MGU has a different expense load – I am being VERY conservative at 20% – Ours is lower but most are MUCH higher.
– This example doesn’t consider underwriting discretion (% to manual, reduced profit load, etc.) to absorb some of the commission by subjectively reducing the rates.
– The employer might prefer it this way 🤷‍♂️, to which I would respond – YOU SURE ABOUT THAT?!

So to answer the question – should you build commission into stop loss premium?

To me, charging a transparent consulting fee that not only doesn’t cost your client additional money because of the calculation AND doesn’t go up with their renewal, seems like a proper alignment of incentives.

The math supports this point of view, but you have to decide what’s best for your business.

What do you think?