Early in my ILSA career, I managed our Carrier Contracts & Appointments Department. We worked with national wholesale brokers to help their licensed producers complete the appropriate producer agreements and secure appointments with insurance companies for the products they represented. While ILSA didn’t play a role in negotiating the terms and conditions of those agreements, seeing the myriad of options available – even with a single carrier – impressed upon me how important (and complex) these agreements can be.
Signing an agreement with unfavorable or unclear terms can seriously limit your ability to grow a book of business and profit from your labors. So what are the essential points that a producer agreement should address? A recent 2-part Compliance Conversation, co-sponsored by ILSA and Spot On Insurance, tackled just that topic. In case you missed it, here are some of the top items your producer agreement should include. (And check out the links below for a more thorough discussion of these points.)
Who owns the book of business?
It may sound strange to consider at the very beginning of a professional relationship what each party will do when that relationship ends, but there are certain points that should be made clear in the producer agreement. It’s not uncommon for individuals to change agencies, sometimes frequently. When you do, you don’t want any unpleasant surprises!
If you change agencies, can you take your book of business with you? Are you bound by a non-compete clause for a period of time or in a geographical area? These are questions a producer agreement should clearly address. The answer will depend on the terms of the contract, but generally, it’s the agency and not the individual agent that controls the book of business. That said, your producer agreement should also contain lifetime indemnification for you as a producer in the event that any legal or regulatory issues arise later concerning a policy.
How will you be compensated?
In my experience, the section of the producer agreement that agents turn to first concerns their compensation and commissions. (Hey, we’re all in this business to make money, right?) Some agencies offer a base pay with the individual receiving a smaller percentage of commissions. Others operate on a commissions-only basis. Either way, the producer agreement should spell out how the individual and agency will divide up commissions and when/how the producer will be paid.
How commissions are calculated is often determined by the carrier contract between the agency and the insurance company. Be aware, however, that carriers can change the terms governing producer compensation at will and with little prior notice. (Often there aren’t state insurance laws and regulations covering this area.) That said, being a strong producer and having a positive relationship with the carrier can impact these terms. Claim/loss ratios can also influence commission rates.
What fees will be charged to the producer?
There are several fees that an agency or carrier may pass along to an individual producer. Firstly, there are initial licensing and license renewal costs. Who is responsible for handling these tasks and for paying the associated fees? If a producer leaves or terminates a license, how will the agency transition any existing business? This is especially important when it comes to surplus lines, where reports and premium tax payments may be due months after a producer moves on to another agency.
Secondly, state regulators often charge a fee to process or renew appointments with an insurance carrier. Insurers often pass these costs along to producers. Some companies absorb the cost of appointments in producers’ resident states, but pass along non-resident fees. (Additionally, there are a few states — for example, Puerto Rico — that treat appointments as perpetual and do not charge for appointment renewals.)
The producer agreement should state who is responsible for these compliance costs. Finally, it should also list any other fees that might be assessed to a producer. For example, if a producer fails to forward premium paid by policyholders to the carrier in a timely manner, they may be charged interest or other penalties on the amount owed.
What are the minimum production requirements?
Most carrier contracts require agencies to generate a minimum level of premium each year. The producer agreement should define the individual’s responsibilities in meeting this requirement, along with the possible penalties for failing to perform to expectations. Carriers often want potential appointees to demonstrate a proven production track record before approving an appointment request. This is one reason that industry newcomers often struggle to obtain initial appointments.
Does the carrier’s business strategy align with yours?
There are a lot of innovative insurance products being written today – especially in the non-admitted market. Obviously, a carrier needs to be able to support the types of products your clients want. Strategy alignment touches on not only the types of products, however, but also the underwriting process. As an individual producer, you’ll want the carrier to provide access to technologies and informational resources that create the desired customer experience. This is especially true now when so many independent agents must compete head-to-head with direct sales models offered by insurtechs and even incumbent insurers.
A Legal Disclaimer (sort of)
It’s important to remember that producer agreements are private contracts between individuals and business entities. We’ve touched on only a few of the many complex issues they address. Generally speaking, if you find yourself working under an unfavorable contract, there is little recourse. The state insurance department, for example, cannot act unless there is an actual violation of state law.
So what’s the moral of the story? Read your agreement thoroughly before signing and make sure you understand its terms and conditions! And if needed, seek independent legal advice.
Here are the links to the recorded webinars. I hope you enjoy watching them!
This first webinar aired live on July 2, 2020, and helped answer the questions: What is a producer agreement? and What is an appointment? This session focused on the insurance carrier’s role.
This webinar aired live on July 9, 2020, and answered the question: What should the individual producer look for in a producer agreement?