How do car insurance brokers make money in South Africa?

What is a car insurance broker? A broker acts as a ‘middleman’ between a customer and an insurer. He does all the hard work on behalf of a customer, such as locating a policy that will optimally suit his client. A broker must not be confused with an insurance agent who represents the insurer and who finalises insurance sales.

How does a car insurance broker make money?

South Africa’s standard commission^1,2

A broker draws the income from two main sources – commissions and fees made on the sale of policies. In South Africa, insurers pay any broker a standard commission set at 12.5% of the premium for a car insurance policy.² This is according to rates as stipulated in the Short-term Insurance Act.

An outsource fee²

A broker earns this when he has signed a binder or outsourcing agreement. These fees cover the costs of specific administrative tasks which the insurer would have done.

What is a car insurance premium?¹

A premium is an income an insurer earns from a customer for insuring his car. The premium covers all the liabilities of the policy that they underwrite. Like any professional, an insurer needs to stay in business and so may invest some premium to earn additional amounts. He can use the latter to keep premiums low and competitive.

Investing premiums¹

What insurers need to be careful of is to keep a specific amount of available liquidity and not have too much premium tied up with investments. Otherwise, they would not be able to settle any claims.

Other sources of income for brokers¹

Brokers can generate income by charging for advisory and consultative services rendered. They can also charge extra fees by starting a claim procedure with an insurer. Fees must be fair and must agree with the customer.

An additional incentive for brokers¹

Insurers may want to pay an extra commission or bonus to successful brokers who generate additional income. This is not ideal because it could cause a conflict of interest. After all, a broker must represent a client and not an insurer.

How should a broker represent a client?¹

A motorist uses a broker who will act in good faith and work for their customer’s best interests. They need to have intimate knowledge of their client’s setup and find the best car insurance policy suitable for their client. The advantage of employing a broker is that they work with car insurance day in and day out and know, by experience, how to secure an excellent policy. Car insurance is complicated – something which a customer probably knows little about, seeing as one only buys a policy occasionally.

Brokers must stay neutral¹

Brokers should not favour one insurer above another but have an unbiased approach to finding the best policy at the optimal price. That’s why brokers earn a commission and are not on an insurer’s payroll, which could easily cause mistrust between the broker and the customer.

Disclaimer

We’ve seen from the above how complex car insurance is. That is why this article can only provide information and why you first need to consult a certified financial advisor for professional advice before buying car insurance.

Sources:

1. 1. How Does an Insurance Broker Make Money?