Net Rated Products: These are rates we receive from insurers that do not include any commission.
Gross Rated Products: These are rates we receive from insurers that include a percentage of commission built into the price.
The Gross Rated commission is not 'locked' and an agent can effectively convert a gross rated product to have a net rated price by applying the equivalent broker discount. For example, if a product is Gross Rated by 10% an agent can apply a -10% broker discount to view what the net rate price would be.
We, like most brokers, prefer to work with Net Rated Products when they are available. This preference is due to two primary reasons:
- Cost-Effectiveness: Net Rated Products are typically cheaper since they don't have a commission embedded in the rates.
- Pricing Flexibility: Working with Net Rated Products allows us greater flexibility in setting our own retail pricing, which helps us to remain competitive in the market.
On the other hand, Gross Rated Products that include a commission can limit our ability to adjust our prices as freely, thus reducing our pricing agility.
Why Don't We Net Rate All Products?
We choose a net rated product instead of starting with a gross product and then reducing our commission for a specific reason: the tax implications. When we take a gross product, we are required to pay Insurance Premium Tax (IPT) on the full gross amount, even before applying any discounts. By opting for a net rated product, we pay IPT only on the reduced net amount, which enhances our competitive edge.