Chargeback
Carrier reversal of previously paid commission when a policy lapses, is cancelled, or is replaced before the commission protection window ends.
Full Definition
A chargeback is a reversal of commission previously paid to an agent when a policy terminates before the carrier's commission protection window. Most commonly, chargebacks occur when (1) a policy lapses for non-payment in the first 6–12 months, (2) the consumer cancels during free-look, (3) the policy is replaced by another carrier's policy within a defined window (typically resulting in the writing agent losing the commission and, if replacement rules require, refunding it). Chargebacks can exceed monthly commission income in a given pay period for agents with thin persistency, causing negative balances that must be repaid to the carrier or worked off against future commissions. Agencies managing aged leads and Final Expense aggressive advance commissions must model chargeback reserves (often 10–25% of FYC) to avoid cash-flow crises.
Example
A Final Expense agent is advanced 9 months' commission ($612) on a policy in March. The consumer's bank draft fails in June (month 4), and the policy lapses. The carrier charges back $340 (5 months × $68) against the agent's August commission statement.
Related Terms
- FYC (First Year Commission) — The commission an agent receives on a policy's first year of premium — the largest single income event per policy in most insurance lines.
- Persistency — The percentage of policies that remain in force after a given period (commonly 13-month or 25-month), directly driving renewal income and book value.
- Renewal / Residual Commission — Commission paid in years 2+ of a policy's life — smaller per year than FYC but cumulatively the primary source of long-term agent income.