Insurance agents and brokers
Insurance agents and brokers are licensed insurance professionals who help small business owners protect their companies with insurance.
What are insurance agents and insurance brokers?
Insurance agents and brokers who specialize in property and casualty insurance help small business owners buy insurance coverage from insurers at a reasonable price (or premium). Agents and brokers are licensed in their states and must comply with all governing statutes and regulations.
Insurance agents and brokers can specialize in offering one form of small business insurance. Or they can provide many different types, including:
- General liability insurance
- Business owner’s policy (BOP)
- Errors and omissions insurance (E&O)
- Professional liability insurance
- Commercial property insurance
- Business interruption insurance
- Workers’ compensation insurance
- Commercial auto insurance
What is an insurance agent?
An insurance agent is a professional who sells an insurance company’s products to consumers for a commission. To sell insurance, an agent helps consumers select the right insurance to buy, but represents the insurance company in the transaction.
There are two types of insurance agents:
- Captive agents typically represent only one insurer.
- Independent insurance agents typically represent more than one insurer.
Both captive and independent agents work on commission and can execute an insurance transaction from start to finish, on a variety of insurance plans.
What is an insurance broker?
An insurance broker is a professional who represents consumers in their search for the best policy for their needs. Brokers work closely with their clients to research the client’s needs. The broker examines the terms and conditions of several options, and recommends an insurance policy that best suits the client’s needs at the best price.
Unlike captive and independent agents, who represent one or more insurance companies, a broker’s primary duty is to the client.
Since brokers don’t represent insurance companies, they can’t bind coverage on behalf of an insurer. They must hand over the account to an insurer or insurance agent to complete the transaction.
What are the key differences between an agent and a broker?
There are two main differences between insurance agents and brokers:
- Agents represent insurers, while brokers represent consumers.
- Agents can complete insurance sales (bind coverage), while brokers cannot.
Agents also receive appointments to represent one or more insurance companies, but brokers do not. An appointment is a contract an agent and insurer sign that outlines the products the agent can sell and for what commission rates.
Brokers, on the other hand, can solicit price quotes from multiple insurers. When consumers are ready to buy, they must obtain a binder directly from an insurance agent or the insurance company.
Like any small business, insurance agents and brokers both need business insurance to operate.
Is Insureon an agent or a broker?
Insureon is both an agency and an insurance brokerage, with licensed professionals in every state. Our agents help small business owners with their coverage options, from among top carriers in the insurance industry, so they can find the right policies for their insurance needs.
Our insurance brokers help clients with finding coverage outside of standard insurance products, such as excess and surplus lines, from a variety of insurance underwriters. They can help in putting together an insurance program that fits your risk management needs.
An insurance broker is an intermediary who sells, solicits, or negotiates insurance on behalf of a client for compensation. An insurance broker is distinct from an insurance agent in that a broker typically acts on behalf of a client by negotiating with multiple insurers, while an agent represents one or more specific insurers under a contract.
In Canada, insurance brokers are regulated on a provincial and territorial basis. Insurance brokers and insurance agents are licensed and regulated by the same entity in most of Canada; either an arms-length organization, such as the General Insurance Council of Saskatchewan, or directly by a government body. In some provinces, such as Ontario, insurance brokers have self-governing bodies responsible for licensing and regulation.
In the United Kingdom
Insurance broker became a regulated term under the Insurance Brokers (Registration) Act 1977, which was designed to prevent firms holding themselves as brokers but in fact acting as representative of one or more favoured insurance companies. The term has no legal definition following the repeal of the 1977 Act. The sale of general insurance was regulated by the Financial Services Authority from 14 January 2005 until 31 March 2013 and by the Financial Conduct Authority since 1 April 2013. Any person or firm authorized by the Authority can now call themselves an insurance broker.
Insurance brokerage is largely associated with general insurance (car, house etc.) rather than life insurance, although some brokers continued to provide investment and life insurance brokerage until the onset of new regulation in 2001. This drove a more transparent regime, based predominantly on upfront negotiation of a fee for the provision of advice and/or services. This saw the splitting of intermediaries into two groups: general insurance intermediaries/brokers and independent financial advisers (IFAs) for life insurance, investments and pensions.
General insurance brokering is carried out today by many types of authorized organisations including traditional high street brokers and telephone or web-based firms.
The British Insurance Brokers’ Association is a representative organisation for brokers in the UK. It has over 1800 members.
In the United States
In the United States, insurance brokers are regulated by individual states. Most states require anyone who sells, solicits, or negotiates insurance in that state to obtain an insurance broker license, with certain limited exceptions. This includes a business entity, the business entity’s officers or directors (the “sublicensees” through whom the business entity operates), and individual employees. In order to obtain a broker’s license, a person typically must take pre-licensing courses and pass an examination. An insurance broker also must submit an application (with an application fee) to the state insurance regulator in the state in which the applicant wishes to do business, who will determine whether the insurance broker has met all the state requirements and will typically do a background check to determine whether the applicant is considered trustworthy and competent. A criminal conviction, for example, may result in a state determining that the applicant is untrustworthy or incompetent. Some states also require applicants to submit fingerprints.
Once licensed, an insurance broker generally must take continuing education courses when their licenses reach a renewal date. For example, the state of California requires license renewals every 2 years, which is accomplished by completing continuing education courses. Most states have reciprocity agreements whereby brokers from one state can become easily licensed in another state. As a result of the federal Gramm-Leach-Bliley Act, most states have adopted uniform licensing laws, with 47 states being deemed reciprocal by the National Association of Insurance Commissioners. A state may revoke, suspend, or refuse to renew an insurance broker’s license if at any time the state determines (typically after notice and a hearing) that the broker has engaged in any activity that makes him untrustworthy or incompetent.
Because of industry regulation, smaller brokerage firms can easily compete with larger ones, and in most states, all insurance brokers generally are forbidden by law from providing their customers with rebates or inducements.
Insurance brokers play a significant role in helping companies and individuals procure property and casualty (liability) insurance, life insurance and annuities, and accident and health insurance. For example, research shows that brokers play a significant role in helping small employers find health insurance, particularly in more competitive markets. Average small group commissions range from two percent to eight percent of premiums. Brokers provide services beyond procuring insurance, such as providing risk assessments, insurance consulting services, insurance-related regulatory and legislative updates, claims assistance services, assisting with employee enrollment, and helping to resolve benefit issues. However, some states consider the provision of services that are unrelated to the insurance procured through the broker to be an impermissible rebate or inducement.
Negligence on the part of insurance brokers can have severe effects upon clients when they discover their insurance coverage is worthless. In one case, Near North Entertainment Insurance Services provided alternative rock band Third Eye Blind with a commercial general liability (CGL) insurance policy that excluded coverage for the “entertainment business”. After insurance coverage for a lawsuit was denied because Third Eye Blind was and is, after all, in the entertainment business, the California Court of Appeal ruled in a published opinion that the broker had a duty to advise the band it needed something more than a basic CGL policy.
In 2004, Eliot Spitzer found apparent cases of bid-rigging by the major brokers, where the brokers arranged with insurers to provide “fake” quotes in exchange for providing favorable risks amidst contingent commission arrangements. In 2008, AIG paid $125 million to settle with 9 states.
Commission and fees
In most states there is no requirement to disclose the commission of the broker to the customer, but in New York, a regulation (“Regulation 194”) was adopted in 2011 which required disclosure. Brokers or agents may decide to reveal their commission upon request.
In most states, agents cannot charge a fee in addition to their commission, although Texas is one of the exceptions.
Broker vs. agent
Though not an absolute separation; an insurance agent is an insurance company’s representative by way of agent-principal legal custom. The agent’s primary alliance is with the insurance carrier, not the insurance buyer. In contrast, an insurance broker represents the insured, generally has no contractual agreements with insurance carriers, and relies on common or direct methods of perfecting business transactions with insurance carriers. This can have a significant beneficial impact on insurance negotiations obtained through a broker (vs. those obtained from an agent).
Any person acting as an insurance agent or broker must be licensed to do so by the state or jurisdiction that the person is operating in. Whereas states previously would issue separate licenses for agents and brokers, most states now issue a single producer license regardless if the person is acting on behalf of the insured or insurer. The term insurance producers is used to reference both insurance agents and brokers.
In Australia, all insurance brokers are required under the Financial Services Reform Act 2001 to be licensed by the federal government’s Australian Securities and Investments Commission (ASIC). Reputable and experienced insurance brokers in Australia will generally also hold additional qualifications such as a certificate or diploma in financial services which requires the completion of in depth studies in a specific area, the most common being general insurance or insurance brokering.
Within Australia there are also a number of industry bodies that issue professional accreditations to members that comply with best standards of professional practice and integrity and maintain up to date skills and knowledge. The two main accreditations are the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) Certified Insurance Professional (CIP) and National Insurance Brokers Association (NIBA) Qualified Practicing Insurance Broker (QPIB) qualifications.
Dealing with an insurance broker as opposed to directly with an insurer is something many customers (particularly businesses) choose to do in Australia for reasons including: the ease of having the “shopping around done for them”; having the opportunity for premium funding which allows for larger insurance policies to be paid in installments rather than all at once; dealing with one broker for all policies from the car insurance to professional indemnity insurance rather than dealing directly with several insurers; and, the ease of having claims managed by the broker who deals directly with the insurer on the client’s behalf.
Insurance Brokers: What They Do and Who Needs One
When buying insurance, it’s smart to get quotes from multiple insurers to find the best price. While almost anyone can compare rates online, in some cases it makes sense to have a professional walk you through your options.
What is an insurance broker?
An insurance broker acts as an intermediary between you and an insurer. Armed with both your background and their insurance know-how, they can find a policy that best suits your needs for a reasonable price.
While brokers can save you time and money, you may have to pay a broker fee for their services.
Even with the fee, you may spend less overall. For example, if a broker saves you $100 on a policy per year for three years, and charges a $100 fee, you’ve still saved $200.
When to use an insurance broker
Using a broker isn’t necessary for everyone. How you buy insurance is a personal choice, but brokers are usually best suited for people who have more complicated insurance needs, like a landlord or small business owner who needs several policies.
You might benefit from an insurance broker if you:
- Have multiple cars or homes.
- Want to thoroughly understand the ins and outs of your policy, such as exclusions and limits.
- Need insurance for a business.
- Want to shop around with multiple insurers without investing your time or energy.
- Want a personal relationship with someone invested in knowing your background and coverage needs.
Keep in mind, if you’re buying permanent life insurance, it’s best to consult a fee-only financial advisor (more on this later).
How brokers are paid
Understanding how brokers are paid will help protect you from a broker who cares more about making money than placing you with the right policy.
Brokers can make money in two different ways: through a commission or broker fee. They may charge both or only a commission. Most states require brokers to disclose commission rates and other fees upfront. Still, it’s smart to ask about any charges you’ll have to pay besides premiums.
Brokers receive a commission from an insurer when they place you with that company. The commission amount varies based on the policy and company and is typically calculated as a percentage of the premium.
Brokers often receive a larger commission on the first policy versus renewals. Life insurance brokers, in particular, can earn up to a 100% commission the first year. Because this could be a strong motivator to sell you more life insurance than you need, NerdWallet recommends consulting a fee-only financial advisor when you buy a permanent life policy, which is considerably more expensive and complex than term life insurance.
Besides maintaining their reputation, brokers have a financial reason to ensure you like and keep your policy. If you cancel your insurance or stop making payments during the first few years, the broker may need to repay the commission to the insurer.
The commission is automatically included in the price of the policy. If you shop for coverage on your own, you would still pay the same price — the insurer would just not have to pay a commission.
Because insurance brokers receive a commission from each company they work with, they theoretically shouldn’t advocate for one insurer over another. Still, some companies offer insurance brokers bonuses or gifts for bringing in clients, with larger incentives for those who bring in more business. Again, always ask upfront about how the commission works.
In addition to receiving commissions, some insurance brokers also charge fees. In general, broker fees must be reasonable and disclosed to the buyer. Your state might also have fee restrictions. For instance, in Florida broker fees are capped at $35.
Broker fees are often nonrefundable, so if you cancel your policy, you won’t get your money back unless your insurance broker was dishonest.
Insurance broker vs. independent agent
Insurance brokers are often confused with independent agents. It’s easy to see why: Both work with multiple companies and earn a commission. However, independent agents make their money entirely from commissions.
Since both brokers and agents make a higher profit when you buy more coverage, they have an incentive to upsell. At the same time, they need to provide quality customer service to keep your business.
Independent agents represent insurance companies, not the people buying the policies, whereas brokers represent the buyer. Agents are also able to bind a policy, or provide temporary coverage before a policy is finalized and issued. An insurance broker will generally work with an agent or insurer to bind a policy. Before that happens, the price can still change.
While independent agents work with more than one insurer, they have contracts with specific companies and are often limited to selling certain policies, unlike brokers. On one hand, this limits your insurance options to those companies. However, independent agents may know more about the companies and policies they sell than brokers.
Other ways to buy insurance
To avoid a broker fee, you can buy insurance:
- Directly through the insurance company, online or over the phone. Some insurers don’t use agents, in which case you’ll work with the insurer directly.
- Through a captive agent, who works for one insurer.
- With an independent agent.
Even if you’re working with an independent agent or insurance broker, you can still shop around yourself. Using an insurance comparison tool can help you find the cheapest price by looking at rates from multiple companies.
How Does an Insurance Broker Make Money?
- When you hire an insurance broker, they work directly for you.
- An insurance agent, on the other hand, usually works on behalf of an insurance company.
- Purchasing insurance can be complex, and an insurance broker does all the research for their client to help them choose a policy.
- An insurance broker cannot close a deal on a policy, only an agent or an insurance company.
- Insurance brokers need a state license to practice.
Understanding How Insurance Brokers Make Money
The primary way an insurance broker earns money is commissions and fees based on insurance policies sold. These commissions are typically a percentage based on the amount of annual premium the policy is sold for. An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, life, and others.
Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Insurers use premiums to cover liabilities associated with the policies they underwrite. They may also invest the premium to generate higher returns and offset some of the costs of providing the insurance coverage, which can help an insurer keep prices competitive.
Insurers invest the premiums in assets with varying liquidity and return levels, but they are required to maintain a certain level of liquidity. State insurance regulators set the number of liquid assets necessary to ensure insurers can pay claims.
An insurance broker or agent will often earn a lump sum percentage against the first-year premium of a policy that they sell and then a smaller but ongoing annual residual income payment over the policy’s life.
The broker is supposed to represent his clients’ best interests. Part of the broker’s duty is to understand the clients’ situation, needs, and requirements to find them the best insurance policy within their budget. Choosing the right insurance plan is quite complicated, and studies show that many people choose a less than optimal plan when they solely rely on their judgment.
Besides being well-versed on offerings from all insurance companies, brokers should not favor any specific company. For this reason, brokers are paid a commission rather than receiving payment from insurance companies, which could create negative incentives that damage trust between the broker and the client.
A broker has an important responsibility to help people navigate between insurance plans, many of which have subtle differences. In addition to connecting clients to the right policy, the broker continues to have obligations to his clients.
A broker provides consulting services to help determine whether policies should be changed, provide assistance with compliance, and help submit claims and receive benefits.
To stay up to date with changing regulations and ensure they are continuing to meet their duties, brokers are licensed by the state insurance regulatory agencies. This license must be renewed on a biannual basis in most states. The insurance brokers’ job only begins after the policy is sold. They must regularly meet with their clients and determine that their current policies meet the clients’ needs.
Insurance Broker Career Path
Like insurance agents, insurance brokers need a bachelor’s degree, and often a background in sales or business, and have strong interpersonal and research skills. Because insurance brokers must review contracts on behalf of their clients, attention to detail in contracts and comfort in analyzing terms and conditions is necessary to succeed in this career path.
Although insurance brokers can handle as many types of insurance that they are comfortable selling, drilling down into one type and becoming an expert may be beneficial.
Brokers must be licensed in the state where they practice and will need to study for and pass series 6 and 7 FINRA-administered exams. Keeping up to date on changes in insurance laws is a good way to keep your clients confidence, too.
According to PayScale, as of Jan. 15, 2021, a mid-level insurance broker’s median salary is approximately $70,000 a year.1 However, this amount will often rise as an insurance broker gathers experience and clients. According to IBIS World, as of January 2021, there are 412,850 Insurance Brokers & Agencies Businesses in the United States.
Insurance Broker FAQs
What Is the Difference Between an Insurance Agent and a Broker?
Brokers represent and work on behalf of consumers, and agents represent and work for insurance companies. Brokers cannot complete a sale of insurance, unlike agents.
Is It Better to Get Insurance Through a Broker?
You can’t really obtain insurance through a broker, but an insurance broker can help you find the best policy. Once a broker has done all of their research and presented their clients with options, the policy selected must be bound by an insurance agent or company. A broker doesn’t finalize a transaction.
What Is the Difference Between an Insurance Broker and an Insurance Company?
An insurance company sells insurance, and a broker finds you the best deal on insurance by comparing several insurance companies’ policies.
Is It Cheaper to Get Insurance Through a Broker?
You can’t buy insurance from an insurance broker, but they can help you find the best and affordable policy.
What Is an Insurance Broker in the U.K.?
An insurance broker in the U.K. is similar to an insurance broker in the U.S. They act as a liaison between their clients and insurance companies.
5 Reasons Why to use an Insurance Broker
Are you familiar with the insurance product you are about to buy? If the answer is no, it is recommended that you make use of an insurance broker to provide you with objective advice. An insurance broker is an expert in the insurance field to provide best advice.
2. YOUR NEEDS
Be open and share with the insurance broker all your requirements, relevant current circumstances or information to enable the broker to make a correct assessment of the product that will best cover your insurance risks. Whilst we know the Bailiwick is a small place and we prefer to keep our personal information private, the broker is required to treat all your information with utmost confidentiality, and should form part of the Terms of Business Agreement that you enter into with the broker.
3. EXPLANATIONS YOU UNDERSTAND
Your insurance broker should make time to explain in simple English language all the terms and conditions attached to a policy that you are proposing to buy, and once you have agreed to buy the policy, to go over them again with you to ensure you agree to the terms and conditions of the insurance policy. Ask your broker if there is a cancellation policy applicable to your policy, so that if you change your mind you may cancel your policy within the period specified in your insurance policy.
Depending on the type of insurance you are buying, brokers may receive remuneration from the insurer from whom you bought your product, or if buying long term insurance, many brokers have moved to offering advice on a fee basis, which would be payable whether or not you take up their advice. Whichever the mode of remuneration, or charges, a broker advising on long term insurance is required under the Bailiwick laws to disclose the amount of that remuneration to you before you sign on the dotted line. When buying general insurance products through your broker, and the broker is silent on details of their charges and remuneration, you are entitled under the law to ask for these.
5. MAKING AN INSURANCE CLAIM
More often than not, the insurance broker from whom you bought an insurance policy will assist you in making an insurance claim under that policy and liaise on your behalf with the insurer and the loss adjuster. You need only ask if they will provide this facility to you.