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Most individuals buy insurance policies through insurance agents. These insurance agents are often individuals who work on behalf of one or multiple insurance companies. On the other hand, corporations usually tend to buy insurance from insurance brokers. Individual buyers have often heard of insurance brokers such as Willis, Aon Marsh, etc. However, they don’t know what the exact difference between an insurance broker and an insurance agent is. In this article, we will have a closer look at the role that both these types of intermediaries perform as well as the difference between them.
The main difference between insurance agents and insurance brokers is who they represent.
Simply put, insurance agents represent the seller, i.e. the insurance companies. There are captive agents who represent only one seller. Also, there are independent agents who represent multiple sellers of insurance. In each of these cases, insurance agents are authorized by insurance companies to enter into agreements on their behalf.
Insurance companies have agreements with insurance agents which allow these agents to take certain pre-defined types of risk on behalf of the insurer. Other, more crucial types of risks are generally excluded from this agreement.
Insurance brokers, on the other hand, represent the buying side. This means that these brokers are appointed by buyers of insurance. This is why most brokers have huge corporations as their clients. Since insurance brokers buy insurance in bulk, they have a lot of bargaining power and can force insurance companies to lower prices.
Insurance brokers are also required to provide a lot of specialized services to these corporate buyers of insurance. This is the reason why there are very few (if any) individual insurance brokers. Insurance broking firms are usually corporations that deal with insurance companies on behalf of other mega-corporations.
Hence, it would also be accurate to say that insurance agents mostly serve in the retail market whereas insurance brokers tend to provide their services to wholesale buyers of insurance.
Some captive insurance agents receive a fixed salary from insurance companies. However, most insurance agents make money via commissions. They receive various types of commissions from insurance companies. Firstly, they receive the regular commission which is paid when customers renew their policy every year. Then, they also receive more commission for bringing in new business.
Insurance companies tend to pay more money to agents for new policies. This is done so that the insurance agents keep striving for new business. Also, if insurance agents get volume commissions after they underwrite a particular level of business. For instance, they get an additional 3% commission if they underwrite $100,000 in a financial year. These extra commissions act as sales bonuses and keep the insurance agents motivated to bring in more business.
Insurance brokers receive their payout via brokerage. Brokerage is very similar to commission in the fact that it is paid out based on the underlying value of the policy. However, brokerage is paid by the buyer. Also, since the underwriting happens in bulk, the rate at which brokerage is charged is much lower as compared to commissions. Also, when people buy policies through insurance brokers, they are aware about the exact quantity of money that is being paid to the broker. In case of an insurance agent, the buyer really doesn’t know the rate of commission that is being charged by the agent.
Some insurance companies also started paying a contingent fee to insurance brokers. This fee was paid out if the broker provided a certain level of business to the insurance company. This was very similar to the volume based commissions which are paid to insurance agents. However, receiving any kind of remuneration from insurance companies builds an inherent conflict of interest in the business model of insurance brokers. Hence, these payments have attracted a lot of controversy on ethical grounds.
Critics of the so-called “contingent fee” believed that brokers were starting to channel business to certain insurance companies even though it was not in the buyer’s best interest. This is the reason why most reputed brokers abstain from collecting any contingent fee even if the insurance company is willing to pay such a fee.
In the eyes of the law, insurance agents are considered to be an extension of the insurance company. This is the reason why companies are held liable for the actions of their agents. This means that insurance companies can be sued if it is found that their agent has provided misleading information to the customer. This is the reason why insurance companies spend a lot of money in order to train their agents to comply with the law.
On the other hand, insurance brokers are considered to be individual entities. Hence, if an insurance broker provides misinformation to a buyer, the insurance company cannot be sued. Since the company does not pay money to the broker, it is not liable for its actions. In such cases, the insurance broking firm itself may face a lawsuit. If willful misconduct is found, the insurance broker’s license can also be canceled.
To sum it up, insurance brokers and insurance agents are both intermediaries that work in order to sell insurance products. Their roles are similar however not exactly the same.
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