An “insurance broker” is an individual or company who assists other individuals or companies in locating and purchasing insurance, and in some cases, servicing insurance products.
Insurance brokers, similar to insurance companies and agents, must be licensed to solicit coverage in their respective states. Once an insurance broker is licensed in a particular state (usually the state in which they reside) they can readily obtain licenses in other states.
States usually have an agreement with one another that acknowledges licensure requirements are mostly similar and therefore don’t require additional examinations…but there is usually a fee associated with obtaining licenses in other states.
Why An Insurance Broker?
While most of us purchase our personal insurance through a direct insurer or an insurance agent (difference between the two discussed below), there are some instances where a broker makes sense.
Typically, insurance for whole companies, such as life and health insurance, or unusually hard to place individual insurance, are placed through an insurance broker.
Also, insurance brokers may provide services beyond “selling” you a policy. Brokers may provide risk assessment for organizations – helping you understand what coverage may be necessary – or continue to service an account for their insured.
While the continued services are somewhat of a gray area, you might find an insurance broker who helps employees enroll in existing workplace insurance plans or acts as a “benefits” consultant on existing coverage.
Sounds a lot like the description of an insurance agent, right?
Difference Between an Insurance Agent and an Insurance Broker
Brokers and agents don’t necessarily differ in their function in the insurance marketplace. In fact, some people act as both brokers and agents at the same time.
Both assist in connecting potential insured with companies that offer the coverage they need, hopefully at a price they want. Both should assist their clients in understanding what coverage they need by evaluating their risk exposure as well.
The true difference between the two is ultimately a contractual one. Insurance agents are contractually bound primarily to represent the “interests” of the company they are selling for.
Not in a “bad” way, rather more like an employee, although agents are not “employees” in the true sense. Employees of a company should help their client in any possible manner, without jeopardizing their employer in any way.
Without going into too much (boring) detail, the concept is called the “agent-principal” agreement, and simply addresses the fact that agents act on behalf of the company they represent.
At the end of the day, it is a contract that outlines the rights and duties of one to the other.
Note: This principal applies to both independent and captive agents alike.
An insurance broker, on the other hand, isn’t typically contractually bound to the insurers they place coverage with. This doesn’t mean they are more capable of “helping” a client seeking coverage, just that they are primarily aligned with the consumer.
How Are They Paid?
Acting as an agent or a broker will dictate how an insurance professional gets paid for their services as well.
Insurance agents are usually paid a pre-determined percentage of the overall insurance premium for each policy they sell. Anywhere from 10-20% is normal.
Insurance brokers may have to charge a broker fee in order to financially benefit from an insurance sales transaction, though this is not necessarily always the case.
The broker charges a fee (whatever they see fit). Typically, they charge what’s equal to what 15% commission would be. If it’s a particularly difficult client, they may charge more.
There are some brokers that stick it to people – if you have a history of policies that lapse all the time, you can expect a hefty insurance broker fee.
Of course, if the broker charges too much, the insured may opt to go elsewhere.