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When it comes to buying insurance for your small business, should you enlist the help of a broker or an agent? The vast majority of people will use the two terms interchangeably—but in reality there are important distinctions between these two types of insurance sales professionals.
Both insurance brokers and insurance agents act as intermediaries between insurance buyers and insurance companies. Brokers and agents are both licensed to sell insurance policies and required to abide by the laws or regulations enforced by state insurance departments.
The key difference between insurance brokers and insurance agents is who they represent. Insurance brokers represent you, while insurance agents represent one or more insurance companies. The services these two types of insurance specialists provide will depend on where their interests align.
Insurance brokers are independent insurance specialists who legally represent the buyer.
Brokers help clients identify suitable insurance plans that will meet their specific needs. They will meet with a small business client to assess the company’s situation, understand the exposure to various types of risks that the company faces, and recommend insurance products based on the needs of the business. Brokers have a fiduciary duty to select insurance products that protect the financial interests of the client.
- A broker who specializes in property insurance meets with you to assess your business interruption exposure due to the risk of flooding in your area and recommends an extra coverage to cover the exposure.
Brokers also can give clients the widest access to insurance solutions. Insurance brokers don’t just work with one insurance company; they can go into the insurance market to compare plans from any and all insurance companies to find the best fit for their clients and obtain different price quotes.
- A broker looks into general liability insurance plans from State Farm, Travelers, Farmers, Progressive, and Nationwide and provides you quotes from each insurance company and summaries of the solutions.
Brokers should have comprehensive knowledge of many insurance products provided by different insurance companies and the experience to recognize and handle complex insurance needs. On behalf of their clients, brokers will then prepare applications for insurance policies and submit them to the insurance companies.
There are several types of brokers:
Retail brokers work directly with customers to help them obtain insurance, either directly from the insurance company or from wholesale brokers if the risk is more complex and requires a more specialized insurance product.
Wholesale brokers provide specialized insurance products to retail agents or brokers. These types of brokers have no contact with the end buyer—the individual, family, or business that buys the insurance. They provide specialized knowledge and expertise on insurance for more complex risks.
Wholesale brokers work with surplus line brokers who negotiate coverage for excess and surplus lines (E&S) insurers. These insurers cover financial risks that standard insurers are not willing to cover.
You might need a surplus line broker if your business:
- Engages in unusual or dangerous activities e.g. an amusement park, daycare center, or motorcycle rally event
- Requires unique or complex risk coverage that standard insurers don’t underwrite e.g. for a chemical company
- Needs to insure a new type of risk for which standard insurers don’t have a pricing model
- Requires higher liability limits than standard insurers will take on
- Requests coverage for a type of risk that you have a history of claims in
- Has a history of losses
- Is a new venture
Insurance agents represent one or more insurance companies and sell insurance plans to buyers.
Insurance agents act as intermediaries who provide information about available policies from the insurance company or companies they represent to insurance buyers. Insurance agents have “appointments” with insurance companies—or contractual agreements—that specify the policies they can sell and their compensation.
Insurance agents are either “captive” agents who represent one insurance company or “independent” agents who sell policies for multiple insurance companies.
- Work as full-time or independent contractors for the insurance company
- Earn either commission or a combination of salary and commission
- Often receive support such as an office, administrative staff, and referrals from the insurance company
- Have in-depth knowledge of their company’s insurance products and can more easily keep up-to-date on changes
- May be pushed by the insurance company to meet certain sales quotas or sell certain policies
- Can offer a wider array of insurance products to buyers from multiple insurance companies
- Typically earn more commission from insurance companies than captive agents who enjoy more stability
- Pay their own overhead costs for running an independent business
Unlike brokers, all insurance agents—captive and independent—do not have a fiduciary duty to the client. Their allegiance is to the insurance company or insurance companies they contract with. Agents can explain the policies of the insurance company they represent or present different options if they are working with a few different insurance companies, but it is ultimately up to the buyer to ensure that the insurance plans meet the needs of their business.
Brokers receive a commission from the insurance company when a client accepts the quote from the company and completes the purchase. In some states, brokers are also permitted by law to charge a “broker fee” for administrative services such as setting up an account or securing certificates of insurance for clients. Broker fees must be reasonable and disclosed.
Captive agents who work for just one insurance company can be paid with salary only; salary and commission; or salary, commission, and bonus. Independent agents who represent multiple insurance companies are typically compensated with commissions only.
For both brokers and agents, the commission structure can be complicated—because insurance companies try to incentivize different types of sales. Brokers and agents typically earn a percentage of the premium with the percentage varying depending on the type of insurance.
- A broker earns 15% on a line of professional liability insurance from Nationwide but earns 10% on a line of commercial auto insurance.
Brokers and agents may also earn a higher percentage of commission for a new line of insurance than they would earn for a renewal of an existing line of insurance. Some insurance companies also reward brokers and agents for good performance with supplemental or contingent commissions. Brokers and agents who meet a certain level of performance in a set period of time can earn an additional percentage on the premiums they have sold.
- The insurance companies pay an additional 2% of the premiums to an agent who has sold over $5 million worth of insurance products in a calendar year.
However, contingent and supplemental commissions are controversial because they may incentivize brokers and agents to funnel their clients to insurance companies that pay out the highest commissions. As a buyer, it’s important that you ask for a disclosure of compensation structure from your agent or broker even if your state doesn’t already require the disclosure by law. If the agent or broker doesn’t want to disclose, it may be wise to choose another intermediary.
Insurance brokers work in the client’s interest to compare insurance products in the market and select suitable solutions. Business owners who do not have the time to understand the specifics and the details of insurance policies can rely on brokers to assist them and save them a significant amount of time. Brokers will also have knowledge and expertise about which insurance companies provide the best coverage for specific risks.
- Your insurance broker knows that State Farm and Travelers provide the best general liability insurance for small businesses.
Insurance agents who sell policies for only one insurance company or a few different companies are more easily able to have specialized knowledge of the policies and keep clients up to date on changes. Although they are not responsible for assessing your risks and helping you select the best products from the insurance market the way that brokers are legally obligated to do, they can provide detailed information about the policies they do sell and oftentimes offer better customer service in an ongoing relationship.
Agents also have access to exclusive products from the insurance companies they are authorized to sell from. Some business owners may already know the insurance company they wish to work with from past experience, positive reviews, or referrals, and can go straight to an agent to buy the policy. Since agents are representatives of the insurance company, they can also expedite the process of buying the insurance.
When you are deciding between purchasing insurance through a broker or an agent, it’s crucial to think about the role of each type of insurance seller. Who do they represent? How do they get paid? What are their interests and incentives? More specifically, what type of broker or agent are they and what types of insurance are they licensed to sell? Choosing the right seller may also depend on what risks your business is exposed to. In that case, you’ll need to consider the special lines of insurance that only some brokers or agents can provide.