Most of us are familiar with the term “insurance agent,” and these are the people many of us do business with to meet our insurance needs.
You might be familiar with some of the brands agencies are affiliated with: State Farm, Allstate, American Family, and so on. Some people also work with independent insurance agencies, which represent multiple insurance carriers.
An insurance broker is a little different, though, and that’s one thing this article will explain. What does an insurance broker do, and how is this different from the work of an insurance agent?
The World of Insurance Brokers
An Insurance Broker Definition
Brokers solicit insurance quotes and/or policies from insurers by submitting completed applications on behalf of buyers. Brokers don’t have the authority to bind coverage. To initiate a policy, a broker must obtain a binder from the insurer.
Many people wonder how an insurance broker differs from an insurance agent. First, there are two kinds of insurance agents: “captive” and independent.
A captive agents works for only one insurance company–such as State Farm, The Co-operators, or Allstate–whereas independent agents represent various different companies. There are many similarities between brokers and independent agents.
“Insurance brokerage companies are often larger than independent insurance agencies. However, independent agents and brokers approach the business in the same way, which is that they represent the customer.”
Insurance brokers typically specialize in one of several specific categories of insurance, ranging from the common “life, auto, and home” to more specialized categories such as ATVs, classic cars, and weddings.
What Is Insurance Brokerage?”
Brokerage” simply refers to the business of a broker; in other words, it’s someone who buys and sells goods or assets for clients for a fee. In the case of an insurance broker, the goods involved are insurance plans.
What Would Constitute an Insurance Broker Job Description?
According to the Insurance Brokers Association of Canada (IBAC), a typical work week for an insurance broker consists of a combination of the following activities:
- The broker assesses the needs of an individual or family and obtains quotes for the appropriate coverage. Depending on what is being insured, this might include “performing an insurance valuation, taking photographs or obtaining an inspection report.”
- The broker compares the coverage offered by different insurers to find the best rates for the client’s needs and then makes recommendations.
- The broker tries to find ways of reducing overall premiums by “combining different types of insurance for discounts.”
- The broker explains premiums, terms, conditions and any small print the client might not fully understand.
- The broker provides administrative follow-up for matters such as mortgage changes or certificates of insurance.
- The broker offers advice does necessary policy revisions at policy renewal time or as needed.
- The broker is available to answer clients’ questions.
- The broker ensures that claims are fairly handled. They help clients with the process and “ensure a fair and speedy settlement.”
Of course, there could be variations depending on the specific area in which an insurance broker works, as will be discussed below. For more tips and news on the work of insurance brokers, check out this blog.
How Is Insurance Brokerage Regulated?
In Canada and the U.S., insurance brokerage is mostly regulated at the provincial or state level, not the national level. Here is a list of provincial insurance regulators in Canada. And here is a map for identifying these bodies in the United States.
Federal agencies can be involved in regulating the insurance industries in some circumstances. “The Federal Trade Commission enforces a variety of antitrust and consumer protection laws affecting virtually every area of commerce.”
See, for example, the FTC Consumer Report titled “What Insurers Need to Know,” which deals with insurer requests for consumer information regarding their clients.
The Australian general insurance industry is regulated by the Australian Prudential Regulation Authority (APRA) under the Commonwealth Insurance Act 1973.
Just as insurance regulation varies from state to state and province to province in the U.S. and Canada, so too does it vary from one country to another. It shouldn’t be a surprise that there are challenges to regulating insurance at the global level.
What Does It Take to Become an Insurance Broker, and How Much Money Do They Make?
Each U.S. state and Canadian province licenses insurance brokers independently, and there are separate licenses for each category of insurance (e.g., life, auto, home, etc.). Licensing requirements vary considerably from one place to another.
According to the Houston Chronicle, to become a licensed insurance broker in Texas, “you’ll need to take some education courses covering aspects of insurance law, ethics and consumer protection, and pass the state exam.”
An insurance broker’s income comes from commissions paid by the insurance companies they work with, not by their clients.
Are There Any Specialized Insurance Broker Roles?
Yes, one is a wholesale insurance broker–an intermediary role between a retail broker (i.e., one who works directly with clients) and an insurance carrier.
“Wholesale insurance brokers rarely have direct contact with the insured; rather, the retail broker will manage that relationship and will sell the insurance to the client.”
Wholesale brokers often possess specialized expertise in an unusual line of coverage and/or have greater access to or influence with certain insurance markets, which is quite helpful when dealing with risk that is hard to find coverage for.
Some brokers or brokerage firms specialize in the complex business of health insurance, where clients might need expert assistance in finding the most reasonable rates.
Some brokers specialize in providing disaster coverage to augment regular coverage–for example, when serving clients living in coastal communities or on flood plains.
Are There Risks to Working with an Insurance Broker?
As with any service industry, there is fraud in insurance brokerage. “Insurance fraud occurs when an insurance company, agent, adjuster or consumer commits a deliberate deception in order to obtain an illegitimate gain.”
A broker is liable to an insured when:
- the broker misrepresents the nature, extent or scope of coverage.
- the insured specifically requests a certain type or extent of coverage and the broker does not obtain it.
- the broker expressly or ostensibly holds themselves out as an expert in a given field of insurance.
- the broker reduces coverage limits without the insured’s consent.
If you’re interested in specific examples of insurance fraud, Insurance Journal offers an extensive list of cases.
As in any line of business, fraud is an exception with insurance brokers, hardly the rule.
Does the Broker Face Risks as Well?
In an increasingly litigious world, insurance brokers and agents are being taken to court by those they insure. The profession has learned some important lessons from recent disasters. Hurricane Sandy (in fall 2012) is an example.
The article referring to Sandy (above) states, “private homeowner’s insurance does not generally cover flood damage. That means homeowners have been paid for damages attributed to wind, but much of the water damage has not been covered.”
Therefore, a growing number of policyholders have been taking their brokers and agents to court for a “failure to advise” them about how severe potential risks might be, as well as what their insurance will and won’t cover.
Good broker-agent communication is essential. Gene Killian, a New Jersey lawyer who represents policyholders, says that “when brokers and agents don’t get out in front of the problem or aren’t communicating clearly, policyholders get angry.”
The Future of Insurance Brokers
With an average age of 59, the insurance agent and broker workforce is on the brink of retirement and less in touch with consumer demands in a digital world.
Add to this the shift from brick and mortar financial institutions to online service providers and you can see a future world that already is well inhabited by the millennial generation and their successors.
In this scenario, “companies are increasingly shifting the purchase burden to employees. As consumers become more responsible, and individual plans win share over group plans, online aggregators should become more compelling.”
TechCrunch’s Whitney Arthofer sees a role for brokers here. She explains that “given the painful buying process and commoditized nature of the insurance product, consumers derive little intrinsic joy from shopping for insurance…
Instead, the real value proposition will come from creating a single, aggregate destination- to complete the entire buying process and deliver a service experience as quickly and painlessly as possible.”
Hopefully, you’re now a little more familiar with the work of an insurance broker. We also hope you see what an important role this is, and how it gives consumers greater and more informed decision-making capacity in the insurance marketplace.
If you’re weighing options for how to buy, renew, or change your insurance coverage, consider working with a broker. As long as you research possible brokerage firms before committing, we don’t think the outcome will disappoint you.