Insurance brokers serve as intermediaries between consumers and insurance companies. They represent their clients, not insurers, but earn commissions from carriers. Brokers handle all types of insurance lines for individuals and businesses.
Insurance Broker Definition and Example
A broker is an intermediary between an insurance buyer and an insurance company. A broker works on commission and can be an individual working independently, or a brokerage firm that employs numerous brokers.
Brokers work on behalf of the client, not the insurer. For example, if you start a small business, you might use a broker to get business insurance, workers’ compensation insurance, and employee benefits plans. The broker would research the market to find policies that fit your needs, present the findings to you, and help you choose the best coverage.
An insurance broker may work with just one type of insurance product or many. For example, IntelliQuote works in the life insurance line, while Crump brokers disability insurance, life insurance, and long-term care insurance.
Brokers, in a broader sense, operate in many industries, including customs, home mortgages, real estate, and securities.
Understanding Insurance Brokers
Insurance brokers represent you (the policyholder or insurance shopper), not insurance companies. While they can present insurance policies for an insurer, they don’t have the legal right to act on the company’s behalf. For example, a broker would not have the authority to issue a policy or determine a policy’s premiums.
Brokers can manage many of the insurance shopping tasks for you. Let’s say you turn to a broker to find a life insurance policy. The broker would shop the market for you, researching policies’ coverages, optional coverages, rates, and terms and conditions. Once you select a policy, the insurance company or its agent must oversee the rest of the transaction.
According to a study by the United States Government Accountability Office, insurance brokers and agents must obtain a state license and comply with insurance regulations. To qualify for a license, a broker must meet rigorous qualifications. For instance, California’s licensing requirements include at least 20 hours of pre-licensing study and 12 hours of California insurance code and ethics studies, plus continuing education after obtaining a license.
Insurance Broker vs. Insurance Agent
Captive agents, unlike brokers, work exclusively for an insurance company. Carriers also sell policies through independent agents. An independent agency may sell policies for several insurance companies or just one. Captive agents and independent agents work on behalf of insurance companies and are their legal representatives.
A broker might work independently or through an agency, but they don’t represent insurers. Rather, their job is to represent the policyholders they serve.
Certain state insurance codes impose fiduciary duties on brokers that require them to act in the consumer’s best interest, and require them to disclose all sources of their compensation.
Typically, captive and independent agents have the authority to bind coverage. This means that they can confirm a policy is in place. Brokers, however, often don’t have the power to bind coverage. Like brokers, independent insurance agents work on commission or for a fee.
Pros and Cons of Insurance Brokers
- Expediency: When you buy a policy through an insurance broker, the broker does much of the work for you.
- Expertise: A broker can search for policies that fit your needs, collect quotes, and find deals that insurers might not make public. Since brokers don’t work for an insurance company, they can shop among numerous carriers to find you the best coverage.
- Flexibility: Experienced brokers know the fine details of the insurance policies they offer. They can answer your questions and advise you on insurance companies and coverage that’s right for you.
- Possible fees: An insurance broker might charge fees. Fee amounts and how often you must pay them can vary, depending on your state’s insurance code.
- Requires vetting: Whenever you buy insurance, you need to make sure the provider and broker have a license to offer policies in your state. The National Association of Insurance Commissioners provides a broker and insurer lookup tool that accesses licensing information in all states, Puerto Rico, and Washington, D.C.
Do I Need an Insurance Broker?
If you have simple insurance needs and don’t mind doing your own research, you might not need an insurance broker. But if you have complex insurance needs, a broker can help you better navigate the insurance market.
First, consider what insurance shopping entails. Whenever you buy insurance, you should get quotes from several insurers. If you need home insurance, you’ll have to spend hours on the phone or online repeatedly giving information about your home’s replacement cost, construction type, specific features, and fire services.
If you go through a broker, you only have to provide your information once. Brokers can also help educate you about insurance products, and they can explain the fine details of a policy’s terms and conditions, including important aspects an average consumer might overlook.
The Bottom Line
Individuals and businesses with complex insurance requirements need the expertise of an insurance broker. Utilizing an insurance broker can have advantages beyond saving time, because a broker can help you decide how much coverage you need, and help you avoid the pitfalls of buying inadequate coverage.
A seasoned insurance broker can assess the big picture for your situation. They may devise a comprehensive insurance plan that includes auto, home, and life insurance policies; or help business owners attain the wide-ranging coverages needed to protect their real estate and business property, while guarding against liability claims.
- Insurance brokers serve as liaisons between consumers and insurance companies.
- Brokers represent their clients, not insurers.
- Insurance brokers earn commissions or fees from carriers.
- State insurance codes require insurance brokers to have a license.
- Most insurance brokers don’t have the authority to bind coverage.