There about 40,000 independent insurance agencies in the United States, give or take. There are also a number of national and global insurance brokers, direct sales companies and now Insurnet operators. Most people purchase their personal or business insurance from agents or brokers, although direct sales through online portals are making inroads particularly with personal lines.
What’s the difference between agents and brokers and in whose interests do they work?
Although insurance is regulated separately by each state or territory and federally, there are common principles that apply to agents and brokers. Simply put, insurance agents are licensed to sell insurance on behalf of one or more specific insurance companies. They are paid by those companies and are contractually and legally bound to work in the interests of those companies. An insurance broker, generally speaking, works on behalf of and in the interests of their insurance clients rather than overtly for and on behalf of the insurance companies.
The differences are usually overlooked, since many times the lines are blurred with agents acting as brokers and brokers having agency licenses with insurance companies. Practically speaking, agents and brokers have dual loyalties and obligations to both policyholders and insurance companies. Inevitably, conflicts of interest arise. Theirs, yours and separately those interests of the insurance companies.
So who does your agent or broker work for? You or the insurance company, or maybe themselves?
One way to seek an answer to this question is with another question. Who pays the compensation to your agent or broker? Do you pay a fee, exclusive of any compensation payable to that agent by any insurance company? Does the agent/broker accept any form of compensation from any insurance company on your business.
The answer can be as simple as that. Follow the money.
It gets murky regarding agent or broker compensation. Retail commissions are disclosable to policyholders as a matter of law. In some jurisdictions, the policyholder must request said disclosure rather than such being automatically provided. Up front commissions range anywhere from 3% to 50%, depending upon the type of policy. Average commercial retail commissions range from 10% to 20% of the stated premium for most policies. Bonds pay commissions in the 30% range. Some Life Insurance policies can pay 50% or more for the initial year. Homeowners and Auto usually pay 15% to 20% and so on. These commissions are legally disclosable. That is a lot of money in compensation at issue.
There is also “hidden” agent or broker compensation, in the form of so-called profit sharing, bonuses, contingent commissions, etc. that are not typically disclosed to clients, even though those clients pay for such in their premiums. Consumers should be aware of who is paid how much for selling them insurance.
Does any of this matter? All insurance practitioners aspire to “professional” standards of conduct and practice. Regulatory standards of practice also apply. The question of professionalism with respect to insurance will be the subject of another commentary. Suffice it to say now, that whether or not the sale of insurance is a “profession” is a matter of philosophical and sometimes legal debate.
More of that topic in the future.