How Does an Insurance Broker Work |
Main Points
- Insurance brokers facilitate the communication between consumers and insurance companies.
- Brokers advocate for their clients, not insurers.
- Insurance brokers receive commissions or fees from carriers.
- State insurance codes mandate that insurance brokers have a license.
- Most insurance brokers lack the power to bind coverage.
Insurance Broker Meaning and Example
A broker is a go-between for an insurance buyer and an insurance company. A broker earns commission and can be either an independent individual or a brokerage firm that employs multiple brokers.
Note: Brokers work in the interest of the client, not the insurer. For example, if you launch a small business, you might use a broker to get business insurance, workers’ compensation insurance, and employee benefits plans. The broker would search the market to find policies that suit your needs, show you the results, and help you pick the best coverage.
An insurance broker can specialize in one type of insurance product or many. For example, IntelliQuote specializes in life insurance, while Crump offers disability insurance, life insurance, and long-term care insurance.
Brokers, in a wider sense, operate in various industries, such as customs, home mortgages, real estate, and securities.
How Insurance Brokers Work
Insurance brokers represent you (the insured or insurance seeker), not insurance companies. While they can propose insurance policies for an insurer, they don’t have the legal authority to act on the company’s behalf. For example, a broker would not have the power to issue a policy or set a policy’s premiums.
Note: Brokers can handle 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 scour the market for you, comparing policies’ coverages, optional coverages, rates, and terms and conditions. Once you choose a policy, the insurance company or its agent must complete the transaction.
According to a report by the United States Government Accountability Office, insurance brokers and agents must get a state license and follow insurance regulations. To qualify for a license, a broker must meet strict requirements. For example, 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 getting a license.
What Is the Difference Between an Insurance Broker and an Insurance Agent?
Captive agents, unlike brokers, work only for one insurance company. Carriers also sell policies through independent agents. An independent agency may offer policies from several insurance companies or just one. Captive agents and independent agents act on behalf of insurance companies and are their legal agents.
Note: A broker may work on their own or through an agency, but they don’t represent insurers. Instead, their role is to represent the policyholders they serve.
Some state insurance codes impose fiduciary obligations on brokers that require them to act in the consumer’s best interest, and require them to reveal all sources of their income.
Usually, captive and independent agents have the power to bind coverage. This means that they can verify a policy is in place. Brokers, however, often lack the power to bind coverage. Like brokers, independent insurance agents earn commission or charge a fee.
Advantages and Disadvantages of Insurance Brokers
- Advantages
- Efficiency
- Expertise
- Flexibility
- Disadvantages
- Potential fees
- Requires verification
Advantages Explained
Efficiency: When you purchase a policy through an insurance broker, the broker does most of the work for you.
Expertise: A broker can look for policies that match your needs, gather quotes, and find discounts that insurers might not advertise. Since brokers don’t work for an insurance company, they can compare among various carriers to find you the best coverage.
Flexibility: Skilled brokers know the fine details of the insurance policies they provide. They can answer your questions and guide you on insurance companies and coverage that’s right for you.
Disadvantages Explained
Potential fees: An insurance broker may charge fees. Fee amounts and how often you have to pay them can differ, depending on your state’s insurance code.
Requires verification: Whenever you purchase insurance, you need to check that the provider and broker have a license to sell policies in your state. The National Association of Insurance Commissioners offers 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 understand the insurance market.
First, consider what insurance shopping involves. Whenever you purchase 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 value, construction type, specific features, and fire services.
Note: If you use a broker, you only have to give your information once. Brokers can also help inform 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 miss.
In Summary: Individuals and businesses with complex insurance needs require the expertise of an insurance broker. Using an insurance broker can have benefits beyond saving time, because a broker can help you determine how much coverage you need, and help you avoid the risks of buying insufficient coverage.
An experienced insurance broker can evaluate the big picture for your situation. They may create a comprehensive insurance plan that includes auto, home, and life insurance policies; or help business owners obtain the extensive coverages needed to safeguard their real estate and business property, while protecting against liability claims.