The terms "insurance agents" and "insurance brokers" are often used interchangeably and they may be thought of as the same job, but there are differences. The main difference is in the perspective of each insurance professional.
Is an agent or a broker best for you or your business? To make that decision, you first have to understand the differences between them.
Insurance agents generally represent insurance sellers and act as a conduit to present information to insurance buyers. Buyers choose from available policies and contract with the insurer through the agent.
Insurance agents have contractual agreements — known as appointments — with insurers that set up the guidelines for the policies that they can offer and the agent’s compensation. An agent dedicated to one insurance company’s products is known as a "captive agent," while "independent agents" can align themselves with multiple insurers.
Independent insurance agents are able to compare policies from multiple vendors, but that does not mean they have access to all policies from all vendors. A captive agent may have exclusive access to a policy that is best for your particular situation.
What if you don't know enough to assess accurately the best policy for your particular situation? Agents may or may not have sufficient business experience to advise you (since they represent insurers and not businesses). This is where an insurance broker comes into play.
Insurance brokers generally represent insurance buyers. As representatives from the buyer's side, insurance brokers are truly independent. They do not have contracts with specific insurers (in other words, they are not appointed by insurers). Brokers prepare applications to insurers on behalf of their clients.
During the implementation period, brokers acquire a binder (a temporary policy signed by a representative of the insurance company). After the transition period, usually 30 to 60 days, a policy is issued that replaces the binder.
Brokers can be retail — dealing with specific buyers — or wholesale — dealing with specific industries and situations (e.g., product liability in a particular field).
In order to identify the best insurance contracts for your specific needs and prepare applications to the insurance companies, brokers are obligated to assess your business situation for the best fit between policies and needs. To do this properly, brokers need a comprehensive in-depth knowledge of many insurance products and the experience to recognize and handle unique insurance situations.
This comes with a price. Brokers often charge administrative fees or higher premiums than the fees an agent would charge. Also, while brokers should have the expertise to find you the best insurance policy to match your requirements, there is no guarantee that all of them do. Do not be afraid to ask for references before choosing a broker, or contact the insurance regulatory agency in your state.
Aside from the fact that both insurance brokers and insurance agents are mediators between the insurance company and insurance buyers, there are other areas of common ground.
- Both must be properly licensed by the regulatory agency in their state and adhere to the regulations of that state.
- Both may be compensated by either salary or commission. It is smart to ask for a compensation disclosure statement to see if your agent or broker has incentive clauses — although they are both ethically bound to find you the coverage you need at a reasonable price.
- Both may have accreditations. There are a dizzying number of acronyms (AIM, CIC, CPCU, CRM, RHU, etc.) offered by agencies such as the Insurance Institute of America, the National Underwriting Company and the National Alliance for Insurance Education and Research. Do not be afraid to ask what the accreditation stands for, what agency issued it, and what is required to achieve this certification.
There are two distinctive approaches to shopping for insurance. The first approach is to work with a captive agent of one or more insurance carriers to learn about the features, costs and limitations of the policies provided by each agent’s company. Keep in mind that captive agents can only represent one company.
The second approach is to work with an independent agent or broker to consider policies provided by multiple insurance carriers through that agent or broker. The key benefit here is that you can quickly survey a broader array of insurance products from multiple insurance companies who are competing for your business.
And if you still find yourself confused about the difference between an insurance broker and an insurance agent, here’s all you need to keep in mind: A "captive" insurance agent represents just one carrier. While both "independent" agents and insurance brokers represent multiple carriers. For simplicity’s sake, just think of brokers as being "super" independent agents.