by Jason Odgers, SVP, World Insurance Services
In the vast landscape of insurance service providers, consumers may interact with insurance companies, insurance agents, insurance brokers, managing general agents, managing general underwriters, wholesalers, and third-party administrators, to name a few.
What’s the difference between each? Why does it matter?
Some insurance service providers operate in multiple capacities, and many of these terms are used interchangeably. This may obfuscate the roles, responsibilities, and motivations of your chosen insurance provider.
While all are important to the insurance industry, consumers should be aware of the differences and clearly understand the implications of working with each. Failure to do so could result in a misalignment of priorities and a risk management program that favors the insurance service provider at the expense of the consumer.
Insurance Companies
Insurance companies assume the risk, pay claims, decide coverage, decide how much premium the consumer pays, and issue policies and endorsements.
When it comes to seeking new customers, providing ongoing customer service, administering claims, and giving coverage advice, the insurance company generally delegates those responsibilities to a competent and licensed agent or broker. In return for handling these services, the insurance company compensates the agent/broker in the form of commissions, fees, overrides, and profit sharing.
The most common point of consumer interaction is at the broker/agent level. In the realm of business insurance, few insurers work directly with the consumer. Both brokers and agents are generally considered to be the “commercial” element of the process, and both can assist the consumer with placement of coverage and ongoing policy services.
The key difference between agents and brokers is that agents primarily represent the interests of the insurance company, while brokers primarily represent the interest of the buyer/consumer.
Insurance Agents
Insurance agents may work for one (“captive”) or multiple (independent) insurance companies and are experts in the products of the companies they represent. Their responsibility is to present the best risks to the insurer for consideration and assist in negotiating the terms and rates that most benefit the insurer. Good agents, however, will endeavor to satisfy both the insurer and consumer.
When designated as a “Managing General Agent” (MGA), generally, they are empowered with additional authority to act on behalf of the insurer. These additional authorities may include underwriting (risk selection, assignment of terms/rates), claim adjustment/settlement, and other reporting and financial tasks.
MGA’s typically are compensated with a commission, override (bonus based on gross written premium), profit commission (bonus based on underwriting profitability), or a combination thereof. Except for assuming risk, the managing general agent is an extension of the insurance company, thus representing the interest of the insurer.
Insurance agents are limited to the insurance products offered by the insurers and MGA’s by whom they’ve been appointed, regardless of whether alternative options represent a better solution for the insurance buyer.
Insurance Brokers
In contrast, a true insurance broker is an extension of the risk management or insurance department of their client. The insurance broker maintains a fiduciary duty to serve in its client’s best interest by leveraging their extensive relationships with various insurance companies to find the risk transfer solutions that represent the best coverage at the lowest cost, which aligns closest to its client’s interest and risk management strategy.
Brokers are required to prioritize benefits to the client over those to the insurer or even themselves. Compensation typically takes the form of commissions (brokerage) paid by the insurer and represents a fixed percentage of the gross written premium. Brokers may also charge their clients fees for specific consulting or management functions performed beyond basic policy placement.
Because brokers work with so many different insurance companies and policies, they tend to be technical experts, skilled at interpreting policy language and comparing policy forms.
How to Choose?
There is nothing inherently wrong or improper with the business strategy of brokers or agents. Both must meet similar ethical standards as stipulated by the state in which they are licensed.
The sophisticated consumer who knows what they need may confidently work with an insurance agent. Agents usually deliver efficient, direct access to specific products offered by the insurers they represent.
Alternatively, when the consumer is unsure of their financial exposures or the products available and prefers an impartial canvassing of the available insurers and products, a broker is often the better choice.
How to Distinguish Between the Two
When attempting to define the relationship with a risk management partner (agent/broker), the buyer should begin with the most obvious resources available. Ask the insurance service provider to confirm the “official” capacity in which they are acting. How many insurers do they represent? Which insurer gets most of their business and why? Check out public statements, like those available on their website and printed material.
Ask the broker/agent to provide a rough estimate of the percent of total gross written premium placed with their “top markets.” The savvy insurance buyer will give careful attention to the actions of their provider. For example:
- Did they propose only one or multiple insurance company options during the original placement?
- Have they made the consumer aware of alternative solutions and “marketed” the risk more broadly to additional insurers during subsequent renewals?
- Do they represent they have underwriting, binding, or claim settlement authority on behalf of the insurer?
- What services, beyond sales, does the provider handle on behalf of the insurance company?
Before beginning a new relationship, the consumer should request references and pose these questions to them. It is perfectly reasonable to ask both agents and brokers how they are compensated and, in the case of significant policy premiums, consider negotiating a direct fee (paid by the consumer) in lieu of commission. This delivers the dual benefit of potentially reducing the overall cost of insurance by negotiating a reasonable fee based on services delivered (as opposed to premium generated), and it also guarantees the option(s) presented represent the most value for the consumer and not those just paying the highest commission rate.
Waiting until after a claim occurs is the most inconvenient time to determine that your trusted risk management “partner” was motivated by priorities other than protecting your business. Know your partner and ensure priorities are aligned. For questions or information on how to get the most value from your insurance program, please contact World Insurance Services at jason@worldinsuranceagency.com or info@worldinsuranceagency.com.