In this article, we will explore what insurance brokers actually do, why you might want to work with one, what to be on the lookout for, and how working with a broker compares to using an insurance agent.
What Brokers Do
Brokers provide you with a number of helpful services when it comes to buying and holding an insurance policy. Brokers will
- Assess your insurance needs and advise you on what insurance might be desirable and why.
- Compare the policies offered by different insurers, both with respect to coverage and cost.
- Look for ways to reduce your costs.
- Explain anything and everything that you do not understand about insurance.
- Provide follow-up advice at policy renewal times and at any time when your insurance needs change.
- And, last but not least, if you file a claim, they will work with you to ensure that you are treated fairly by the insurer.
How Are Brokers and Agents Different?
You might have heard or read about both insurance brokers and insurance agents. Most state laws refer to both of them jointly as "insurance producers," but they are not the same.
A broker is required to have a broker’s license. To get one, they must demonstrate significant knowledge of insurance.
Brokers that you work with are known as "retail brokers." And they don't just work with you; they work for you, not for an insurance company. They analyze your insurance needs and help you decide how much and what type of insurance you need.
They are also free to deal with any insurance company whatsoever, which means they can often get you the best rates since they will be knowledgeable about the industry, how much various insurers charge, how reliable the insurers are, what problems insureds like you might have had collecting on policies, and other insider information.
Agents are also licensed in most states, though the standards are typically not quite as high as those for brokers.
The biggest difference, however, is that agents work for one or more insurance companies, not for the policyholder. This is not to say, of course, that agents aren't trustworthy—the vast majority are hardworking and honest—but when it comes time to look for what insurance is best for you, they will only be looking at what is offered by a single insurance company, if they are captive agents, or perhaps two or three companies, if they are independent agents (if you opt to work with an agent, consult our 5 Questions to Ask Before Choosing an Insurance Agent).
And a quick mention here of two other methods of obtaining insurance.
Second, if you are looking for some extremely specialized insurance (including some very Strange Insurance), an agent or broker might end up working with a wholesale broker. These brokers do not deal directly with insureds, but with agents or retail brokers.
How Are Brokers Paid?
Brokers are paid by way of commissions, that is, they receive a percentage of the premiums that are paid to the insurer by the clients they bring to that insurer. In many cases, the percentage for the first year of any policy is higher than subsequent years. For example, if a broker writes a general liability policy with an insurance company on your behalf, they might receive 15% of the premium you pay the first year, but only 12% in all subsequent years. The percentage the broker receives varies with different types of insurance and generally follows the industry norm.
Life insurance policies are exceptional in that the broker earns most of the money in the first year. They might, for instance, receive a commission of 70% to 120% of the premium the first year, but only 4% to 6% in all subsequent years.
Because brokers are paid by a commission from the insurer, all of the services they provide you are completely free of charge. If you need advice about something concerning your insurance, call your broker and don't be worried that you will receive a bill—you will not.
What to Watch Out For
Some states allow what are known as "contingent commissions." These are commissions paid by a single insurer to a broker for a high volume of business and are in addition to the percentage paid for the regular commission.
For example, an insurer might tell a broker: "If you write $20 million in property policies for our company in the next six months, we will pay you an extra 3% in commission." This could encourage the broker to steer clients toward this particular insurer in hopes of making that extra commission, rather than looking only at the client's interests and buying insurance from the company that offers the best deal.
Also note that, while illegal in most parts of the country, a handful of states also allow brokers to charge fees directly to clients, in addition to the commissions received from the insurers.
So how should you deal with these potential issues? All brokers are required to provide you with a compensation disclosure that itemizes exactly how they earn their commissions and, if applicable, fees. Be sure to get a copy of it and read it carefully. If anything about it is unclear, don't be bashful about asking the broker for an explanation. And be sure to ask specifically about contingent commissions and fees. Many brokers do not accept contingent commissions, and in most states there are no fees, but it doesn’t hurt to ask.
Why Use a Broker?
As a general rule, it's to your advantage to use a broker. Best is to use one who has an established reputation in the community where you live. The commissions they receive have no effect on the premiums you pay. They are an invaluable source of information with respect to finding the best deals and are not affiliated with any particular insurer, as agents are. They offer you follow-up information whenever necessary, including every year when you renew your policy. And if you file a claim, they can be an ally if any dispute arises between you and the insurer.
This is not to say that there is anything wrong with agents or with direct-writing insurers (see Insurance Agents: What's the Point?), especially if you know exactly what you want, but brokers are a great option for people who need help figuring out what they need in the way of insurance.