Brokerage Firm

Updated: 11 March 2024

What Does Brokerage Firm Mean?

A brokerage firm is a business that serves as a transactional intermediary between a buyer and a seller. The firm earns its income from a commission collected for every finished deal. It can also function as a professional adviser for people who engage in trading securities.

In the insurance context, a brokerage firm deals with multiple insurance companies to sell their products. This means they often have a wider selection of products to choose from to ensure their clients get the protection they need with the best possible terms.

Insurance is generally distributed in two main ways: through an intermediary such as an independent broker or through a direct writer.

Insuranceopedia Explains Brokerage Firm

A brokerage firm is mostly composed of brokers, people who buy and sell goods on behalf of others. These brokers usually specialize in securities, financial instruments like stocks or bonds. Clients go to these firms either to buy or sell these instruments. For every completed transaction, the firm earns a commission, which serves as its source of income. A brokerage firm can also give professional advice about financial matters for a fee.

Where insurance is concerned, a broker is also the term for one who sells insurance. Like the brokers at a brokerage firm, these insurance professionals earn a commission from every insurance policy they sell. In a complex insurance market like Lloyd’s of London, brokers also act as intermediaries between insurance buyers and insurance syndicates. A brokerage firm earns a commission from insurers and pay their own expenses for office space, staff, software and other costs involved in operating a business. Clients also belong to the broker, so they can place policies with different insurance companies depending on market conditions and who is able to offer a product that is most suitable for their clients.

As the intermediary between customers (insureds) and sellers (insurance companies), brokers play an important role. As a representative of the insured, brokers at a brokerage firm are responsible for helping clients evaluate their risks and match them with the insurance products that best fit them based on risks identified, budget and risk appetite. Some brokers may also conduct extra risk management services, helping them with recommendations on how to control risk outside of what insurance covers. These are important value-added services that can help create a better customer experience and generate additional revenue for the brokerage firm.

Since brokerage firms contract with insurance companies to offer their products for sale, they also act as representatives of the insurance companies and owe them certain responsibilities as well. As the intermediary between insureds and insurers, brokers are also responsible for ensuring the insurers succeed. This means collecting premiums in a timely manner for policies written and fully disclosing all material facts to underwriters when making an application. Some brokerage firms may also have additional powers provided by the insurance company, such as the power to quote, bind coverages or even handle certain claims on behalf of the insurer.

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