Insurance brokers are intermediary parties who stand between the insurance companies and insurance buyers. They should not be confused with insurance agents. Insurance agents represent the insurance company. Insurance brokers represent consumers or businesses as insurance buyers.
Insurance brokers have a variety of responsibilities and roles. They are legally bound to help individuals and businesses to find and purchase the insurance coverage that they require for a fair price. Insurance brokers must also maintain the correct license to be able to sell insurance. In addition to this, a broker is required to stick to the regulations that its state mandates by the insurance department in the state.
Insurance agents are able to represent either a single or multiple insurance companies. Insurance brokers only represent the individual or company purchasing insurance. Agents can be independent or captive. Independent insurance agents have the luxury of representing a variety of insurers. Captive agents are only able to rep products for one insurance company like State Farm, Allstate, or Farmers Insurance. Brokers do not receive their appointments from insurance companies.
To become an insurance broker is much easier than to become an insurance agent. Brokers get binders from insurance companies in order to start policies. They take insurance applications from their clients and submit them to the companies. These legal document binders are like temporary insurance policies. They cover the insured individual for limited time periods like 30 to 60 days. The insurer’s representative must sign them for them to be valid. Such binders that the brokers obtain for their customers will then be replaced when the policy is ready and issued.
Insurance brokers can be wholesale or retail. Wholesale insurance brokers deal in specific types of insurance coverage. Many of these are not available to retail insurance brokers. Such coverage includes long distance trucking auto coverage and motorcycle maker product liability coverage.
Retail insurance brokers work one on one with their policy holders. Individuals are able to obtain standard commercial insurance from their retail broker. For more complicated insurance coverage they turn to the wholesale insurance brokers.
Brokers are paid in a specific way. They receive commissions on their policy sales as income. These commissions come from the premiums that insurance companies charge the policyholders. Many times insurance brokers receive base commissions as well as contingent commissions in compensation.
A base commission would be the typical compensation that insurance companies pay when the insurance broker sells insurance policies. This works out to be a percentage amount of the total premium paid. The percentage amount will depend on the kind of insurance coverage which has been sold. As an example, brokers or agents could earn 15% for selling general liability insurance policies to customers. On typical workers compensation coverage, they might receive 10% in commission.
There are also different commission levels for renewals than for initial policy sales. Many insurance companies pay out smaller commissions for renewal policies and larger ones for new policies. The reason for this is to encourage brokers to bring in new business. Where the insurance company may give 10% on new policies for workers compensation, they may decide to only pay 9% for renewals of such policies.
Insurers provide contingent commission bonuses to insurance brokers who reach certain goal levels of growth, profitability, volume, or customer retention. This has become a controversy for insurance brokers because they are intended to represent the buyers of the policies, not the insurance companies.
There have been cases where brokers obtained these contingent commissions without their customers’ awareness. Critics have accused brokers who accept these of putting customers into policies that make the broker more money. Because of this controversy, there are insurance brokers who do not accept contingent commissions anymore.