Insurance agency vs. brokerage: which should you choose?
Insurance agency vs. brokerage: which should you choose? | Insurance Business America
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Insurance agency vs. brokerage: which should you choose?
Find out more about the differences between an insurance agency vs. brokerage, especially if you plan to launch an insurance business. Read this guide to help you decide
Guides
By
Ramon Berenguer
It’s a safe bet that most people do not know the difference between an insurance agency and an insurance brokerage. In fact, the two different terms are used interchangeably, further contributing to the confusion.
There are major differences between an insurance agency vs. brokerage. When choosing between establishing either one of these ventures, it’s sound business practice to know their differences. After all, being successful in business means knowing the challenges beforehand and assessing whether you have the right skills and resources for success and maximize profit.
It’s also important to know which of these businesses suit your personality and preferences. For example, insurance agencies represent one or more insurance companies while insurance brokers represent their clients. Would you prefer to transact business with big entities or deal with companies and individual clients?
In this article, Insurance Business offers would-be business owners the information they need to help them decide between an insurance agency vs. brokerage.
Perhaps the main reason why many people mistake insurance agents and agencies for insurance brokers and brokerages (and vice versa) is that both essentially perform the same function.
Insurance brokers and agents serve as the bridge between individuals and companies that sell insurance. They primarily assist their clients in finding suitable insurance coverage they need at a fair price.
As for their differences, here’s where insurance agencies vs. brokerages differ:
Representation
Insurance agents represent the insurance company and typically have extensive knowledge about the insurance coverage offered by the insurance companies they represent.
Insurance brokers, meanwhile, represent the consumer and offer them expert advice. Brokers are obliged to work in their clients’ best interests.
Policy initiation and accountability
It’s the insurance agencies that have the prerogative to start insurance policies, while brokers must have an insurance binder. When dealing with an insurance brokerage, the insurance binder must be signed by the insurance company’s underwriter before starting an insurance policy. The insurance binder is a temporary legal document, which is later replaced by a permanent insurance policy.
Compensation
Insurance agents and insurance brokers have different pay structures. In general, insurance agents earn commissions from insurance companies when they sell insurance policies. Meanwhile, insurance brokers can charge a broker’s fee in addition to earning commissions.
Legal responsibility
In most cases, since the insurance broker represents their clients, brokers work in the interest of their clients. This intersection of ethics, legal responsibility, fiscal prudence, and insurance rules is commonly known as the fiduciary duty. As for insurance agencies and agents, they are typically not held to a fiduciary duty.
What this means is when it comes to their legal responsibility, anyone who sues an agent for issues like breach of fiduciary duty may not see their case prosper. Whereas if you’re a broker or run an insurance brokerage, your clients can sue you if they find that there was a breach of fiduciary duty on your part.
Legally speaking, an agent is a person or entity who acts on behalf of another person or group. When applied to insurance, an agent can represent one or more insurers or insurance companies. It’s the insurance agent’s responsibility to distribute insurance products (insurance policies) from the provider they serve. There are two types of insurance agents:
1. Captive agents
These insurance agents work for a single insurance company. They can be full-time employees or independent contractors. The insurance company they work for can provide them with operational support, like an office and/or administrative staff. Captive agents receive referrals and potential clients from the insurance company they work for.
2. Independent agents
Insurance companies may also enlist the services of independent agents. These are agents who work for several different insurance companies. Since they are not exclusively employed by one insurance company, they can offer a wider range of insurance products. This also means that independent agents have a larger distribution network compared to captive agents.
An insurance broker works like a middleman who is well-versed in insurance and legally represents individuals or businesses who need insurance. As opposed to agents, insurance brokers are bound by a fiduciary duty to their clients in some states.
Compared to insurance agents, insurance brokers typically work with their clients to determine their specific insurance coverage needs, then assemble the best insurance plan to meet these needs.
And while they are not limited to selling insurance policies from only one insurer, brokers can shop around for insurance policies from multiple insurance companies.
A broker will work with their clients to identify and put together the best possible insurance plan for their specific coverage needs. They have no obligation to sell policies from one insurance company or another, meaning they can shop around to find the best policies at the best prices according to their clients’ needs. There are also different types of brokers, which include:
1. Retail brokers
This is a type of insurance broker who works closest with their clients. Retail brokers work in a very detailed manner, determining their coverage needs and finding the most suitable insurance policies.
Retail brokers can recommend that clients purchase their insurance directly from an insurance company or from wholesale brokers. More generalized, less complex insurance policies that cover common risks are the forte of retail brokers.
2. Wholesale brokers
These insurance brokers sell insurance products that are more specialized. One advantage wholesale brokers have is their large customer base – they can sell products from multiple insurance carriers to both retail brokers and insurance agents.
Another unique feature of a wholesale broker is that they don’t have to interact with clients or work with them to understand their needs. Wholesale brokers operate in stark contrast to retail brokers, who must work closely with clients, and they offer more specialized insurance products that cover more complex risks.
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3. Surplus lines brokers
Surplus lines brokers can be retail or wholesale. They specialize in providing insurance to clients that are greater or riskier than the admitted market is willing to provide coverage for and insure. Whenever a client has a business that requires more specialized insurance policies or a greater-than-average risk, they turn to surplus lines brokers for coverage.
Businesses or industries that have a substantial risk or history of claims and losses may have to buy insurance coverage from a surplus line broker if they’re viewed as too risky for standard insurance companies. Apart from the maritime cargo industry, for example, cannabis industry is now a prime customer for insurance provided by surplus line brokers.
Here’s a short video that explains the differences between insurance agents and insurance brokers. Do note that the video is from the client’s point of view. However, the explanations should be helpful for those thinking about setting up an insurance business.
From a business standpoint, choosing between running an insurance agency and an insurance brokerage offers different sets of advantages and disadvantages. For instance, brokers must exercise more diligence when it comes to recommending insurance policies to individual or business clients, thanks to their obligation to adhere to the fiduciary standard.
Whether you choose to set up an insurance agency or brokerage matters in several aspects, like how you compensate your agents (by commission) or your brokers (via commissions and brokers’ fees).
Another way your choice affects your business is how you deal with clients. Brokers, due to their legal obligations to act in clients’ interests, are expected to offer more tailored insurance solutions. Insurance agents, meanwhile, can afford to have a more hands-off approach.
The decision as to which type of insurance business to set up and operate is not a simple one. Whether you choose either type of business can boil down to factors like:
Cost
Regardless of the type of insurance business you decide on, it can have significant startup costs. You can use this guide to determine the cost of putting up an insurance company, whether it’s an agency or brokerage.
In a nutshell, the cost of starting an insurance company can range from $50,000 to $500,000. This can include a long laundry list of costs and expenses, like office space, recruitment, operating expenses, license fees, and more.
Specialization
As detailed in a previous section, once you put up an insurance company, you will have to decide on what type of agency or brokerage you wish to operate.
As an insurance agency, you can be captive or independent. If you operate as an insurance broker, you can choose to be a retail, wholesale, or surplus lines brokerage. Your choice will depend on your comfort level for risk and client engagement.
Pay structure
As the business owner, you must decide how to pay yourself and your employees or contractors. Will you have a steady salary, commissions, fees, or combinations of these? Will you offer the same to your employees or contractors and can you afford to do so?
Level of engagement
Would you prefer to have a hands-on or hands-off approach when dealing with clients, both current and potential? How comfortable are you with having a fiduciary duty to your clients? These can also impact your choice between an insurance agency or brokerage.
Level of risk
The type and level of risk that you are willing to take can heavily influence your business choice as well. Insurance agencies generally have less risk compared to brokerages due to fiduciary duty. The sort of industry you want to service and insurance products you want to offer have their own risks as well.
Here’s a summary of the key similarities and differences between insurance agencies and brokerage firms:
Variable
Insurance Agency
Insurance Brokerage
Cost
$50,000 – $500,000 or more
$50,000 – $500,000 or more
Fiduciary Duty
No
Yes
Risk level
typically less risky
can be riskier if surplus lines brokerage
Payment schemes
commissions
commissions + fees
Clients
insurance companies, then sell to businesses or people
direct to people or businesses
Insurance binder
No
Yes
Can initiate insurance policies
Yes
No (binder is required first)
Client relationship
can be less personal
very personal
Choosing between insurance agency vs. brokerage ultimately depends on the stakeholders’ risk appetite, startup budget, and time horizon for their ROI. A good way to arrive at the most informed decision is to consult with a financial expert and determine which business is more viable.
Did you find this comparison between an insurance agency vs. brokerage helpful? Let us know which type of business you are considering in the comments below.
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