Insurance Agent VS Insurance Broker: Who is Better?

Business insurance, or commercial insurance, protects businesses against financial losses resulting from natural disasters, accidents or lawsuits. Small business owners purchase business insurance from either an insurance agent or insurance broker. Who advise clients on the various available coverages. While both insurance agents and insurance brokers are licensed professionals, what differentiates them is whom they represent.

Independent agents represent a single insurance carrier or multiple insurance carriers. While an insurance broker represents the insurance buyer. Both insurance brokers and agents follow regulations enforced by their respective state insurance departments.

Insurance Agents

Insurance agents are representatives of insurance firms on whose behalf they sell different types of insurance. There are two kinds of agents: captive and independent.

Captive agents represent a single insurance carrier. For example, State Farm sells its policies through captive agents. They are usually employees or independent contractors of the carrier and are provided with office space, training and administrative support.

However, insurance agents only sell the products and services offered by the carrier. For example, if the carrier only sells personal lines, then the captive agent cannot sell business lines. Moreover, they cannot sell another carrier’s policy even if that policy is more affordable and has better coverage for the client.

Independent agents on the other hand, represent multiple carriers. They have legal contracts with the insurer called “appointments”. The contracts specify the policies they can sell and their compensation. An independent agent can sell their client a variety of financial products such as property and casualty insurance, life insurance, etc. They help their clients make informed decisions. By advising them about various policies available to them and will help clients by reviewing their existing policies to make sure their coverage is still appropriate for their needs.

Responsibilities of an agent:

• Solicit new business
• Assess insurance needs
• Assist clients in completing applications
• Bind coverage

How do agents get paid?

Captive agents get paid depending on whether they are employees or independent contractors. Insurance agents as employees are provided salary and benefits. Whereas agents classified as independent contractors receive payment based on sales and commissions.

Independent agents are paid on a commission basis.  They receive a regular commission every time they sell an insurance policy and when a client renews their policy. Compared to captive agents, their commission splits are higher. Therefore, since they can sell from an array of companies, they have the potential to earn a lot more.

Whether they’re captive or independent, insurance companies tend to pay agents more money for new policies. It works as a reinforcement for the insurance agent to bring in new policies and strive for new business.

According to the U.S. Bureau of Labor Statistics, the median pay (salary, commission, and bonuses) for an insurance agent in 2019 was $50,940. With the lowest 10% earning less than $28,000 and the top 10% earning more than $125,500.

It’s simple: The more clients an agent serves, the more money they make.

Accountability for an insurance agent

Data from the Insurance Information Institute showed that the insurance industry collected $1.32 trillion in premiums in 2019. Wherein premiums collected by P&C insurers accounted for 48% of the total amount. State and federal laws impose certain responsibilities on insurance agents, which regulates their activities.

Agents can be sued if they: (1) misrepresent the nature, extent or scope of the insurance coverage; (2) fail to disclose material information regarding insurance coverage that the insured requested; and (3) fail to disclose requested information.

At minimum, an agent must have a high school diploma or GED, though a Bachelor’s is preferred. They must have an insurance license from each state where they intend to sell insurance. As well as a license for each type of line of insurance they want to sell. For example, if you want to sell health insurance and life insurance, you’ll need a license for each.

Insurance Brokers

Compared to agents, insurance brokers represent consumers and will do most of the groundwork for them. Brokers help clients identify their individual, family, business, or organization’s liability risks. They have a knack for understanding their client’s needs and providing them with the best coverage at the best price. Brokers know which insurance companies are competent to work with and how to handle a client’s claims and provide customer service.

Brokers don’t need appointments with insurance companies. Therefore, they have access to a broader market and can easily acquire multiple price quotes to fit a client’s needs. However, since brokers represent the consumer and not the insurance company, once a client has selected a policy, they cannot bind coverage (complete the sale) and must turn it over to an insurance agent to complete.

Responsibilities of an Insurance broker

Insurance brokers perform many tasks, and some of their roles and responsibilities include:

• Develop effective marketing strategies
• Business development and promotional activities
• Building relationships with clients and insurance companies
• Administrative tasks and maintaining documentation

How does an insurance broker get paid?

Insurance brokers earn money by collecting broker’s fees and charging commissions. When a client accepts a quote from a company and has completed the purchase, brokers then receive a commission from the insurer.

Depending on regulations, commissions vary from state to state and are based on the amount of annual premiums sold to clients. Not only do insurance brokers receive commission by selling insurance products, but they service that policy too.

An insurance broker also charges extra fees, referred to as administrative fees to execute transactions. According to Investopedia, “full-service Insurance brokers can charge an annual fee between 1% and 1.5% of total assets managed for a client.” Insurance brokers are required to fully disclose their commission rates.

Accountability for an insurance broker

Insurance brokers are individual entities. Therefore, if an insurance broker misleads a buyer, the insurance company cannot be sued. Since the insurance company does not pay the broker, they cannot be held liable for their actions.

The legal responsibility of an insurance broker is similar to an insurance agent, but not identical. According to Advocate, an insurance broker can be sued when: (1) the broker misrepresents the nature, extent or scope of coverage; (2) the insured specifically requests a certain type or extent of coverage and the broker does not include it in the policy; (3) they hold themselves out as an expert in a specific field of insurance; and (4) the insurance broker reduces coverage limits without the policyholder’s consent.

Like agents, an insurance broker must have at minimum a high school diploma or GED, but a Bachelor’s is preferred. They also need an insurance broker license from each state where they intend to work.

Agents vs. Brokers: Who do you choose?

When choosing to become either an agent or a broker, it’s important to determine which side of the equation you want to be on. As an insurance agent, you’ll represent the insurance company. But that doesn’t mean you can’t also serve as an advocate and advisor for your clients. As an insurance broker, you’ll be working for your clients and helping them research and find the best coverage for their needs. However you won’t be able to bind coverage and you’ll need an insurance agent to step in. An extra advantage that agents have is they have access to exclusive services from the insurers they are approved to sell from. Since agents are representatives of an insurance company, they can also speed up the insurance purchasing process as well.

Furthermore, if you decide to go the agent route, you’ll need to decide whether to become a captive or an independent agent. While captive agents have the support and brand recognition of a major carrier, they are limited to that carrier’s products and services. Also, their commission splits are lower than those of an independent agent. Independent agents are their own bosses, can work with multiple carriers and have high earning potential. However, all this freedom means they are also responsible for overhead, marketing and administrative tasks.

Key Takeaway

Whether you decide to become an insurance agent or an insurance broker, it’s important that you research your state’s licensing requirements and decide what lines of insurance you want to sell. You may need to complete a pre-licensing course before you can sit for the licensing exam. Whichever you decide, working in insurance as an agent or broker can be a lucrative, challenging, and satisfying career.

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