Wednesday, May 14, 2014

Ruminating on Insurance Agents, Brokers, Producers

In the insurance industry, the terms 'Agent', 'Broker' and 'Producer' are used interchangeably many a times. But in different markets, they have different meanings and also governed by different regulations. Jotting down the information I have gathered after discussions and Q&A sessions with my friends in the Insurance industry.

  • Agents have a primary alliance with the insurance carrier, whereas Brokers have a primary alliance with the insurance buyer. But in the Healthcare industry, both the terms are used interchangeably and agents/brokers are also called as 'Producers'.
  • Agents can be 'captive' or 'independent'. A captive agent only represents a single insurer. He is typically on the salary rolls of the carrier and earns a commission on every policy he sells. An independent agent can represent multiple insurance carriers. Independent insurance agents are not on the insurance carriers salary rolls and earn only commissions. Several insurance carriers may authorize an agent to sell for them. 
  • Independent insurance agents may also work with insurance intermediaries, that aggregate quotes from multiple insurance carriers and allows the agent to compare and select the best fit for the customer. Independent agents also provide packaged policies - for e.g. combining auto and home insurance as a single policy. The customer benefits with lower premiums. 
  • Both captive and independent agents have a contract with the insurance carrier that details out the the binding authority of the agent - essentially the authority to bind a policy on the insurer’s behalf.
  • Brokers typically do not have the authority to bind policies. Since brokers cannot bind policies, they have to obtain a binder from the insurance carrier. A binder is a legal document that serves as a temporary insurance policy for around 30 days, and must be signed by a representative of the insurer. A binder is replaced by a policy, once the policy is generated.
  • Brokers may or may not earn commissions from the insurance carrier. They get a flat fee from the insurance buyer for their services. 
  • Brokers can be retail or wholesale. Retail brokers directly engage with the end customers. Sometimes for very specialized insurance needs, retail brokers may contact a wholesale broker. For e.g. a wholesale broker can specialize in auto-manufacturing liability insurance, etc. 
  • Commissions are of two types - a flat (base) commission that is paid for every policy sold and a incentive commission if a particular volume is met or other growth targets are met. There is a lot of debate on the incentive commissions received by independent agents and brokers. This is because these bonuses may affect the neutrality of broker who is supposed to represent the insured. In many countries there are regulations around brokers providing disclosures to customers on the commissions that they would earn.