An insurance broker (also insurance agent) locates sources for insurance contracts on behalf of their customers. The three largest insurance brokers in the world, by revenue, are Aon, Marsh & McLennan, and Willis Group Holdings.[1]
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Brokers and agents are the retail side of insurance. Some insurers underwrite insurance only through brokers, who obtain raw data from layperson customers and fill out the complex forms which insurers need in order to thoroughly assess the risk they are being asked to underwrite. Some jurisdictions have special rules about how policies must be printed, assembled, and delivered to insureds, and brokers are responsible for such compliance issues.
Most importantly, brokers assist prospective insureds with developing risk management strategies appropriate to their risk profiles. They work with insureds to find out what kinds of risks they regularly encounter, and educate insureds about what policies are available for each type of risk. Often, an insured may buy a regular policy plus endorsements or additional policies to fill in exclusions in the regular policy.
Brokers can also help insureds obtain multiple layers of excess policies from different insurers over a primary policy, and can work through scenarios for reducing premiums with deductibles or self-insured retentions. For huge risks (e.g., the "slip and fall" risk of a multinational retailer with hundreds of stores), these complex strategies can be more cost-effective than buying a single gigantic primary policy (which may not even be available) to cover the entire risk from the first dollar (or euro) of loss incurred.
Insurance broker became a regulated term under the Insurance Brokers (Registration) Act 1977[2] which was designed to thwart the bogus practices of firms holding themselves as brokers but in fact acting as representative of one or more favoured insurance companies. The term now has no legal definition following the repeal of the 1977 Act. The sale of general insurance has been regulated by the Financial Services Authority since 14 January 2005. Any person or firm authorised by the Financial Services Authority can now call themselves an insurance broker.
Insurance brokerage is largely associated with general insurance (car, house etc.) rather than life insurance, although some brokers continued to provide investment and life insurance brokerage until the onset of more onerous Financial Services Authority regulation in 2001. This drove a more transparent regime based predominantly on up front negotiation of a fee for the provision of advice and/or services. This saw the splitting of intermediaries into two groups: general insurance intermediaries/brokers and independent financial advisers (IFAs) for life insurance, investments and pensions.
General insurance brokering is carried out today by many types of authorised organisations including traditional high street brokers and telephone or web-based firms.
A Lloyd’s broker is a firm of brokers that has been approved by Lloyd's of London, and having met certain minimum standards, is able to place business directly with Lloyd's underwriters.[3]
Insurance brokerage in the United States is also a regulated industry, with almost all states individually issuing brokerage licenses. Most states have reciprocity agreements whereby brokers from one state can become easily licensed in another. Over the last 10 years the Insurance Licensing requirements amongst the states have streamlined and most applications for license can be done electronically.
Because of industry regulation, smaller brokerage firms can easily compete with larger ones, who are forbidden by law from providing their customers with rebates or other discounts on the policy prices of insurance companies.
Brokers play a significant role in helping companies and individuals find property and casualty (liability); life and health insurance. For example, research shows that brokers play a significant role in helping small employers find health insurance, particularly in more competitive markets. Average small group commissions range from 2 percent to 8 percent of premiums. Brokers provide services beyond insurance sales, such as assisting with employee enrollment and helping to resolve benefits issues.[4]
Though not an absolute separation; an agent is an insurance company's representative by way of agent-principal legal custom. The agent's primary alliance is with the insurance carrier, not the insurance buyer. A broker generally has no contractual agreements with insurance carriers and relies on common or direct methods of perfecting business transactions with insurance carriers. This can have a significant beneficial impact on insurance negotiations obtained through a broker.
In Australia, all insurance brokers are required to be licensed by the federal government’s Australian Securities and Investments Commission (ASIC). Reputable and experienced insurance brokers in Australia will generally also hold additional qualifications such as a certificate or diploma in financial services which requires the completion of in depth studies in a specific area, the most common being general insurance or insurance brokering.
Within Australia there are also a number of industry bodies that issue professional accreditations to members that comply with best standards of professional practice and integrity and maintain up to date skills and knowledge. The two main accreditations are ANZIIF's CIP (certified insurance professional) and NIBA's QPIB (qualified practicing insurance broker).
Dealing with an insurance broker as opposed to directly with an insurer is something many customers (particularly businesses) choose to do in Australia for the following main reasons; the ease of having the "shopping around done for them", having the opportunity for premium funding which allows for larger insurance policies to be paid in installments rather than all at once; dealing with one broker for all policies from the car insurance to professional indemnity insurance rather than dealing directly with several insurers, and the ease of having claims managed by the broker who deals directly with the insurer on the client's behalf which typically expedites processing time and assists in achieving a favourable outcome.