Insurance intermediaries facilitate the placement and purchase of insurance, and provide services to insurance companies and consumers that complement the insurance placement process.
Traditionally, insurance intermediaries have been categorized as either insurance agents or insurance brokers. The distinction between the two relates to the manner in which they function in the marketplace.
Insurance agents are, in general, licensed to conduct business on behalf of insurance companies. Agents represent the insurer in the insurance process and usually operate under the terms of an agency agreement with the insurer. The insurer-agent relationship can take a number of different forms.
In some markets, agents are “independent” and work with more than one insurance company (usually a small number of companies); in others, agents operate exclusively – either representing a single insurance company in one geographic area or selling a single line of business for each of several companies. Agents can operate in many different forms – independent, exclusive, insurer-employed and self-employed.
Insurance brokers typically work for the policyholder in the insurance process and act independently in relation to insurers. Brokers assist clients in the choice of their insurance by presenting them with alternatives in terms of insurers and products. Acting as “agent” for the buyer, brokers usually work with multiple companies to place coverage for their clients. Brokers obtain quotes from various insurers and guide clients in determining the adequate policy from a range of products.
In some markets, there are distinctions among brokers depending upon the types of insurance they are authorized (licensed) to intermediate – all lines of insurance, property and casualty or life/health coverage. While most, if not all, brokers are active in commercial lines, some also intermediate personal lines policies. There are also distinctions between “retail brokers,” who negotiate insurance contracts directly with consumers, and “wholesale brokers,” who negotiate insurance contracts with retail brokers and agents, but not directly with consumers.
Reinsurance brokers solicit, negotiate and sell reinsurance cessions and retrocessions on behalf of ceding insurers seeking coverage with reinsurers. Reinsurance brokers can also be involved in a reinsurer’s retrocession of parts of its risk.
As a technical matter, a broker’s role may change during an insurance transaction and over the course of an on-going relationship with a client. Many brokers sometimes act as an “agent” of the insurer and other times as a “broker” of the client when assisting a client with insuring its risk exposures through an insurance contract with a traditional carrier.
For example, the broker acts on behalf of the client when negotiating the contract of insurance and placing the policy. When the broker provides services that would otherwise be handled directly by the insurance company, such as premium payments and claims handling, the broker is essentially acting as agent for the company. This unique concept makes the insurance process more efficient for both the policyholder and the insurer.
As a practical matter, regardless of the legal role in which a broker is acting, the manner in which the broker approaches all such placements for his clients is as an intermediary – working on behalf of his clients to facilitate the consummation of insurance contracts with carriers who have the ability and capacity to properly insure his risks.
Having said that, determining whether an intermediary is legally an agent or broker is not always clear-cut. An intermediary’s status is determined by the totality of the facts regarding the specific transaction at issue. An intermediary might be called a “broker,” but actually represents the insurance company in a particular transaction. In such situations, the broker is actually – and legally – considered the company’s agent, not that of the customer. Although, such an activity-based approach is increasingly used around the world, the legal status of insurance intermediaries varies throughout the international insurance market. For purposes of this memorandum, included within the term “intermediary” are insurance agents, brokers, producers, advisors and consultants.