Insurance Agent vs. Insurance Broker: What’s the Difference?

Both an insurance agent and a broker will help you obtain insurance policies.¹ Agents and brokers exist in all lines of insurance, including auto, home, and life insurance. They are licensed in the state that they do business in to solicit and transact insurance business.

The fundamental difference between the two is that the insurance agent works for the insurance carrier, while the broker works for the consumer. That may seem odd, since both are helping the consumer buy insurance, but as we look at what the agent versus broker can and can’t do, we start to see how the difference affects the insurance buyer.

Because insurance agents work for the insurance carrier, they can complete insurance transactions. This is called binding a policy. If an agent takes a payment on the insurance application, it is said to be bound. That means coverage has started.

Essentially, the agent is acting as a limited field underwriter to start the policy. Brokers can’t bind coverage; they only facilitate transactions.

But because brokers are not tied to any specific carrier, they can present more policy options to consumers. This is different from agents who can present only insurance policy options from the carrier(s) they are appointed with. An agent may be with one or more carriers but will still be limited to offerings from those carriers. Ultimately, the insurance broker is able to offer more comprehensive options from a broader range of insurance carriers.²

Insurance agents represent the carrier to the public. To do so, the carrier must appoint the insurance agent. The appointment is public information listed with the state insurance commissioner. There are two types of insurance agents: captive agents and independent agents.

Captive Agents

Captive agents work specifically with one insurance carrier and usually have a contractual agreement to not represent any other carrier.³

A great example of a captive insurance agent is a State Farm agent. This person is appointed with State Farm and only State Farm. They are contractually forbidden to represent other insurance carriers. They will present only State Farm policies and prices to consumers and manage the book of clients. By managing it, they take care of many of the servicing issues that arise and get paid commissions to sell policies.

Independent agents are appointed with multiple carriers but still represent the company to the consumer. In other words, they work independently of insurance companies. Consumers may buy policies from companies like The Hartford or Liberty Mutual through an independent agent. The agent will talk to the consumer to find out what they need and shop the policy needs around among the carriers that they are appointed with.

Many people confuse independent agents with brokers. They are not the same. The agent can only present policies from carriers they are appointed with, while the broker doesn’t have this limitation. Additionally, independent agents make money based on commissions the insurance carrier pays them, whereas brokers may charge a fee on top of the commission.

Insurance brokers have no contractual bond to an insurance carrier. This means they can find and present an unlimited number of options to consumers. Consumers often use brokers when they are shopping for the best price or have a policy that is difficult to get issued. There are three types of insurance brokers: retail brokers, wholesale brokers, and surplus lines brokers.

Retail brokers work with consumers to help them buy insurance. They solicit policies from various insurance carriers based on the consumer’s needs.

Note that the insurance broker may not be able to solicit insurance from every carrier, as captive agent scenarios usually don’t allow brokers to get policy details from captive carriers. However, all other carriers are fair game for brokers to solicit policies from. A broker is specifically licensed with the state’s insurance commissioner to solicit policies.

Wholesale Brokers

Retail brokers may not be able to find the right policy for a special need. This is where a wholesale broker comes in.

The wholesale broker works with retail brokers to help place specialized policies that satisfy a very specific need. An example would be a policy for high limits or a business policy in an industry with increased risk, such as coverage for more than $1 million in liability. Wholesale brokers don’t typically work with the public, but with the primary broker on behalf of that broker’s client.

Surplus Lines Brokers

A surplus lines broker is the middleman between the wholesale broker and the insurance carrier capable of handling high-risk insurance categories. These insurance carriers are called excess and surplus lines insurance carriers. They typically offer coverage for things that other carriers won’t insure, such as these areas:

• People with a high loss history
• New ventures
• High liability limits
• A new type of risk coverage
• Complex coverage (e.g., a motorcycle or chemical factory)
• Dangerous activities such as long-haul drives

The difference between an agent and a broker really lies in the insurance seller’s loyalty. The agent is loyal to the carrier they represent. This carrier may not have the best price or best policy for the consumer, but it is all the agent has to offer. The broker is loyal to the consumer, shopping for a policy that best fits their buyer’s needs.

With this difference comes a key consideration: how quickly a consumer can get insurance. Because the agent can bind coverage on behalf of the carrier, they often have a leg up on getting a policy to a consumer quickly. The broker must wait for the insurance carrier to issue the policy. This could pose a problem for some consumers who can’t get a policy issued quickly.

When an agent sells a policy, they also become the contact person for servicing the policy. They often have access to back-end office engines that help them make address changes, update the policy, and take payments.

This is different from a broker. Once the broker sells the policy, the insurance carrier becomes the party that services the policy. So the consumer may buy a policy from the broker, but then they will need to deal directly with the insurance carrier for servicing and claims.

There’s a lot of confusion among consumers about insurance agents and brokers, because both can secure insurance policies for the consumer. Both agents and brokers are considered industry experts and can advise clients on how to protect themselves against risk with insurance policies.

From the consumer’s perspective, they only see a person who helps them purchase insurance. This happens whether you go to an agent or a broker. Consumers rarely see most of the nuanced differences between the two, which is why a lot of confusion still exists.

Anyone who has worked as an agent or broker knows that this is a sales job. Both parties make money based on selling policies. They don’t get paid to simply represent companies; they need to sell policies to generate revenue.

Both an agent and a broker make money on insurance commissions. Insurance carriers pay a percentage of the policy premium to the agent or broker. The consumer doesn’t pay the commission, and it only applies if the policy is underwritten.

Some brokers also charge brokerage fees, which affects the cost of insurance. Brokerage fees are fees for the service on top of the commission. Consumers pay these amounts, not the insurance carrier.

It’s important for consumers to know that they can buy and cancel the insurance policy and get a refund on any unearned premium. However, broker fees are nonrefundable in most cases and an added cost to buying insurance.

There’s no simple answer to the question of what’s better, an agent or a broker. Both an agent and a broker can get you the insurance you need. For someone who is concerned about shopping for the best price, the broker might be able to find the cheapest policy, but if there are fees on top of that, it might negate the benefits of using a broker. Fees may be as high as $250.

Some people have brand loyalty, meaning that they know they want to use a specific insurance carrier. In this case, finding an agent who is appointed with the carrier can get them the policies quickly. Ultimately, there are pros and cons to both.

Using an agent or broker is a primary way that many people shop for and buy their insurance. However, it is possible to go to the carrier directly and purchase a policy in some cases. While you can’t do this with carriers that have captive agents (like State Farm), you can do this with places like The Hartford and Liberty Mutual.

Buying the policy directly from the carrier is often simple. You can call the customer service line directly and speak with a licensed company representative who works on salary (rather than commission), or you can apply for insurance online with no personal information. More and more companies are making the online process of buying insurance easier with less “insurance speak.” There are also online insurance platforms that help consumers find policies to fit their needs.

Keep in mind that you don’t save money when buying direct. It would seem that if the insurance carrier doesn’t need to pay a commission, it can pass those savings on to the consumer, but this isn’t the case. The premium will likely be the same whether you go through an agent, through a broker, or direct. You might just prefer to cut the middleman out of the process when buying insurance.

Understanding the difference between agents and brokers can help you find the right party to meet your insurance needs. Both can help you obtain insurance, but an agent’s loyalties are to the insurance carrier, whereas a broker’s loyalties are to you, the consumer. However, be mindful of fees that brokers may charge to make sure you are truly getting the deal you expected.