Insurance agent or insurance broker – two different partners for entrepreneurs

Understanding the differences between insurance agents and brokers

Entrepreneurs use insurance experts for risk protection. The article compares insurance agents and brokers to find the right partner.

Every entrepreneur covers part of their business risks with business insurance. Finding the best possible cover at the lowest possible premiums is almost impossible on your own – especially in today’s complex insurance world.

Consequently, in practice, specialized experts are called in to provide support – in most cases insurance agents or insurance brokers. What is the difference between the two insurance experts and who is better suited as a partner for entrepreneurs due to their special features?

Insurance agents

Insurance agents are commercially active natural or legal persons who are commissioned by an insurer to broker and conclude insurance contracts on the basis of a contractual agreement. The underlying contract obliges the agent, as an independent trader, to broker policies exclusively from the respective insurer to interested private individuals or companies. The insurance agent therefore has a close relationship with the insurer and is therefore in practice more on the insurer’s side than on the policyholder’s side. As a rule, the insurance company provides the insurance agent with a power of attorney to receive declarations directly on behalf of the insurance company.

Insurance agents can be divided into the following sub-types according to their appearance and contract design with the insurers:

  • Exclusive agents,
  • multiple agents,
  • occasional agent and
  • sales employee of the insurer.

The exclusive agent is the form frequently encountered in practice. In this case, the agent works exclusively for one insurer and is usually closely bound to this insurer by a contractual non-competition clause. He therefore only offers his customers insurance solutions from his contractual partner and naturally does not have to justify this one-sidedness.

Typical exclusive agents work for large companies such as Allianz, Gothaer or Nürnberger Versicherung.

Multiple agents broker contracts for several insurance companies; they are therefore not or only partially restricted by a contractual non-competition clause. In this form, it is also conceivable that the agent works for competing insurance companies. Due to their tied nature, multiple agents do not have to explain to their customers that they offer products from their contractual insurance companies.

The occasional agent – as the name suggests – is only active in the brokerage of insurance contracts in individual cases (occasionally). Apart from his unregulated activity, he is to be equated with an exclusive agent.

The sales employee of an insurer is not an insurance agent in the true sense of the word; rather, he is a dependent employee. However, with regard to the conclusion of contracts and (auxiliary) liability, they are treated in the same way as insurance agents.

Insurance broker

In contrast to an agent, an insurance broker does not work for an insurance company, but for the policyholder: his client. The broker therefore arranges and concludes insurance contracts in the interests and for the benefit of his client.

According to the definition, the insurance broker is a “fiduciary trustee of the entrepreneur, who as such is obliged to safeguard the interests of his policyholder to the best of his ability”.

The decisive difference to an insurance agent is that the broker is independent of the insurance companies. While the insurance agent only brokers the insurance policies that he contractually “represents”, the independent insurance broker explores the entire insurance market to find the best offer for his customer.

The basis for the cooperation between broker and client is a brokerage contract, which regulates all essential conditions of the business relationship. The insurance companies play no role in this contractual relationship.

However, the broker’s duties are not limited to the one-off brokerage of optimal insurance contracts, but also include ongoing support through administration, claims settlement and advice on the entire insurance package.

As the broker is independent and unbound, he must provide his client with a documented explanation of why he has opted for the offer of a particular insurance company. The insurance agent does not need to provide this justification.

The broker does not have to consider offers from direct insurance companies that do not reimburse brokerage commissions (brokerage fees) in order to reduce their distribution costs, among other things, and does not have to justify this. This means that anyone wishing to benefit from the low premiums of direct insurance companies must go directly to these providers to conclude a contract without an intermediary partner.

Another major difference between insurance brokers and insurance agents is liability. As there is a direct contractual relationship between the policyholder and the broker, the latter is personally liable to the client for his own misconduct and that of his employees. The prerequisite is, of course, that a breach of duty by the insurance broker can be proven. If the broker is not responsible for the breach of his contractual obligations, he bears the burden of proof.

Significance of the distinction between broker and agent

The distinction between broker and agent is not always easy to make in practice – also due to the many special forms of arrangement. This differentiation is important when legal questions of attribution arise. If, for example, it needs to be clarified whether the actions of an intermediary are attributable to an insurance company, this is generally the case for insurance agents, but not for insurance brokers.

The effective conclusion of an insurance contract can also be relevant for the distinction. While the insurance agent negotiates and concludes directly for the insurance company, the broker merely forwards offers and declarations. The independent broker is authorized by his client, but usually not by the insurance company.

While it is rare for an insurance agent to be personally liable to a policyholder, liability claims against insurance brokers are more common due to the direct contractual relationship with their client.

Who is the right partner for entrepreneurs?

Having emphasized the background and significance of the distinction between insurance agents and insurance brokers, the final question is who can be a suitable partner for entrepreneurs in the complex and multi-layered world of insurance.

A key point in the broker’s favor is their independence and commitment to the client. The fact that the broker’s advisory and support duties are generally more comprehensive also speaks in their favor.

It is true that both insurance agents and brokers support the policyholder in the settlement of claims. In certain cases, however, the agent’s dependence on the insurance company will deliver poorer results for the client. The broker is independent of the insurance company and may take a harder line with the insurance company when settling the claim.

In the event of liability claims, the policyholder will also be in a better position compared to an insurance broker. The existence of a brokerage contract provides a much more tangible basis for claims than a “loose” relationship with an insurance agent.

As with any complex environment placed in the hands of an external advisor, the performance of an insurance broker can be superficial. His results depend not only on his personal commitment, but also on his expertise, his knowledge of the industry and the market, and his negotiating skills.

When in doubt, an insurance agent will always be able to fall back on a broad network of experts within the associated (major) insurance company. An independent broker is often left to his own devices and his personal network.

As with so many decision-making issues, every entrepreneur must ultimately make a decision for themselves and take their individual characteristics and experience into account. Whatever the decision, in almost all cases it will be better to rely on a swimming expert in the insurance shark tank instead of paddling off on your own, inadequately equipped and inexperienced.

Vor über 30 Jahren wollte Nikolaus Zöllner wissen, wie Unternehmen funktionieren und wie man sie besser machen kann. Ein Studium der Betriebswirtschaftslehre und langjährige Erfahrung in einem mittelständischen Unternehmen lieferten Ansätze und praktische Umsetzungen. Alle gesammelten Erfahrungen fließen in seinen Blog; der den Lesern betriebswirtschaftliche Themen mit hohem Praxisbezug bietet.

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