The distinction between insurance brokers and underwriters is not well understood. Yet, learning the key differences between the two is important for understanding the process of acquiring insurance and how premiums are determined.
While insurance underwriters and brokers are in some cases assumed to play the same role, it is important to know their duties vary in very significant ways. Below we discuss how the two mainstays of the insurance business differ.
We will talk about brokers first:
What Is An Insurance Broker?
A common understanding of a broker is that of a person or entity who acts as a commercial representative of another. In most cases, they operate as an extension of another business, appointed to canvass for customers in a specific territory. For their efforts, they are paid commissions.
But there’s an important difference between how a regular broker or brokerage works and how an insurance broker operates. While standard brokers represent the commercial interests of a business, an insurance broker represents the person on the other end of the transaction – the insured.
So, in practice, an insurance broker is an intermediary who advises and procures a policy or contract of insurance on behalf of an individual or organization. Their allegiance is to the insured, not the insurer.
Insurance brokers are trained in risk analysis and use their expertise and experience to advise people on which policies to buy. Their duty is to make sure the insured get fairly priced and adequate insurance cover.
Are Insurance Brokers The Same As Insurance Agents?
To many people, insurance brokers and agents do the same thing. But do they really?
To answer this question, insurance agents are different from brokers. Yes, their roles do overlap and on the surface, they seem to function in similar ways. Again, as we pointed out when we separated insurance brokers from regular brokers, there is one key difference between insurance brokers and agents. It is to do with who they represent.
An insurance agent represents the insurance company while the broker looks after the interests of the insured party. Agents operate under appointment by the insurance company. They must have a contractual agreement to sell insurance on behalf of the insurance company.
The agreement between the insurance company and its agent will also specify which products the agent can sell and the commission they will earn for doing this work. This means the agent will have the authority to grant policies and to bind coverage for certain risks.
Insurance agents may represent one insurer, in which case they are called captive agents. Or, they may be independent agents, which means they represent several insurers.
Brokers, in comparison, represent the insured, providing insurance advice, completing insurance applications, and in some cases making claim requests. Brokers do not have any power to bind coverage or approve applications for policies.
Who Pays Insurance Brokers?
Insurance brokers draw their income from the commissions they earn from the insurance policies they procure on behalf of their clients. So, in effect, they are paid by the insurance companies with whom they place your insurance.
You’re probably asking if this doesn’t raise conflict of interest concerns:
As a consumer, it is a valid concern. Every broker will tell you they will always prioritize the insured’s best interests. And that’s what’s required of them.
Where you feel your broker has acted unscrupulously there are ways you can get recourse. You can report the matter to your state’s insurance commissioner who may institute proceedings to have the broker deregistered.
What Is An Insurance Underwriter?
An insurance underwriter evaluates insurance applications to determine if the risks for which people seek cover are insurable and at what premiums. Underwriters, in fact, work in any field where businesses charge money for assuming other people’s risks, like in banks where they assess loans and determine interest rates.
When you underwrite you are essentially promising to restore, at a fee, an entity after the occurrence of a specific risk. The term has its origins in marine insurance where an insurer would write their name under the stated risk for which they are promising to cover a shipowner.
In modern practice, however, an underwriter commonly refers to a person employed by an insurance company to evaluate insurance applications and to determine what premiums the insured should pay. But most of the work is done using software and actuarial data. The underwriter will only intervene in special cases.
So, an underwriter works for the insurance company. Their work differs greatly from what insurance brokers do. But do their roles ever overlap?
Do The Roles Of Insurance Brokers And Underwriters Overlap?
Insurance agents and brokers perform complementary tasks but their roles do not overlap. In fact, the two do not normally deal directly with each other.
Where a broker is unhappy that their client’s application was unfairly appraised by the underwriter they would still not approach them directly. They will have to go through the insurer’s ombudsman or customer service people.
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