What is an insurance broker?

The simplest definition of an insurance broker is this: one who sells insurance for compensation. Ta-da! Looks like we're done here! Or are we...

Sufficient as that concise wording may be in providing a base understanding of the profession, it also omits quite a bit of information that helps to distinguish insurance brokers from their comparable industry peers. The definition written out above could just as easily apply to a handful of other people and organizations in the world of insurance.

So let's go ahead and set the record straight.

What does an insurance broker really do?

Yes, a broker sells insurance. But for that person to truly be considered a broker, he or she must be representing the insurance buyer—and no one else.

In the same way that a tutor meets with students for no other reason than to help them comprehend academics as well as possible, or a lawyer represents clients with the sole objective of bringing about the optimal legal outcome for them, insurance brokers exist solely to find insurance buyers the best insurance for someone in their particular circumstances. They provide a service that requires a fairly intimate knowledge of their industry—that is, if they plan to do their job well.

According to the Insurance Brokers Association of Canada, these are the specific services a broker performs: assessing one's individual needs and obtaining quotes, finding the best rates and conditions by comparing company policies in an unbiased manner, actively suggesting and searching for discount opportunities (e.g. bundling), demystifying fine print and unfamiliar terms, organizing and sharing administrative follow-up, providing expert advice when necessary, being available for questions, and ensuring that claims are being fairly handled by insurers.

Which brings us to our next section...

When are brokers not involved with insurance sales?

Insurance brokers are just one avenue through which an insurer can ensure that its products get shopped to the public. Before resorting to print, visual, or auditory advertisements, there are some other human-performed roles that fulfill that function.

If it's not a broker that is arranging the sale of an insurance policy, then it's probably an insurance agent. The difference between an agent and a broker lies in who they represent. As outlined earlier, brokers always represent clients directly. They scour the insurance landscape and try to come back with the product that will best serve the buyer. Agents work differently. They are still intermediaries, but instead of representing the buyer, they are representing the insurer(s).

That may seem to imply that agents don't really have a buyer's best interests at heart, but that simply isn't true. Yes, agents have less of a product pool to draw from; however, at the same time, their role also makes it exceedingly likely that they'll have a more intimate knowledge of that company's products. Perhaps they might even be able to offer prospective buyers a deal that unaffiliated brokers cannot.

Sometimes an insurer really does all the groundwork itself, without the services of an agent or broker. When that happens, it is called a direct writer.

How are brokers and agents compensated and regulated?

Having read all of this, it would be natural to wonder what the incentivization structure is like for insurance salespeople. Obviously the nature of business dictates that it would be in their best interests to sell as much as they can. But how can that be fair for the customer?

Though there have been and will continue to be instances of insurance professionals scamming the industry—as is the case with most industries—things have been set up so that incentives usually align as they would for other commercial transactions.

Most insurance salespeople, be they brokers or agents, are compensated primarily through commissions. Even though brokers don't work directly for an insurer, their work still benefits insurers, and they are compensated by insurers because of it. Whenever brokers complete a sale, they are rewarded with a commission. Agents may be salaried, but they still receive commissions for individual sales as well; the value of which will likely be smaller if they are getting paid as a full-time employee.

In Canada, insurance is regulated on a provincial basis. Each province has organizations that exist to provide oversight of the industry, advocating for consumers, insurers, or both.