Insurance 101: Insurance Agents vs. Insurance Brokers vs. Insurance Producers
May 26, 2021
The insurance industry has its own quirky terminology, and while some words are synonymous (carrier vs. insurer, for instance), others that are often used interchangeably actually have somewhat different meanings when you get down to the nitty-gritty.
The terms we commonly use for insurance professionals are like that. While different sources may use insurance agent, broker, and producer interchangeably, there are actually a few distinctions between them. Bear with us as we air our punctilious side, and this information may come in handy for making small talk at your next fondue party.
When discussing insurance professionals, the ones that most readily come to mind are insurance agents. The role of an agent is well known – agents represent carriers, and carriers pay them to sell insurance products to clients. “Insurance agent” is synonymous with insurance salesperson. Whether independent or captive, they have a role to play that involves both being licensed by their state and, in most states, appointed by the carrier.
Insurance agents are a link between the policyholder and the carrier, and most are held to the “suitability” standard, meaning they must know the client can afford the insurance product the agent is selling to them.
Instead of representing carriers, brokers represent clients. They are product agnostic and cannot “bind” coverage on behalf of an insurer. Insurance brokers must act in a fiduciary capacity, which is a higher standard of responsibility that requires brokers to put the best interests of their clients first.
To ensure they are filling that fiduciary capacity, a broker must take the time to truly understand a client’s needs, overall financial situation, motivations, and personal life before seeking out the policies that might constitute a best fit. Instead of acting as an insurance salesperson, a broker is expected to act in an advisory capacity, asking questions and helping clients understand and clarify what they are looking for.
Brokers’ value in the insurance space comes from the idea that people benefit from having a knowledgeable professional who isn’t just pushing a sale, as evidence shows most people choose poorly when selecting their own insurance contracts – the variety of choices often proves overwhelming. As the linked New York Times piece suggests, this is an area ripe for digital revolution! Clients agree to pay the broker typically based on a flat percentage of the contract premium and have complete transparency on those costs before engaging their service.
Once a broker has looked amongst a variety of policies available from multiple carriers and has determined the policy that best fits their client’s needs, the broker alerts an insurance agent who is appointed with the carrier. The agent then binds the coverage, and the client sends a check for both the cost of the policy and their broker’s commission to the carrier, which then splits the check, taking the policy payment and paying the broker their agreed commission.
If the use of an insurance broker as opposed to an agent is not clear enough yet, consider if you were the head of human resources (likely among other duties) of a small business tasked with finding health insurance for your employees. Finding a plan that fits the company budget, employee pool, and any other particulars could be a time-consuming process. The repercussions to the employees can be daunting, and sometimes learning the language and specifics of the insurance space is its own job. Having someone who already has that training, skillset, and knowledge base working on your behalf to find something that meets your needs could be a very valuable service.
In 2005, the National Association of Insurance Commissioners issued the Producer Licensing Model Act, which combined the functions of an insurance agent with that of insurance brokers, putting both under the banner of “producer.”
Essentially, Section 3 of the PMLA states:
“A person shall not sell, solicit or negotiate insurance in this state for any class or classes of insurance, unless the person is licensed for that line of authority in accordance with this Act.”
The NAIC’s Producer Licensing Working Group, which develops guidelines and best practices for state regulators across the nation, puts out a handbook each year compiling its recommendations. In the “State Licensing Handbook,” Chapter 5 expands on the activities for which a producer is required to maintain a state license, saying:
- “Sell” means to exchange a contract of insurance by any means, for money or its equivalent, on behalf of an insurance company.
- “Solicit” means attempting to sell insurance or asking or urging a person to apply for a particular kind of insurance from a particular company.
- “Negotiate” means the act of conferring directly with, or offering advice directly to, a purchaser or prospective purchaser of a particular contract of insurance concerning any of the substantive benefits, terms or conditions of the contract, provided that the person engaged in that act either sells insurance or obtains insurance from insurers for purchasers.
Since brokers are, by definition, conferring with and offering advice to prospective customers over the terms of contracts and their various benefits, the role necessarily means they “negotiate.” The terminology here matters because it makes it clear that brokers and agents must both be licensed in whatever state they operate in.
Since “producer” is used as an umbrella term that covers insurance agents and insurance brokers alike, the PMLA does differentiate that producers may have roles that vary based on whether they are appointed with a carrier or not. Put another way, producers are deemed to be acting as agents and typically held to a suitability standard if they are appointed with a carrier, and will be held to the heightened fiduciary standard as brokers if they are acting in a role that doesn’t require an appointment.
For both agents and brokers, whatever area of the insurance space they work in, they must be licensed for the particular line of authority (LOA) they are selling, soliciting, or negotiating for. So, for example, a broker may know a lot about health insurance but cannot consult with a business’s human resources department unless they actually hold a license for that LOA.
As an aside, some states such as Florida have provisions for “self-appointing” that would apply to brokers. This gives the state an extra touchpoint to verify that a broker is operating under their own supervision and ensure they aren’t appointed by a carrier.
Of course, not all state legislatures have adopted the PMLA. Yet, according to resources like the Securities & Insurance Licensing Association and its License Exceptions by State, even the states that haven’t used the PMLA to form their producer licensing legislation still regulate brokers and agents similarly. So, all states require both agents and brokers to be licensed in the state in order to operate in the insurance space there and receive commissions from the proceeds of an insurance sale.
The term “insurance producer” is broad, encompassing both insurance agents (who act on behalf of carriers) and insurance brokers (who act on behalf of clients). States regulate them similarly when it comes to their licensure, with the differences coming into play during the appointment process.
Agents may spend time with the clients to help them find something suitable, but in the past have only been obligated to one-off interactions with clients and don’t have the obligation to maintain a relationship with them after the point of sale. Insurance brokers, however, maintain ongoing relationships with their clients, periodically reviewing coverage and providing advice about their continuing needs. The initial policy sale is really more of the starting point of a relationship for brokers and their clients.
It is worth noting, however, that as robo advising and self-service tools emerge and grant clients more direct access to carriers and wholesale insurance contracts, many agents are also feeling the pressure to act in an expanded, broker-like role. Just as organizations are best-served by incorporating more technology into their processes, somewhat ironically, individual producers’ (agents and brokers alike) successes may be tied to the strength of their relationships and the human element.