The primary difference between insurance agents and insurance brokers is that agents are representatives of the insurance company, whereas brokers are representatives of the insured. Because of the difference in representation, agents are given different powers in insurance transactions than those afforded to brokers, such as the power to bind coverage.
Insurance companies that transact directly with the insured without benefit of an agent or broker are known as direct writers. It is more common to find direct writers in personal lines -- insurance for individuals -- than in commercial insurance for businesses.
An insurance agent transacts insurance as an intermediary between the insured and insurer, but is an agent or representative of the insurer. Independent agents may conduct business as agents of multiple insurance companies, whereas captive agents may only transact insurance on behalf of one company of which they are employees.
Insurance brokers act as intermediaries between insurers and insurance companies but represent the interests of the insured. As agents of the insured, their obligation is to produce the best possible insurance solution for the insured and not the insurer.
Insurance agent powers
As a representative of the insurance company, agents may be given the ability to bind the insurance company to certain obligations unavailable to brokers. For example, an insured may receive a binder of insurance that effectuates coverage immediately from the agent. Brokers may not produce such a document and instead must secure a binder of coverage from the insurer which is then passed to the insured.
Managing general agent (MGA)
Certain agents are provided with significant authority to underwrite and bind coverage on behalf of the insurer they represent. These are known as managing general agents (MGAs), and they serve an important function for insurers who do not maintain internal staff with the necessary technical expertise or administrative infrastructure to complete such traditional insurance company tasks. MGAs allow the insurer to operate in many lines of business without maintaining a large staff.
Insurance agents and brokers are commonly compensated by the insurer in the form of commissions on premiums paid to the insurer. Commissions are generally a specified percentage of the insurance premium generated in each transaction. Some brokers may also be compensated by an agreed fee arrangement with the insured that is not driven by the volume of premium income.