Underwriters and insurance brokers both perform important functions in the insurance industry, but their roles are very different. The difference between an insurance broker and an insurance broker is that it is the underwriter who is actually issuing the insurance cover. The insured customer has a different relationship with the underwriter of the insurance policy and the broker of the policy.
An insurance policy involves odds. The insurer calculates the likelihood of an event occurring and then takes a payment from a customer which is a proportion of the total cost of compensating the customer if that event occurs. The less likely the event, the less the customer has to pay for the cover. By this method, issuing g policies covering a range of possible events, the insurer spreads the risk of a damaging event and its financial consequences across unrelated customers.
“Underwriter” is another name for “insurer.” Your insurance policy is a bet between you and the underwriter. Underwriters prosper if the event covered by the insurance never occurs. If the underwriter miscalculates and offers too great a compensation for too little premium, he can go bust. If the underwriter looks like it has made insufficient provision to cover its liabilities built up by its policies, the Financial Services Authority can apply to have the underwriter into administration. Although the administrators try to gain compensation for the insurer’s customers, the fact that the insurance company did not have enough money explains that some policy holders will not be paid in the event of a claim.
The insurance broker is a salesman, or company. The broker does not have any liability towards the customer in the event of any claim. When the customer pays the broker for insurance cover, the broker is merely acting as an intermediary. Although the broker received the payment for the policy it passed that money on to the underwriter minus a commission.
As the broker has no legal liability towards the company, it does not matter if the broker goes bankrupt during the term of the insurance cover. It is the responsibility of the underwriter to pay out in the event of a policy condition being activated, not the broker. The only recourse the customer might have against an insurance policy would be a complaint about mis-selling. Some insurers cut out the broker and sell directly to the public. This enables them to deduct the broker commission from the price of the policy.