An insurance agency is a business that sells policies created by insurance companies. These companies appoint the agency to sell their products, and they pay the agent a fee for each policy sold.
An agency can be a small, family-owned operation or a large company that employs many people. Regardless of size, every state requires all insurance agents to hold a license and follow state laws and regulations.
Insurance agencies are responsible for selling and servicing policies created by insurers. The agency must be appointed by an insurance carrier to do so, and they must have a contract with the carrier describing which policies they can sell.
Independent agencies typically represent multiple insurance carriers and can compare policies from these companies. These agents can also offer advice on evaluating the risk of an insurance product and helping clients make the best decisions when it comes to purchasing policies.
They must comply with a number of industry rules and regulations, including those set forth by the National Association of Insurance Commissioners and FINRA. These rules govern their sales and marketing activities and the types of financial information they are required to disclose to consumers.
The compensation they earn for their work depends on several factors, including the size of their client base and the type of coverage they sell. For example, some agents are only obligated to provide base commissions on insurance premiums, while others receive both base and supplemental commissions on policies they sell.
A broker has a fiduciary duty to their clients, which means they are obligated to act in the best interest of their client and provide them with unbiased, non-sales advice. This includes offering the best available coverage at a price that makes sense for their client’s needs.
If the broker fails to act in this way, they could face a variety of legal and financial penalties, such as the loss of their license, their ability to sell insurance in the future and even fines. They may also be liable for a negligently filed or unpaid claim.
They must also disclose their compensation to consumers in a compensation statement, which will detail the types of commissions they are paid by the insurer. These include base commissions and supplemental and contingent commissions. Supplemental commissions are additional compensation payments made to brokers based on the value of the policy they sell or on how much their client increases their policy’s coverage level. Contingent commissions are additional payouts that are not based on the amount of new business they sell or the amount of premiums they sell, but instead are based on how much the insurer promises to pay out when certain criteria are met.
These compensations vary from insurer to insurer and from product to product, so it’s important to understand the specifics of any deal you are considering before signing on the dotted line. Generally, you can expect to see an agent’s or broker’s total commission percentage displayed on their website or in their brochures.