Insurance markets can often be complex and difficult for the average client (individual or business) to navigate. Insurance products are highly detailed and specific, and it is not simple to make perfect comparisons between similar products from different insurers.
Insurance brokers are licensed industry professionals who may work as part of a brokerage firm, or as sole traders. They are not employed by insurers, although they do earn commissions from policies placed. Brokers compete with insurance agents and online aggregators to link clients to insurers – but unlike these other agents, brokers act for the client rather than the insurer.
The broker acts as an intermediary between the insurer and their client, the ‘insured’. By facilitating trade between their clients and insurers, insurance brokers:
- Reduce search and matching costs for clients and insurers
- Reduce adverse selection in the insurance market
- Reduce instances where clients are under- or over-insured for their level of risk
- Allow economies of scale to be realised
The role of the broker is:
To discuss with the client the nature of their risks, give some advice where appropriate on the management and mitigation of those risks, work with the client to identify appropriate insurance coverage for those risks and ultimately, negotiate coverage to the market. [If] a claim is to be pursued, the broker then assists the client with the pursuit of the claim to the insurer and the resolution of the claim Brokers provide value to their clients, to insurers, and the economy and society more broadly:
Brokers facilitate the purchase of appropriate insurance on behalf of their client (the customer), and provide support throughout the insurance lifecycle. This includes providing general risk advice and claims advocacy services.
Brokers support insurers to distribute products efficiently and effectively. Insurers use brokers to minimise their product distribution and tailoring costs, access a greater range of clients, and support product innovation.
Broker’s facilitation of insurance sales results in greater choice and competition in the insurance market, and more appropriate purchasing of insurance (i.e. reducing underinsurance or overinsurance), which promotes more efficient market outcomes.