Choosing a broker: who pays them, and what the law makes them owe you

Nearly every piece of advice about choosing an insurance broker is advice about character. Find someone who picks up the phone, someone a colleague recommends, someone who explains things without condescension. That describes a pleasant working relationship and it settles nothing. The question that decides what you actually get is duller and it is answerable: who pays this person, what that payment does to what they will put in front of you, and what the law requires them to owe you regardless. Each of those has an answer, in writing, before you sign anything.

Three ways a policy reaches you

The NAIC’s consumer guide describes the market in one sentence per channel. Independent agents represent several companies and can give you several quotes; exclusive agents only sell the products of one insurance company; direct market sales are done over the Internet or by mail or telephone. Then it says the part most buyers have never been told outright: the insurer — not you — usually pays the agent, commonly as a percentage of your premium, and a salaried agent may receive bonuses for sales.

Spain’s insurance-distribution law puts names on the same spectrum, and the vocabulary is worth having because the paperwork uses it. An agente de seguros acts under an agency contract with one or more insurers; an agente exclusivo is tied to a single one, which keeps its own register of the exclusive agents it has contracted; an agente vinculado holds agency contracts with several. An operador de banca-seguros is the bank branch selling you motor cover across the counter. A corredor de seguros is defined by that law as a distributor offering independent advice based on an objective and personalised analysis — and the same statute keeps the roles apart, listing agents and the external collaborators of agents among those who may not act as a corredor.

That is the spectrum: from a channel where nobody is acting for you to a channel where somebody is, with every interesting argument in the middle.

The settled end: buying direct

If you buy from an insurer’s website or its call centre, nobody there owes you advice. You should know that going in rather than infer it afterwards from a claim that went badly. The European directive requires an insurance undertaking to tell you whether it provides advice at all — a disclosure that would not need to exist if the answer were always yes.

What survives even at that end is smaller than advice and larger than nothing. Before an insurance contract is concluded, the directive requires the distributor to specify, on the basis of information obtained from you, your demands and your needs, and to give you objective information about the product in a comprehensible form. Any contract proposed has to be consistent with those demands and needs, and for non-life cover it comes with a standardised insurance product information document. Only where advice is actually given does the obligation step up to a personalised recommendation explaining why a particular product would best meet what you said you needed.

A direct purchase is therefore not lawless. The judgement is simply yours, and price is the only thing anybody has optimised.

The contested middle: paid by one side, owed to the other

Here is the arrangement that makes people uneasy, and it is the commonest one. An intermediary is remunerated by the insurer, out of your premium, and the duty it owes runs to you.

The directive states it without qualification: insurance distributors must always act honestly, fairly and professionally in accordance with the best interests of their customers, and all information related to the directive’s subject matter, marketing communications included, must be fair, clear and not misleading. The remuneration problem is then dealt with head on rather than left implicit — a distributor may not be remunerated, and may not remunerate or assess the performance of its employees, in a way that conflicts with the duty to act in the customer’s best interests, and in particular may not operate a remuneration or sales-target arrangement that incentivises recommending one product when a different product would better suit the customer. Spain’s transposition repeats the principle in the same shape.

What turns that from aspiration into something checkable is disclosure, and the list is unusually specific. Before the contract, the intermediary must tell you its identity and that it is an intermediary; whether it gives advice on the products it sells; the procedures for complaints and the out-of-court redress available; the register it is entered in and the means of verifying that entry; and whether it represents you or acts in the name and on behalf of the insurer. It must tell you whether it holds, directly or indirectly, ten per cent or more of the voting rights or of the capital in a given insurer, and whether a given insurer or that insurer’s parent holds as much of it. It must place itself in one of three boxes: it gives advice on the basis of a fair and personal analysis; or it is contractually obliged to place insurance business exclusively with one or more insurers, which it must then name; or it is neither, in which case it must name the insurers with which it may and does place the product being offered. And it must tell you the nature of its remuneration — a fee you pay directly, a commission included in the premium, any other economic benefit, or a combination.

None of this is a favour you have to request. It is owed before the contract, and owed again on amendment or renewal if what you were first told has changed.

The other end: a fee you can see

The third position is the one many buyers assume does not exist in insurance: paying for the advice.

Spain legislates the mechanics. A corredor’s remuneration from the insurer takes the form of commission, but corredor and client may agree in writing that it include professional fees invoiced directly to the client, in which case a separate invoice is issued for those fees, apart from the premium receipt. Where a fee is agreed, the intermediary has to tell you the amount or, where that is not possible, the method of calculating it. A fee makes visible a cost that was there the whole time, which is part of why it is less popular than it deserves.

The verdict

Commission is not the thing to be afraid of. An intermediary paid by the insurer can owe you a real duty and can discharge it, and the directive’s answer to the conflict is not prohibition but disclosure sitting on top of a hard rule against incentives that pull the other way. What should decide your choice is not whether money changes hands between the insurer and the person advising you. It is whether that person will put in writing which of the three boxes they occupy, whether they hold or are held by an insurer, what their remuneration actually consists of, and what they will do when a claim of yours is open. Those disclosures are owed to you anyway. Asking for them costs nothing, and the manner of the response is itself information.

Checking the licence

Do this before the conversation gets interesting. The NAIC states the rule and the trap in the same breath: it is illegal for unlicensed companies or agents to sell insurance, business cards and websites are not proof that an agent is licensed, and a policy bought from an unlicensed seller may not pay your claims or refund your premiums if you cancel. Its instruction is to check with the state insurance department. The European framework reaches the same place from the opposite direction, requiring the intermediary to name the register it appears in and the means of verifying the entry — in the United Kingdom the Financial Services Register, and in Spain an administrative register of insurance distributors that the statute makes public and free to consult by electronic means. The supervisor named in the data below is where that entry is checked, and the body that takes a complaint about an intermediary.

The questions that are actually about the claim

Everything above is about the purchase. What you are really trying to find out is what happens eighteen months from now, on a Tuesday, when an estimate comes back short.

Ask who files the claim — you, through an app, or the intermediary on your behalf. Ask who chases it when nothing has moved for two weeks, and what that person’s name is. Ask who talks to the adjuster when the first offer sits below the repairer’s quote, and whether that conversation is part of what you are paying for or a favour that depends on how busy they are. Ask what happens at renewal after a claim: whether the same intermediary will re-market the risk, and whether they will tell you when the incumbent’s renewal quote has stopped being competitive. The NAIC’s own suggested list reaches into the same territory — what the policy does not cover, whether you can use your own repair shop, how a fault and a non-fault accident each affect the premium. Put them to a named person and write the answers down.

Spain shows what a positive answer looks like when a legislature writes it out. A corredor there is obliged, while a contract it arranged is in force, to give the policyholder, the insured and the beneficiary the information they ask for about any clause of the policy, and in the event of a claim to provide them with assistance and advice. The same law requires corredores to run a customer-service department for complaints, or to hand that function to a defensor del cliente whose decision in the client’s favour binds them. Whether anything of that shape applies where you live is a question about your market. Whether your intermediary will commit to it in your engagement letter is a question for them.

For a company running vehicles

A fleet buyer has a lever a household does not. In the United Kingdom, an insurance intermediary must, on a commercial customer’s request, promptly disclose the commission it and any associate receives in connection with a policy, in cash terms — estimated if necessary — and in writing or another durable medium. Asking is free, the answer is a number, and the number is a fact about your renewal you can hold from one year to the next.

The claim-time questions matter more for a fleet, because its losses are frequent and individually small, which is exactly the profile nobody has time to argue about. If the answer to who argues with the adjuster is that you do, what has been sold to you is a placement service and it should be priced as one.

The one to lead with

Of everything above, the question whose answer tells you most is the one the law already entitles you to ask: are you contractually obliged to place business with one or more insurers, and if so which, and do you give advice on the basis of a fair and personal analysis? Send it by email, so that the answer arrives in writing. An intermediary who answers it in a sentence has told you what they are. An intermediary who will not put it in writing has told you rather more.