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Who are they?
There exists a wide variety of legal definitions of insurance brokers, insurance agents and financial intermediaries across the EU.
Since the European Insurance Mediation Directive (IMD), European rules do no longer refer to the traditional distinction between agents and brokers and adopts an activity-based approach. The Insurance Distribution Directive (IDD - 2016) maintains this approach and adds the concept of insurance distributor to the set of EU definitions (and to the scope of the Directive).
Thanks to disclosure at contract level the insurance-seeker is aware of the capacity in which the insurance intermediary / distributor is acting.
Some EU Member States have however retained the reference to agents and brokers in their laws.
Insurance agents are, in general, intermediaries who conduct business on behalf of one or more insurance companies with whom they have an agency "agreement" or "mandate". The insurer-agent relationship can take a number of different forms (multiple, exclusive, …).
Insurance brokers assist clients in the analysis of their needs and in the choice of their insurance by presenting them with alternatives in terms of insurers and products. What distinguishes them from the agent is in most cases, the absence of a contractual relationship with one insurer or multiple insurers to place business on an exclusive basis.
Financial intermediaries assist their clients in planning their future finances; advising on investment strategy, tax planning and other financial services (including insurance and mortgages). In Europe there are a wide variety of financial intermediaries that offer different services and are known by different terms, such as financial advisers, independent financial intermediaries, patrimonial managers, etc.
There can be more than one intermediary involved in the chain of the intermediation activity for one risk or client. Furthermore, there are reinsurance intermediaries who solicit, negotiate and place reinsurance cessions and retrocessions on behalf of ceding insurers seeking coverage with reinsurers. Reinsurance intermediaries can also be involved in a reinsurer’s retrocession of parts of his risk.
Their key role
Intermediaries play a key role in the insurance process.
For clients, intermediaries:
- identify the risks clients face;
- ensure that clients take informed decisions about the risks they wish to insure;
- design new and innovative solutions;
- reduce the clients’ search costs;
- put their knowledge at the service of the clients;
- assist their clients with claims related services and policy administration services.
For insurers, intermediaries:
- facilitate entry into the market by new insurance companies, as the latter can reach a wide client base without having to incur the costs of building a distribution network.
- intermediaries assist insurers with claims-related services and policy administration services.
How do intermediaries help clients in the choice of a particular insurance?
Once the risks of the client are identified and the insurance needs are defined, there are a number of factors determining the recommendation that intermediaries make to their clients when advising them on the choice of a particular insurance or insurer. Apart from the price, these factors include, inter alia:
- the breadth of coverage available (capacity),
- the insurer’s flexibility in agreeing coverage,
- the insurer’s image and reputation, especially in respect of claims service (speed, fairness of settlements, additional benefits to claimants),
- the insurer’s financial security,
- the quality and clarity of documentation provided,
- the insurer’s speed in issuing documentation or in quoting terms,
- timeliness in inviting renewal,
- the technical competence of the insurer’s staff,
- the quality and availability of advice provided to policyholders,
- the quality of the other services provided by the insurer, his locational proximity.
This illustrates very well that price is not the only determining factor in the choice of insurance.
How are they paid?
Generally, there are two primary mechanisms by which insurance intermediaries are compensated for their services:
- A fee system under which the client directly pays for the services provided;
- A commission system under which the intermediary is paid a percentage of the premium paid by the client for coverage based upon the intermediary's agreement with the carrier.
Many insurance intermediaries offer the choice to the client (particularly in the business segment) to work either on a commission or a fee basis. When considering the choice between the two, a number of factors need to be considered by both the intermediary and the client in their dialogue. For example: commission is only payable if a contract ensues. In a fee system, clients should consider if they will be able to afford to pay fees based on time spent in the event of a claim. The commission system satisfies a need for services in the future. The transparent co-existence of various remuneration systems is the best guarantee for competitive and dynamic markets.
The remuneration of the intermediary, being in principle commission–based with the possibility to agree fees, has been a major contributing factor to the successful and competitive development of insurance markets all over the world. The decision to work on a fee or commission basis is a decision that should be taken between the parties based upon a transparent dialogue about the various options.
Intermediation sector
Insurance intermediation: a dynamic, innovative and competitive sector
The insurance intermediation sector is characterised by the presence of many intermediaries. The majority of these are SME scale undertakings with a local focus.
Reputation and trust are important factors that can only be built up over time. They can potentially be lost in an instant, and thus require on-going attention and maintenance.
Banks, internet operators and direct writers compete head-on with insurance intermediaries.
Companies in every sector of the economy work with intermediaries to find solutions for their risks in the national, European or international market.
Thanks to intermediaries, the European insurance market can export its capacity and know-how worldwide. Intermediaries make insurance more accessible to consumers and smaller businesses. Thanks to intermediaries more people and businesses are well insured.
Insurance intermediaries: mostly SME-sized companies employing altogether many hundreds of thousands of employees
Broadly speaking, in the EU, the insurance intermediation sector is divided into three major sub-sectors:
- The (few) global and multinational business insurance intermediaries, which serve major multinational and domestic firms, and provide a wide range of services to these clients in addition to the traditional brokerage services. They also serve a large part of the SME client market.
- The major domestic intermediaries that provide services to larger and medium-sized companies. They also serve some of the national branches or subsidiaries of multinationals and small companies and are active in a variety of sectors and niches. Such intermediaries are likely to be present throughout the country.
- The smaller intermediaries which focus mainly on serving the “small” end of the business spectrum and the personal lines market occasionally serve larger companies on a relationship basis.
Some of the intermediaries which fall into the latter two categories belong to international networks. These arrangements allow smaller intermediaries to offer products to their clients in several countries.
Distribution channels
Though few statistics exist on the precise market shares of the main distribution channels for insurance (namely direct sales by insurance companies, sales through agents and sales through brokers), the information available shows a great deal of variation across Members States in market shares of various insurance distribution channels.
There is wide variation across countries in the number of intermediary firms present. The number of intermediary firms does not appear to be systematically related to the size and income level of the various countries. This is because, in some countries, there has been a longer tradition for intermediaries to provide services to customers than in other countries.
Within the insurance intermediary channel, the agents’ channel is the largest in countries such as France, Germany, Greece, Italy, Luxembourg, Portugal and Spain while in countries such as Belgium, the Netherlands and the UK, brokers are by far the largest non-life distribution channel.