We all do it, receive our insurance renewal premiums in the post, sign the form, tick the box and send it back. Alternatively, you may look at one of the comparisons websites to find the “best offer” for you. There is a common myth that insurance brokers are just an “added cost” when this is most certainly not the case. How do you make the most of an insurance broker to get the best deal for your specific situation?
What does an insurance broker do?
The most concise description of an insurance broker is an intermediary link between, you the client and the insurance industry. There could be numerous deals out there for you, whether you are looking for:
- Mortgage insurance
- Critical illness cover
- Life insurance
- Car insurance
- House insurance
This is just a selection of the different types of insurance available through insurance brokers. Whatever type of insurance you are after, there will be an insurance broker to help you.
Even though the financial sector has benefited more than most from the online era, it is impossible to list all insurance options. Consequently, what you see on the Internet may not be the best deal available for you. In this scenario, insurance brokers can offer exceptional value for money.
Tied vs Independent insurance brokers
When you begin looking at insurance brokers to approach, you will come across two very different types, tied and independent. While the obvious choice might be to approach an independent insurance broker, there are several issues to consider.
Tied insurance brokers
As the term suggests, tied insurance brokers can only offer insurance products from one insurance company. On occasion, you may come across multi-tied insurance brokers; they can offer products from a small number of different companies. In essence, a tied insurance broker cannot scour the market for the best deal available for you. So, what are the benefits of a tied insurance broker?
At first glance, it may be challenging to recognise the benefits of a tied insurance broker. However, as they deal with one, or sometimes a small group, of insurance companies, they often have a very close relationship. Consequently, they may be in a position to negotiate/improve on terms available to the general public.
Much will depend upon the type of insurance products available and the amount of business a tied insurance broker can bring. The more business, the more likely they will be able to negotiate significantly improved terms.
Independent insurance brokers
An independent insurance broker can research the best products available across the entire market. They have no formal ties with any individual or group of insurance companies. However, they will often have closer relationships with particular companies. Consequently, they may have relatively stronger negotiating powers with those companies they deal with regularly.
One of the main benefits of an independent insurance broker is that they can scour the market for the best deal, but they can approach several parties. The UK insurance market is one of the most competitive globally, with new entrants emerging regularly. You shouldn't underestimate the ability to play off insurance companies against each other to negotiate the best terms and price for you.
Is it worth using an insurance broker?
There is no doubt that the online revolution has had a significant impact on the UK financial services industry. This sector is now more transparent and accessible to the general public. However, there is still the option of dealing directly with insurance companies. Consequently, it may be tempting to dismiss the benefits of using insurance brokers to your detriment.
Access to a greater range of products
With the best will in the world, insurance companies can't list all of their products on the Internet. The insurance sector is often fast-moving, and companies will respond to competitors and demand for particular types of insurance. Therefore, using an insurance broker, you will have access to products that are not always in the public domain.
Ability to negotiate
As we touched on above, whether using a tied insurance broker or an independent insurance broker, there are opportunities to negotiate individual insurance policies. This is a power that is not necessarily available to the general public and can lead to significant savings/policy improvements.
Niche insurance policies
In essence, whatever type of insurance you are looking for, there will likely be insurance companies willing to create very specific policies. When looking at insurance premiums, everything comes down to a simple risk/reward ratio which is usually relatively easy for underwriters to calculate. Again, these are services not ordinarily available to the general public.
How much money does an insurance broker make?
Recently we have seen a significant tightening of the regulatory framework when it comes to insurance policies and the broader financial sector. Historically, there has been evidence of insurance brokers favouring some insurance companies offering the highest commission rates on their products. Unfortunately, this type of arrangement was not always made public, causing a degree of scepticism amongst those looking at insurance broking services. The situation is very different today:
- Brokers are obliged to publish a breakdown of their remuneration structure
- Brokers must disclose relationships with specific insurance companies
When it comes to remuneration, there are three traditional options which include:
- Charge to a client, no commission from insurance companies
- Mixture of client charge/insurance company commission
- Commission from insurance companies
Many people prefer to pay a fee for their insurance broker services to avoid any potential conflict of interest for the broker. However, the industry is now highly transparent. You will be made aware of remuneration arrangements before agreeing to a new insurance policy.
Is insurance cheaper through a broker?
Many people automatically look towards insurance comparison websites for new policies/renewals before considering an insurance broker. There are several factors to consider with regards to comparison websites:
- These websites are, in effect, insurance brokers, receiving commission from insurance companies to which they direct business.
- In recent years some insurance companies have withdrawn their products/services from comparison websites - often reducing competition.
- Insurance companies tend to publish generic policy terms and conditions, many of which can be improved via direct negotiation.
- Comparison websites offer a helpful snapshot of insurance policies available but are unable to list all available policies.
- Some generic policies may include terms/conditions not relevant to you, sometimes creating an avoidable cost.
There is no doubt that the introduction of the Internet has increased competition in the insurance sector. This has to a certain extent, "encouraged" us to use automated online services, where historically, many of us felt more comfortable speaking to an adviser. Contrary to popular belief, you can still take advice/guidance over the telephone from insurance companies and insurance brokers. It is still good to talk!
When it comes to the value offered by an insurance broker, much of this will depend on:
- Business volumes - higher volumes create more scope for negotiation
- Market contacts and relationships
- Specialist brokers can enhance value for particular types of policies
- Reputation - this is still very important in the financial services sector
Each of the above elements in isolation will enhance an insurance brokers ability to negotiate the best deal for you; combined, they can be a powerful tool.
Looking at the broader financial picture
Whatever type of insurance you are looking for, it is essential to look at the broader picture to secure the best value for your situation. When using a comparison website's services, as one example, you are looking at your insurance needs in isolation. By not taking into account your more comprehensive financial picture, you may find:
- There are areas of duplication with existing cover
- Combining, for example, house and car insurance offers scope to reduce combined premiums
- Generic cover available online is not tailored to your specific needs
Those operating in the financial services industry have an obligation to “know your client". Often abbreviated to KYC, this is a fundamental obligation for your insurance broker. For example, if they were to recommend insurance cover which duplicated existing cover, this could be construed as mis-selling. As a consequence, your insurance broker could leave themselves open to regulatory action and compensation payments.
The key to an insurance broker's value is their ability to enhance generic services available in the market. You may find that while discussing your specific insurance requirements, areas of reduced cover emerge. For example, as a self-employed individual, you may not have even considered critical illness insurance cover. Do you have the appropriate life insurance cover to ensure that your loved ones are provided for on your death?
In the early stages of your communication with an insurance broker, they will likely bring out their trusty questionnaire. While many of us cringe at the generic questions asked, they can identify areas of undercover and excessive cover. This is all part of the KYC operation, the requirement to know a client’s circumstances so that your insurance broker can give you the best possible advice. The more information you reveal, the better the standard of advice, the less information you disclose, the less value for money. It is that simple.
The power of negotiation and contacts
When it comes down to it, the enhanced value offered by many insurance brokers relates to their power of negotiation and contacts in the marketplace. We live in a world of automation, emails and online forms, often neglecting good old-fashioned negotiation. The fast-moving world of finance has benefited more than most from the online revolution. Still, it is impossible to publish the details of every policy and every service. Insurance brokers cannot only negotiate, but they will have access to policies and services not necessarily in the public domain.
Historically, remuneration has been something of a bugbear, with concerns regarding conflicts of interest. The industry, and specifically the subject of remuneration, is now more transparent than ever before. The rules and regulations are in the public domain. Consumers are protected, and brokers flouting the rules are often chastised in public. So, it is safe to say that the insurance broker industry is alive and kicking, still able to offer potentially significant savings and enhanced services.