Hazard Insurance—A Buyer’s Guide


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The insurance industry is beginning to recognize the value of effective marketing/product placement and the technology boon. Insurance is a conservative business. Companies strive to impart a sense of stability and permanence because their product is nothing more than a promise—a promise to pay for a covered loss at some time in the future. While this remains insurers’ primary concern, their challenge has been to preserve this image while using a variety of technology-driven marketing techniques. Today, business insurance is available from a variety of distribution channels, including independent agents, so-called “captive” agents, direct-writing insurers, banks and the Internet. A distinction must be made between the terms “agent” and “broker.” An agent means that a person has a contractual relationship with a principal—in this case, an insurance company. A broker, on the other hand, is a true middleman whose job is to arrange transactions between two or more discreet parties. Our focus here is on property/casualty insurance, such as fire; and general liability, both for individuals and businesses.

Independent Agents

Independent insurance agents have one thing in common: They represent more than one insurance company. The term independent is derived from the fact that no insurer owns and/or controls the business. An independent agent is free to choose among a variety of insurers competing for insurance business from the agent’s customers. These insurers are known as contract companies. While the ability to select among a range of potential insurance companies is important, it is also important for the buyer to understand the nature of the agency relationship between the independent agent and its insurers. Independent agents and their insurers are bound by a contract.

Because the insurers are the principals in these contracts, the independent agent is just that—an agent of the insurer. Agency contracts are also structured to encourage the placement of profitable insurance business through various profit sharing formulas. For example, if an agent’s overall loss ratio (losses offset by premiums) is less than, say, 50 percent, and the premium volume meets the goal stated in the contract, the agent could receive a bonus from the insurer at the end of the year. Independent agents also have access to a myriad of other insurance companies that typically do not require an agency contract. These are known as brokerage companies and surplus lines companies, and they generally insure difficult loss exposures that the contract insurers will not cover.

Captive Agents And Direct-Writing Insurers

Captive agents, as the term suggests, represent one insurance company. They can be either employees of that company or independents, owning an agency with one insurance company contract. Examples include State Farm and Allstate insurance companies. Historically, captive agency companies have been extremely effective at selling and servicing personal insurance. These companies take full advantage of the economies of scale inherent in such a business plan, and they generally pass the efficiencies on to their customers in the form of competitive premiums.
Similar to captive agency companies, direct-writing insurers distribute their own insurance products through an employed sales force, and they provide similar efficiencies. They are, however, more focused on the business insurance market. Salespeople are compensated through salaries, and no independent agency force is typically used.


Banks have been selling insurance for many years. In the past, they restricted their offerings to such things as mortgage life insurance and other credit-related insurance products. As a result of the repeal of federal legislation (the Depression-era Glass-Steagel Act) that prohibited banks, insurance firms and broker/dealers from entering one another’s business, many large local and regional banks have developed insurance agency and brokerage capabilities. Interestingly, banks have not opted to create insurance company operations. Instead, they’re moving in on the independent agents’ turf. The banking industry’s strengths lie in its distribution networks (hundreds of branch offices) and extensive client base.

Banks generally focus on marketing personal insurance, such as homeowners and personal auto liability, to existing customers. In this vein, some banks have established alliances with insurance companies that heretofore only sold insurance through independent agents, using the bank’s Internet Web site as a direct link between the customer and the insurer.

The Internet

The Internet changed the way insurance is marketed. The Web is being used by the entire spectrum of insurance marketers. Similar to the banks’ experiences, the Internet has focused mainly on personal insurance. However, several reinsurers (insurers that insure insurance companies) have established Web-based reinsurance coverage “exchanges” similar to an over-the-counter (OTC) securities market. Names such as Quotesmith.com, InsureZone and Insurancenoodle.com are proving to be competition for the personal insurance dollar.


It is becoming clear that no single distribution scheme will emerge as the Holy Grail for insurance marketers. Many people are delighted to be able to purchase insurance on the Internet without interacting with an insurance salesperson. However, human behavior and the relative complexity of the insurance transaction, especially in business insurance, almost ensures that people will continue to rely on professionals to satisfy this need.