What is an insurance broker?

What is An Insurance BrokerIn one line, insurance brokers advise their clients on what insurance they need and buy the insurance on their behalf.

But what does that actually mean? To understand what an insurance broker is, it is important to understand why insurance experts are needed.

Let’s take an African mining company, which is publically traded on the NYSE as an example. The directors are great at running the company and over the last 3 years their business has boomed, but they didn’t purchase any insurance. One day their mining equipment breaks and a drought causes unbearable working conditions which results in production grinding to a halt. They can’t fulfil their orders and their customers are without the raw materials they need to produce their products. Not only this, the loss of production severely affects their cash flow and because they are so heavily leveraged they cannot service their debt repayments. The stock price drops as a result and investors file a law suit against the directors for mismanagement. The company goes under, 10,000 people are out of a job, the directors lose their homes and you have to wait 3 more weeks to get that iPad you ordered. Owch.

It is an insurance broker’s job to ensure this does not happen. A broker looks at the business, analyses exactly what it does and creates an insurance programme to suit the company’s needs. For this mining company, they would need Business Interruption insurance, Property insurance, Directors’ & Officers’ insurance and Employers’ Liability insurance, potentially they would need Terrorism insurance, Kidnap & Ransom insurance and Political Risk insurance and many other types.

They then go to into the insurance market and purchase the necessary types and amounts of insurance on their client’s behalf. They visit underwriters, giving them all the facts about the company, promote their client and try and procure the insurance for the best possible price . For a company of this type and size, they might have to buy hundreds of millions of pounds worth of cover and will have to place the insurance with more than 20 different insurance companies.

This is an extreme example to demonstrate the true value an insurance broker offers a company of this size, but if you get into the right parts of insurance and become a broker you could end up working with similar sized companies. If you work in Directors’ & Officers’ insurance, you could be placing $100 million towers for US public companies, or; if you worked in property catastrophe reinsurance these figures could be larger.

Back in the old boy days of insurance, the industry was a close knit community where brokerages were run by public school boys with vast networks. Their clients would be friends who ran multimillion dollar companies, and it was a tough industry to infiltrate. Now the broking world is dominated by a handful of huge global companies and smaller niche players and is open to anyone who wants to make the jump into insurance.

To see what makes a good broker, read: Broker vs Underwriter.

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