Independent Broker or Captive Agent After You Buy?

For most acquired companies with several lines of coverage, a lender and customer contracts, an independent broker usually gives you more room to compare options than a captive agent. An independent broker can place coverage with many insurers. A captive agent sells for one insurer or one group of insurers. A captive agent can still be a sound fit when the business is simple and one insurer writes every line you need. This is for new owners deciding who handles the policies they inherited, including searchers and holding companies picking a service model for a first deal or an add-on.

The short answer

An independent agent or broker can quote several insurers. A captive agent represents one insurer or one group under common management. That difference largely sets how many insurers can quote your account.
In general industry usage, agents represent insurers and brokers represent buyers, but states define the roles differently. Ask each person in writing whom they represent on your account.
Independent brokers are usually paid mainly by insurer commission, sometimes plus fees. A captive agent is paid under its agreement with the one insurer, so ask how, and whether bonuses depend on volume or profit.
A captive agent can fit a simple, single-carrier business. An independent broker tends to fit better when the company has many lines, contracts, a lender or a plan to add more companies.
Service quality depends on the individual and the firm, not the label. Test both with the same questions.

What is the difference between an independent broker and a captive agent?

An independent agent or broker is an intermediary who can place your coverage with more than one insurer. The International Risk Management Institute (IRMI) describes the independent agency system as independent contractors who sell policies for one or more insurers and are paid by commission or fee. A captive agent, also called an exclusive agent, represents only one insurer or one group of insurers under similar management. IRMI adds that an agent can be independent or an employee of the insurer.

A license shows what a person may sell, not whom they represent, and a firm can act as an insurer's agent on one policy and as a broker for the buyer on another. Insurance producers (people licensed to sell, solicit or negotiate insurance) are licensed by states, so check the license on your state insurance department's lookup before you rely on anyone. The broker-versus-agent basics are in what is the difference between a broker and an agent, and the library has a shorter version of this comparison at independent agent vs captive agent.

Who do they work for, and how are they paid?

In general industry usage, an insurance agent legally represents the insurer and an insurance broker represents the buyer. States draw the lines differently, and one firm can play both roles, so do not assume a standard. New York separates the two by statute and license. California presumes a licensee is a broker when it is bonded and signs a written agreement that discloses its role, fees and any insurer compensation, with exceptions, including for a licensee appointed as the insurer's agent. The duties an agent or broker owes a client also vary by state and by the facts.

On pay, IRMI says independent agents are paid by commission or fee. The mix differs by firm. Insurers can also pay extra compensation, such as incentives tied to the volume of business placed or profit-sharing based on underwriting results. IRMI describes profit-sharing contingent commissions as "not considered illegal or, given proper disclosure, unethical" but "somewhat controversial," because they can pull against representing the policyholder. A captive agent is paid under its contract with its insurer, and IRMI notes an agent can be an employee of the insurer, so ask how the arrangement works.

Disclosure rules differ by state. New York, for example, requires a producer to describe its role and say whether it will be paid by the insurer or another third party, with exceptions that include most renewals. Other states may require less, more or something different. The simple protection is to ask each person how they are paid and whether it changes with the insurer or the volume they place. How insurance brokers get paid goes deeper on pay.

Which one gives a newly acquired company more options?

Independent broker vs captive agent, by what matters after an acquisition
What matters to you	Independent broker	Captive agent
Insurers available	Several, depending on the firm's appointments and the account's appeal	One insurer or one group under common management
Several lines at once	Can split lines across insurers when one insurer is stronger in some lines than others	Works well when that one insurer writes every line you need on terms you accept. Lines it does not write may have to be referred out
Authority to bind	Depends on the written agreement with each insurer and the size of the risk. An independent agent may hold binding authority with some insurers, and a broker may need the insurer's acceptance first	Depends on the written agreement and the size and class of the risk. Many commercial accounts need the insurer's underwriter to accept the risk whichever channel is used. Ask which insurers they can bind with
Product knowledge	Breadth across insurers	Depth in one insurer's forms, underwriters and claims staff
Remarketing at renewal	The broker can take the account to the other insurers it works with	Requires the agent to refer elsewhere, or a change of agent
Hard-to-place pieces	May use specialty brokers who can reach surplus lines insurers (not licensed in your state, but allowed to write risks that standard insurers decline)	Depends on the insurer. Ask what happens if the insurer declines a line
Claims help	Coordinates with whichever insurer is paying. The insurer decides coverage	Coordinates with its one insurer. The insurer decides coverage
Changing later	A broker of record letter can move servicing of existing policies to a broker the insurer accepts, which usually means one that holds an appointment (a contract to sell for that insurer)	Moving to another insurer generally means writing new policies, easiest at renewal. A captive insurer may not accept an outside broker on its policies at all

Two cautions. A longer list of insurers is only useful if the broker actually uses it for your account, so ask which insurers quoted last time. And a single insurer's depth is only useful if its appetite matches your business. See retail broker, wholesaler and managing general agent roles for how hard-to-place accounts reach specialty markets.

What if the seller's captive agent cannot write the cyber policy you now need?

A hypothetical example. A searcher buys a 30-person commercial services company. The seller's program was a package from one insurer, bought through a captive agent: property, general liability, vehicles and workers' compensation, all with the same insurer. After closing the buyer finds three new needs. The lender wants a lender's loss payable endorsement on the equipment (wording that protects the lender's interest). A large customer wants additional insured status (the customer is covered under your policy for claims tied to your work) and a waiver of subrogation (your insurer gives up the right to sue the customer to recover what it paid). And the buyer plans a cyber policy because customer data now sits on the company's systems.

The buyer asks the captive agent which of these the insurer can write. The first two may be handled by endorsement. The cyber policy may need a different insurer, which the agent may or may not be able to arrange. An independent broker would take all three needs to several insurers at once. Neither path is automatically right. If the one insurer can meet all three needs at terms the buyer accepts, staying put keeps the program simple. If it cannot, the buyer ends up managing a second relationship alone.

The same question comes up in a stock purchase, where the seller's policies often stay in force (check each policy's change-of-control terms), and in an asset purchase, where the new company needs its own. Should I keep the seller's insurance or start over explains how deal structure changes the starting point.

When does each one fit best?

A captive agent may fit when

The business has one location, a small number of lines and standard customer contract terms.
The one insurer already writes the account, has a clean claims history with it and offers every line you need.
You value one point of contact who knows that insurer's underwriters and claims staff well.
You do not plan to add companies, locations or lines soon.

An independent broker may fit when

The company has several lines, several locations or contracts that require specific endorsements.
A lender sets insurance conditions that you need to match across more than one policy.
The loss history, the industry or the ownership change makes some insurers decline, so you need a wider field.
You expect add-ons, a roll-up or an exit, and want one adviser who can fold new companies into a program or take it to market.
Your investors or lender will want to see that you compared options, and a broker's side-by-side quote comparison can give you that record.

Either model can disappoint. A captive agent with a narrow appetite can leave a gap unaddressed. An independent broker with a thin bench can quote the same two insurers every year. Judge the person, not just the label. How to remarket an inherited insurance program shows what a good broker process looks like.

What should you ask before you choose?

Ask these of any agent or broker, in writing if you can. They come from disclosure rules in New York and California, but you can ask them in any state. The Small Business Administration advises comparing offers from several different agents, and these questions give you a common yardstick.

What is your role in this sale: agent for an insurer, or broker for me?
Which insurers can you quote for my account, and do you have authority to bind with any of them?
Will you be paid by the insurer, by me, or both? Does it change with the insurer, the volume you place or the profitability of the account?
What would you earn on each alternative quote?
Do you or an affiliate own part of any insurer you would quote, or does an insurer own part of you?
Are you licensed for this line in my state, and for surplus lines if needed?
What fees do you charge beyond commission?
Who handles certificates, claims and renewals, and what happens if my contact leaves?

Confirm the license of both the individual and the firm on your state insurance department's lookup. Also ask for the National Producer Number (NPN), the unique identifier assigned during licensing. More in questions to ask an insurance broker after buying a business.

Where does Morrow fit in this choice?

Morrow is the brand of Afthonea Inc., an insurance agency (broker) in Boston that focuses on business insurance. Which insurers it can quote for your account depends on its carrier appointments, so ask it, as you would any firm. It can review inherited policies, flag gaps and request quotes from insurers. It does not issue policies or decide coverage, and any new terms depend on carrier underwriting. A quote request is not bound coverage. Morrow is licensed in these 18 states only: Arizona, California, Colorado, Florida, Georgia, Illinois, Louisiana, Massachusetts, Michigan, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas and Virginia.

You may want to look elsewhere if your business is in a state not on that list, if you need life, disability or health benefits advice (a benefits adviser or life insurance specialist is the right contact), or if you need a very large, complex program that calls for a firm built for it. Compare any firm, Morrow included, using the questions above.

Keep reading

Frequently asked questions

Is a captive agent a bad choice after I buy a business?

No. A captive agent can be a good fit for a simple company whose needs one insurer can meet. The trade-off is that the agent can offer only that insurer's products, so ask what happens if the insurer declines a line or adds a requirement you cannot meet.

Does an independent broker work for the insurer or for me?

In general industry usage a broker represents the buyer and an agent represents the insurer, but states define the roles differently and one firm can play both roles. Ask in writing whom the person represents on your account and check your state's rules.

Will a broker cost me more than a captive agent?

Not necessarily. Independent brokers are usually paid by insurer commission, sometimes plus fees, and captive agents are paid under their agreement with the one insurer. Premium depends on the insurer, your class of business, limits and loss history. Compare quotes at the same limits, deductibles and endorsements, and ask each person how they are paid.

Can I switch from a captive agent to an independent broker later?

Usually yes, but the route depends on the insurer. Moving to a different insurer generally means new policies, which is easiest at renewal. If you want to keep the same insurer, ask whether it works with outside brokers at all, because some sell only through their own agents. Where it does, a broker of record letter may move servicing, but only if the insurer accepts the new broker, which usually means the broker has an appointment with it. Each insurer sets its own process, so ask first.

The seller's captive agent just sent me a renewal quote. Should I just take it?

It can be a reasonable choice if one insurer writes every line you need and the terms fit your lender and contracts. Check the limits, deductibles and endorsements against what you now need, and ask what the agent would do if the insurer declined a line.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Independent Broker vs Captive Agent After You Buy a Business