This article was updated March 2004, there is now a new licensing regime so the previous article is obsolete.

From March 2004 there is no longer technically such a thing as an insurance agent. An "agent" legally represents someone else (the "principal") and the principal is responsible for their actions. The principal of an insurance agent was an insurance company and although the agent could have agencies with a great many insurance companies at once the insurance company was always responsible for the advisor's advice.

Now agents are gone. The application process for a financial advisor to recommend an insurance policy is similar to that he has to go through to recommend an investment product. Instead of product competency exams (which were just multi-choice things often done online) and agency application forms that were up to 100 pages long, advisors these days just have to prove to the insurer that their license covers insurance (most advisors would) and then fax in their details.

As such, since the onus is now back onto the advisor and his or her dealer group, all financial advisors who deal in insurance these days are in a position somewhat more akin to the "brokers" discussed below. There are some quirks that enable some advisors to call themselves "brokers" while others cannot, but most of what I wrote below in 2001 about brokers would describe any insurance advisor from March 2004.

On a personal level, given that I no longer have to go through a lengthy application process to get an agency and accredited for every product, one of the first things I did after our firm got its new license was to email, write or fax every life insurance company I had even a remote interest in using to get set up with them. Previously I avoided this and only set up an agency when it was required. That comment above about 100 page agency application forms wasn't an exaggeration!

The new system has both advantages and disadvantages for the consumer. One advantage is that advisors will now for the most part carry a wider variety of insurance products because getting accredited will be easier and that the rules governing insurance are now the same that govern investments so things should overall be simpler since only one set of rules needs to be observed not two (or more).

One disadvantage is the loss of that layer of protection where the insurance company would be responsible. It is all very well to go after the advisor for compensation, but if he's broke and has no assets to sell and didn't keep his insurance going (a crook, in other words, since advisors and dealers have liquidity and solvency requirements and insurance is compulsory), then you've got nowhere to turn. Once you could sue the insurance comopany for what an insurance salesman did, now they will tell you it isn't their problem.

For your information, what follows is the old article explaining what went on before the new licensing regime.

There is much confusion about insurance brokers. The confusion comes because agents can be agents for many companies simultaneously. A multi-agent can be an agent of as many insurance companies as he likes, provided written advice is given to each insurance company. Some multi-agents like to blur the picture with hazy language, giving the impression to the insured that they are in fact a broker.

There is a very fundamental difference between an agent and a broker. An agent is a representative of an insurance company, with some sort of contractual arrangement to sell insurance to members of the public. A broker is a representative of a customer, and is bound to deal with insurers on the client's behalf. This is the same sort of thing with real estate agents, and brokers, the agent works for the seller, and the broker works for the buyer.

At common law, agency is a relationship where one party, known as the 'principal', authorises another party to act on its behalf, known as the 'agent'. Usually an agreement is made, usually in writing, between the principal and the agent.

When a third party deals with the agent, the principal is liable to the third party. This means that if an agent of an insurance company gives deceptive advice or somehow causes you a loss, you can pursue compensation from the insurer. The insurer is then entitled to pursue damages from the agent and deal with the agency agreement as necessary.

The Insurance (Agents and Brokers) Act 1984 is (was - it is now gone) administered by the ASIC. One of the reasons for the introduction of this act was that some brokers, who lacked the statutory financial backing required of insurance companies, were going broke, taking client's premiums with them, thus causing financial loss to clients, which the insurers refused to accept liability for.

The Act applies to anyone who arranges insurance for a reward. The Act classifies anyone, including corporations, as insurance intermediates. They are divided into two groups: agents, where the insurer is liable for their actions, and brokers who must be registered under the act. There is thus a clear distinction between brokers and agents under the law.

The agent must have a written agreement with the insurer. The agent must be able to provide a copy of this agreement to a client, or to ASIC, within seven days of the request.

The agent's agreement sets out his responsibilities, which in the case of life insurance rarely goes beyond offering contracts of insurance for assessment by the insurer. General insurance agents sometimes have the authority to accept or reject risks. Claims settling is seldom part of this agreement.

An agent can appoint a subagent, who makes some sort of written arrangement with the agent that promises commissions on referred sales. The agent is responsible for the actions of the subagent, even if the subagent is not acting within the bounds of the agreement. The insurer is in turn liable for all of this, and can pursue the agents and subagents for costs incurred while reimbursing the client.

Where things get confusing for clients is when agents become multi-agents. This means nothing more than the multi-agent is able to sell insurance for a variety of companies, he is not by any stretch of the imagination a broker. Sometimes multi-agents use unclear language like "we represent various companies" which implies he is a broker, at least as far as the client is concerned. To be accurate (and lawful) a multi-agent must use the language "we are agents for A, B, C and D".

A broker is different. A broker is answerable only to the client (though the Act lays out certain responsibilities and rules to live by to protect the client). A broker's job is to carry out the instructions of the client (usually, to get them a good deal on insurance). The broker ascertains the client's needs and goes out to find the most suitable insurance policy to cover those needs.

Sometimes a broker is also an agent. This means that he is a broker for certain types of products, and doubles up as an agent for some other companies. For example a life insurance broker might also be an agent for one or more general insurance companies. The broker must make it very clear to the insured about his change of role when acting outside their broker registration, and therefore acting as an agent.

Anyone who is not a registered broker who arranges insurance for monetary reward must be an agent of the insurer.

In practice, clients should not be particularly worried about finding a broker over a multi-agent. At my firm we are multi-agents, we deal with a dozen different companies. Popular belief that a broker is someone who shops around for the best price and an agent is someone who tries to stitch you up with "the works" is incorrect. The difference between the two types of advisers is mostly legal, few people would understand the difference. As agents for so many life companies we always look for the best deal for clients. Firstly I find out the sort of cover they need and then I prepare quotes for each policy that meets those requirements. 90% of the time the client ends up getting the cheaper cover, provided that this meets all of their needs. The only important thing to us is that the cover meets their needs. It isn't, after all, the agent or broker who sets the price of insurance; it is the insurance company that sets their rates. A broker can not write insurance any cheaper than an agent, so the important thing is to make sure you trust the adviser, the best deals depend more on the number of quotes you compare, rather than the regulation regime the adviser works under.

Where did the idea come from that a broker is someone who deals with a large number of companies and an agent is someone that deals with only one? Well partly it is historical, once upon a time agents used to work with just one company and rarely had multiple agencies, but partly it is through confusion with other types of broker. A car broker runs around looking at cars in lots of car yards to find you a good one, and takes the commission from whichever car yard you buy from. A business broker values businesses and facilitates their sale when the old owner wants out. The term works differently in insurance. In fact it is possible (though rare) to be a broker and deal with only one company. Like I say, the difference is a legal one and for most people it would just go right over their heads if you explained to them.