Captive vs Independent Insurance Agents

By Jason Rogers

Insurance agents often face a pivotal decision after spending a few years in the business: remain captive or go independent. Here are the pluses and minuses of each career path.

Insurance sales careers follow a common pattern. Recruits often enter the business as career or captive agents for a large insurance company. They receive extensive training, support and employee benefits in return for selling what their firm wants them to sell.

After a few years of experience, they may decide to become independent agents in order to provide their clients with more product choices. As independents, they no longer qualify for employee benefits, but their sales compensation may increase significantly due to increased commission rates. Plus, they enjoy greater autonomy as independent business owners than they did when they first entered the business as captive producers.

Has your career unfolded in this fashion? If not, are you approaching the point where having more independence sounds appealing, both for you and your clients? Then it’s important to fully understand each option in order to make a wise decision.

Business Models Defined

A captive insurance agent, also known as a career or exclusive agent, only works for a single insurer. That company provides the agent’s total compensation, which consists of a combination of base salary or other support payments, commissions and benefits. A captive agent can either be an employee or an independent contractor.

Captive agents are commonly required to sell only their company’s products. If their firm has brokerage capability, they may be allowed to access other companies’ products when no internal solution meets a client’s needs. In most cases, however, captive agents are highly “encouraged” to sell only their company’s products.

Independent insurance agents are not employees of any single insurer. In fact, they work only for themselves. They can access products from multiple companies, selecting the most appropriate solutions for their clients. As their own boss, they have the ability to manage their businesses as they see fit. They can define their own procedures, hire the people they want to work with, take as much time off as their cash flow allows and, ultimately, sell their book of business to anyone who accepts their terms.

Neither model is inherently better than the other. In some cases, new agents will prefer a captive arrangement in order to access the training and coaching required to achieve a fast start. In other cases, they will prefer the independent model to be able to solve more of their clients’ needs. Although younger recruits often prefer starting off as captives and older professionals prefer independence, age isn’t the only factor at play. It often boils down to financial resources, learning style and business temperament. In short, there is no single right or wrong way to sell insurance just the right or wrong way for you.

Pros and Cons of Being a Captive Agent

There are many advantages to being a captive agent. One of the main ones is being able to enter the insurance business without start-up capital. Another is having a limited product portfolio. Although this is usually seen as a disadvantage, for new agents, it can be a big plus. That’s because having fewer products in their portfolio shortens their learning curve. Another advantage is that agents can quickly learn a single company’s underwriting policies and new business procedures. This compares with having to master multiple company procedures as an independent agent.

What’s more, captive agents strongly benefit from their insurer’s brand power. Many large insurers spend millions of dollars annually building national brand awareness. They also spend heavily on lead generation to provide their agents with prospects to approach.

Large captive insurers typically have robust new-agent training. It usually takes place in local offices (agencies) across the country, supervised by sales managers or coaches who are compensated to get new agents productive quickly.

However, not everything is sweetness and light when it comes to captive agents. The biggest disadvantage is that agents working under this model are expected to sell only their employer’s products. If a client has a unique need for which their company lacks a solution, agents may be pressured to sell a company product anyway. For agents who believe in serving their customers’ best interests, the pressure to sell only their company’s offerings regardless of client needs can become demoralizing, leading them to pursue more independence.

Related to product constraints is the inability to secure coverage for clients with unique risk profiles. For example, life insurance career agents might have clients with serious health conditions. However, their companies might underwrite such prospects more stringently than do other insurers. Because of their captive status, agents may not be able to sell life insurance to them even though their need is acute.

Another downside is that captive agents have little or no say about how to operate their business. They must use their employer’s computers and applications no matter how antiquated they are. What’s more, they’re forced to operate in their companies’ target markets despite being uniquely equipped to pursue other markets. And if their sales productivity falls below quota for any reason, captive agents may be out of a job.

But here’s the biggest disadvantage of being a career agent: no ownership of renewal commissions. If agents move to another insurer or leave the industry, they will stop receiving renewal payments. Depending on how long they worked as a captive agent, they will likely forfeit substantial compensation, perhaps enough to retire on. In effect, this gives insurers leverage over captive agents with long tenures. They may crave more independence, but can’t afford to pursue it.

Pros and Cons of Being an Independent Agent

The main advantage of being an independent agent is the ability to sell products from multiple insurers. This allows agents to access any product a client might need or want, including niche policies that captive insurers don’t offer. Similarly, independent agents can match clients with unique risk profiles with insurers that have the underwriting appetite to serve them. In fact, producers can shop clients with special needs to multiple carriers to see which can provide the best solution at the lowest cost.

Independent agents typically receive higher commission rates than captive agents. This is because insurers don’t have to house them, provide income support or provide employee benefits. And since independent producers are autonomous business owners, they can seek out the highest-paying insurers, further expanding their overall compensation.

Since independent agents can work with any insurer, they can partner with those that serve the same markets they’re targeting. This allows them to penetrate underserved markets, which will improve their ability to acquire clients that other agents and carriers are ill-equipped to serve.

The ability to access a wide range of products lets independent agents position themselves as objective insurance providers. Since a captive insurer can’t handcuff them to a single product portfolio, they can highlight their freedom from ethical conflicts when speaking with prospects. This becomes a competitive advantage for them over their captive competitors.

Most importantly, independent agents are in business for themselves. They have the ability to create their firms from the ground up, conforming to their vision of how an insurance agent should operate to benefit their clients. For people who like to call their own shots, being an independent agent is the best of all possible worlds.

Of course, no insurance-agent model is perfect. Independent agents have disadvantages, just as captive agents do. Here are some of the major ones:

• Independent agents have to provide their own start-up capital.
• They must create their own brand as opposed to benefiting from a captive insurer’s preexisting brand. This can be expensive and take a long time to realize.
• They must generate their own leads rather than have their captive insurer provide leads for them. This can be costly, as well.
• It can be challenging for independent agents to master the underwriting and new business procedures for many different carriers. Each insurer will have its preferred way of doing business, which independent agents must adhere to. If they don’t, their insurance applications might get “lost” in the process.
• Because independent agents represent so many different insurers, it can be difficult to master every company’s product portfolio.
• Even though independent agents theoretically aren’t subject to sales quotas, they usually have to produce a minimum amount of sales in order to maintain their insurer appointments. Affiliating with insurance marketing organizations (IMOs) can remove this restriction since multiple agents can team up to fulfill their IMOs overall sales target.
• If independent agents select an insurer that ends up leaving the market or going insolvent, it can harm their customer relationships.

Which Model Is for You?

Cleary, captive and independent insurance agents live in different worlds. Neither is better or worse than the other except in the context of agent strengths, weaknesses and preferences regarding how to operate a business.

However, in general, being a captive insurance agent is best suited for people who:

• Are new to the business.
• Need training and coaching to achieve a fast start as an agent.
• Prefer financial support while they grow their commissions to an acceptable level.
• Appreciate not having to pay for their own leads.
• Don’t have a preference regarding markets to serve or products to sell.
• Like representing a large national brand, which will help open doors to prospective clients.
• Don’t mind being an employee or having a boss.

Meanwhile, being an independent agent works best for people who:

• Have more insurance sales experience.
• Enjoy being their own boss.
• Relish the opportunity to define their own markets and generate their own leads.
• Like to create their own sales and administrative procedures.
• Have the mental bandwidth to master multiple companies’ product portfolios and underwriting procedures.
• Require the ability to sell products that meet their clients’ needs, not their insurance company’s needs.
• Appreciate the ability to earn more money than a captive agent can.

Once you decide on which agent model works best for you, it’s time to consider the liability risks you’ll face.

The Legal Risks of Selling Insurance

Picking the right agent model means you’ll be more satisfied with your job. The more satisfied you become, the more sales you’ll make, which in turn increases your liability exposure. Clients may file complaints and lawsuits against you in connection with alleged errors and omissions. To protect your assets against litigious clients, you need to buy errors and omissions (E&O) insurance.

How does E&O insurance work? It shields you in case you make a mistake or forget to do something important that financially harms a client. After you buy an E&O policy, your insurer will:

• Supply you with an approved defense attorney at no cost.
• Provide you with a claims adjuster to manage the process of resolving your claim.
• Cover your legal fees and court expenses.
• Pay for an expert witness to strengthen your legal defense.
• Cover arbitration, mediation or other alternative dispute resolution services.

In short, if you want to build a successful long-term career as an insurance agent, think hard about which agent model plays to your strengths and minimizes your weaknesses. Then mitigate your liability risks by purchasing an affordable and comprehensive E&O policy from an insurance provider you can trust. Good luck!

Having E&O insurance is an essential element of an insurance agent’s or broker’s long-term success. Learn more about the AIP Errors and Omissions (E&O) insurance program exclusively for agents and brokers of Colonial Life.