What exactly is an insurance broker?

Curtis Killen

As president of KBD, Curtis aims to simplify insurance for his clients. He’s helped lead KBD to become one of Canada’s fastest 400 growing companies according to the Globe & Mail.

We throw out a lot of kickass knowledge on the KBD blog.

KBD is a prominent Montreal insurance broker, and we’re happy to let you in on some of the secrets of the industry.

But some of you are probably thinking, PUMP THE BRAKES!

What exactly is an insurance broker anyways?

Fair question!

Brokers are the middle men between insurance companies and their clients.

You probably have follow up questions.

And we’ll get to those.

First, let’s back it up a bit.

Going back 50 years ago, you could only get insurance through a broker; direct agents like Desjardins didn’t yet exist.

In those days, it was common for Canadian insurance brokers to work with 20 or 25 different companies.

But consolidation led to there being fewer insurance companies, and those companies had to become more efficient.

So today, brokers typically provide access to “only” three to five companies.

Another outdated part of the insurance industry is the Mom and Pop shop, the smaller insurance broker that could provide extremely personal service.

For example, it was customary for customers to go for lunch with their broker once a year to renew their policy.

Nowadays, fewer customers value that personal relationship and often prefer the ease of renewing their policy online or over the phone.

The Mom and Pop model just isn’t profitable for companies.

Put simply, the market has changed.

Some people like the idea of working with an insurance broker because they often do retain a bit of that Mom and Pop feel to deliver a more personalized service than a direct insurance agent can offer.

KBD is a broker, and we are proud to offer a more personal experience, but our business model is actually closer to that of a direct insurance company in many ways.

People often assume that a broker will relentlessly shop for its clients.

And that’s true — to an extent. Some do and some don’t. 

KBD has 15,000 clients — so do we shop for each and every client?

No, we don’t.

We don’t have the time or resources to be able to do that and we simply can’t afford to when faced against the big, efficient players. 

Any broker or insurance professional that says they shop for every client is lying.

And lying is wrong! Which is why today we’re opening the vault on the inner workings of an insurance brokerage.

We’re here to present the information whether it benefits us or not.

Here’s what we’ll cover:

I’m not here to tell you whether you should work with a broker or not.

I’ll give you the facts — the truth — and then you can decide for yourself.

Is it cheaper to get insurance through a broker?

There’s no right answer here.

Here’s why:

Real talk: No insurance company is permanently cheaper than the competition.

Every insurance company adjusts their rates on an annual basis.

That’s because of something called loss ratio.

Loss ratio: (Insurance claims paid + Adjustment expenses) / Total earned premiums

The loss ratio determines whether an insurance company makes money on their policies in a given year.

They adjust their rates based on this number.

And since the amount of claims and total cost of those claims fluctuates from year to year, it’s impossible for one company to stay consistently cheap.

No one can be the cheapest year after year — if they were, they would lose money.

Over time, it all evens out.

A lot of people assume online insurance will be cheaper because it’s cheaper for the companies to issue it.

Not so fast.

These companies make heavy investments in research & development, so if anything, you could argue they should be MORE expensive.

The reason these online insurance companies exist is not about lower cost to operate — it’s about doing their best to satisfy what their customers want.

Today, a lot of customers want to get their insurance online. Hence, online insurance companies.

You might also hear that brokers take commission so they must be more expensive.

WRONG AGAIN!

That commission is there for a reason. We’ll get to that a bit later.

There are just too many factors that go into determining your insurance rates.

So is it cheaper to get insurance through a broker or direct?

The debate lives on.

What does an insurance broker do?

Brokers find insurance for their clients.

At Quebec broker KBD, we can sell you a policy from Intact, Economical, L’Unique, or Lloyd’s.

But when someone asks who you get your insurance from, you might say KBD.

And that’s because you deal with us.

We handle sales and service, but in the event of a claim, the insurance provider pays.

A lot of people believe that direct companies offer cheaper insurance because they don’t have to pay a middle man.

That’s not true.

The business models are more similar than you might think.

While direct companies cut out the broker, they still pay for sales and service labour — they just do it in-house.

So is it better to go with a broker because they have access to more providers?

Maybe.

That’s one benefit of using a broker.

But at KBD, while we work with the four providers mentioned above, we can’t sell you insurance from Desjardins or Belair, two big players.

Neither can any of the Quebec brokers.

Even the best insurance broker doesn’t have access to everything.

So there’s no better or worse way to get insurance.

It often comes down to personal preference.

How much commission does an insurance broker make per policy?

I bet you’ve never found the answer to this anywhere online!

We’ve got it for you.

Home, tenant, condo insurance = 20% commission.

Ex. Say your policy costs $1,000 per year, we’ll collect $200 from the insurance company every year the client renews.

Car insurance = 12.5% 

Commercial insurance = 10 – 25%

For commercial insurance, the cut varies.

A common reaction is that the higher the commission, the more your broker is gouging you. Not so.

When the brokerage fee is as high as 25%, that means the broker is doing their own policy issuance and underwriting.

So, yes, we’re making more. But we have more work to do, which means paying for software, expertise, and more.

In the end, the profit is roughly the same.

Why use an insurance broker?

Personal preference and price.

If you like dealing with the same person every time, a broker is for you.

Price can also vary on a person to person basis.

Depending on your profile, a broker might be cheaper, while for someone else with a different profile, direct may be cheaper.

Then there’s the company you want to get your insurance from.

There are some insurance companies in Montreal and Quebec that have great name recognition and so customers flock to them.

The same way you can only get access to Desjardins by going directly through their agents, if you want Intact’s insurance, you have to go through a broker like us.

That’s just the way they choose to do business.

KBD insurance broker Montreal – A final word  

The broker vs direct debate isn’t going away any time soon.

At the end of the day, they’re two different business models. (Though in some ways, as we said, more similar than you’d think.)

Whichever way you go, you’re getting the same thing.

So choose wisely. Or, just choose.