Money

Insurance brokers

Updated: 01 Sep 2009
09sep-insurancebrokers-hero

Introduction

Insurance brokers should take the hard work out of comparing policies or finding the right cover. Are they worthwhile?

We asked our members about their experiences with insurance brokers, and also used a mystery shopper to make some enquiries. Results were mixed - but following our tips should help you find a good broker and avoid some fishhooks.

Why use a broker?

Insurance brokers see themselves as a "one-stop-shop" for everything to do with insurance. And some companies - wholesale insurers Vero, Lumley and NZI spring to mind - offer the majority of their policies through brokers and not directly to consumers.

Gary Young from the Insurance Brokers Association of New Zealand (IBANZ) says good brokers add value by making sure the risks a client wants covered are presented clearly so that the best possible premium is obtained. He also argues that brokers have an important role as advocates for their clients when they make a claim.

What it’s really like

Our members had good and bad things to say about insurance brokers.

Positive experiences

Gordon, a member from the Bay of Islands, tells us he’s used the same broker for his farm-based business for the last 23 years. His experience is one of hassle-free claims (including three written-off cars), rapid restoration of bonuses following these, helpful advice each year when renewing policies, and a professional service. The broker finds the most cost-effective company for Gordon each year when he renews his policies. Having seen some of the problems his friends have had when dealing directly with insurance companies, Gordon recommends using a good broker.

Nadine and her partner have used an insurance broker for four years and believe they have received service that is second to none. Nadine says they receive comprehensive advice and full disclosure. Before buying any policy they always do their own research. They always give their broker the opportunity to come up with something better - and he always does.

Janet has used the same broker for over 20 years for personal and business insurance (but not health and life). "During that time they have swapped us around various insurance companies to get the best deal. We have made several claims which have been handled through the broker and the outcome has been satisfactory and the process painless. One claim involved a boat and the broker argued on our behalf and the claim was successful."

Not so good

Not everyone has had a good experience.

Sandie says brokers tend to have favourite insurance companies and far from getting the best deal, stick with one company or at most two. "I have found that by phoning round myself, I have managed a much better deal than a broker could do for us. Every three years or so I do the rounds and get quotes from other companies but so far this has resulted in us sticking with AMI."

Julie, a subscriber from Christchurch, told us that when a window was wind-damaged one weekend her insurance broker would not return calls. She phoned the insurance company listed on her policy but they had no record of her and said her broker would have to sort it out. Her only options were to pay for the repairs or leave a gaping hole. She paid for the repairs and never heard from her broker. She found out policies from the bigger companies were cheaper and they offered a 24-hour claims service.

Sophia wanted to halve her life insurance cover so that she could reduce the $185 monthly premium. While her broker had been efficient in signing up the original policy, trying to get her to reduce Sophia’s cover was a nightmare. “She tried to convince me not to change. But I didn’t agree. Then she tried to delay the process. It wasn’t sorted out a month after I first contacted her … I then contacted Sovereign trying to sort it out myself. Sovereign told me I had to do this through the broker.”

Only when Sophia wrote to Sovereign directly did her broker get in touch. Sophia ended up cancelling the policy.
 

Our mystery shopper

We asked someone who was reviewing her home and contents policy and car insurance, to phone a few brokers. She reported that the brokers were happy to discuss her needs over the phone and the risks she wanted to cover. A few days later she received quotes and policy documents in the post.

Little meaningful comment

When she asked the brokers how the policies they suggested differed from the ones she already had, only one broker offered any meaningful comment: in his view, the policies he recommended would be more expensive than what she already had.

Another broker said they used Vero because it had a good record in paying claims – but no evidence was given to substantiate this.

Lack of information

Where a broker represented more than one insurer, no comparison of the policies was given to support the one the broker was suggesting.

None of the brokers explained to her how they were being paid by the insurance companies or how this might affect which policies they recommended.

No cost savings

There also didn’t seem to be any cost savings from using the brokers. The quotes she obtained from the brokers for car insurance policies from Vero and Lumley (largely broker-only companies) were in the range of the direct-to-the-public policies we surveyed in our car insurance article.
 

Rules and regulations

Insurance brokers are largely unregulated with no barriers on who can call themselves a broker. There are no minimum skill or education requirements and, other than the laws about fraud and misleading advertising, there are no rules covering what the broker has to tell you about themselves.

Payments

Brokers are usually paid by commission from the insurance company, once a policy is sold. This introduces a possible conflict of interest into their relationship with customers. Policies may be recommended not because they are the best, but because they pay the highest commission. Unnecessarily high cover limits may be recommended because they generate higher commissions.

New rules

New legislation for the financial advice industry (which includes insurance brokers) is to be implemented in 2010. It seems likely the new rules will succeed in removing some dodgy brokers, improve complaints procedures and improve the quality of information given to consumers.

However, there are no plans to do anything about how brokers are paid. And like all registered financial advisers, the main registration requirements for brokers will be minimal. They must, however, be part of an approved dispute-resolution scheme.

Brokers versus agents

You need to know whether the person you’re dealing with is a “real” broker selling policies from a number of insurers or is merely an agent representing one firm. Our mystery shopper came across cases where the broker seemed to be an agent.

Gary Young from the Insurance Brokers Association (IBANZ) says many who call themselves “brokers” are agents and can’t be relied upon to give unbiased advice. If a broker is a member of IBANZ (which has fire and general insurance brokers as its members) they must meet the association’s Code of Practice. All its members must represent at least three insurers and provide advice “objectively, independently and impartially”. The Code of Practice is backed up by an independent complaints body.

If you have problems with your insurance or the type of cover, the broker is responsible for fixing it up if the policy was bought through a broker. If the insurance was sold by an agent, then the insurance company is responsible.
 

Finding a good broker

  • Visit a number of brokers and ask each one to explain what they do, how many insurance companies they deal with, how they are paid, and what qualifications they have. Ask what they do when you need to make a claim.
  • Put your questions in writing and ask for written answers.
  • Ask to read any client testimonials the broker has.
  • Discuss what conflicts of interest they may have and why they believe their advice is independent.
  • Ask how much of your annual insurance premium is going to the broker. This info should be volunteered, but if it isn’t ask for it. 
  • Expect a good broker to ask you a lot of questions about your insurance needs and the risks you might want to insure. If they don’t understand your situation well, they can’t give good advice.
  • Membership in industry groups such as IBANZ is one way to find brokers who comply with a code of practice.
  • Don’t put up with poor service – if you’re getting the run-around when you make a claim it’s probably time to find a new broker.

Our view

  • The new rules for financial advisers will also give consumers who use insurance brokers some extra protections.
  • Commission paid to brokers by insurance companies can create conflicts of interest with brokers’ clients. 
  • The term “broker” should be used only where the person represents at least three or more insurers. Agents of one insurance company shouldn’t be able to call themselves brokers.
     

 

More information

More from consumer.org.nz

 

Report by Susan Guthrie.