The role of insurance intermediaries

Insurance intermediation in practice 
The intermediary’s role within this enterprise stems from two essential functions 
performed by the intermediary: reducing search costs and uncertainty .. 
Search costs
Intermediaries reduce the search costs to insurance buyers looking for the right coverage 
and the right insurer for their risks, and they reduce sales and marketing costs to 
insurance companies in search of insurance buyers. 
Intermediaries know the insurance marketplace. They know their clients’ risks; they 
know the insurers willing to cover those risks; and they know the best way to secure that 
coverage. 
Uncertainty
Insurance purchasers and companies do not have all the information relevant to the 
placement of a policy, which makes it difficult to negotiate a fair price and the proper 
terms and conditions of a policy. Purchasers know the risks in need of coverage, but may 
not know the financial health of the insurer or the prevailing conditions of the insurance 
market. Insurers, on the other hand, may have all the company and market financial 
information necessary to make a decision, but are not in a position to know enough about 
the risk and the prospective client. 
Intermediaries know the insurance marketplace, they solicit and provide information on 
insurance purchasers and companies, and they make the information more easily 
understood to both parties to a transaction. 
In the interest of long-term client and insurer relations, brokers have a strong incentive to 
ensure that all parties have the information they need so as they are able to enter into a 
mutually beneficial arrangement.
Insurance purchasers and companies may come to a transaction with unequal bargaining 
power. A small- or medium-sized insured may come to a transaction with significantly 
less clout than the large insurer with whom they need to do business. An intermediary is 
often able to balance the equation by leveraging its business volume with carriers, and 
thereby obtain better terms and conditions for the client.”
Every carrier essentially offers the same promise – to compensate the insured for a loss. 
To make that promise meaningful, however, the carrier must have the ability to properly 
understand and evaluate the risk presented and the capacity and financial solvency 
required to pay any claims that may result from that risk, as well as a reputation that 
suggests a willingness to make good on that promise.
There are literally thousands of insurance carriers, from large national carriers that offer a 
broad range of coverages to small regional carriers that may specialize in a single product 

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line. For most clients, coverage terms must be solicited from and negotiated with the 
carriers on a case-by-case basis. 
Clearly, numbers dictate that this cannot be done with every carrier in the marketplace 
that has the capacity to insure a given exposure. Clients rely on intermediaries to know a 
universe of carriers that are well-situated to address their needs and negotiate with 
selected companies to obtain the relatively best overall insurance value for them. 
To do this, the development of a relationship between intermediary and carrier is 
essential. In order to provide products and services to their clients, intermediaries must 
have expertise with the risk profiles presented by their clients and the savvy to go to the 
right place for the right coverage for each risk profile. 
The best way for an intermediary to evaluate a carrier’s ability to insure a risk and its 
capacity to pay claims is by working with that carrier over time. Similarly, a carrier will 
be in a much better position to understand and evaluate the risk presented if it 
understands and trusts the intermediary presenting the risk to be insured. 
Intermediaries are valued by insureds and insurers as an essential element of the 
insurance marketplace.
Intermediaries search the insurance marketplace to find and place coverage for their 
clients’ risks. They also assist clients in the development of alternative risk transfer 
mechanisms for risks that otherwise would be impossible – or prohibitively expensive – 
to insure, and they provide services to both insureds and insurers. 
In today’s complex insurance marketplace, however, intermediaries have become more 
than middlemen between insurance companies and insurance buyers. 
They bring experience and expertise to the insurance marketplace, using their knowledge 
of the insurance markets, their familiarity with their clients and clients’ risk, and their 
access to insurers forged through long-term relationships, to sell and service insurance 
coverage for costly, and in many cases unique, risks. 
Commercial insurance clients are generally professional risk managers. As sophisticated 
insurance purchasers, they realize that commercial insurance products are not 
commodities; rather, they are customized risk transfer tools, the price and terms of which 
are generally negotiated on a case-by-case basis. 
Placement of such risks can be a long and difficult process. Sophisticated commercial 
purchasers rely on their intermediary to fully understand and appreciate their insurance 
coverage needs and to find the coverages suited to address those needs. 

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