Captive Agent (insurance) – Definition

Cite this article as:"Captive Agent (insurance) – Definition," in The Business Professor, updated March 14, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/captive-agent-definition/.

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Captive Agent Definition

A licensed insurance agent who works for one single insurance company exclusively, is known as a captive agent. A captive agent represents one single insurance company and sells only the products offered by that company. A captive agent may be a full-time employee of the company or an independent contractor. The full-time employees get a fixed salary plus commission while the independent contractors earn on a commission basis. Captive agents do have thorough knowledge about all the offerings of their own company but are unable to serve those who do not need or qualify for the products of the company.

A Little More on What is a Captive Agent

Many big and well-known insurance companies employ captive agents who sell their insurance policies exclusively. Nationwide, State Farm, Allstate, and many other companies have their captive agents. Captive agents are experts in their company’s policy with detailed knowledge. They do not have to learn about the rules and products of different insurance policies offered by different companies. They can easily suggest the products offered by their company according to your need. They can easily calculate the price for coverage after knowing a few details. Common insurance products include car, house, mobile, home-rent, motorcycle, boat, commercial and health. Annuities, investment funds, retirement plans, business life etc. are some of the common financial products.

Captive Agents and Independent Agents

There are mainly two types of licensed agents work for the insurance companies; captive agents and independent agents. Captive agents enter into an agreement with a single insurance company to sell their products only. Whereas independent agents are allowed to sell policies offered by multiple insurance agencies. They have a contract with more than one insurance companies and sell specific lines of insurance policies offered by those companies.

Captive agents enjoy certain benefits against the contract including a fixed salary, office space to work from and direct access to the administration of the company for speedy paperwork. When a customer approaches the company for a policy, the insurance company generally refer them to their captive agents working in that area.

On the other hand, independent agents do not get such supports and referrals from the insurance company. They have to work from their own office, and they depend on the commission for earning. However, they are able to offer their clients a varied range of policies offered by different insurance companies to choose from. Their clients can pick up the most suitable one according to their need and eligibility. But in general, independent agents do not get a chance to sell the policies offered by the companies who have their own captive agents. Those companies often exclusively rely on their own agents for selling their products.

Generally, independent insurance agents earn a much higher percentage of the sales and their commission rate is often 50% higher than the captive agents. But at the same time, they need to run their own business without any support from the company. The commission rate is often much lower for the captive agents but in addition to the commission, they get other supports including monthly salary, operational expense etc. The earning of the captive agents is generally more consistent and stable than independent agents. Independent agents often team up with other independent agents to form an agency and run its operations jointly.

Advantages of operating as a captive agent

Captive agents need to learn and memorize the rules, products, and guidelines of one single company. They do not have to gather knowledge about different policies offered by multiple agencies.

Usually, insurance companies provide handholding support for setting up captive agencies. They offer training and all other required supports to its captive agents and agencies,

Captive agents are not required to advertise their products and offerings. The insurance company takes all the responsibilities of marketing and advertising. Usually, the captive agents sell the products of some nationally recognized brands, so the agents do to need to worry about the advertisement and promotion.

Captive agents generally get a monthly salary and other benefits from the company in addition to the sales commission thus they have a more consistent earning.

Captive agents have direct access to the company’s administration thus they can get the paper works done more efficiently and quickly.

Disadvantages of operating as a captive agent

Captive agents have only one product to sell. They cannot offer different options to their clients. Even when they know the product is not best suited for their client, they need to convince the client to buy that insurance plan.

If the company stops offering a certain line of insurance, the captive agent of that company needs to stop offering that policy.

The captive agents often need to push certain policies which are not in the best interest of their clients.

The responsibility of the captive agent is to promote and sell the products of their parent company and build a business for it. When the agent wants to retire from work, he or she is not free to perpetuate the agency to whomever they wish.

References for Captive Agents

Academic Research on Captive Agent

  • Critical success factors in captive, multi-line insurance agency sales, Keck, K. L., Leigh, T. W., & Lollar, J. G. (1995). Journal of Personal Selling & Sales Management, 15(1), 17-33. In this empirical study, depth interviews were conducted for identifying 35 success areas associated with successful captive, multi-line insurance agency practices. The study concludes that the critical success factors include motivation to achieve peer recognition, office delegation, extrinsic rewards, goal-oriented management and willingness to spend money to run the business effectively. The study draws practical implications for the insurance companies and their captive agencies. It also includes some suggestions for future research.
  • Insurance Agent and Broker Liability, Richmond, D. R. (2004). Tort Trial & Insurance Practice Law Journal, 1-58. This article discusses the different types and classification of intermediaries who act in the interstitial space between the buyer and seller of the insurance business. Then the article analyzes the liabilities that may be faced by the intermediaries from insureds and other third parties. Such liabilities may arise on the occasion of failure to continue coverage, failure to procure insurance or failure to advise in general.
  • The economics of insurance intermediaries, Cummins, J. D., & Doherty, N. A. (2006). Journal of Risk and Insurance, 73(3), 359-396. This article provides an analysis of the economic functions of independent insurance intermediaries and the study is focused on the commercial property that is casualty insurance market. Besides it also provides a comprehensive study of the market competition, the compensation of intermediaries, and the process of placement of the policies with insurers.
  • Incentive compensation and the use of contingent commissions by smaller distribution channel members, Carson, J. M., Dumm, R. E., & Hoyt, R. E. (2006). This paper analyzes how the contingent commission compensation arrangements work for the independent agents in the insurance business. It further explores whether the use of such a compensation arrangement is justified. The paper concludes contingent commission compensation along with other compensation structures and various producers and distribution system have developed naturally in the insurance market and this system helps the insurance consumers to get insurance at an affordable price.
  • Differential Compensation and the Race to the Bottom in Consumer Insurance Markets, Schwarcz, D. (2008). Conn. Ins. LJ, 15, 723. This paper examines the compensation offered to the insurance intermediaries including independent agents and brokers. The paper is focused on various forms of differential compensation and argues such compensation weakens the competitiveness among consumer insurers with respect to non-price product attributes. The paper argues in this system the insurers are inclined to sell the cheapest coverage possible within the legal boundaries and that increase the risk of a race to the bottom. To avoid this, the article proposes the prohibition of paying differential compensation for selling the same line of insurance.

 

  • Insurance intermediaries, Beh, H., & Willis, A. M. (2008). Conn. Ins. LJ, 15, 571.The role of insurance intermediaries was the focus area of the meeting held in 2008 by the Association of American Law Schools Insurance Law Section. This article introduces reflections on intermediaries presented by Professors Jeffrey Stempel, Daniel Schwarcz, and others at that meeting. The second part of the paper discusses different methodologies for understanding the legal relationships of the intermediaries with the insureds and insurers. The third part discusses the legal treatment of the claims against intermediaries and the last part briefly explores whether contingent commission system further complicates the already muddled legal relationships.
  • Enabling informed consumer choice in the long-term care insurance market, Lutzky, S., & Alecxih, L. M. B. (1999). Journal of aging & social policy, 10(3), 27-44. This paper explores whether the provisions in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) increase consumer protection and helps the consumers to make informed choices. Industry experts, agents, insurance companies, consumer groups, and regulators were interviewed for collecting data for the study. The paper proposes a few mechanisms for improving consumer protection and enabling the consumers to make informed decisions.
  • Federal Income Taxation and Captive Insurance, Barker, W. B. (1986). Va. Tax Rev., 6, 267. This paper discusses the federal taxation and captive insurances in the light of the decisions taken by the U.S. Claims Courts, U.S. District Courts, U.S. Tax Court, and Ninth and Tenth Circuits. All these bodies agreed that captive insurance does not fit into the federal tax definition of insurance thus insurance premiums paid by a corporation and its affiliates to a completely or partially owned insurance affiliate do not constitute deductible insurance premiums. The paper analyzes this decision and the issues presented by it.
  • The Autonomy of the Profession: Whose Agent Are You?, Duska, R. F. (2005). Journal of Financial Service Professionals, 59(3), 25. This paper deals with a critical dilemma faced by the insurance agents while selling an insurance policy. The captive agents are often obligated to sell policies to their clients offered by their company even after realizing that policy is not best suited for the client. The independence of an independent agent is also somewhat limited. When a choice of a product is made, an independent agent is legally bound to act on behalf of that company with which he or she has signed a contract. The paper revolves around this critical question of autonomy of the insurance agents and aims to address this critical yet important question.
  • An Analysis of Agent Location and Homeowners Insurance Availability., Schultz, J. D. (1995). Journal of Insurance Regulation, 14(1). This paper examines whether racial composition and income of a community affect the agent location, independent of fundamental insurance and economic factor. It uses correlation and regression analysis for examining the hypothesis that racial composition and income of a community indeed have an impact on the placement of agents and provides evidence in support of this hypothesis.

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