DEFINITION of American Agency System

American agency system is a method of selling insurance policies in which independent insurance agents locate the best insurance policies for their customers and receive a commission for each insurance policy sold. The American agency system uses independent agents who can sell policies from a wide variety of companies, unlike captive agents, who can only sell one company's insurance products.

BREAKING DOWN American Agency System

While many insurance customers these days are accustomed to calling different insurance companies and comparing quotes online, an independent agent, working in the manner known as the American agency system, does the work of researching different policies and companies on the customer's behalf. This may help a customer obtain a better deal.

How Insurance Is Sold

Up until a few decades ago, the only way to get a homeowners, auto or life policy was to contact an agent in your area, either one representing a single company, known as a captive agent, or an independent agent, who represents multiple companies. If you went to your local Prudential office, you'd walk away with a Prudential policy. At the independent agency's office, you might buy a policy from any one of dozens of companies that the agency represented.

This system still endures today, but the rise of the internet and direct-selling insurers with huge, national advertising budgets, massive online operations and legions of online agents, has changed the landscape. There may not be a person in North America who doesn't know that if you've got 15 minutes, Geico can save you 15% on your car insurance.

Geico, however, isn't one company. It's seven operating companies and you may get a quote from any one of them. Geico is in turn owned by Berkshire Hathaway, the massive holding company that Warren Buffett made famous. It now insures more than 25 million cars in the U.S. Geico will also send customers looking for homeowners and other types of insurance to companies it has agreements with in each state. For example, if you want homeowners insurance in New Jersey, Geico may refer you to Stillwater Insurance Group.

The direct sales model has changed how Americans shop for insurance, but independent agents are still going strong. There are close to 40,000 independent agencies in the U.S., nearly one for every Zip Code on average. The average age of an independent agent is 59, however, and some independent agencies have been slow to adopt to new technology and internet sales channels.