What is the American Agency System?

The 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.

Key Takeaways

  • The American agency system allows independent agents to locate and sell policies from a large group of companies.
  • This system can allow the agent to find better policies at better prices.
  • The American agency system can also benefit insurance buyers by finding the best coverage for their needs.

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.

How the American Agency System Works

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 areaeither 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 landscape has changed with the rise of internet and direct-sales insurers armed with national advertising budgets, massive online operations and legions of online agents. There may not be a person in North America who doesn't know the phrase that if you've got 15 minutes, GEICO can save you 15% on your car insurance.

GEICO, however, isn't one company. It's eight 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 insures more than 28 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 U.S. consumers shop for insurance, and this appears to be cutting into the business of independent agents. As of 2018, roughly 36,500 independent agencies were operating in the U.S., down from 38,000 two years earlier. According to McKinsey & Co., the average age of an independent agent was 59. Some independent agencies have been slow to adopt to new technology and internet sales channels.