As described behind the tab, “Who Can You Trust?,” the fundamental difference in how insurance is sold; either online or by local independent agents, can also result in a difference in its price.
For example, while it can occur, you rarely see a homeowners company that sells through independent agents spending millions of dollars on expensive newspaper ads.
Online carriers, on the other hand, have no choice but to do so. Remember, independent agent companies have a local sales force that promotes their policies via community relationships and/or by using local, more targeted promotions that are more efficient and therefore, far less costly.
And, independent agents don’t get paid unless a sale is made, nor do they get to keep their commission if they don’t provide good service and you cancel your policy. Internet companies, on the other hand, pay for expensive advertising whether or not a sale is made. According to filings with the Office of Insurance Regulation (OIR), one recently formed Florida-based online carrier spends over 15.5 percent of your premium just on “advertising and promotion.”
In addition to advertising, online companies must also pay for phone banks, Internet systems and flashy websites, computerized answering machines, and more. According to filings with the OIR, the same online insurer spending 15.5 percent on advertising (part of which accuses others of charging “hidden fees”), also spends another 15 percent of your premium to process your policy for a total of more than 30 percent. This money, plus another $25 fee, is paid to what is called a Managing General Agency or MGA, which in this case, according to OIR filings, is wholly-owned by the online insurer.
Agents for traditional carriers can provide information on the various fees and assessments on your policies including MGA fees of the carriers they represent. When dealing with an online insurance company, the important thing is that you ask the right questions up front to fully understand exactly how your premium dollar is being allocated.