For someone new to the world of insurance, some of the terms can be quite confusing. Many people have trouble determining what the difference is in an insurance company versus an insurance agency, especially since the two terms are sometimes used interchangeably.
The simple answer is: one is part of a whole. Any major insurance carrier brand names you recognize from television are companies. The insurance companies are comprised of many different agencies. The company provides the product while the agencies provide the service and distribute the product (the insurance policies) among the customers.
This distinction is further complicated by the fact that some agencies may offer policies from several different companies. So you should know that there are two types of insurance agencies: exclusive, or captive, agencies and independent agencies. Exclusive insurance agencies sell products for only one company or brand.
For instance, a State Farm exclusive agency cannot sell Traveler's or Allstate insurance. However, an independent agency works as a contractor for several different insurance companies and can offer policies from many different insurance carriers. Usually independent agencies will be branded under the owner's name or a generic company name such as "A+ Affordable Insurance."
At an independent agency, you could purchase a homeowner's policy with one company, an auto policy with another company, and a life insurance policy with a third company. This allows you to get the best rate for each line of insurance while still having the benefit of using only one agent to manage all your business. The independent agent won't make as much commission off each policy as he or she would if it were an exclusive agency. However, they are able to save their customers more money and retain more prospects that would otherwise go looking for cheaper rates elsewhere.
Read more about the differences between independent insurance agents and exclusive agents.
A local insurance agency does not set insurance rates, create policies, or perform underwriting (underwriters choose whether or not to accept or reject a risk based on guidelines set forth by the insurance company). All of these things are done at the company level. So even an independent agent who has more control over how his agency operates, cannot change the price rates set forth by the various parent companies whose products he sells.
Using statistics from actuarial studies, insurance companies determine the amount of exposure to risk for any given policy. Then, accounting for losses while working to adhere to state regulatory laws, insurance companies may set premiums. It's important to set premium amounts that will allow the company to make a profit while still adhering to the state's laws. There's a delicate balance to be maintained so that customers aren't charged an unfair amount and the insurance company is still able to make a profit.
At a local insurance agency, an insurance broker or agent can only change the price of a premium for a policy by adding or removing coverage. Once all the risk factors are entered into the computer, a price is given and cannot be changed. Typical risk factors usually include location, claims history of the policy holder, and age of the property being insured.
Policies are created by the parent company. The insurance company determines what coverage a standard policy may include, if any additional endorsements may be added, and sets the policy definitions. Within those definitions, a policyholder will find detailed information about what types of loss the parent company will cover and what the company will not cover. There may also be limits to how much will be paid out for certain types of loss (i.e. If a standard homeowner policy includes $2,000 coverage for musical instruments and a policyholder owns musical instruments with a total value of $5,000, the policy will only pay up to $2,000, even if all the instruments are destroyed under a covered loss. An endorsement should be made to cover the additional $3,000.)
While an insurance agency may write policies for their clientele, they are not able to add or remove coverage from any given policy outside of what the company has set forth. In some cases, supplementary coverage may be added for an additional premium, but the most basic coverage of a policy cannot be changed. Moreover, an insurance agency cannot determine what type of losses will or will not be covered under any given policy as that is also laid forth by the company.