What Is an Insurance Broker Dealer?

Purchasing common types of insurance, such as auto, life and homeowners' policies, usually involves working with either an agent or broker. Through your relationship with these individuals, you can provide for your family's financial protection with a variety of insurance products. You may wonder how an insurance broker dealer is different than an agent or broker and which products you may need from this other type of professional that you cannot get elsewhere.

According to the U.S. Securities and Exchange Commission (SEC), a broker is "any person engaged in the business of effecting transactions in securities for the account of others." In other words, a securities broker deals with financial products, such as stocks, bonds and mutual funds, just as your insurance broker does for your homeowner's insurance. Brokers arrange deals between customers and companies that provide products to meet their customers' needs.

The SEC further defines a dealer as "any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise" in a principal capacity. Whereas you may be considered a trader if you buy and sell certain securities for your own private portfolio, a principal dealer does so professionally and may even create the securities it sells. Dealers are the people and businesses that the brokers go to in order to buy and sell securities products for their clients.

As the name implies, a broker dealer is a company that meets both of these requirements. A broker dealer provides the securities and also arranges and executes transactions for others to buy and sell those securities for their own accounts. Insurance broker dealers work with securities that are designed for insurance products. Variable annuities and variable universal life insurance both invest a portion of the customers' premiums into securities that look and act like, though legally are not, mutual funds. Insurance broker dealers originate and manage these securities on behalf of their clients.

Many insurance broker dealers are subject to the same types of federal regulation as normal broker dealers. In addition, broker dealers must carry professional liability insurance, called errors and omissions coverage. As a result of the financial crisis that began in 2008, Investment News reports that the cost of E&O insurance has risen by as much as 20 percent and now often comes with exclusions that were not present before the crisis. Because broker dealers are in a position of responsibility over other people's money, they must be regulated and insured for their customers' protection.