Chapter 5 - Broker-Insurance Company Regulations

Question 1

3 items regarding authority within a brokerage agreement.

Answer 1

1. Limits for each type of risk.
2. Types of risks permitted to be bound.
3. Risks not permitted to be bound.

Question 2

Disadvantages of direct billing

Answer 2

• Lack of control over prep/maintenance of policies.
• Loss of personal contact with clients.
• Inaccessibility to insurance company records.
• Mistakes in policy issuance.
• Brokerage deprived of use of premiums.

Question 3

2 reasons insurance company may wish to terminate brokerage agreement.

Answer 3

1. Lack of sales.

2. Producing poor book of business.

Question 4

Hold harmless

Answer 4

Holds brokerage harmless against all civil liability

-Covers attorney fees, and cost of investigation/defense.

Question 5

Elements to consider when negotiating profit sharing agreement.

Answer 5

• How much business is the brokerage required to write in what line by what time?
• Lines of business included/excluded.
• How insurance company income computed.
• How losses are defined.
• How profit is calculated.
• When profit sharing is paid to brokerage.

Question 6

4 important aspects when considering an insurance company’s marketing philosophy and practices.

Answer 6

1. Type of insurance product.
   - is it compatible?
2. Volumes of business.
   - brokerage must produce the volumes to be worthwhile.
3. Consistency and stability.
   - inconsistency with the insurance company can be detrimental to brokerage relationship with client.
4. Compensation.
   - commission
   - profit sharing
   - rewards

Question 7

3 components of compensation

Answer 7

1. Commissions.
2. Profit sharing agreements.
3. Rewards.

Question 8

3 Policyholder services to consider.

Answer 8

1. Procedural matters.
   - How easy is it to conduct business.
2. Support services.
   - Risk Management is important part of service provided.
3. Technology.
   - Improves efficiency.

Question 9

Procedural Matters of insurance company to consider.

Answer 9

1. Availability of premium financing plans.
2. Length of time to receive a quote.
3. Length of time to receive policy.
4. How far ahead of expiration are renewals sent.
5. Turnaround time.

Question 10

What does PACICC (Property and Casualty Insurance Compensation Corporation) do?

Answer 10

• Protects policy holders in the event insurance companies become insolvent.
• Pays out covered claims up to $250,000 per claim.
• Pays unearned premium up to 70% or $700.
• Industry funded.
• Contributions depend on amount of business written.
• Automatic coverage.

Question 11

Underwriting procedures to examine.

Answer 11

1. Location of underwriting decisions.
2. Underwriting guidelines.
3. Rate levels.
4. Competence and continuity of staff.

Question 12

4 areas to consider when trying to decide how many companies a brokerage should represent

Answer 12

• There is no magic number.
  1. Types of clients.
  2. Needs of clients.
  3. Total volume of business handled.
  4. Services and rates provided.

Question 13

Advantages of direct billing.

Answer 13

• Collection costs are reduced.

- Eliminates having to bill client, collect premium, and remit to insurance company.

Question 14

Why would an insurance company terminate a brokerage agreement?

Answer 14

• Lack of sales.
• Poor book of business.
• Agreement commonly states a notice period of termination, ~90-180 days.

Question 15

Claims services

Answer 15

• How the claim is handled will define insurance company and brokerage reputation.
• Other than purchasing, this is the only time the client interacts with brokerage.
• Insurance companies constantly try to reduce claims costs.
• Broker should monitor all claims to ensure that the client is satisfied with the service.

Question 16

How can technology benefit the brokerage and the insurance company?

Answer 16

• Reduce administrative duties.
• Define client relationships.
• Improve efficiency.
• Increase profitability.

Question 17

What does it mean to be insolvent.

Answer 17

When an insurance company is unable to meet it’s obligations.

Question 18

Underwriting procedures: What to examine regarding the location of underwriting decisions.

Answer 18

• Can decisions be made at branch office, or only head office?
• Where is the head office?
• Different underwriters for each line?
• Several underwriters on one account?
• Does company practice class underwriting?

Question 19

Underwriting procedures: Underwriting guidelines.

Answer 19

• How much information is required for underwriting?

- If massive amounts are required, this may not be cost effective for the brokerage.

Question 20

Underwriting procedure: Why are rate levels important to examine?

Answer 20

• Brokerage must determine if rates charged by insurance company are competitive.
• Must determine if there are any flexibility in rates.
• Rate negotiation is easiest in commercial insurance.
• Insurance company should not be selected based on their rates alone.

Question 21

Underwriting procedures: Why is competence and continuity of staff important?

Answer 21

• Relationships cannot develop when underwriter turnover is high.
• No relationships develop if broker is constantly being transferred.

Question 22

How many insurance companies?

Answer 22

• There is no magic number.

- Consumers aren’t concerned about number of insurance companies represented, as long as their needs are met.

Question 23

Advantages of representing fewer insurance companies.

Answer 23

• Can maintain greater volumes of premium.

- Relationships are better when broker works with the same underwriter often.

Question 24

Disadvantages of representing fewer insurance companies.

Answer 24

-If the relationship were to deteriorate, insurer became insolvent, be purchased, or withdraw from the province, brokerage is now in a tough position.

Question 25

Suitability of a brokerage

Answer 25

1. Premises
   - easily accessible?
2. Financial Information
   - premiums must be handled properly.
3. Type/Mix of business.
4. Other insurers represented.
5. Loss experience.
   - severity (size of loss)
   - frequency (number of losses)
6. Human Resources.
   - staffing
7. Business plan.
   - how does the insurance company fit into the brokerage’s plan.
8. E & O Claims record.

Question 26

Insurance Company Relations

Answer 26

• Important to keep communication open between broker and insurance company.
• Frustrations arise with insurance companies when info provided is inadequate, or incorrect.
• Challenge for brokers if policy issued late or incorrectly.

Question 27

Insurance companies must listen to brokerage’s concerns regarding…

Answer 27

• Pricing
• Compensation
• Degree of underwriting authority
• Volume/Sales requirements
• Turnaround time.

Question 28

Name & Explain the 2 forms of communication channels.

Answer 28

1. Informal channels
   - golf games, lunches.
2. Formal channels
   - newsletters, advisory councils

Question 29

What are advisory councils for?

Answer 29

• Making decisions.

- Justify decisions already made.

Question 30

What’s the problem with advisory councils?

Answer 30

• Involve selected brokers only.

- To alleviate, insurance companies notify all brokerages of council meeting dates.

Question 31

Factors to consider when selecting an insurance company.

Answer 31

• Marketing philosophy and practices.
• claims services.
• Policyholder services.
• Financial Stability.
• Underwriting guidelines.
• How many insurance companies?