AINS 21 Marketing

Question 1

Legal Roles

Answer 1

the agency relationship requires absolute trust between the principal (insurer) and the agent (producer) because it imposes serious legal obligations on both parties. while the agent has authority to act for the principal, the principal has control over the agent’s actions on the principal’s behalf. This authority and control are the two essential elements of an agency relationship.

Question 2

Legal Responsibilities of the Agent (producer) to the Principal (insurer)

Answer 2

be lower to the principal (insurer)
obey the principal’s lawful instruction
exercise a reasonable degree of care in actions on behalf of the principal. the agent must act as a reasonably prudent person who would under the same or similar circumstances.
Account promptly for any of the principal’s money that the agent holds. Under the duty of accounting, the agent is responsible to the principal for all of the principal’s money and property that comes into the agent’s possession
Keep the principal informed of all facts relating to the agency relationship. this is the duty of relaying information.

Question 3

Legal Responsibilities of the Principal to the Agent

Answer 3

the principal’s duty to pay the agent for services performed requires the insurer to pay commissions and other specified compensation to the agent for the insurance the agent sells or renews. the principal also has the right to indemnify, or reimburse, the gent for any losses or damages suffered without the agent’s fault, but arising out of the agent’s actions on behalf of the principal. if a third-party sues the agent in connection with activities performed on behalf of the principal, ,the principal must reimburse the agent for any liability incurred, if the agent was not at fault. No reimbursement is due if the agent acted illegally or without the principal’s authorization.

Question 4

Responsibilities to Third Parties

Answer 4

the agent’s authorized actions on behalf of the principal legally obligate the principal to third parties in the same way as if the principal acted alone. Therefore, from an insured’s point of view, little distinction exists between the insurance agent and the insurer. Because the agent represents the insurer, the law presumes that knowledge acquired by the agent is knowledge acquired by the insurer.

Question 5

Actual Authority

Answer 5

From the third parties perspective
Actual authority (expressed or implied) conferred by the principal on an agent under an agency contact. Express authority applies not just to carrying out the principal's specific instructions, but also to performing acts incidental to carrying out those instructions. 
for example, the power to sell generally includes authority to collect payment and make customary warranties. however to illustrate consideration of scope, a sales agent who has no possession or indication of ownership of merchandise has no authority to collect the purchase price. in most commercial situations, the agent has authority only to solicit orders or to produce a buyer with whom the principal can deal.

Question 6

Binding Authority

Answer 6

An insurance agent’s authority to effect coverage on behalf of the insurer.

Generally granted to the agent in the agency contract. A form of express authority.

Binding coverage is usually accomplished by issuing binders, which are agreements to provide temporary insurance coverage until a formal written policy is issued. Binders can either be written or oral. when an insurance agent binds coverage for a new client, the agent commits the insurer to covering an exposure for, and possibly playing claim to, a customer who is unknown to the insurer. Binding authorization involves important responsibilities for the agent, and agents are expected to use their binding authority carefully.

Question 7

Custom- Implied Authority

Answer 7

most common source of implied authority. agents can reasonably infer that they have authority to act according to prevailing custom unless the principal gives different instructions. without different instructions, an agent’s authority extends to, and is limited to, what a person in this agent’s position usually does.
Implied authority can also apply with an agent acts beyond the usual scope of authority in an emergency. If the agent needs to act to protect or preserve the principal’s property or rights but is unable to contact the principal, and if the agent reasonably believes that an emergency exists, he or she has authority to act beyond or even contrary to the principals instructions.

An example of implied authority is if Miller agency and Big Insurance Company has an agency agreement together. The agency collects premiums on behalf of Big Insurance enough though the agency agreement lacks a clause specifically granting the authority to do so.

Question 8

Apparent Authority

Answer 8

A third party’s reasonable belief that an agent has authority to act on the principal’s behalf. Based on appearances and includes all the authority that a reasonable person acquainted with the customs and nature of the business could reasonably assume the agent has. It generally arises in one of two overlapping circumstances:
a principal grants less authority than agents in the same position in that business usually have.
the method of operation of the principals business differs from that of other businesses of the same kind in the principals area.

Question 9

The main insurance distribution systems:

Answer 9

Independent agency and brokerage marketing system
Exclusive agency marketing system
Direct writer marketing system

Question 10

Independent agency and brokerage marketing system

Answer 10

the independent agency and brokerage marketing system uses agents and brokers who are independent contractors rather than employees of insurers. these independent agents and brokers are usually free to represent as many or as few insurers as they want. vital distinction between independent agents and brokers and other distribution systems is the ownership of the agency expiration list.

Compensation- typically in two forms:

1) a flat percent commission on all new and renewal business submitted
2) a contingent or profit-sharing commission based on volume or loss ratio goals

Question 11

Brokers

Answer 11

independent producer who represents insurance customers. they shop among insurers to find the best coverage and value for their clients. because they are not legal representatives of the insurer, brokers are not likely to have authority to commit an insurer to write a policy by binding coverage, unlike agents, who generally have binding authority.

Question 12

Agency Expiration List

Answer 12

record of an insurance agency’s present policyholders and the dates their policies expire.

Question 13

National and Regional Brokers

Answer 13

generally represent commercial insurance accounts that often require sophisticated knowledge and service. in addition to insurance sales, large brokerage firms may provide extensive risk control, appraisal, actuarial, risk management, claim administration, and other insurance-related services. Large insurance brokerage firms operate regionally, nationally, and internationally. Brokers receive negotiated fees for the services they provide, or they receive fees in addition to commissions, subject to state regulation.

Question 14

Independent Agency Networks

Answer 14

also known as agent groups, agent clusters, or agent alliances- operated nationally regionally or locally, and in majority of cases allow their agent-members to retrain individual agency ownership and independence. links to share services, resources, and insurers to gain advantages normally available only to large regional and national brokers.

Question 15

Managing General Agents

Answer 15

an authorized agent of the primary insurer that manages all or pert of the primary insurer’s insurance activities, usually in a specific geographic area. the exact duties and responsibilities depend on its contracts with the insurers it represents. MGAs can represent a single insurer, although they more commonly represent several. Can be strictly sales operations, appointing and supervising subagents, or dealing with brokers within their contractual jurisdiction (that jurisdiction cab be specified in terms of geographic boundaries, types of insurance, or both).
An insurer operating through an MGA has several advantages:
- a low fixed cost
- specialty expertise
- assumption of insurer activities

Question 16

Surplus Lines Brokers

Answer 16

most agents and brokers are limited to placing business with licensed (or admitted) insurers. the circumstances under which business can be placed with an unlicensed (or nonadmitted) insurer through a surplus lines broker vary by state. Normally, a reasonable effort to place the coverage with a licensed insurer is required- they must certify that a specified number (usually 2 or 3) have refused to provide the coverage and may have to provide letters from the insurers. some states also maintain lists of eligible surplus lines insurers, requiring producers to place business only with financially sound insurers.

Question 17

Exclusive Agency Marketing System

Answer 17

marketing system under which agents contract to sell insurance exclusively for one insurer (or for an associated group of insurers). can exercise greater control over exclusive agents than over independent agents. however, some exclusive agency companies allow their agents to place business with other insurers if the exclusive agency insurer does not offer the product or service needed. compensated by commissions. the focus is on new business production and a reduced renewal commission rate encourages sales and supports growth. do not own expiration as independent producers do, some insurers that market through the exclusive agency system do grant agents limited ownership of expiration. The exclusive agency insurer handles many admin functions for the exclusive agent including policy issuance, premium collection, and claim processing.
Might offer loss adjustment services similar to those offered by independent agents and brokers; however, these agents might be restricted in their ability to offer some risk management services to their customers.

Question 18

Direct Writer Marketing System

Answer 18

an insurance marketing system that uses sales agents (or sales reps) who are direct employees of the insurer. may be compensated by salary, commission, or both salary and portion of the commission generated. because sales agents are employees of the insurers they represent, they usually do not have any ownership of expiration and, like exclusive agents, are usually restricted to representing a single insurer or a group of insurers under common ownership and management.
sometimes a customer needs a type of policy not available from the direct writer insurer that the agent represents and so they may then act as a broker and contact agents who represent another insurer and apply for insurance through that agent. Commission is shared. insurance sold in this manner is referred to as brokered business.

Question 19

Distribution Channels

Answer 19

The distribution channels used by insurers and their representatives are conduits for contacting and establishing communication with their customers and prospective customers.

Question 20

Distribution Channels: internet

Answer 20

can be used to varying degrees by all parties to the insurance transaction: the insurer, its representatives, and the customer. can increase an insurer’s market share and brand awareness.
benefits:
reduced cost for underwriting and claims processing
streamlined business practice
increased brand awareness
broadened marketing potential
lead-generation and cross-selling potential

Challenges:
regulation requirements- purchases made entirely online may not meet regulatory compliance requirements that a licensed agent consummate the sale
assumed cost advantage (consumers think bough over the internet will be less expensive than if purchased from a producer)
competitors are just a click away
quoting capabilities- an insurer’s ability to quote easily and quickly is critical because about 50% of users will simply move to another website if quoting mechanism is too complicated
availability of info- many consumers don’t fully understand insurance products, a website should maintain a frequently asked questions section or a live contact
extent of services provided- will the internet presence be sales-only or a combination of sales and service
informed consumer- info about many insurance products and their prices is available to customers shifting focus to the price rather than service
Security concerns- some customers are unwilling to transmit personal and financial info over the internet
website content- info posted on the website must be fresh, interesting, and accessible

Question 21

Distribution Channels: Call Centers

Answer 21

best-equipped call centers can replicate many of the activities of producers. they can make product sales, respond to general inquiries, handle claim reporting, answer bill questions, and process policy endorsements.

Question 22

Distribution Channels: Direct Response

Answer 22

markets directly to customers, no agents involved, relies primarily on mail, phone, or internet sales, relies heavily on advertising and targeting specific groups of affiliated customers.commission costs, if any, are greatly reduced. Disadvantage is that advertising costs are typically higher.

Question 23

Distribution Channels: Group Marketing

Answer 23

Sells insurance products and services through call centers, the internet, direct mail, or a producer to individuals or business that are all members of the same organization. Known as:
Affinity Marketing- based on profession, interests, hobbies, or attitudes
Mass Marketing/Mass Merchandising- design an offer for their policies to large numbers of targeted groups/individuals
Worksite Marketing/Payroll Deduction- employers contact to offer voluntary insurance coverage as a benefit to their employees
Sponsorship Marketing- a trade group sponsors an insurer in approaching a customer group, participate in the profitability of the program

Question 24

Distribution Channels: Trade Associations

Answer 24

serve their members through activities such as education, political lobbying, research, and advertising. advertising programs intended to create favorable image of association members as a group and to make the public familiar with logos and symbols.

Question 25

Financial Institutions

Answer 25

can elect to market their products and services through a bank or another financial services institution, either exlusively or through additional distribution channels. diversifying into new markets appeals to many finciancial insitutions. in fact some financial insitutions have expanded into insurance by participaing in renewal rights arrangements by which they purchase only a book of business and not the liabilites of an agency or insurer.

Question 26

Prospecting

Answer 26

Virtually all producers prospect. This involves finding individuals and business that may be interested in purchasing the insurance products and services offered by the producer’s principals. Prospecting involves several different methods:
referrals from present clients
referrals from strategic partners
advertising
interactive websites
telephone solicitation
cold canvass (contacting a prospect w/o an appt.)

Insurers might also participate in prospecting especially in the exclusive agent and direct writer marketing systems.

Question 27

Risk Management Review: Individual or Family

Answer 27

this review process might be relatively simple and may just be an interview or answering a questionnaire

Question 28

Risk Management Review: Businesses

Answer 28

more complex because they have property ownership, products, services, employees, and liabilities that are unique to the size and type of organization. Loss Run report can guide the producer in helping the business owner develop risk management plans, track the results of risk management efforts, identify problem areas, and project costs.

Question 29

Agency Bill and the three methods of transmitting premiums to the insurer

Answer 29

a payment procedure in which a producer sends premium bills to the insured, collects the premium, and sends the premium to the insurer, less any applicable commission. Can be used for personal insurance policies, but is more commonly used with large commercial accounts.

Three widely used methods of transmitting premiums to the insurer:

1. Item Basis (The premium, less commission, is forwarded to the insurer when the producer collects it or when it becomes due. This is the least complex of the three methods. Producer is usually not required to pay the insurer until the premium has been collected.
2. Statement basis (the insurer sends a statement to the producer showing the premiums that are due. The producer is obligated to pay the premiums indicated as due or to show that the statement is in error)
3. Account current basis (the producer periodically prepares a statement showing the premiums due to the insurer, after deducing appropriate commissions, and transmits that amount to the insurer. The agency contract indicates how often the producer must submit the account current statement. the most common interval is monthly. The producer must pay the insurer when the premium is due, even if the policyholders have not paid the producer.

To give the producer some protection against the policyholders’ late payments, premiums are usually not due to the insurer until thirty or 45 days after the policy’s effective date. this delay also allows the producer to invest the premiums collected until they are due to the insurer.

Question 30

Customer Service

Answer 30

for independent agents and brokers, value-added services and the personalize of insurance packages are what differentiate them in the marketplace.

For the producer of a direct writer, service might consist of providing advice, taking an endorsement request over the phone, providing coverage quotes, or transferring a policyholder who has had a loss to the claim dept.

Question 31

Claim Handling

Answer 31

produces are expected to be involved to some extent- might just give a telephone number of the claim dept and maybe a name. some producers handle only certain claims (authorized by insurer), or other agencies/brokers have a claim dept that handles large, more complex claims.

Question 32

Consulting

Answer 32

Many producers offer consulting services, for which they are paid on a fee basis. usually performed for the insured, but may also be performed for noninsureds or for prospects. might be provided for a fee only, or the producer might set a max fee to be reduced by any commissions received on insurance written because of the consulting contract.
Laws in some states prohibit agents from receiving both commission and a fee from the same client. fees are billed separately from any insurance premiums due, whereas commissions are included in the premium totals billed.

Question 33

Direct Bill

Answer 33

for small commercial accounts and the vast majority of personal insurance, the customer is usually directed to send premium payments to the insurer, bypassing the producer in a procedure known as the direct bill process. Here the insurer assumes all responsibility for sending premium bills to the insured, collecting, and sending any commission payable on the premium collected to the producer.

Question 34

Customers’ Needs and Characteristics

Answer 34

the needs and characteristics of customers are key factors in an insurer’s selection of distribution system and channels- their satisfaction drives their purchase decisions.
Examples:
Products and Services (what are customers’ expectations regarding coverage, accessibility, price, and service? some may be satisfied with the ease of comparison shopping over the internet for direct writers’ policies. Or a large commercial account’s risk manager will seek the expertise of an agent or broker to provide advise, assist in coverage placement, and respond to changing needs)
Price
Response Time (some may expect speedy financial service transactions, for customers whose inquiries and transactions can be addressed by telephone or via the Internet, a variety of distribution systems and channels can meet those needs. but speed can be an issue in attracting commercial accounts that demand extensive services if producers are not in the territory of the business’ facilities.

The ease of accessibility within the channel is an important consideration with regard to customers’ needs and characteristics.

Question 35

Insurer Strengths: Financial Resources

Answer 35

The initial fixed cost of entering the market through the exclusive agency system or direct writer system is greater than doing so through the independent agency system. The insurer must hire, train, and support the direct writer and exclusive agency producers at a substantial cost until they become productive.
Internet-based distribution channels have a high start-up costs. The cost of conducting a direct response campaign can be much lower.

insurers that lack the financial resources to cover those start-up costs may be limited in the target markets they enter.

Question 36

Insurer Strengths: Core Capabilities

Answer 36

abilities of organizations staff, process, and technology.
an insurer whose strength is successfully servicing large, complex commercial accounts can capitalize on the firms core capabilities.

Question 37

Insurer Strengths: Expertise and Reputation of Producers

Answer 37

the level of expertise and reputation can be a crucial strength or weakness for the insurer. the level of expertise required of a producer depends on the lines of insurance written.

Question 38

Existing and Target Markets

Answer 38

if agents/brokers own the expiration for current accounts, the insurer must either give up that account and start over or purchase the expiration from the producers.

Disruptions in communications may lead to policyholders to be dissatisfied and perhaps loss accounts. thus insurers change market systems and channels for existing customers with great caution.

customer’s needs and characteristics are the driving factors for an insurer that is considering changing its marketing approach or adopting a mixed marketing approach for a new target market.

Question 39

Geographic Location

Answer 39

the geographic location factors in selecting a distribution system and channels because the insurer’s fixed cost of establishing an exclusive agent or direct-writer agent in a territory are substantial. Exclusive agent or direct writer marketing system can only be successful when a sufficient number of prospects exist within a relatively small geographic area.

the cost of appointing an independent agent or using the direct writers response system in generally lower, those systems can be used in sparsely populated area or when the target market is widely dispersed.

Question 40

Degrees of Control

Answer 40

• insurers can exercise the great control over producers in the direct writer system since they are the employee
• under agency/brokerage and exclusive system, the producers are independent contractors and can control the advertising or marketing; insurers control the number and type of new applications the producer must submit each month (results)
• Producers are not involved in the direct response system. Insurer has complete control of its distribution system.

Degree of control becomes important in meeting the needs of customers.

Question 41

Licensing

Answer 41

to function legally as an insurance agent, a producer must be licensed by the state(s) in which they want to sell insurance.

some states separate licenses for agents, brokers and solicitors.

to obtain a license, must pass an examination on insurance principals, coverages, laws and regulations. some states require classroom study

producers license generally have a specified term like one or two years and can be renewed by paying a fee. some have to take classes before being allowed to renew

Question 42

Solicitors

Answer 42

work for and are representatives of agents/brokers, often as office employees, but have less authority than agents.
can solicit prospects but cannot bind insurance coverage
some states, such office employees who solicit insurance must secure an agent’s license, often called customer service representatives or customer service agents

Question 43

Licensing an Insurer: Domestic

Answer 43

generally has no expiration date

an applicant for an insurer license must apply for a charter

an insurer must be financially sound

Question 44

Licensing an Insurer: Foreign

Answer 44

to be licensed in an additional state, must show that it has satisfied the requirements first in its home state.

must satisfy the minimum capital, surplus, and other requirements imposed on the states domestic insurers.

Question 45

Licensing an Insurer: Alien

Answer 45

must satisfy the requirements imposed on domestic insurers by the state in which they want to be licensed.

must usually establish a branch office in any state and have funds on deposit in the US equal to the minimum capital and surplus required

Question 46

Licensing an Insurer: Nonadmitted

Answer 46

typically a surplus lines insurer

might be permitted to transact business through a specially licensed surplus lines producer if the insurance is not readily available from admitted insurers, the non admitted insurer is “acceptable”

must be a resident of the state

must file a financial statement that the insurance commissioner finds satisfactory

supply docs of transactions to state regulators

obtain a cert of compliance from its home state or country

if alien insurer, maintain a trust fund in the US

Question 47

Licensing an Insurer: Risk Retention Groups

Answer 47

formed under state captive laws which generally maintain lower capital and surplus requirements for captives than for traditional property-casualty insurers

once licensed as a commercial liability insurer under the laws of least one state, a risk retention group can write insurance in other states without a license by filing the appropriate notice and registration forms with the non chartering state

can only write commercial liability insurance for its members

Question 48

Licensing Personnel

Answer 48

Producers- must pass a written exam

Claim Reps- exam, typically involves a background check as well as ethics requirements. Public adjusters are generally required to be licensed to ensure technical competence and to protect the public.

Insurance Consultants- separate exams are required to be an insurance consultant in both life-health insurance and property-casualty insurance

Question 49

Contingent Commission Agreements

Answer 49

a contract provision in which an insurer agrees to make supplemental payments to producers based on the profitability alone or on a combination of profitability, volume, and growth in the agency’s book of business placed with that insurer. for agencies that provide insurers with a steady stream of business, contingent commissions can provide up to 10% or more of total agency revenues. However, this can lead to scandals and conflict of interests. calls to abolish contingent commission

Question 50

Unfair Trade Practice: Misrepresentation and False Advertising

Answer 50

it is an unfair trade practice to make, issue, or circulate info that exhibits any of the following:
misrepresents the benefits, advantages, conditions, or terms of any insurance policy

misrepresents the dividends to be received on any insurance policy

make false or misleading statements about dividends previously paid on any insurance policy

uses a name or title on insurance policies that misrepresents the true nature of the policies

Question 51

Unfair Trade Practice: Tie-In Sales

Answer 51

cannot require that the purchase of insurance be “tied” to some other sale or financial arrangement. each transaction must stand on its own

Question 52

Unfair Trade Practice: Rebating

Answer 52

producers are not allowed to pay a portion of the premium or give any commission to a policyholder

most states (not Cali) have enacted antirebating laws because it is unfair to customers who do not get a rebate. some people believe that rebating allows insurance customers to pay a rate that is below that needed to maintain the insurer’s solvency. Opponents of antirebating laws argue that such laws inhibit competition in the insurance marketplace.

Question 53

Unfair Trade Practice: Other Deceptive Practices

Answer 53

these laws prohibit an insurer and its producers from making false statements about the financial condition of another insurer

to enter false info on an insurance application to earn a commission from the insurance sale