Chapter 2

Question 1

Define “organizing”.

Answer 1

Organizing is the process of determining the way the brokerage’s resources will be utilized to achieve the strategic plan.

Question 2

What are the three types of organizational structures?

Answer 2

Line Organization, Functional Organization, Line & Staff Organization

Question 3

Describe a Line Organization, and it’s advantages and disadvantages.

Answer 3

Authority is concentrated in managers who are directly responsible for achieving the brokerages goals. Authority flows down while responsibility flows up.
Advantage: Simplicity, clear authority, quick decision making
Disadvantage: Managers must be fully knowledgeable in a wide array of topics, limits employee growth, power is concentrated at the top

Question 4

Decribe a Functional Organization, and it’s advantages and disadvantages.

Answer 4

The organizations activities are grouped together by function. Departments are headed by specialists who have authority over their specific area of operation.
Advantages: Expert advice, decisions made by specialist
Disadvantages: Several bosses, slow decision making, too many managers distract employees from work

Question 5

Describe a Line & Staff Organization, and it’s advantages and disadvantages.

Answer 5

Sales, service & financial management functions are treated as line management functions. Those who support the line functions are considered staff.
Advantages: Authority clearly defined, expert advice, encourages communication
Disadvantages: Difficult to implement, cost associated with experts who are not directly generating revenue

Question 6

What are the three legal forms of a brokerage?

Answer 6

Sole Proprietorship
Partnership
Corporation

Question 7

Describe a sole proprietorship, and it’s advantages and disadvantages.

Answer 7

Business owned by a single individual.
Advantage: Earn all the profits, quick decision making
Disadvantage: All liability rests with owner, limited expertise, business dies with owner

Question 8

Describe a partnership, and it’s advantages and disadvantages.

Answer 8

Two or more co-owners - may be general or limited partners.
Advantage: Additional expertise, shared liability, business does not die with death of one partner
Disadvantage: More potential for conflicts, partnership agreements required, difficult to dissolve

Question 9

Describe a corporation, and it’s advantages and disadvantages.

Answer 9

Legal entity created by government charter, ownership of which is evidenced by stock.
Advantage: Personal assets protected, corporate tax breaks,
Disadvantage: Costly start up, legal fees, income tax are under greater scrutiny

Question 10

What are the four types of operating affiliations

Answer 10

Loosely-Knit
General Purpose Groups
Clusters
Common Identity Groups

Question 11

Describe a Loosely-Knit Affiliation

Answer 11

Owners and managers meet on an informal basis to discuss common opportunities and threats.

Question 12

Describe General Purpose Groups

Answer 12

Formalized extension of loosely-knit affiliation. Provides brokers with resources such as education, preferred attention from insurance companies, management assistance and advice, and a general source of information. Typically a fee to participate.

Question 13

Describe Clusters

Answer 13

Brokerages band together to share ‘back room’ services such as: Administrative services, physical space, group advertising, education.

Question 14

Describe a Common Identity Group

Answer 14

Established to give brokerages an image and resources of national or international strength. Primary emphasis is account servicing and participants are likely to be larger brokerages that require reliable affiliates to provide local service on national or international accounts. Very selective & subject to a fee to sustain the network.

Question 15

What are five ways to evaluate an affiliation?

Answer 15

Services & support
Exclusivity
Fees
Contract
Financial Stability

Question 16

Why must services and support be evaluated?

Answer 16

Services must address the needs of the brokerage. for example, a brokerage looking for a way to service national accounts will be attracted to an affiliation which will provide contracts across Canada. Those wanting additional products to sell may be attracted by brokerages having a variety of commercial group insurance programs.

Question 17

Why must exclusivity be evaluated?

Answer 17

Consider the reputation of participating brokerages, and how many in the immediate marketing area will be permitted to join. If the brokerage is seeking prestige and image, this can be derived only if others participating are up to the standards described by the sponsoring organization.

Question 18

Why must fees be evaluated?

Answer 18

Determine whether the services offered are worth the price being charged.

Question 19

Why must an affiliation contract be evaluated?

Answer 19

Contract should outline responsibilities of the brokerage and what benefits are guaranteed by the contract. An attorney should review.

Question 20

Why must financial stability be evaluated?

Answer 20

The sponsoring organization should have the resources necessary to assure delivery of the services to which it has committed.

Question 21

Define the law of agency.

Answer 21

Under the law of agency, the agent owes a duty to act primarily for the benefit of the principal and to deal fairly with the principal in every way.

Question 22

Define an Agent

Answer 22

If the individual selling the insurance is the agent of the insurance company providing the coverage, they are an insurance agent.

Question 23

Define a Broker

Answer 23

If the individual selling the insurance is the agent of the party buying the insurance, they are a broker.

Question 24

What are three types of authority?

Answer 24

Express Authority
Implied Authority
Apparent Authority

Question 25

Explain express authority.

Answer 25

Anything legal that the parties agree to either verbally or in writing. Ie. Anything contained in the broke contract.

Question 26

Explain implied authority.

Answer 26

Anything deemed necessary in conjunction with express authority which has not expressly been addressed, or that which is based on precedent.

Question 27

Explain apparent authority.

Answer 27

Authority which an innocent third party might perceive that the brokerage has. Ie. A broker binds $2M coverage but binding authority is limited to $500k. The client suffers a loss. The insurance company will be obligated to pay, however they may take legal action against the broker.

Question 28

By use of an example, explain ratification.

Answer 28

When the broker exceeds their authority, but the insurance company accepts knowing full well of the unauthorized act, it is as if the authority has been granted in the first place.

Question 29

Describe two types of sub-brokers

Answer 29

1) When the brokerage appoints an individual to represent it. The brokerage would be responsible for the individual in the same way as they would be responsible for an employee.
2) When brokerage has difficulty placing business and becomes a sub-broker by placing through another brokerage. In this case, they have no authority, but still have a responsibility to the client.