1) What are the THREE (3) categories of agent, and what are the distinctions between those categories?
· 1) A company-employed agent works directly for the insurer. The person is part of the insurer’s staff and can be paid a salary, a commission, or a blend of all types of compensation.
· 2) Entrepreneurial independent agent who maintains a separate office from the insurer and pays their own expenses. The independent agent is paid by commission or by a combination of base salary and commission. The contract between the insurer and the independent agent must be negotiated and specifies which of the two owns the client expiration list. The insurer has less control over the staffing of the agency than a company employed agent.
· 3) An exclusive agent/captive agent places business with one insurer but remains an independent businessperson with his/her own office. Depending on the terms of the contract between insurer and agent, the exclusive agent may have the option to place business elsewhere if the insurer declines it. This arrangement is known as the insurer’s first right of refusal.
2) Why is it valuable to have an exclusive contract between an insurer and an agent?
· Exclusive contract concerns the distribution of a certain product or program owned by the insurer.
· An exclusive contract with the insurer would prevent the agent from placing business with an insurer that has a competing program or product.
· I.E. not to run a competing or sell similar business.
3) Why might a wholesaler be useful to a small producer?
· A broker/agent unable to place a risk with the insurers they deal with might instead arrange coverage through a wholesaler.
· Wholesalers act as auxiliary markets for broker/agent who cannot place their risk elsewhere.
· A wholesaler functions as another intermediary, placing risks on behalf of a broker/agent with a pool of insurers in return for commissions and other fee arrangements.
· Small producers without sufficient volume to attract the traditional insurers might be left without a market were it not for a wholesaler.
· Many insurers have moved to reduce the number of producers they deal with in order to manage expenses. Insurers tend to use premium volume as the basis upon which to make such a decision.
4) What are general agents, MGAs, and MGUs?
· General agents, managing general agents (MGAs), and managing general underwriters (MGUs) are producers that are categorized as being in the wholesale market.
· Each of these producers operates in an entrepreneurial style and has authority from an insurer to manage all of the insurer’s business as outlined in the contract between the insurer and the wholesaler.
· One reason an insurer would retain a wholesaler to perform these function is the wholesaler’s competence in a certain line of business, industry, product or distribution network.
· In return for its competence and the associated insurance services it provides, the wholesaler receives commission and fees. This allows the insurer to maintain a smaller operation, thereby lowering its internal expenses.
5) Give an example of a type of risk that would be more suited to a wholesale market than a standard market?
· Risks with liability exposures in the US
· May also lack the expertise to underwrite the risk or the claims and legal network to handle losses arising in the United States
· The standard market may need additional capacity to provide the limits required by the risk and no single insurer is able to meet that demand.
6) What risks are associated with an insurer’s having too few producers? What risks are associated with too many producers?
· Too few producers: risk losing a block of business. If the insurer does not own the expiration lists, it could be at the mercy of a few agencies that might use their ownership of expiration lists as leverage to improve terms/conditions.
· Too many producers: management of the production force, not cost-effective in dealing with more producers/distributors. As insurers move to control costs, they look to reduce the number of producers concentrating on those with higher premium volume and more profitable business.
7) Which elements typically compose a due diligence review made of a potential producer?
1) Network analysis
2) Ownership
3) Financial analysis
4) Business plan
5) Business processes
6) Staff
7) Computer systems
8) Other insurers
8) List FIVE (5) questions an underwriter should ask when assessing a producer?
1) Is the producer aggressive and looking to expand its business? (growth plans)
2) Can the producer grow with the insurer, or has it reached its maximum capacity? (capacity for growth)
3) Can the producer sell the range of the insurer’s products? (ability to sell)
4) What is the producer’s mix of business? (mix of business)
5) Will the producer support and work with the insurer? (renewal retention/increase in prices)
6) How well does (or will) the producer work with the insurer? (compatibility with insurer / loyalty/attitude)
7) What about the producer’s staff? (quality, reputation, training)
8) What makes the producer’s customers loyal to the producer? (customer loyalty)
9) Will the producer allow the insurer to have contact with the client? (client contact)
10) Could the insurer delegate to the producer certain insurance functions? (flexibility, receptiveness to other functions)
9) Why would an insurer pay particular attention to the ownership of a producer?
· The insured needs to know whether a producer it does or is considering doing business with depends on another insurer for any part of its capital.
· The insurer also needs to consider whether such support of the producer by another insurer would create a conflict of interest for the producer if the insurer were to grant it binding authority.
· Details on other non-insurance investors, controlling interest in the producer, any subsidiary/branch operation and new owners goals must be determined.
10) If a producer is a subsidiary or branch operations, what potential problem might arise for an insurer?
·
11) What is a bordereau?
· A bordereau is a list or summary of information about an account or portfolio of insurance business.
· The information captures summaries premium or claims activity for an insurer or reinsurer on accounts, portfolios, or reinsurance treaties.
· A bordereau can be prepared for any collection of data that needs to be collected and summarized in a standard format.
12) How is the granting of underwriting authority to a producer by an insurer similar to the decentralization of that authority from an insurer’s head office to its field offices?
· When an insurer decentralizes its operations and allows more or perhaps most of its underwriting to be done in its field offices, it implements audits and other procedures to retain some control over the results.
· In the same way, an insurer that grants underwriting authority to a producer should implement audits and controls to retain some control over the producer’s exercise of the authority it has been granted.
13) When considering outsourcing underwriting, what conflicts arise between the producer and the insurer?
· A program should be implemented for outsourced underwriting function that will materially affect the insurer’s position, in order to manage and monitor risks.
14) What must an insurer consider before entering into a relationship with a start up brokerage?
· New producers may initially lack the critical premium volume to support the expected losses, or they may not have the distribution network in place, or they may be otherwise limited in some way.
· The insurer must investigate its chances of success with the startup and the expenses it is likely to incur, but good planning and an exit strategy can prepare all parties well.
· Strong relationships can be built with way if the insurer is the supporting market and if the producer is successful in its strategy.
15) What is a key person clause in an agency agreement?
· Allows the insurer the option to terminate the agreement if certain people leave the employ of the producer.
16) How might a producer and an insurer each protect themselves against the other’s potential insolvency?
· The insurer may protect themselves with a clause in the contract that makes it contingent on the producer’s financial good health as measured by specified minimum standards.
· The clause would require the producer to maintain a certain amount of surplus or capital and allow the insurer, if the producer’s capital falls below the required amount, to either terminate the contract or waive the clause for a certain period of time to allow the producer to meet its obligation.
· The producer can ask for the corresponding provision if the insurer’s surplus falls below a certain amount or its financial rating drops below a certain level, the producer be entitled to terminate the agreement.
17) Why should a producer have a trust account?
· The contract between the insurer and the producer dictates how premium payments from an insured will be handled.
· Funds may have to be placed in a separate account from other funds the producer handles for the insurer.
· Some jurisdictions regulate how premiums are to be held by producers.
· Producers have a trust account to prevent creditors from attaching liens against the funds.
· A trust account offers this protection because the producer is only a trustee of the money; not the owner.
· Placing premium funds in a trust account also protects the money from being used by the producer for operating expenses or other needs.
18) What does an insurer need to consider when developing a provision for the termination of its contract with a producer?
· The contract should outline a strategy to run off policies and claims and determine the cost associated with terminating the contract.
19) What elements should be included in a contract between an insurer and a producer?
· The contract between the producer and the insurer will establish the authorities, rights, obligations, and duties of both parties and include the agreed underwriting guidelines and any necessary schedules.
· Depending on what the parties agree to, the authority granted to the producer could encompass any or all of the following activities:
- Soliciting and submitting insurance applications
- Underwriting and binding coverage on behalf of the insurer
- Issuing policies and endorsements
- Collecting premium
- Handling claims
20) What are some advantages and disadvantages of using the Internet as part of an insurer’s distribution network?
· Most Internet underwriting is limited to a template that allows the majority of risks in a class to be rated w/o involving an underwriter. Controls are set to ensure that any risks quoting/bound fall within a specific set of parameters. Risks not meeting the criteria are flagged for review by a underwriter.
· The insurer must audit its producers or otherwise confirm the validity of the information being entered in its system via the Internet.
· One of the reasons the insurer allows producers to use its system via the Internet is to reduce expenses by reducing the number of accounts an underwriter must deal with personally, thus reducing the time spent receiving filing and storing paper documents.
· Storing information in a paperless file, without ever securing hard documentation achieves this goal but makes it more difficult to validate information.
Internet disadvtanges for brokers:
· Some think that using Internet access to the insurer’s system amounts to doing the insurer’s job yet receiving no more extra commission.
· Some have to hire additional staff, thus incur additional cost, to enter information in to the insurer’s system.
· Others find the risk eligibility criteria too restrictive, diluting the value of the Internet for a majority of accounts that will have to be referred to an underwriter.
Internet advantages for brokers:
· Useful if the insurer has allowed only a limited number of producers such access to its system. Producer can consider itself to part of an elite group.
· It can secure a quote immediately, compare it to what other markets offer, and thus provide better and faster service to its clientele.
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