CH 9

Question 1

Brokerage’s Prime Goal

Answer 1

Profit maximization, balancing short-term and long-term gains, and considering both soft and hard insurance markets.

Question 2

Brokerage Valuation Methods

Answer 2

Multiple of commissions and multiple of earnings, along with other factors affecting value.

Question 3

Multiple of Commissions

Answer 3

Valuation method (1-3x) using gross premium, regardless of profitability.

Question 4

Multiple of Earnings

Answer 4

Valuation method using income-producing ability, considering factors like risk and client base.

Question 5

Balance Sheet Assets

Answer 5

Cash, Investments, Accounts Receivable, Office Equipment, and Technology.

Question 6

Balance Sheet Liabilities

Answer 6

Current and long-term obligations that reduce a brokerage’s value.

Question 7

Shareholders’ Equity

Answer 7

Owners’ stake in the business, calculated using Assets = Liabilities + Equity.

Question 8

Revenue (Income Statement)

Answer 8

Essential component in valuing a brokerage, including commissions, investment income, and fees.

Question 9

Commission Revenue

Answer 9

Largest revenue source, varying with premiums written; includes profit sharing agreements.

Question 10

Expenses (Income Statement)

Answer 10

Costs to consider in valuation, including controllable (managed) and uncontrollable (external) expenses.

Question 11

Cash Flow

Answer 11

Essential for value; capacity to generate cash.

Question 12

Billing Processes

Answer 12

Speed and accuracy in billing impact valuation and cash flow.

Question 13

Operational Efficiency

Answer 13

Essential, ensuring the brokerage operates effectively and minimizes wasteful spending.

Question 14

Client Retention

Answer 14

Critical for value; high retention indicates stability.

Question 15

Loss Ratio

Answer 15

Claims paid vs. premiums collected, impacting value and relationships with insurers.

Question 16

E&O Claims

Answer 16

Malpractice claims against brokers, reducing value and scaring away investors.

Question 17

Trust Fund Regulations

Answer 17

Insurance premiums are separate from the brokerage’s other operating funds.

Question 18

Commission Reserve Accounts

Answer 18

Accounts for unearned commissions, for handling refunds from policy cancellations.

Question 19

Accounts Receivable

Answer 19

Money owed to the brokerage from clients, managing effectively minimizes risks.

Question 20

Acid-test Ratio

Answer 20

Measures short-term liquidity by comparing liquid assets to current liabilities.

Question 21

Equity-to-Debt Ratio

Answer 21

Indicates the proportion of equity and debt used to fund the business.

Question 22

Working Capital Defense Interval

Answer 22

Measures how long working capital can cover daily expenses.