Chapter 1 - The Insurance Intermediary Flashcards
What is insurance?
- is based on risk
- risk is the possibility of loss/damage to property or the chance of incurring liability
- an insurance policy is a contract formed between an insurer and an insured in which the insurer reimburses the insured for specified losses
What are the 3 main categories of insurance?
1) social insurance
- provided through the state/government
- provide basic coverages
- ex) OHIP, employment insurance benefits, workers comp
2) life and health insurance
- provided by life insurers
- provide life, accident, sickness and disability insurance
- as well as pension and other financial services for individuals and groups
3) general insurance/prop and casualty insurance
- covers a large group of diverse classes of insurance such as: auto, prop, transportation, boiler and machinery, fidelity, liability, aviation, marine and surety bonds
- can be divided into 2 main types:
i) personal insurance
- provides coverage for loss/damage to physical property by fire, crime, water, wind, and other insured perils, and provides coverage arising out of insureds liability or responsibility for injury/damage to others
ii) commercial insurance
- covers businesses and autos used for business purposes for similar risks
Explain what an insurance intermediary is.
- help identify insurance needs
- match those needs with products that are available
- facilitate insurance contracts to the satisfaction of both insured and insurer
- vital link between insured and insurer
- must be licensed
- bring insured and insurer together in contractual relationship
- act to facilitate the purchase of insurance policy and service the account
What is an insurance agent?
- generally sell and service insurance policies offered by a single insurer
- employed by the insurer or operate independently on contract with one insurer
What is an employed agent?
- work directly for insurer
- are known as direct writers
- are paid a salary, salary with bonus, or salary plus commission
- business written and client list belong to insurer
- the insurer issues and services policise and takes care of invoices and collects premiums
What is an independent agent?
- operates in an entrepreneurial style maintaining seperate offices from the one insurer they deal with
- these companies are known as agencies and can vary in size
- are paid by commission or base salary plus commission
- they pay their own expenses
- business and client list belong to insurer
What is an insurance broker?
- independent business people
- they work from brokerages
- the brokerage is paid a commission for each policy issued on behalf of its clients
- in some cases brokerage will charge a fee to the client for servinces rendered, rather than taking a commission from insurer
- brokers may be paid by salary, salary plus commission, or straight commission
- the broker owns the book of business
- sell for more than one insurance company
What is a general agent?
- aka managing agent or provincial manager
- operates in entrepreneurial style
- is someone who has authority from insurer to manage all of that insurer’s business within his/her territory
- can appoint agents
- can settle claims
- owns client list
What is a wholesale broker?
- aka surplus lines broker in USA
- specializes in non-standard or difficult to place risks
- provide market access
- identifies a particular need for specialized coverage
- negotiates a contract with insurer/group if insurers to produce cover
- insurers usually give wholesale broker broad contract which they can underwrite, issue policies, and pay claims
- they function as a middleman, contacting their markets on an individual basis for broker/agent
- do not usually have binding authority
- are not required to be licensed
- insurers that deal with wholesaler brokers are regulated
Explain what a non-standard risk is.
1) a difficult to place risk
ex) poor loss history
2) or the nature of the risk could be hard to place in regular market (needs unique coverage)
ex) client wants terrorism insurance
- (doesn’t fit standard market)
- in this case, intermediary can approach wholesale markets for supplementary coverage
3) if there are high values to be insured
What terms are used in Quebec regarding contract, principal, and agent?
- contract = mandate
- principal = mandator
- agent = mandatary
What is the legal definition of agent?
- in law, agent is a person who is authorized to act on behalf of another
- under common law, agents are employed to secure contracts or act for their employers in contractual matters
Explain the relationship an intermediary has with client and insurer.
- can have 2 principals (dual responsibilities)
- has obligations to act as both agent to the insurer and as principal and agent for the insured at different points in the insurance transaction
Ex) ACTING FOR INSURER -soliciting insurance, apps, describing types of coverage/policies available, or interpreting policy provisions
Ex) ACTING FOR CLIENT - providing insurance advice, carrying out specific tasks requested by client such as increasing coverage, monitoring client’s insurance needs
What does the law of agency state?
- that both agent/brokers are responsible to both client and insurer at various points in time in the insurance process
- their duty to their client is to ensure that all exposures are covered
- their duty to insurer is to act within the authority granted by insurer and to place coverage only on risks acceptable to that insurer
What are the insurer’s obligations?
- have obligations to parties entering into contracts with them through their agents
- when an agent makes an agreement/contract on behalf of principal with another party, contract is legal between the principal and other party
- insurer as prinicipal is legally bound to honour that contract
Explain agents/brokers authority.
- may be authorized to issue policies and settle claims
- others may only have authority to solicit apps and submit for consideration
- most often agents/brokers have authority to conduct their business somehwere between these 2 extremes
What is the Agency/brokerage Contract?
- will enter into contractual agreements with insurers they represent
- written contract that provides broker/agent with stable access to the insurance market under defined terms/conditions
- identifies both parties, details of authority, obligations, rights, and duties of each party
- arrangement is further influenced by provincial law set out in appropriate insurance act and by regulations administered by the super of insurance
What is duty of care?
- is a legal duty that one owes to another, arising out of the prinicipal and agent relationship
- a reasonable degree of care is expected
- duty of care shifts depending on whom the intermediary is an agent for at each point in the process
- must act with utmost good faith at all times and a high ethical standard
- must operate within the scope of contract
- must operate within the authority of their license
How can an intermediary prospect for potential clients?
1) target marketing - target a specific segment of population
2) market segmentation - segment market
3) advertising - in relevant publications
4) cold-calling - introduce yourself and offer services
5) referrals - client’s recommendations
What are the roles and functions of insurance intermediaries?
1) prospect for potential clients
2) qualify the client
- based on routine info you need to gather to see if you have the market to place them
3) advise the client
- evaluate client’s exposure (RISK ANALYSIS)
- recommend proper coverage
- counsel them on risk control and risk prevention (RISK MANAGEMENT)
- ethical duty to advise all of insurance available
4) facilitate the app for insurance
- know which forms are necessary to complete and help client to complete form, and submitting them to insurer
- clarify what info is being requested and why it is required
- clients duty to provide full disclosure on app
- must get client’s signature on app
5) obtain instructions from client
- only make recommendations not decisions for client
- by person, phone, email, letter
- must acquire signature when adding and deleting coverage
- should contact clients regularly
6) negotiate insurance
- negotiate terms and conditions of policies
- pre-qualify client in line with companies u/w guidelines
To fulfill the rest of the insurance-negotiating process brokers/agents:
1) review clients insurance portfolio
2) solicit info from client as required
3) offer options to improve coverage
4) carry out clients instructions
5) arrange insurance coverage
6) arrange changes to exisiting coverages
7) arrange for cancellation/lapsing of coverage
7) facilitate claims process
- you’re the first claims contact so..
- explain what will happen
- advise them of coverage they have
- notify company ASAP
- monitor for satisfaction with claims services
Explain the licensing and regulatory authorities.
- by law all insurance brokers/agents must be licensed
- this ensures that those who adivse the public on insurance matters are qualified to do so
- some provinces offer restrictes licences that allow the holder to transact business in only certain classes of insurance
- licences are generally renewed annually or bi-annually
- some provinces have instituted mandatory continuing education requirements
- in some provinces agents/brokers are licensed by the appropriate gov department responsible for insurance
- in others agents are licensed directly by appropriate gov department, while brokers are self-regulated with insurance counsils overseeing licensing
- licensing of persons to be engaged in the selling of insurance to the public is controlled through the prov insursance regulator
- in the self-regulated enviro, licensing laws are enacted by the prov gov, then control and licensing are passed to an org
- this org is made up of members who are elected by licensed persons engaged in business, or a council made up of representatives from insurance industry, gov, and consumer interests
ex) in ont, agents receive licences from FSCO, and brokers receive theirs from RIBO, a self-regulatory body
Explain professionalism in insurance.
- the reputation of the ins industry demands a high degree of professionalism in order to isntill trust and confidence in consumers
- this requires an appropritae level of education and expertise, a strong sense of ethics and a high stanadrd of client care.
1) Education and expertise
- being well informed about the technical subject matter of your profession (ins products and how they can be used) will help you to effectively insure clients
CONTINUING EDUCATION
- will keep you informed of changes in industry and laws that affect industry
- will make it easier for you to discuss risk exposures and coverages with client
- read trade publications and newsletters will help you maintain a clear and accurate perspective on the industry
2) Ethics and Client Care
- insurance acts outline minimum standards of ethical behaviour required of brokers/agents
- to maintain their licences brokers/agents must:
i) comply with provious of the various insurance acts
ii) act in a competent, trustworthy fashion, while avoiding fraud,deceit, or misrep
iii) pay insurers premiums collected as stipulated in broker agreement
iiii) comply with legislation relating to unlicenced insurers, if placing insurance with them
- by-laws enacted by ins counsils expand on provincially mandated standard of ethical behaviour
3) UGF
- requires all ppl involved in an ins contract to operate with honesty and integrity, employing high ethical standards
- the duty to disclose is confined to facts that the insured knows or ought to know regarding material facts
- insurer has obligation to ask questions and be knowledgable about the nature of the risk presented
- brokers must pass on all pertinent info to insurer
- as material info disclosed to a broker by a client is deemed to be knowledge of the insurer
- ensure that best interests of client are served
What are brokers and agents duties?
TO THE CLIENT:
1) provide coverage best suited to clients needs
2) not be swayed by renumerative gain
3) not take advantage of clients lack of knowledge or inexperience
4) hold info in strict confidence
5) compentently perform services undertaken, which requires brokers to be well educated and indicates need for CE
TO INSURER:
1) be honest and trustworthy
2) stay within terms of broker agreement
3) disclose all relevant material facts to insurer, even if it will make placing risk difficult
Define material fact.
- is any info that could affect the contract of ins to the extent that, if it were disclosed, it would change the agreement between the insurer and insured.
Explain the privacy laws.
- PIPEDA (personal info protections and electronic document act) governs the collection and use of personal info
- PIPEDA a federal statute, states that personal info to be collected must be relevant, and that all info that has been collected, is being collected, or will be collected must be held in the strictest of confidence
- any change in privacy laws may affect what you can and cannot ask your client
Describe errors and omissions.
- a lawsuit could arise out of allegations either of an error or an omission (not doing something you should have)
- best defence against E&O is documentation, comm, and acting within the scope of your authority and competence
What are the major causes of errors and omissions?
1) provide cover for exposure
- could arise if broker/agent didnt fully understand nature of risk
2) explain effects of exclusions, exemptions and restrictions
- after highlighting limitations, confirm discussion in writing
3) place cover at all
- could arise because broker/agent did not pursue placing coverage, wrongly advised client that cover was not available/cover was already in place, or lost file
4) provide correct cover
- if the client requested on form, but broker arranged another
- could happen either if broker requested incorrect cover, or insurer issued policy incorrectly
5) provide cover in time
- must forward all apps promptly to insurer
