Chapter 10 Flashcards
Key Term: Selling additional coverages or lines of insurance to an existing client
Cross Selling
Key Term: Selling an upgraded version of an existing policy to an existing client or improving the existing coverage of a new prospect.
Upselling
What variations between insurers allow brokerages to choose the best insurers for their clients?
Clientele: Types of clients they accept
Products: Services and rates they offer
Capacity: Volumes of business they require brokerages to produce
Profitability: Profitability ratios required for the business
Business type: Types of business they are willing or licensed to write; they can be international, national, or regional in their scope; some are multi-lined, while others write only one type of business
When two or more companies merge, what systems must be integrated?
General ledger financial results: The accounting staff and/or accountants will deal with this
Operating payables: For example, ensuring that payments for utilities such as electricity continue when the new company takes over the old company’s premises
Computer systems: All related systems activity needs to be thoroughly reviewed by the information technology (IT) staff
Office space: May take considerable time and planning and may involve renovations, changes to furniture and equipment, or additional office space
Books of business: While physical integration may take up to one year, typically, combining the books begins immediately
List and describe FIVE (5) formal affiliations.
Clusters: A group of independent brokers or brokerages who agree to share certain expenses, to make unified volume commitments to their insurers, and to conduct specified aspects of their financial affairs in an agreed-upon manner
Joint ventures: A mutually advantageous partnership between a small brokerage and a larger one, enabling the larger brokerage to acquire new business relatively easily as a share of the smaller brokerage’s existing book of business and giving the smaller brokerage increased access to markets and services
Common identity groups: Marketing organizations established to give participating businesses the image and resources of national- or international-strength organizations, permitting them access to marketing and service assistance
Franchises: A franchisee brokerage, like a chain of franchised restaurants or real estate offices, is affiliated with a franchisor to which it pays a percentage of its revenues in return for various services similar to those provided by the head office of a national insurance brokerage to its branch offices
Insurer investment: At times, insurers invest in a brokerage by purchasing shares in the business, providing the brokerage with an infusion of cash to operate the business, to finance growth in the book of business, or to expand operations
Application Question
Selma, the chief executive officer of a large brokerage, wants to buy a boutique brokerage, Musician and Artist Insurance (MAI). MAI has high-value clients and a set of specialty insurers that Selma’s firm currently does not represent. She enters into negotiations with the owner of MAI. As they move through the acquisitions process together, there are many steps that allow the process to be successful and pieces of information that need to be gathered and used to calculate the appropriate value for the firm being acquired.
Question 1
What steps should Selma follow in her acquisition of MAI?
Collect information: Obtaining confidential information about the target business from the seller
Due diligence: Performing a due diligence review
Valuation review: Establishing an accurate valuation of the target business
Organization: Organizing the new entity
Merging companies: Integrating the organizations
Post risks management: Managing post-closing risks effectively
Application Question
Selma, the chief executive officer of a large brokerage, wants to buy a boutique brokerage, Musician and Artist Insurance (MAI). MAI has high-value clients and a set of specialty insurers that Selma’s firm currently does not represent. She enters into negotiations with the owner of MAI. As they move through the acquisitions process together, there are many steps that allow the process to be successful and pieces of information that need to be gathered and used to calculate the appropriate value for the firm being acquired.
When conducting an operational review, what documents should Selma gather?
Organizational charts
Employment contracts (particularly producer contracts): Do they exist? What are the terms of ownership of the business, non-competition, and non-piracy?
Insurance company contract files: Are there any special deals or restrictions? Will they apply to the new owners? If so, are these negotiable?
Production and book of business reports
Loss ratios: With each insurer and details of the losses
All vendor contracts
All brokerage-produced manuals: That is, workflow documents and process and procedures documents
Human resources (HR) files: Employee and HR policies and manuals
Performance management documents
Tax records: Records of income tax, property taxes, payroll taxes, and withholdings
Property and equipment leases
Debt agreements: Including notes and lines of credit: If the purchaser is buying the shares, it may become responsible for outstanding liabilities.
Ownership agreements: Shareholder agreements, buy-and-sell agreements, and previous acquisitions or sales of business that could affect the current purchase
Insurance policies: The target brokerage’s insurance policies, especially the errors and omissions policy and the brokerage’s application for that coverage
Application Question
Selma, the chief executive officer of a large brokerage, wants to buy a boutique brokerage, Musician and Artist Insurance (MAI). MAI has high-value clients and a set of specialty insurers that Selma’s firm currently does not represent. She enters into negotiations with the owner of MAI. As they move through the acquisitions process together, there are many steps that allow the process to be successful and pieces of information that need to be gathered and used to calculate the appropriate value for the firm being acquired.
In order to calculate the value of MAI, what components might Selma need to consider that would affect the multiple of the brokerage’s annual commission earnings?
Personal/commercial business breakdown: Line of business split between personal lines and commercial lines
Auto/property/liability business breakdown: Line of business split between automobile and property/liability
Market breakdown: How the business is split between markets (how much is in the standard market versus niche markets; the distribution between markets)
Loss history: Historical loss ratio of the book of business
Billing method: How much business is broker billing versus direct billing
