Chapter 2: Organizing

Question 1

Advantages of Line Organization (3)

Answer 1

Simplicity
Clear delegation of authority
Quick decision making

Question 2

Disadvantages of Line Organization (3)

Answer 2

Line managers must be fully knowledgeable in wide areas in order to make decisions

Power concentrated at top; senior management involved in all decisions

Limits growth and development of employees through stifling of innovation

Question 3

Advantages of Functional Organization (2)

Answer 3

Provides employees with expert advice

Decisions made by management specialists/supervisors

Question 4

Disadvantages of Functional Organization (3)

Answer 4

Overlapping authority may give conflicting or inconsistent instruction

Slow decision making regarding responsibilities that do not fall into clear jurisdictions, ‘pass the buck’

Too many instructions from too many managers distract employees from primary roles of serving their clients

Question 5

Advantages of Line & Staff Organization (3)

Answer 5

Areas of authority/responsibility are clearly defined

Quick decision making via line managers, and expert advice readily available for line managers

Encourages better communication and cooperation on all levels

Question 6

Disadvantages of Line & Staff Organization (3)

Answer 6

Conflicts when overstepping managerial authority, or staff advice is ignored by line managers

Line managers may resent having to seek advice, and also feeling obliged to accept

Heightened costs; brokerage must be large enough to generate sufficient revenue that covers production and staff functions

Question 7

Why is it important to clearly define flows of authority/responsibility?

Answer 7

Employees held responsible for activities over which they have no control are frequently frustrated and have morale problems.

Question 8

What goes into a position description? (4)

Answer 8

Title

Purpose

Primary Responsibilities

Scope of Position

Question 9

What are the legal forms of a broker? (3)

Answer 9

Sole Proprietorships

Partnerships

Corporations

Question 10

Advantages of Sole Proprietorships (3)

Answer 10

Right to all profits

Easy to start

Decision making process simplified

Question 11

Disadvantages of Sole Proprietorships (3)

Answer 11

All liability rests with owner

Expertise limited to owner

Business lives & dies with owner

Question 12

Advantages of Partnerships (4)

Answer 12

Broader expertise

Liability shared

Business does not live or die with one owner

Earning “all the profits”

Question 13

Disadvantages of Partnerships (3)

Answer 13

More potential for conflict

Difficult to dissolve

Partnership agreements should be in place

Question 14

What is included in many partnership agreements?

Answer 14

Shotgun clause

Question 15

What is a General Partnership?

Answer 15

Partnership where all owners are general partners, and have all rights & obligations of a partner who operates the enterprise.

Question 16

What is a Limited Partnership?

Answer 16

Includes at least 1 General Partner and at least 1 Limited Partner. Has the advantage of limiting maximum liability of Limited Partners to the value of capital invested. This is the case unless the Limited Partner becomes active in the management of the business.

Question 17

What is a Corporation?

Answer 17

Legal entity, created by government charter, ownership of which is evidenced by shares or stock.

Question 18

Advantages of Corporations (2)/Disadvantages of Corporations (3)

Answer 18

Liability limited to corporate assets (on paper)
Tax advantages - corporate tax rates

Start-up fees
Legal fees
Income tax considerations - greater scrutiny by CCRA

Question 19

What are the types of Operating Affiliations? (4)

Answer 19

Loosely Knit Affiliations

General Purpose Groups

Clusters

Common Identity Groups

Question 20

What are Loosely Knit Affiliations?

Answer 20

Informal meetings where managers/owners/brokers can discuss common opportunities/threats. eg. golf tournament

Question 21

What are General Purpose Groups?

Answer 21

Formalized extensions of Loosely Knit groups. These groups provide brokers with resources in the form of education/training, preferential treatment from insurers, management assistance/advice, and a general information source.

Question 22

What are Clusters?

Answer 22

Brokerages that frequently band together, sharing “back room” services, such as technology, processing, and talent acquisition services.

These groups can also seek out better terms with insurers, achieved through economies of scale.

Each brokerage retains ownership of their book of business.

Question 23

What are Common Identity Groups?

Answer 23

Organizations that give participating brokerages an image and resources of national/international strength.

Question 24

What would a brokerage manager evaluate about different operating affiliations?

Answer 24

The services/support provided

Exclusivity; number of participating brokerages in the immediate area, legal nature of the exclusivity, reputation of other participants

Fees; all costs should be known in advance

Contractual agreement; documents should be reviewed to determine responsibilities of the brokerage, if benefits are guaranteed, should be reviewed by an attorney

Financial strength; that resources are not only present, but are being actively committed to the project

Question 25

Define, “Agency”, the legal term

Answer 25

Used to describe the relationship that exists when one entity acts on behalf of another. A fiduciary relationship (one that is based on trust) in which one entity (the principal) authorizes another (the agent) to act on its behalf in business dealing with other parties.

Question 26

What is an Insurance Agent and what is an Insurance Broker?

Answer 26

Insurance Agent refers to the person who is selling insurance FOR an insurance company/insurer.

Insurance Broker is used to describe the person who is representing the party that is buying the insurance.

Question 27

What is the overlap between brokers and agents?

Answer 27

Depending on who’s interest is being represented, a person can be either a broker or agent, or both simultaneously.

When the person is marketing and representing the client’s risk to insurers, they are considered the broker. However, once terms are all agreed upon, they are tasked with obtaining premiums on behalf of the insurance company, and are then considered to be an insurance agent.

Question 28

How are brokers and agents different, from a legal perspective?

Answer 28

A broker’s primary allegiance and fiduciary responsibilities are owed to the insurance buyer/client.

Agent’s have an allegiance and fiduciary responsibility to the insurance company.

Question 29

What are the types of authority that insurance agencies/brokerages have? (3)

Answer 29

1. Express authority - anything legal that the parties agree to, verbally or in writing (‘binding authority’)
2. Implied authority - necessary actions that are undertaken in conjunction with express authorities (eg. advertising a new product that they offer, or adding an insurer’s logo to the brokerage’s website)
3. Apparent authority - something that the brokerage may be perceived to have authority over, but which, in fact, has not been given to the brokerage by the insurer (eg. binding authority for risks that exceed the brokerage’s granted limits)

Question 30

What is Ratification?

Answer 30

Retroactive approval - an insurance company, with full knowledge that an unauthorized act has taken place, accepting the risk/action taken by the brokerage. The action is approved as if authority had been granted in the first place

Question 31

What is a Sub-broker? (2)

Answer 31

1. An entity that a brokerage appoints as a representative. The brokerage takes on the responsibilities of the individual’s actions as if they were an employee (eg. independent adjuster, risk manager)
2. A brokerage that places a risk through another brokerage. The ‘sub-broker’ has no binding authority, but still has a responsibility to the client (eg. small brokerage who places a large industrial risk through a specialized brokerage that has markets for said risk)