Chapter 2: Organizing Flashcards
Advantages of Line Organization (3)
Simplicity
Clear delegation of authority
Quick decision making
Disadvantages of Line Organization (3)
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
Advantages of Functional Organization (2)
Provides employees with expert advice
Decisions made by management specialists/supervisors
Disadvantages of Functional Organization (3)
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
Advantages of Line & Staff Organization (3)
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
Disadvantages of Line & Staff Organization (3)
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
Why is it important to clearly define flows of authority/responsibility?
Employees held responsible for activities over which they have no control are frequently frustrated and have morale problems.
What goes into a position description? (4)
Title
Purpose
Primary Responsibilities
Scope of Position
What are the legal forms of a broker? (3)
Sole Proprietorships
Partnerships
Corporations
Advantages of Sole Proprietorships (3)
Right to all profits
Easy to start
Decision making process simplified
Disadvantages of Sole Proprietorships (3)
All liability rests with owner
Expertise limited to owner
Business lives & dies with owner
Advantages of Partnerships (4)
Broader expertise
Liability shared
Business does not live or die with one owner
Earning “all the profits”
Disadvantages of Partnerships (3)
More potential for conflict
Difficult to dissolve
Partnership agreements should be in place
What is included in many partnership agreements?
Shotgun clause
What is a General Partnership?
Partnership where all owners are general partners, and have all rights & obligations of a partner who operates the enterprise.
What is a Limited Partnership?
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.
What is a Corporation?
Legal entity, created by government charter, ownership of which is evidenced by shares or stock.
Advantages of Corporations (2)/Disadvantages of Corporations (3)
Liability limited to corporate assets (on paper)
Tax advantages - corporate tax rates
Start-up fees
Legal fees
Income tax considerations - greater scrutiny by CCRA
What are the types of Operating Affiliations? (4)
Loosely Knit Affiliations
General Purpose Groups
Clusters
Common Identity Groups
What are Loosely Knit Affiliations?
Informal meetings where managers/owners/brokers can discuss common opportunities/threats. eg. golf tournament
What are General Purpose Groups?
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.
What are Clusters?
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.
What are Common Identity Groups?
Organizations that give participating brokerages an image and resources of national/international strength.
What would a brokerage manager evaluate about different operating affiliations?
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
Define, “Agency”, the legal term
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.
What is an Insurance Agent and what is an Insurance Broker?
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.
What is the overlap between brokers and agents?
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.
How are brokers and agents different, from a legal perspective?
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.
What are the types of authority that insurance agencies/brokerages have? (3)
- Express authority - anything legal that the parties agree to, verbally or in writing (‘binding authority’)
- 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)
- 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)
What is Ratification?
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
What is a Sub-broker? (2)
- 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)
- 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)
