Chapter 4 Flashcards
Key Term: The ratio of current assets to current liabilities
Current Ratio
Key Term: Potential buyer of insurance
Prospect
Key Term: 1. A commission paid in excess of the regular agents or brokers commission for additional services provided by the intermediary for administration costs associated with placing increased business with the insurer when supervising sub-agents in a given geographical territory, transferring a book of business, or placing a particular desirable business with the insurer.
2. In reinsurance, an amount paid to ceding company in addition to the acquisition cost to compensate for overhead expenses. Also called overwrite commission
Override Commission
Key Term: A commission paid to an agent that depends upon the profit the insurer has realized from the agency’s business.
Contingent Commission
Key Term: Analyzing a risk to quantify the potential for losses in a specific investment and to decide what is the appropriate action to take (or whether not to take action)
Risk Management
Key Term: Any account that is considered uncollectible
Bad Debt
Describe FIVE (5) key metrics of a brokerage’s portfolio performance.
Earned loss ratio: Relates total incurred losses to earned written premiums
Loss frequency: How often clients have claims
Renewal retention: How much of the existing book of business is renewed annually
New business growth: Companies should replace non-renewed business by acquiring new business
Split of business: Maintaining a balanced portfolio is important to ensuring stability through various economic and market adjustments
Policies in force growth: Many brokerages use premium dollars to determine growth of their portfolio
Identify FIVE (5) actions that lead to successful budgeting.
Coordinating activities and motivating staff
Timing the budget process appropriately
Consulting participants throughout the organization
Securing support at all levels
Choosing a budgeting method
Using appropriate considerations and assumptions
Analyzing budget versus actual performance frequently
Amending the budget in response to changing circumstances
What does the successful implementation of collection procedures depend on?
Speed of invoicing: The sooner an invoice is issued and the sooner the broker can follow up on outstanding unpaid premiums, the better the chances of being paid
Error-free invoicing: Billing errors give clients reasons for not paying
Monitoring payments: Client payment habits
Receivables persistence: Persistence in collection efforts
Following policy: Strict adherence to the collection policy
Application Question
Gerald is a very successful sales representative at his brokerage and was recently promoted to the management team. He is not yet familiar with all the financial statements that are now a part of the reports he receives and has asked the company’s CFO to give him a quick tutorial on financial management and what he needs to know.
Question 1
What are the FIVE (5) steps of the financial management cycle?
Classify financial data
Analyze income and expenses
Adopt financial standards
Make comparisons
Take corrective action
Application Question
Gerald is a very successful sales representative at his brokerage and was recently promoted to the management team. He is not yet familiar with all the financial statements that are now a part of the reports he receives and has asked the company’s CFO to give him a quick tutorial on financial management and what he needs to know
What is the content of each of the financial statement documents?
Balance sheet: A snapshot of the financial position of the entity at a point in time. Main classifications are assets, liabilities, and shareholders’ (owners’) equity. Simple accounting equation: Assets = Liabilities + Shareholders’ equity.
Income statement: A statement of all revenues and expenses over the stated time period. Net income or loss is the difference between revenues and expenses (Net income = Revenue - Expenses).
Statement of changes in shareholders’ equity: Links the balance sheets at the beginning and end of a reporting period to the income statement. Presents capital contributions or withdrawals.
Statement of changes in financial position: Also known as statement of cash flows, uses the income statement to explain the movements in cash through the reporting period. Shows the sources and uses of cash in three categories: operating, investing, and financing.
Application Question
Gerald is a very successful sales representative at his brokerage and was recently promoted to the management team. He is not yet familiar with all the financial statements that are now a part of the reports he receives and has asked the company’s CFO to give him a quick tutorial on financial management and what he needs to know
What is the purpose of each of the financial statement documents?
Balance sheet: Shows what the company owns and owes.
Income statement: Measures net income or loss over the stated time period; includes figures used in calculation of EBITDA (earnings before interest, taxes, depreciation and amortization) measurement of the company’s operating performance; used to compare profitability to the organization’s peers.
Statement of changes in shareholders’ equity: Illustrates how the net income activity is presented on the balance sheet.
Statement of changes in financial position (also known as statement of cash flows): Shows where cash is being generated and spent over a specific period of time.
