Chapter 5 Flashcards
How are brokerage agreements established?
Brokerage agreements are established by negotiations between the insurer and brokerage
Brokers will often enter into agency contracts or agreements with insurers. State two advantages brokers receive when they enter these agreements.
i) Right to bind coverages
ii) Take part in profit-sharing plans
While there is no standard agency contract or agreement used by all insurers, they all essentially address the same issues. Identify them and give a brief description of each.
i) Authority – This includes areas such as binding authority or restrictions on certain classes
ii) Ownership of Expirations – This should outline whether the brokerage owns client files.
In cases of insolvency of a brokerage, an insurer may assume ownership of files insured with them.
iii) Billing Procedures – This should outline when and how premiums collected are remitted to insurers
iv) Commissions – This includes the commissions to be paid a brokerage, and can be negotiated. Changes to commissions should include notice period. Brokerage is responsible for paying their own expenses from commissions earned.
v) Termination – This outlines notice period and other issues when relationship is being terminated. Rehabilitation clauses allow for problems to be corrected prior to termination.
vi) Hold Harmless – This outlines protection for brokerage from responsibility when insurer does not meet obligations in certain acts
vii) Privacy Act – This should outline compliance to legislation regarding privacy of information
viii) EDI Provisions – This outlines responsibility of data transferred electronically
Billing procedures must be spelled out in brokerage agreements. Premiums can be remitted in various ways. Identify three ways and briefly explain each.
i) Agency Bill – Brokerage Statement
This method allows brokerage to pay accounts based on brokerage accounting records
ii) Agency Bill – Insurance Company Statement
This method allows brokerage to pay accounts based on insurer accounting records
iii) Direct Billing
With this method, clients are billed directly by an insurer and commissions are paid
monthly to brokerage on paid accounts
Identify three disadvantages of direct billing to brokerages.
i) Brokerage cannot earn investment income on premiums collected
ii) Brokerage loses control over document preparation
iii) Brokerage may lose the opportunity to establish client contact
Identify eleven items considered by brokerages when negotiating profit sharing agreements.
i) Volume required to qualify
ii) Classes of business included or excluded
iii) How insurer computes income
iv) How losses are defined and the presence of a “Stop Loss”
v) Credits for subrogation, adjustment premiums and sale of salvage
vi) IBNR definition
vii) Consideration of growth verses profitability
viii) Percentage paid of underwriting profit
ix) Consideration of insurer investment income
x) How profit is calculated
xi) When profit-share will be paid to brokerage
Identify five factors to be considered before establishing a relationship with insurers.
i) Marketing philosophy and practices
ii) Claims services
iii) Policyholder services
iv) Financial stability
v) Underwriting procedures
Identify four important areas to consider when evaluating an insurer’s Marketing Philosophy and Practices.
i) Type of insurance product required
ii) Volume of business
iii) Consistency and stability
iv) Compensation
What are three components of compensation?
i) Commissions
ii) Profit sharing agreements
iii) Rewards
Identify three policyholder services that should be considered by brokerages when considering insurers.
i) Procedural matters
ii) Support services
iii) Technology
Identify three sources of financial information available to brokerages to assist in the evaluation of the financial strength of insurers.
i) Provincial regulators
ii) Insurer financial statements
iii) Industry publications eg: Canadian Underwriter
Identify four factors to be considered by brokerages when evaluating an insurer’s underwriting procedures and practices.
i) Location of underwriting decisions
ii) Underwriting guidelines
iii) Rate levels
iv) Competence and continuity of staff
Brokerages must decide on the number of insurers to represent. Identify the advantage to the brokerage that chooses to represent a small group of insurers.
Greater premiums volumes reduces the impact of large losses on a brokerage’s loss ratio and larger volumes usually indicates strong a insurer-brokerage relations
There can be disadvantages when placing too much insurance with a single insurer. Explain the kinds of things that might happen that would place brokerages in a vulnerable position.
When the ‘only’ insurer were to withdraw, become insolvent or be sold, the brokerage would be faced with the daunting task of re-writing an entire client base with a new
insurer
Most insurers have established criteria for evaluating prospective appointments. Identify the factors established by insurers to determine the suitability of brokerages and summarize the key points of each.
i) Premises – A brokerage office’s appearance and location will affect an insurer’s first impression. Personal Lines insurers may wish a brokerage to be located in residential areas where Commercial Lines insurers may wish a brokerage to be located in commercial business locations
ii) Financial Information – Brokerage financial statements will be reviewed to ensure the financial health of brokerage and to ensure proper handling of premiums collected
iii) Type and Mix of Business – Insurers will want to ensure that a brokerage currently writes lines of business of interest to an insurer
iv) Other Insurers Represented – Insurers will be looking for opportunities to be a unique insurer within the brokerage operations. When insurers currently
represented are similar to those considered there may be little opportunity for a new insurer to write business
v) Loss Experience – Insurers will want to see brokerages with a profitable book of business. Insurers will consider the frequency and severity of losses reported.
vi) Human Resources – Insurers will want to see a well trained professional staff at any brokerage under consideration
vii) Business Plan – Insurers will want to see a business plan that will show an insurer areas in which brokerage plans to grow, the amount of planned growth and the time frames to achieve planned growth. Also, business plans should indicate the volume of premiums anticipated from new business planned; volumes from existing clients; targets to improve client relationships and methods to be used to improve client retention
