Chapter 5: Broker - Insurance Company Relations

Question 1

When do brokerages have agreements with insurance companies, and what advantages would an agreement accrue for the brokerage?

Answer 1

Brokerages are more likely to have agreements with insurers that underwrite a decent portion of the firm’s business, or are the insurers that the brokerage approaches frequently.

Having agreements with insurers can provide brokerages with advantages such as profit sharing eligibility and rights to bind certain coverages.

Question 2

What are a couple examples of profit sharing between brokerages and insurance companies? (2)

Answer 2

Contingent commissions & bonus plans

Question 3

What are the section of a brokerage agreement? (9)

Answer 3

1. Authority
2. Ownership of expirations
3. Billing procedures
4. Commissions
5. Termination
6. Hold harmless
7. Privacy act
8. EDI provisions
9. Other provisions

Question 4

What does the authority section of a brokerage agreement outline?

Answer 4

Binding authority, limitations of binding authority, and any restrictions of the granted authorities

Question 5

Ownership of expirations; what does this refer to?

Answer 5

This refers to the basis of all independent insurance broker systems, the ownership and control over the brokerage’s clients’ files. This section of a brokerage agreement outlines that the brokerage is to retain ownership, and has control over placement of insurance for those clients.
(Clients of the brokerage, not the insurer)

Question 6

Why are ownership of expirations sections in brokerage agreements important?

Answer 6

The expiration dates and clients’ information represent a capital value which can be bought and sold. Consequently, a brokerage that does not represent their interests in this section is at-risk of potentially losing clients if the information is not protected legally.

Question 7

What is a situation where an insurer may go against the instructions detailed in an ownership of expirations section?

Answer 7

Insurers may insist upon gaining ownership of expirations when the brokerage fails to remit owed premiums. This can take the form of a brokerage facing bankruptcy, and the insurer attempting to salvage some of the brokerage’s assets to recoup some lost premiums. Because of this possibility, most brokerage agreements contain clauses/endorsements that would deal with ownership in the event of a relevant problem.

Question 8

What are the common billing procedure practices? (2)

Answer 8

1. Agency bill
2. Direct bill

Question 9

An agency bill agreement has 2 parts. What are they?

Answer 9

1. Brokerage statement - normal procedure for a brokerage to identify all accounts due within a specific period (typically 1 month)
2. Insurance company statement - the agreed remittance period having passed, the insurer bills the brokerage for the amount due for a specific period (usually 1 month)

Question 10

What are the advantages and disadvantages of direct billing? (3 & 5)

Answer 10

Advantages:
Brokerage no longer has to bill the client (1), collect premiums (2), or remit funds to the insurance company (3).

Disadvantage:
1. The brokerage is deprived of the potential use of premiums normally permitted by other billing methods; loss of opportunity cost.

2. Locus of control is with the insurer; brokerage loses some control over policy maintenance.
3. May weaken personal contact and connection with clients.
4. Inaccessibility to the insurance company’s records. (eg. client payment status)
5. Policy issuance and delivery mistakes before the broker has the opportunity to review documents.

Question 11

What is the time horizon for commissions agreements on brokerage agreements with insurers?

Answer 11

Typically, a period of 12 to 18 months would be guaranteed at a specific rate.

Question 12

Why do brokerage agreements have a termination section?

Answer 12

All contracts need an escape clause. In this case, it is common for a notice period of 90 to 180 days to be detailed as a requirement prior to termination.

Question 13

What is the hold harmless section of a brokerage agreement?

Answer 13

This section protects the brokerage from responsibility for acts/actions of the insurance company. The insurer indemnifies and holds the brokerage harmless against all civil liability incurred by the insurer.

Question 14

What does the privacy act section of a brokerage agreement do?

Answer 14

This section clearly outlines the brokerage’s and insurer’s agreement on their respective responsibilities.

Question 15

What are EDI provisions?

Answer 15

This section outlines issues regarding damages for loss of data, or any other losses suffered when sending insurance transactions between the brokerage and the insurer.

Question 16

What is an example of something that could be included in the other provisions section of a brokerage agreement?

Answer 16

A desirable clause would be on that calls for arbitration to provide an objective means of settling disputes over the agreement (attorneys, counsel, etc.).

Question 17

What are some key elements in negotiations of profit sharing agreements? (5+)

Answer 17

• How much business a brokerage is required to write in a specified time, in a specified line
• Lines of business included or excluded
• How insurer income is computed (gross premiums vs net income, etc.)
• How losses are defined - if a “stop loss” applies to losses over a certain dollar amount
• If there are any credits awarded from amount received through large audits, subrogation recovery, sale of salvage, etc.
• Whether IBNR (insured but not reported) losses are included in calculations
• If any credit is given to growth over profitability (insurers pay for growth)
• What percentage of net underwriting profits are paid out
• If any credit provided for income from insurer’s investments (trickle-down effect)
• How profit is calculated (insurer overhead, expenses, etc.)
• When profit sharing sums would be distributed out to brokerages
• Whether the agreement is subject to arbitration
• The effect of a brokerage’s termination on such plan

Question 18

What are some aspects that are important in assessing the needs of the brokerage’s philosophy, regarding markets and insurers? (4)

Answer 18

1. Type of insurance product
2. Volume of business
3. Consistency and stability
4. Compensation - commissions, profit sharing agreements, rewards

Question 19

When evaluating potential markets and insurers, what are the important aspects to research? (6)

Answer 19

1. Market philosophies & practices
2. Claims services
3. Policyholder services
4. Financial stability
5. Underwriting procedures
6. How many insurers?

Question 20

Procedural matters that should be considered should include: (6)

Answer 20

1. Availability of premium financing
2. Average length of time to obtain quotes
3. Normal time to have policies issued after order
4. Time horizon for renewals leading up to expiration dates
5. Turnaround on policy changes & endorsement requests
6. Normal length of time to credit brokerage for cancelled policies (refunded premiums)

Question 21

What are the support services that an insurance company could provide?

Answer 21

Risk management services, such as engineers, surveyors, estimators, etc.

Question 22

What organization is industry-funded, and ensures that moneys are available to pay claimants in the event of an insurer’s insolvency? What does this organization guarantee to claimants?

Answer 22

PACICC - Property and Casualty Insurance Compensation Corporation
Guarantees a maximum of $250,000 in coverage for any one claim (subject to change)

Question 23

Under the PACICC’s plan, what happens to premiums following an insurance company’s insolvency?

Answer 23

70% of unearned premiums (maximum of $700) would be returned to policyholders, while the remaining balances may have to be paid out by the brokerage. This is not covered by any E&O policy.

The brokerage may have to engage in legal action to recoup it’s losses (eg. real assets of the insurance company)

If premiums are not returned (client not made whole), the brokerage is likely to lose the client and potentially face legal action by the client.

Question 24

What are some implications regarding the location of underwriting decisions? (4)

Answer 24

1. When dealing with branch offices, do they have the authority to make decisions or do submissions need to be made to head office? (Slows down final approval)
2. Are there separate underwriters for each line of business or does one underwriter handle several lines?
3. Would brokers have to deal with multiple underwriters on large accounts, and if so, what could be done in the event of a disagreement with one of them?
4. Are applications judged on its merits, or does the insurance company accept/reject submissions based on pre-defined sets of characteristics?

Question 25

What is class underwriting?

Answer 25

The practice of accepting or rejecting submissions because it has a set of pre-defined characteristics.

Question 26

Why are rate levels of insurers important to brokerages?

Answer 26

The brokerage would need to be satisfied that the rates charged by the insurer are competitive in the overall marketplace.

It would also be important to know if the insurer has any flexibility.

Question 27

What are the benefits to brokerages when they choose to not represent all insurers within a market? (3)

Answer 27

When just a few companies are used:

1. Greater premium volumes can be maintained with each.
2. Reduces effect of an unusually large loss on the brokerage’s loss ratio
3. Dealing with the same underwriters develops the relationship and rapport over time

Question 28

When would reliance on few insurers pose a risk to a brokerage?

Answer 28

1. If the insurer were to deteriorate
2. If the insurer were to withdraw from the market/province
3. Insurer insolvency
4. If the insurer were to be acquired/purchased

Question 29

What must a brokerage manager/owner present in order to attract insurers’ business? (7)

Answer 29

1. Location matters (different settings convey different messages; small town vs urban skyscraper)
2. Financial information; profitable brokerage operations, appropriate handling of premiums
3. Brokerage’s mix of current business; books that are more in-line with the risks that the insurance company writes would be more attractive
4. Other insurers represented; too many competitors being represented by a brokerage may indicate a future inability to place and maintain required volumes with the new insurer
5. Loss experience by insurer and by line of business will be requested; 2 key measures - severity & frequency
6. Human resources; the qualifications of those employed at the brokerage (work experience/tenure, education, professional designations, etc.)
7. Business plan; where the insurer fits into the brokerage’s overall plans

Question 30

What would a brokerage’s business plan detail when it pertains to an inquiry from an insurer? (4)

Answer 30

This plan would indicate the areas of growth opportunity for the brokerage, amount of such growth, and the time frames in which the plan is to be achieved.

1. Projected premium volumes from new clients
2. Volumes from existing clients (retention)
3. Growth targets through enhancing relationships with existing clients (cross selling)
4. Should reflect an increasing retention rate

Question 31

What are some formal channels of communication between insurers and insurance brokerages? (3)

Answer 31

1. Monthly newsletters (“good news”)
2. Company letter or bulletin (“bad news”)
3. Advisory councils (“inner circle” brokers)

Question 32

What do special programs do? (Brokerage & Insurer relations)

Answer 32

They help build rapport between the insurance company and the brokerage. Examples of these special programs would be greater responsibilities and authority for claims, underwriting, and policy issuance.