Study 1 Insurance and the Intermediary - LO

Question 1

Explain why pure risk is insurable but speculative risk is not.

Answer 1

• Risk means the chance of loss.
o Speculative risk entails a chance of loss or a chance of profit; it is uninsurable.
o Pure risk only allows a chance of loss; it is insurable.

• Three categories of risk:
o Personal risk
o Property risk
o Liability risk

• There are three classes of insurance:
o Personal lines
o Commercial lines
o Special risks

Question 2

Describe the various distribution channels used to deliver insurance products to consumers, including the benefits and drawbacks of each.

Answer 2

• P&C insurance industry delivery systems:
o Independent agency system

o Independent brokerage system
• Independent brokers act as sales force

o Exclusive agency system
• Works through agents representing only one company

o Direct writers
• Deal directly with the public

o Online or web-enabled applications
• Deal directly with the public
• All representatives selling insurance must be licenced.

Question 3

Describe the obligations and duties that the principal and agent relationship places on the three parties to an insurance transaction.

Answer 3

• Agents secure contracts or act for their employers in contractual matters.

• Agents may be:
o Employees
o Independent businesspeople

• The Civil Code of Québec sets out mandator and mandatary rules (similar but not identical to agency
rules under common law).

• Principal–agent relationship entails agent and broker obligations to their principals and vice versa.

• Intermediary responsibilities include:
o Prioritize consumer’s best interests regarding coverage recommendations
o Comply with insurance companies’ underwriting guidelines
o Meet insurers’ expectations of behaviour

Question 4

Describe how agents and brokers are licensed and regulated.

Answer 4

• Insurance agents regulated by their province or territory’s insurance act.
• Self-regulatory councils oversee broker licencing and operations in some regions.

• Primary regulation considerations:
  o Qualification
  o Licensing
  o Operating requirements
  o Renewal of licence

Question 5

Outline strategies to minimize, avoid, or defend against an errors and omissions (E&O) claim.

Answer 5

• Best defences against E&O:
o Documentation
o Communication
o Compliance with ethical standards of profession
o Action within scope of authority and competence

• Primary causes of E&O claims is failure to:
o Provide cover that address exposures
o Explain exclusions, exemptions, and restrictions
o Place cover at all
o Provide correct cover
o Provide cover in time

• To minimize exposure to E&O claims:
o Comply with agent/broker duties
o Act competently and within terms of the agreement
o Behave in an honest and trustworthy manner