Study 4: New Business

Question 1

Brokers and Agents: Define an Agent (1) and how they contrast with brokers. (1)

Answer 1

• An agent is a person who is employed or authorized to act on behalf of another. An Agent acts on behalf of the insurance company they work for. (one underwriter)
• Brokers on the other hand, choose among several insurance markets which they represent (Many underwriters)

Question 2

Brokers and Agents: What are the similar functions both brokers and agents perform? (4)

Answer 2

• Make inquiries into the nature of the risks to be insured.
• Communicate the info assembled to insurer.
• Liaise between insurer and insured.
• Respect the terms of any contract made with an insurer.

Question 3

Define Producer. (1) Why it makes sense for them to discourage fraud. (3) and how they can help discourage fraud. (1)

Answer 3

-A producer is a broker or agent licensed to sell insurance.

It makes business sense for them to discourage fraud because it may:

• Lead to unacceptably high loss ratios.
• Cause loss of premium income.
• Tarnish reputation of producer.

-Producers can help discourage fraud by letting potential clients know of serious consequences of misstating info on application, and how the penalties for fraud can be severe.

Question 4

What are the basic functions of selling insurance? (5) and more specifically the brokers functions? (3)

Answer 4

The following are the basic functions of selling insurance:

1. Getting to know the client
2. Determining insurance needs
3. Giving advice
4. Obtaining instructions from the client
5. Providing quotes

The additional functions of the Broker:

1. Negotiating coverage with insurers
2. Facilitating the claims process
3. Choosing the best suited insurer

Question 5

What are the required qualifications for Brokers and agents? (3)

Answer 5

• Individuals who sell insurance must be licensed to ensure that their insurance knowledge meets certain standards. (Some provinces require passing a qualifying exam)
• Some provinces also have continuing education requirements which brokers or agents must complete.
• The Registered Insurance Brokers of Ontario (RIBO) Act advises that brokers must:
• Pass the applicable exams.
• Be otherwise qualified under the act.
• Have received a certificate to this effect.

Question 6

New Customers: How can producers help prevent and control insurance fraud related to new customers? (6)

Answer 6

-New customers represent growth and stability to businesses but also the greatest degree of risk.

• Producers can prevent and control insurance fraud by considering these three areas:
  1. Business Practices – develop effective work process and develop and maintain technical competencies.
  2. Professional Standards – Develop and maintain professional standards of conduct to serve the public.
  3. Interpersonal Skills – To identify factors that characterize those who are intent on committing fraud. (Use checklists of red flags)
• The more that is known about a risk, the more accurately it can be analyzed, and more chances you have of catching fraudulent activity.
• Ask questions about who, what, where, when, and why. Be alert to fraud whatever to circumstances

Question 7

Applications: Why is meeting with the client a good way for brokers and agents to gather info and help prevent fraud? (6)

Answer 7

Meeting with potential policyholders is an investment in the future. It is a way to get to know a person, and meeting with the potential client provides the best environment to:

• Discuss applicants requirements in detail.
• Gain knowledge of clients background.
• Explain why certain info is required.
• Explain how misinformation or omission may jeopardize insurance coverage.
• Evaluate physical hazards.
• Build rapport.

*It is critical that agents and brokers consistently elicit info and record it accurately. Applications serve as templates for gathering such info.

Question 8

What are some common questions that often appear on applications? (8)

Answer 8

Certain answers on applications generally prompt further questions such as:

• Where does applicant live?
• Why does applicant only have PO Box address?
• Have there been many address changes over past few years? why?
• Why does applicant not have a phone?
• Is applicant unable to get a telephone?
• Why is applicant unable to produce drivers license?
• Who is principle driver if car insurance is involved?
• Are underage drivers likely to be principal operators?

Question 9

Why must satisfactory responses be obtained on insurance applications? (5)

Answer 9

• Satisfactory responses can be a deterrent to fraud and help prevent it.
• Omissions and unusual responses to questions on applications should not be ignored and must be pursued until a satisfactory response is obtained.
• If applicant is unemployed, its generally worth it to investigate further.
• Applicants are required to read and sign the application. It is important for the broker to go over all the fine print, and make sure that the applicant is aware of what they are about to sign.
• An application that has not been signed fully should be looked at closely to ensure that signature is legitimate. (A fully completed app signed by insured is effect measure to counteract fraud)

Question 10

Placing the risk: Why is placing the risk with the right insurer an important deterrent of fraud? (3)

Answer 10

-Choosing the right insurer is not only good for the customer, but also a deterrent to fraud. Some markets are better suited than others to handle certain high risk customers.

• Specialized niche markets can curb fraud by:
  1. Properly underwriting high risk frauds
  2. Make the best recommendations
  3. Impose the right conditions
  4. Provide the right contract

-For some larger risks, may be beneficial to approach more than one insurer to handle the risk.

Question 11

Confidentiality: Must all insurance info about an applicant be kept confidential? (3)

Answer 11

• Yes, The law protects insureds specifically against information being used inappropriately.
• Information about a insureds business affair should not be disclosed unless a court orders it, or it falls within an exception within the regulations.

-Private information must be kept confidential.
Any wrongdoing in this regard could impair defenses against a fraudulent claim.

Question 12

Define and contrast moral and morale hazard. (3)

Answer 12

-A moral hazard is a hazard arising from the nature of the insured or another person involved with the insurance including their character, interest, habits, lack of integrity or combination.

-This would include those instances where the chance of loss is increased by the insured’s carelessness,
incompetence, recklessness. (Intentional loss)

-A morale hazard is a hazard that is based on the insureds attitude towards the insured belongings. (no long cares about his possessions because they are insured)

Question 13

Who would be the best judges of moral and morale hazards? Brokers or underwriters? (2)

Answer 13

• Brokers and agents are on the front lines dealing with the client so they would be the best to judge moral/morale hazard.
• However underwriters , through property inspections, MVR reports, and hits on property, can detect if any hazards are present. (Ex: poor credit rating for moral hazard, many small losses suffered for morale hazard)

Question 14

What are some documents and info to review that can be a judge of whether a moral or morale hazard exists? (7)

Answer 14

-A prospective clients financial condition can be checked through an independent source such as credit reporting company.

Other docs an info to review may include:

• Business credit info
• Financial statements
• Payment records
• Public filings, lawsuits, judgement’s
• Historical info on owners, current management, company
• Receivership’s or fines

Question 15

Why might new companies be a cause of concern for brokers, agents and underwriters? (3)

Answer 15

• New companies can look attractive, but the individuals who own it could have a less than attractive insurance record.
• It is important to check for the identity and history of the principals of a commercial risk, as some owners may be reluctant to identify themselves because they have poor insurance records.
• Some individuals may have an acceptable loss record, but they may have a history of unsuccessful business ventures, so its important to check more than just their loss records.

Question 16

Define a binder (2), and how binding authority can expose an insurer to a potential claim. (1)

Answer 16

• A binder is a written or oral agreement given by an insurer to insure a risk, pending the issuance of a formal policy.
• Producers will generally not issue a binder when only a telephone request to do so comes from a new customer.

-Some brokers have authority to bind on behalf of the insurer, and this can expose the insurer to potential claims as insurers sometimes may not have had the proper opportunity to review the risk carefully, which might expose them to potential fraudulent acts committed by others.

Question 17

Property Inspections: How can property inspections help prevent fraud? (5)

Answer 17

Inspections provide a method to verify the information contained in an insurance application. This can prevent fraud both directly and indirectly by doing the following:

• Property inspection’s are necessary to prove that property exists and it will shed light on its value.
• Good security measures and fire suppression equipment will deter insureds who are tempted to fabricate a claim.
• Certain Risks end up being bought to the attention of the insurer which can reduce fraud.
• Inspections are important for good risk management as they can bring to light certain risks that can be mitigated
• Location of property is important as high risk locations are less attractive to insurers.

*Inspections are carried out selectively as they can be costly

Question 18

What can be done to prevent fraud related to automobile insurance? (4)

Answer 18

• Insurance providers tend not to know their auto clients well. Therefore, fraudulent claims can flourish more readily in an atmosphere where anonymity prevails.
• For this reason, pre-insurance inspections are conducted, especially for resale vehicles.
• This is an initiative to reduce false and insurance claims regarding:
• Phantom vehicles
• Non existent equipment and accessories
• Pre-existing damage
• Import/export frauds.

-Detailed descriptions are helpful when it comes to insuring vehicles. (VIN, unrepaired damage, photos, special equipment, etc)

Question 19

Premiums: Why should you look closely into how applicants approach insurance premiums? (2)

Answer 19

• It could trigger some questions to find out why certain choices were made. Consider why premium payment was late, if applicant appeared to be unconcerned about premium, and if they made a cash payment but only for minimum amount required.
• You may uncover your applicant is facing some financial difficulty, that in itself is not a sign of fraud but should still be monitored.

Question 20

Appraisals: Why do certain items of property need to be scheduled and require their own specific insurance? (4)

Answer 20

When specific insurance is placed on specific property, often an appraisal accompanies that request. Items are usually scheduled because they are:

• Expensive to replace
• Subject to low limits on standard insurance forms
• Insured only for certain limited perils
• Completely excluded on standard property forms

(Examples of scheduled items include cameras, film equipment, contractors equipment, fine art, jewelry)

Question 21

What are the three basic facts that should be established related to appraisals? (3)

Answer 21

1. The item exists
2. The item has been fairly and accurately valued,
3. The item belongs to the insured

Question 22

How can insurers help deter fraud related to fraudulent appraisals? (4)

Answer 22

• Should select person to do appraisal who has experience and someone who has earned their trust overtime.
• Should be aware of questionable or overstated values on appraisals.
• Ask for gemologists to appraise jewelry, as they are more trustworthy than other types of jewelry appraisers.
• Be aware of certain identifying factors on property that can help determine its value, and determine whether it is real or fake. For example, gold and silver usually are stamped with hallmarks which are an official mark that indicates standard of purity.

Question 23

How should diamonds be described on an appraisal? (3)

Answer 23

• Should be described in detail and include info on the four C’s: Cut, Carat, Colour and Clarity.
• For diamonds over 0.75 carats, its common to mention any inclusions or blemishes that exist.
• Inclusions refer to imperfections on the interior and blemishes are exterior imperfections.

Question 24

Designing the right coverage: what additions can insurers incorporate into the policy coverage that can help prevent fraud? (3)

Answer 24

• All of the info obtained about a risk influences the design of the policy, and the premium charged.
• By incorporating policy exclusions, clauses limiting coverage, and by introducing limits of liability, the insurer attempts to control the moral hazards associated with a risk.
• Insurers may also ask for larger deductibles which may entice insured to take greater care of their property and reduce their temptations to commit fraud.

Question 25

What kinds of coverage can the insurer offer to help discourage fraud? (2)

Answer 25

• An insurer may only offer a named perils policy, rather than an all risk policy when faced with high risk potential insureds. Limiting coverage is generally an effective way to discourage fraud.
• A named peril policy is a policy where the perils insured against are listed, and an all risk policy covers each and every loss, except for those specifically excluded.

Question 26

Define replacement cost (1) and Actual cash value (1), and when each should be offered. (1)

Answer 26

• Replacement cost - to provide substitute of the damaged or lossed property with something similar.
• Actual cash value - Fair market value of property, taking into account factors that might reduce value of property (Replacement cost - depreciation)
• Equipment that is outdated, no longer used, or worn out should not be insured under replacement cost. Policies that include replacement cost coverage often include caveats advising the equipment must work to qualify for such coverage.

Question 27

What are the different ways a building may be valued?

Answer 27

A building may be valued in different ways:

• The cost of replacement of a new building of like, kind and quality.
• A building insured for ACV can be determined by giving consideration to:
• —replacement cost less depreciation,
• —market value (Current selling prices of comparable properties)
• —income approach (Income produced as a rental property)

Question 28

What conditions are normally put on rental or retail space properties? (2)

Answer 28

• Conditions on these policies normally oblige the insured to rebuild on the same site, replace the destroyed building with a similar structure, to be occupied for the same purpose.
• This is to prevent insureds from having a claim, and rebuilding with a new state of the art building

Question 29

Wreckage value: How can building with really low values be covered under insurance policies? (1)

Answer 29

Buildings that are worth very little can be endorsed with a policy (endorsement) to cover the cost of repair or replacement as long as the work is completed within 12 months on the same site or on an adjacent site with the same materials and the same type of occupancy.

Question 30

What is valued basis coverage? (2)

Answer 30

• A valued policy is a policy that provides that a special amount shall be paid in the event of a total loss of a property.
• Generally based on their appraised value.

Question 31

What is a floater policy? (3)

Answer 31

• Insures movable items such as jewelry and antiques beyond the value in the standard homeowner’s policy
• Standard floater policies entitle the insurer to replace the articles insured or alternatively to settle for the amount it would take to replace them.
• This provision may be unpopular with insureds as they can suffer a loss if the replacement cost is well below appraised value.

Question 32

*Go over appendix

Answer 32

Go over appendix in back of chapter 4