Study 7: Relationship between Sales Intermediaries and Insurers

Question 1

Define Agent (1) and describe the different types of Agents (4)

Answer 1

Agent - A licensed person that sells insurance policies offered by an insurer.

The different types of Agents are:
-Company Employed Agent - works directly for the insured. Is paid salary with bonus and insurer owns book of business.

• Independent Agent - Maintains separate office from insurer. (more of an entrepreneur) Generally paid commission and they negotiate contract with the insurer. They generally own their book of business.
• Exclusive Agent (Captive Agent) - Places business with one insurer but remains independent (have own office). May have option to place business elsewhere if insurer declines it.
• Sub-Agent - Appointed to perform functions undertaken by the agent for the insurer. Appointing agent is responsible for the sub-agent. In most cases, insurer needs to approve use of sub-agent.

Question 2

Please Define brokers (1) and how they operate. (4)

Answer 2

Broker - Licensed independent person who acts on behalf of an insured in placing business with insurers.

• Brokers work with clients to identify the risk exposures and coverage they need, and than shop the clients risks amongst their portfolio of insurers to identify best price.
• Brokers help clients by guiding them or advocating for them if they had a claim.
• Insurers pays broker commissions for the business. In some cases, a fee arrangement is not unusual with large accounts.
• In most cases, Brokers own client list, they have power to move entire book of business between insurers.

Question 3

Please define wholesale brokers (1) and how they operate. (4)

Answer 3

Wholesale broker - A broker who acts as an intermediary between an agent and an insurer, often possessing specialized expertise in particular line of coverage.

• A broker unable to place a risk with insurers might instead arrange coverage through a wholesaler.
• Small producers without sufficient volume might be left without a market if not for wholesalers.
• Wholesalers charge insurers a commission and pass a portion of that back to broker or agent. (Thus, commission a broker or agent receive is less when they deal with wholesalers)
• Wholesalers may specialize in particular classes of risks or participate in programs underwritten by one or more insurers interested in that class.

Question 4

Please describe how Managing General Agents (MGA’s) and Managing General Underwriters (MGU’s) Operate. (4)

Answer 4

MGA - Independent business operation given authority by a number of insurance companies to solicit business on behalf of such companies.

• MGA’s operate in a entrepreneurial style and has authority to manage all of the insurer’s business as outlined in contract. (Can include handling policy admin, providing accounting, and handling claims)
• One reason an insurer retains an wholesaler/MGA is because they specialize in certain lines of business, industry, products, and distribution network.
• MGA’s receive commission and fees for their services.

Question 5

Do all wholesale insurance markets deal with substandard business or unique risks only? (2)

How does the market cycle effect wholesale insurance markets? (1)

Answer 5

• No, not all wholesale business is substandard.
• As the market hardens, more accounts (Including those generally thought of as standard) go to the wholesale market.

-An insurer cannot afford to write every risk individually. Often, depending on the market cycle, certain accounts that don’t fit appetite of insurer may go to the wholesale market.

Question 6

Program business: How do wholesalers try and protect themselves against Market cycles? (1) and what are some examples? (4)

Answer 6

-Try to form programs for niche markets. They identify a particular need for specialized coverage and negotiate a contract with an insurer.

Examples include:

• Professional liability insurance for veterinarians
• General liability for roofing contractors
• Liability insurance for hospitality industry
• Property and liability package policies for bed & breakfast.

Question 7

Compare and contrast direct insurers and broker market insurers. (2) and how insurers can take advantage of both distribution channels (2)

Answer 7

• Direct writer: no intermediaries. Sell straight to client.
• Broker-Market: use intermediaries in the transaction between insurer and the insured.
• Because insurers need to reach as many potential buyers as possible, some insurers have created different companies to take advantage of both distribution channels.
• Superior communication and trust is needed to assure producers that insurers direct company will not bypass producers on any risk and go directly to the client.

Question 8

Is it advantageous for insurer to have as many producers as possible? (4)

Answer 8

• No, the cost of dealing with more producers adds up.
• An insurer looks to control costs, often reduce number of producers, concentrating on those with higher premium volumes/more profitable business.
• Too many producers can overstretch insurers resources.
• Insurer-producer relationship can benefit when the insurer deals with fewer producers (Spend more time with one another/ are able to better identify issues earlier)

Question 9

How do insurers select what producers they do business with? (2)

Answer 9

• Every insurer has own way of choosing who it wants to sell it products. (Some leave choice to head office, others leave to branch/business development units)
• When identifying new production sources, most insurers start with a business plan (What lines of insurance, what class of risk, etc.) - Plan sets out strategy which helps dictate the types of producers insurer will consider.

Question 10

What is a due diligence review (1) and what elements does it include? (8)

**NOFBBSOC

Answer 10

A Due Diligence review helps insurers decide what producers it would like to work with from among the candidates it has identified.

A due diligence review of a producer includes the following elements:

• Network Analysis
• Ownership
• Financial Analysis
• Business Plan
• Business Processes
• Staff
• Other insurers
• Computer Systems

Question 11

Network Analysis: What questions should an insurer consider when reviewing potential producers? (10)

Answer 11

• A producer should be assessed for such considerations as premium volume, average account size, loss ratio, and profitability.

Underwriters assess these considerations with answers to the following questions:

• Is producer aggressive and looking to expand? (Profits over the years)
• Can producer grow with insurer? or has it reached its max capacity?
• Can producer sell range of insurers products?
• What is producers mix of business? (Large or small accounts, small accounts with # of transactions can increase cost to insurer)
• Will producer support and work with insurer?
• What HR practices does the producer follow? (Quality of staff/reputation)
• What makes the producers customer loyal to producer? (Service they offer)
• Will producer allow insurer to have contact with client? (Large accts may require meeting with client)
• Could insurer delegate to producer certain insurance functions? (Claims, underwriting, etc.)

Question 12

Ownership: Why must insurers pay attention to the ownership of producers? (1) and what questions must they consider? (4)

Answer 12

-It is not unusual for insurers to provide capital to producers. They need to consider whether support of producer by another insurer would create a conflict of interest.

Following questions need to be answered:

• Are there any non insurance investors?
• Who has controlling interest in producer?
• Is producer a subsidiary or branch operation? (If so, would want to know about parent company)
• If producer has been recently sold, will it handle its affairs’ differently now? (are owners only in it for money?)

Question 13

Financial Analysis: What questions should an insurer ask when reviewing a producer? (2)

Answer 13

• Does producer have enough capital to be viable in the long term? (ensure producer can remain in business)
• How high are the producers expenses? (commissions should be able to cover expenses)

Question 14

Business Plan: What questions should an insurer ask when reviewing the business plan of a producer? (3)

Answer 14

• What is the producers record of growth? (history of good premium growth, solid income statement, Balance sheet)
• How does the producer plan to grow in the foreseeable future? (Does its growth strategy fit with insureds)
• How will producer handle the increased business caused by growth? (possible greater expenses, change in organizational structure)

Question 15

Business Processes: What does an insurer consider when reviewing a producers business processes? (4)

Answer 15

• Consider the producers present state of affairs.
• What is producers organization structure? (Flat, or structure with more authority)
• Are producers resources equal to demands on them? (If someone is away, will someone else cover for them)
• Are there provisions to cover for an absent staff person?

Question 16

Staff: What must an insurer consider related to a producers staff? (1) and what principles were articulated by Canadian regulators related to the relationship between insurers, producers, and consumers? (3)

Answer 16

-Insurers must consider that producers have enough staff to handle the work, and that the staff is qualified.

The Canadian insurance industry reviewed following principles:

• Priority of clients interest: must place interest of policyholders above your own
• -be honest when advising clients
• -not taking advantage of inexperienced consumers
• -act with integrity/utmost good fait
• Disclosure of conflict of interest: Must disclose potential and actual conflicts of interest. (Publicly available)
• Product suitability: must recommend products that are suitable for client.

Question 17

Staff: What questions can insurers ask that might be of interest to them? (3)

Answer 17

• What are the experience and skills of producers staff?
• How well does staff deal with insurance business processes? (How quickly can they produce quotes, issue policy, handle MTA’s, etc.)
• If key people leave, will it adversely affect producer?

Question 18

Computer Systems: What questions should an insurer ask when reviewing the computer systems of a producer? (4)

Answer 18

• How do producers systems compare to current technology?
• Who provides computer system? (Does producer expect insurer to supply everything)
• Are producers and insurers computer systems compatible?
• Can producers system communicate with insurers system on admin matters such as accounting?

Question 19

Other Insurers: What questions should an insurer ask when reviewing the other insurers of a producer? (3)

Answer 19

• Who are the other insurers producers work with? (Do they compete with insurer, or offer completely different coverages)
• How does rate structure of other insurer compare to insurers own? (If they compete with insurer)
• What can insurer offer the producer that other insurers cannot?

Question 20

Establishing tasks: What must an insurer consider when granting underwriting authority to a producer? (4)

Answer 20

• When deciding to give autonomy to a producer, an insurer must have confidence and trust to make it work.
• Insurers that grant underwriting authority should implement audits and controls to retain some control over producers expertise.
• Producers bias might be to write as much business as possible, insurers might be more willing to sacrifice premium volume to write profitable business. Must consider interests of both parties as they may not align.
• An insurer can benefit from producer’s expertise yet must continue to manage the relationship and oversee the functions.

Question 21

Planning for implementation: How can insurers manage the entity that is granted underwriting authority? (4)

Answer 21

• If due diligence review has identified any weaknesses, those need to be addressed.
• As a result of due diligence review, may want to limit producers underwriting authority for a period of time. Limitations might be placed on type of risks producer can bind, size of premium, etc.
• Producers may also be granted greater authority of due diligence review was positive.
• Training seminars, audits can be done to manage producer.

Question 22

Employing audit controls: How should insurers implement audit controls for producers? (3)

Answer 22

• Insurers should attempt to replicate as closely as possible the same audit controls, procedures, and monitoring tools that is used in own offices.
• If producers book of business performs well, may need less monitoring. (and vice versa)
• Insurers need effective plans and tools to monitor/control newly launched producers and programs because they initially lack premium volume to support expected losses.

Question 23

Assigning Resources: How do insurers manage their resources when it comes to granting producers underwriting authority? (3)

Answer 23

• Producers staff must have someone at the insurance company to contact at any time. (Can be a resource issue)
• Insurers dedicate people and resources to manage accounts with producers. (referral UW’s, account managers, etc.)
• If all these peoples time and resources are dedicated to producers, insurers must ask whether the profit margin on its business with producer can support these expenses.

Question 24

Complying with insurer Standards: What must producer who is granted underwriting authority understand related to insurers guidelines? (3)

Answer 24

• Producer must understand insurers philosophy and culture.
• Helps them to understand context within which insurers underwriting guidelines have been developed, and how they are to be applied.
• insurer needs to develop and provide administration standards for the producers. (reports, audit guidelines)