Study 7 - Relationships Between Sales Intermediaries and Insurers

Question 1

Name the four (4) types of Agents

Answer 1

1. ) Company Employed Agent
2. ) Independent Agent
3. ) Exclusive Agent
4. ) Sub-Agent

Question 2

Which type of agent works directly for the insurer

Answer 2

The company employed agent.

• may be paid a salary, bonus, commission or a blend fo the three
• Insurer owns the client expiry date list
• insurer issues and services policies, sends out invoices and collects premium

Question 3

Which type of agent is more of an entrepreneur

Answer 3

An Independent Agent:

• maintains an office seperate from that of the insurer
• pays their own expenses
• contract between agent and insurer negotiated
• has more control over staffing
• relieves insurer from providing salaries and benefits to the staff

Question 4

Which type of agent is also known as a captive agent and places business with only one insurer?

Answer 4

The Exclusive Agent:

• remains independent as a businessperson.
• places insurance with one insurer, if that insurer declines the risk the exclusive agent may have the option to place the risk elsewhere
• known as “Right of Refusal”
• One reason for this exclusive contract could concern the distribution of a certain product or program

Question 5

Which agent is appointed to perform functions undertaken by the agent for the insurer?

Answer 5

The Sub-Agent:

• is the agent for the agent and the insurer
• the insurer must approve of the use of the sub-agent

Question 6

What is a broker?

Answer 6

• A Broker is an independent business person
• Works with the public as a trusted advisor
• Brokers establish agreements with multiple insurance companies to sell their products
• May act as a liason between insurer and client during a claim, may provide loss-control services
• Broker owns the client list

Question 7

What is a Wholesaler?

Answer 7

• A Wholesaler is a broker to brokers
• An intermediary
• If a broker does not have a market for a certain risk they would approach a wholesaler who finds a market in return for commission.

Question 8

What is a benefit of a Wholesaler

Answer 8

The wholesaler may specialize in risks of a certain class, or they may participate in a program underwritten by certain insurers. Such as:

• airbnb risks
• snow removal companies
• demolition / blasting companies

Question 9

What is a Managing General Agent or Managing General Underwriter

Answer 9

• MGAs and MGUs are producers that are categorized as being in the wholesale market
• They operate entrepreneurially
• They have authority from an insurer to manage all of the insurer’s business
• They typically have authority to appoint agents on behalf of the insurer, handle policy administration, accounting services, and handle claims.

Question 10

Why would an insurer use a Managing General Agent (MGA) or Managing General Underwriter (MGU)?

Answer 10

• The insurer does not have the specialization to manage this risk itself? They may lack infrastructure, expertise, or distribution network.

The insurer can write the business, pay a fee or commission to the wholesaler, maintain a smaller operation, lower internal expenses.

Question 11

What are the eight (8) elements of a Due Diligence Review when looking for a potential new producer?

Answer 11

1. ) Network Analysis
2. ) Ownership
3. ) Financial Analysis
4. ) Business Plan
5. ) Business Processes
6. ) Staff
7. ) Computer systems
8. ) Other Insurers

Question 12

What is NETWORK ANALYSIS?

Answer 12

An aspect of a due diligent review? Network analysis considers a producers premium volume, average account size, loss ratio and profitability?

Question 13

What are some questions to ask during NETWORK ANALYSIS?

Answer 13

• Is the producer aggressive and looking to expand?
• can the producer grow?
• Can the producer sell a range of products?
• Will the producer support and work with the insurer?
• How well does the producer work with the insurer?
• What HR practices does the producer follow?
• What functions can be delegated to the producer (claims handling, underwriting, policy admin, accounting?)
• Will the producer allow the insurer to have contact with the client?

Question 14

Why is examining OWNERSHIP of a producer important when performing a Due Diligence Review

Answer 14

• It is not unusual for the insurer to provide capital to the producer. The insurer needs to know whether a producer depend on another insurer for any part of its capital
• would having another insurer supporting the producer create a conflict of interest?
• Are there non-insurance investors?
• Who has controlling interest in the business?
• Is the producer a subsidiary or branch?
• Is the ownership stable?
• Is the producer looking to be in the relationship for the long term?

Question 15

Why is FINANCIAL ANALYSIS an important aspect of a Due Diligent Review?

Answer 15

Because an insurer wants to know if the producer has enough capital to be viable in the long run.

• If they are delegating functions it wants assurance that they can perform them.
• Insurer wants a long term relationship.
• Insure would like a producer that is profitable and capable of investing money back in itself

Question 16

What element of a Due Diligence Review looks at the GROWTH capabilities and desires of a producer?

Answer 16

The BUSINESS PLAN.

• Looks at producers history and projections for the Future

Long-term survivability and Stability of the producer is important to the insurer.

Business plan looks at the Growth of producer. Are they capable of growing?

Does the producers growth strategy fit with the insurer? E.g. does the producer want to increase premium volume at expense of loss ratio and service?

Can the producer handle more growth?

Question 17

What are BUSINESS PROCESSES and why are they an important element of a Due Diligence Review?

Answer 17

Business process - looks at the present state of the producer.

• What is the organizational structure? Flat or Hierarchical?
• Is the process efficient?
• Does it have adequate supervision?
• Does the producer have resources equal to demands on them?

Question 18

Why is STAFF an element of a Due Diligence Review?

Answer 18

• Is staff qualified?
• Looks at ethics of the producer.
• Is there a history of problems with staff? High turnover?
• Is there a process for disclosure of conflict of interest?
• What are the experience and skills of the staff?
• Does the producer invest in training?
• How well does staff deal with insurance business process? From quote to sale, adding endorsements, can they handle this?

Question 19

What can examining the COMPUTER SYSTEMS element during a Due Diligence Review reveal?

Answer 19

• Is the producers systems suitable for the insurer?
• Need to know if there are any compatibility problems
• Need to know if the producer expects the insurer to supply equipment or just software or rating systems.
• What kind of security and maintenance does the producer have?
• Can the producer and insurers system communicate on accounting matters. Financial reporting, delays and errors, can affect an insurers profit and loss statement

Question 20

How can knowing what OTHER INSURERS a producer is dealing with help with a Due Diligence Review?

Answer 20

• Helps the insurer know how they are competitive or how they can be competitive with re: to the relationship between producer and insurer
• Helps the insurer know whether they can be competitive with the other insurance companies. If they can’t be is it worth contracting with this producer as they may not get much premium volume from them

Question 21

What does it mean “giving the pen away”

Answer 21

This means to grant underwriting authority

Question 22

How can an insurer determine how to give underwriting authority away

Answer 22

By performing a due dilignence review