Insurance Distribution and Intermediaries – Study 5

Any business’s success will depend largely on its sales force. In the insurance industry the sales forces is referred to as insurance intermediaries. They are the link between the company and the consumer and most often have a close relationship with the client.

Broker – an independent business person who may place business with a number of insurers. This person has an obligation to meet all of the clients and companies needs.

Agent – represents one company only.

A general agent – has the authority to manage all of a companies business with in an assigned territory.

There are several types insurance distribution systems in the property/casualty industry.

• Independent brokerage system –sells insurance for many companies and gets paid a commission.
• Exclusive Agency system – agency sells for only one company but agents are paid a commission and must pay their own expenses.
• Direct Writing – employees work for the company and are paid by salary usually with some commission incentives.

A legal relationship exists between an insurer and broker. This is referred to a principal and agent relationship. An agent is a person authorized by another to act on his or her behalf.  Under common law agents act on behalf of their employer in contractual matters. In Quebec the relationship is simialr but called Mandator (principal) and Mandatee (agent).

Intermediaries are subject to some government regulation. But mostly intermediaries are self regulated. In Ontario the regulatory body is RIBO their responsibilities include: qualification, licensing, operating requirements, renewal of license.

Agency / Brokerage agreement will set out the terms and conditions of doing business. Basic items covered in an agreement are: parties to the agreement, classes of business, binding authority, premium collection and credit terms, remuneration (commission), termination and other items; profit sharing and incentives.

• Broker / Agent authority is outlined the broker agreement or contract which can be express or implied.

• Binding authority is the capacity to confirm coverage prior to submitting an application.
• A binder is written or oral confirmation that coverage is in effect.  

Insurer obligations:  Must pay agreed upon commission,  may assist with advertising expenses.

Broker obligations:   Act within the terms of the contract, follow binding authority, collect premiums, remit premiums, promptly advise insurer of new business and claims, exercise care, no delegation of authority. Brokers must operate two bank accounts: business account, trust account. Commission is the brokers share of the premium. Profit commission is a bonus for profitable business.

Advantages	Disadvantages
Sole Proprietorship – owned by one person, easy to set up, flexible, least amount of government control, based solely on the work of the owner.	Sole Proprietorship – unlimited liability for debts, responsible for all functions, expansion limited by capital.
Partnership – owned by 2 or more people, more capital, more skills, minimal legal restrictions, expansion possibilities.	Partnership – Unlimited liability, possible disputes between partners, limited means of obtaining capital, lack of continuity.
Corporations – owned by shareholders, Ltd. Inc. Corp., limited liability, continuity, tax status, easier to raise capital: issue bonds, sell stock, use shares as security.	Corporations – high initial cost, government regulation, privacy (certain information must be made public).

Intermediaries facilitate the completion of contracts. They have a responsibility to clients and insurers and must not overstep their authority. Their function is to help clients understand complex insurance contracts.

Production is the first priority: 1. Knowledge, 2. Targets, 3. Prospecting, 4. Time Control, 5. Curiosity.

Service is the second priority: good product knowledge, adequate market, retaining customers at renewal, claims handling by promptly notifying the insurer and monitoring the process, customer satisfaction.

Sample Exam Questions – Principles & Practices

Multiple Choice

December 2001

1. An express contract between an insurer and an intermediary is one in which

1. all terms have  been specifically stated and agreed to by both parties.
2. confirmation of insurance is given and can be written or oral
3. one party in return for consideration, agrees to indemnify another party.
4. the parties have acted in such a way that it is understood an agreement exists.

July 2001

2. Rules or agreements with respect to the binding of insurance coverage by brokers are

1. enforced by the department of insurance
2. laid out in the insurance contract
3. set and agreed upon between insurer and broker.
4. Set by the local broker association – they are uniform and apply to every insurance brokerage firm in the province.

April 2001

3. Insurance agents and brokers are regulated in which of the following areas?

1. Licensing
2. Operating requirements
3. Qualification
4. All of the above

4. What is the purpose of an agency/brokerage contract?

1. It is not a valid contract but merely an informal agreement between insurers and their

agents.

2. It sets out the terms of an agreement between an insurance broker and an insurer wherein the broker agrees to bring business to that insurer.
3. It sets out the terms of contract between and insured and his insurance agent.
4. Its sole purpose is to state the amount of commission to be paid to the broker.

5. An express contract between an insurer and an intermediary is one in which

1. all terms have been specifically stated and agreed to by both parties.
2. confirmation of insurance is given and can be written or oral
3. one party in return for consideration, agrees to indemnify another party.
4. the parties have acted in such a way that it is understood an agreement exists

December 2000

6. The regulation of all insurance intermediaries falls under

1. federal jurisdiction
2. provincial jurisdiction
3. federal and provincial jurisdiction
4. the insurance companies act

7.     Binding authority is

1. a confirmation that a binder is in force
2. an agreement between an insurer and intermediary
3. the capacity of the intermediary to confirm coverage without first submitting the application to the insurer
4. the equivalent of a cover note

1. Rules or agreements concerning the binding of insurance coverage by brokers are

1. enforced by the Department of Insurance
2. laid out in the insurance contract
3. set up and agreed upon between insurer and broker
4. the equivalent of a cover note

2. Which of the following is true of brokers’ accounts?

1. The operating account may be used to pay for rent and salaries as well as claims.
2. The operating account may be used to pay for rents and salaries as well as miscellaneous expanses.
3. The trust account is the account into which all commissions collected from insureds are deposited and from which net premiums are paid to insurers.
4. The trust account is the account into which all commissions collected from insurers are deposited.

Essay Questions

December 2001

1. Agents and brokers are often the physical link between insurers and consumers. Discuss fully the

the importance of the role of an intermediary and the responsibilities of agents and brokers to their

clients. (10 marks)

July 2001

2. Agency/brokerage agreements set out the terms and conditions under which an agent/broker will bring

bring business to a particular insurance company. Such agreements may vary but will include certain basic items. Identify and briefly explain the basic provisions you would expect to find in such an agreement. (20 marks)

April 2001

3. Agents and brokers are often the physical link between insurers and consumers. Discuss fully the

the importance of the role of an intermediary and the responsibilities of agents and brokers to their

clients. (10 marks)

December 2000

4. Describe the THREE (3) types of delivery systems that have commonly been used in the Property

and casualty insurance business for the distribution of its products. (9 marks)

What other delivery systems are now being used? (5 marks)

Briefly describe three disadvantages if incorporation as a type of insurance brokerage ownership.

(6 marks)

July 2000

5. You are a well trained insurance person and you wish to establish an insurance intermediary.

1. You can set up a business:

1. as a sole proprietorship
2. in partnership with another person or
3. as a corporation

For each of these possibilities name two advantages and two disadvantages and two disadvantages. (12 marks)

2. Identify FOUR (4) basic points which should be included in an insurance intermediary’s

Agreement with an insurer. (8 marks)

April 2000

6.     (a) Describe THREE (3) types of delivery systems that have commonly been used in the general

insurance business for the distribution and delivery of its products. (10 marks)

A major priority of any business is the production of business. Discuss the factors that will affect the success of an insurance intermediary in producing business. (10 marks)