Chapter 7 – Relationship Between Sales Intermediaries and Insurers - Shorten notes

What does the term 'producer' refer to in the context of insurance?

Any person or entity that sells insurance and related services.

What dual responsibilities do producers have?

To the insurance companies they represent and to the consumers they serve.

What is required of producers when acting as insurance advisers?

They must act in the best interests of their clients.

How do some provinces and territories differ in licensing requirements for agents and brokers?

They may require different licenses for agents and brokers or not distinguish between them.

What has technology changed about insurance quotes?

Insurance quotes can now be provided in just a couple of minutes.

How many licensed intermediaries are there in Canada?

More than 35,000.

What are the two main types of agents in the insurance industry?

Company-employed agents and independent agents.

What is a company-employed agent?

An agent who works directly for an insurer as part of its staff.

What is the compensation structure for company-employed agents?

Salary, bonus, commission, or a mix.

Who owns the client expiration list in the case of a company-employed agent?

The insurer.

What is an independent agent?

An entrepreneur with a separate office who pays their own expenses.

What determines the ownership of the client expiration list for independent agents?

It is contract-dependent.

What is the compensation method for independent agents?

Commission or base salary plus commission.

What is an exclusive (captive) agent?

An agent who places business with one insurer but operates independently.

What happens if an exclusive agent's primary insurer declines their business?

They may place business elsewhere if they have the first right of refusal.

What is the definition of a sub-agent?

An individual who performs functions on behalf of the agent for the insurer.

What is a broker in the insurance context?

An independent businessperson advising the public on insurance needs.

How do brokers assist their clients?

By working with multiple insurers to find the best coverage and helping during claims processes.

Who typically owns the client list in a broker-client relationship?

The broker.

What is the compensation for brokers?

Commission from the insurer based on a contract.

What role do wholesalers play in the insurance industry?

They help brokers/agents place risks they cannot place directly.

What is the primary function of a wholesaler?

Act as intermediaries for brokers and agents.

How do wholesalers get compensated?

They charge insurers commission and the broker/agent receives a reduced commission.

What are Managing General Agents (MGAs) and Managing General Underwriters (MGUs)?

Wholesalers with insurer-granted authority.

What do MGAs and MGUs manage for the insurers?

Insurer’s business as per contract, including appointing agents and handling policies.

What are some advantages for insurers by working with MGAs or MGUs?

Gain expertise without internal investment and maintain a smaller, lower-cost operation.

What happens to risks when market cycles change?

They may shift to wholesale due to claims frequency or other factors.

How do wholesalers mitigate market cycles?

By forming niche programs that cater to specific industries or risks.

What are direct writers in the insurance industry?

Insurers that sell insurance directly to the public without intermediaries.

What is the concern regarding broker-market insurers?

Brokers worry that direct-writing subsidiaries may bypass them.

What must insurers determine regarding the number of producers?

How many producers will distribute their products.

What can happen if insurers rely too heavily on a few producers?

It increases risk, especially if they do not own the expiration lists.

What should insurers balance when selecting producers?

Balancing premium generation with offering reasonable terms and conditions.

What is the impact of managing an excessive number of producers?

It increases operational costs and resource allocation.

What percentage of producers typically account for a substantial portion of premium generation?

20% of producers generate 80% of premium, while 80% generate only 20%.

What does the due diligence review ensure regarding prospective producers?

It ensures they align with insurer objectives.

What key factors are reviewed in a due diligence process?

Network analysis, ownership, financial health, business plan, staff, and tech systems.

Why is staff quality important for insurers when selecting producers?

Qualifications and experience are critical, especially if underwriting authority is granted.

What does granting underwriting authority involve for insurers?

Insurers must maintain oversight while allowing producers certain decision-making abilities.

What risks do insurers face when outsourcing underwriting?

They must evaluate the balance between authority granted and maintaining control.

What happens if a producer's business does not justify the expense of dedicated resources?

Insurers may reconsider the extent of their support and resources allocated.

What standards must producers with underwriting authority comply with?

They must understand the insurer's philosophy, culture, and clear guidelines.

Why is monitoring and auditing necessary for producers?

To ensure profitability and adherence to the insurer's underwriting guidelines.

What complications can arise from granting a producer underwriting authority?

It can lead to overproduction for higher commissions and require careful management.

Summarize the roles of agents and brokers in the insurance model.

Agents work with specific insurers, while brokers represent clients with multiple insurers.

What do insurers evaluate when selecting brokers?

Distribution territory, experience, licensing, current book of business, and staff quality.

What is an definition of an Agent and provide the types of Agents. (CIES)

Agent sells and services insurance policies for a single insure; may or may not own the client list .

Types of Agents:

• Company-Employed Agent

• Independent Agent

• Exclusive (Captive) Agent

• Sub-Agent

What is a Company-Employed Agent?

• Works directly for the insurer as part of its staff.

• Compensation: Salary, bonus, commission, or a mix.

• Insurer handles policy issuance, invoicing, and premium collection.

• Insurer owns the client expiration list.

What is an Independent Agent?

• Entrepreneur with a separate office; pays own expenses.

• Compensation: Commission or base salary + commission.

• Ownership of client expiration list is contract-dependent.

• Requires effort to maintain insurer-agency relationships.

• Insurer has less control over staffing but avoids salary and benefits costs.

What is an Exclusive Agent ?

• Known as a captive agent

• Places business with one insurer but operates independently.

• May place business elsewhere if the insurer declines (first right of refusal).

• Exclusive contracts can be product/program-based.

• Insurer may also be exclusive to an agent.

§  One reason for an exclusive contract between insurer and agent could concern the distribution of a certain product or program owned by the insurer. In this case, an exclusive contract with the insurer would prevent the agent from placing business with an insurer that has a competing program or product.

§  The exclusivity can work both ways—an insurer can also be exclusive to an agent.

What is an Sub-Agent?

• Performs functions on behalf of the agent for the insurer.

• Responsible to both the appointing agent and the insurer.

• Insurer typically must approve the sub-agent.

What are some example when Agents are at work?

• Restaurant Program:

  • XYZ Agency must place all restaurant business with ABC Insurer.

  • If ABC Insurer declines, business can be placed elsewhere.

  • May include better pricing, high coverage limits, unique coverages, and enhanced commissions.

What is the Vintage Car Program (Exclusive)?

• ABC Insurer develops a vintage car insurance program.

• XYZ Agency is the sole distributor; no other agencies can access it.

• Agreement includes portfolio size, growth, and profitability targets.

What is an Exclusive Insurer ?

• Agent develops a proprietary product with a rating plan.

• Insurer agrees to underwrite but not compete with the agent’s product.

• Client list belongs to the agent.

Explain and Define - What are broker?

• Definition: Independent businessperson advising the public on insurance needs.

• Functions:

  • Licensed professionals providing expertise and guidance.

  • Work with multiple insurers to find the best coverage for clients.

  • Help clients during claims processes.

  • Typically own the client list and can move business between insurers.

• Compensation:

  • Insurer pays commission based on a contract.

  • Large accounts may involve broker-client fee arrangements.

  • Fees may cover additional services like claims advocacy or loss control.

Example – Fee Negotiation

• Scenario:

  • A large accounting firm negotiates a fee with a broker.

  • Needs $150M errors and omissions coverage with $50M self-insured retention.

  • Requires local policies of at least $1M in foreign jurisdictions.

  • Broker manages coverage and service with an account team.

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Explain and Define What are Wholesalers?

• Definition: Help brokers/agents place risks they cannot place directly.

• Functions:

  • Act as intermediaries for brokers and agents.

  • Place risks with specialized insurers for commissions/fees.

  • Assist small producers who lack volume for traditional insurers.

• Compensation:

  • Wholesaler charges insurers commission.

  • Broker/agent receives a reduced commission.

• Wholesaler’s Role:

  • Specialize in certain risk classes (e.g., Airbnb rentals, demolition blasting).

  • Can act as intermediaries or directly seek insurers for a risk.

  • Brokers/agents contract with wholesalers, not insurers.

Explain and Define - What are Managing General Agents (MGAs) & Managing General Underwriters (MGUs) ?

• Definition: Wholesalers with insurer-granted authority.

• Functions:

  • Manage insurer’s business per contract.

  • Appoint agents, handle policies, accounting, and claims.

  • Often specialize in certain industries or distribution networks.

• Advantages for Insurers:

  • Gain expertise without internal investment.

  • Maintain a smaller, lower-cost operation.

• Compensation:

  • Receive commissions and fees for services provided.

What is Wholesalers’ Business?

• Not only for substandard risks:

  • Market cycles influence whether a risk moves to wholesale.

  • Hard markets drive more business to wholesale; soft markets bring it back.

• Example – Going to the Dogs:

  • Insurer stops covering homes with specific dog breeds due to dog-bite claims.

  • Homeowners with these breeds must find alternative markets (e.g., wholesalers).

What is a Market Cycle?

• Impact on Insurers:

  • Insurers avoid underwriting every risk individually for efficiency.

  • Claims frequency can push risks to wholesale/specialty markets.

  • Standard market insurers may later take back these accounts.

• Example – The Wholesale Market:

  • Risks with U.S. liability exposures often go to wholesale markets.

  • Standard insurers lack expertise, legal networks, or underwriting capacity.

  • Wholesalers specialize in placing such risks.

Define Agent

Sells and services insurance policies for a single insurer; may or may not own the client list.

Name the different type of Agents

Company Employed Agent

Independent Agent

Exclusive Agent

Sub Agent

What is a Company Employed Agent?

• Works directly for the insurer as part of its staff.

• Compensation: Salary, bonus, commission, or a mix.

• Insurer handles policy issuance, invoicing, and premium collection.

• Insurer owns the client expiration list.

What is an Independent Agent?

• Entrepreneur with a separate office; pays own expenses.

• Compensation: Commission or base salary + commission.

• Ownership of client expiration list is contract-dependent.

• Requires effort to maintain insurer-agency relationships.

• Insurer has less control over staffing but avoids salary and benefits costs.

What is an Exclusive Agent?

• Known as a captive agent

• Places business with one insurer but operates independently.

• May place business elsewhere if the insurer declines (first right of refusal).

• Exclusive contracts can be product/program-based.

• Insurer may also be exclusive to an agent.

One reason for an exclusive contract between insurer and agent could concern the distribution of a certain product or program owned by the insurer. In this case, an exclusive contract with the insurer would prevent the agent from placing business with an insurer that has a competing program or product.

The exclusivity can work both ways—an insurer can also be exclusive to an agent.

What is an Sub-Agent?

• Performs functions on behalf of the agent for the insurer.

• Responsible to both the appointing agent and the insurer.

• Insurer typically must approve the sub-agent.

What are some example of Agents at work?

• Restaurant Program:

  • XYZ Agency must place all restaurant business with ABC Insurer.

  • If ABC Insurer declines, business can be placed elsewhere.

  • May include better pricing, high coverage limits, unique coverages, and enhanced commissions.

• Vintage Car Program (Exclusive):

  • ABC Insurer develops a vintage car insurance program.

  • XYZ Agency is the sole distributor; no other agencies can access it.

  • Agreement includes portfolio size, growth, and profitability targets.

What is an Exclusive Insurer?

• Agent develops a proprietary product with a rating plan.

• Insurer agrees to underwrite but not compete with the agent’s product.

• Client list belongs to the agent.

Name the elements of the Due Diligence Review ?

No One Feels Bad But Smart Companies Operate"

• Network analysis

• Ownership

• Financial analysis

• Business plan

• Business processes

• Staff

• Computer systems

• Other insurers

Network Analysis - Elements of the Due Diligence Review

Insurers assess producers to make sure they align with company goals.

1. Trust & Performance – Honest, licensed, good premiums, profitable.

2. Growth Potential – Can they expand and grow with the insurer?

3. Product Range – Can they sell all products, even niche ones?

4. Business Mix – Large vs. small accounts, industry focus.

5. Loyalty & Support – Will they stick with the insurer, even at higher rates?

6. Cooperation – Are they team players or trying to control the relationship?

7. Staff Quality – Well-trained, reputable, good workplace?

8. Customer Loyalty – What keeps clients coming back?

9. Insurer-Client Contact – Will they allow direct contact with clients?

10. Delegation Ability – Can they handle insurer tasks (claims, underwriting, etc.)?

Ownership - Elements of the Due Diligence Review

• Who owns the brokerage matters – especially if another insurer or investor is involved.

• If another insurer gives money, it could cause a conflict of interest.

• Outside investors? Insurer checks:

  • How much control they have

  • Any financial obligations (like dividend payments)

• If the brokerage is a subsidiary, the insurer looks at:

  • Who owns the parent company

  • If it was recently sold or bought, and what that might mean for future business

• New owners? Insurer worries they might just chase profits and not care about long-term quality.

Financial Analysis - Elements of the Due Diligence Review

Insurers assess a producer’s financial health to ensure stability and long-term partnership.

• Is the producer financially stable?

  • Do they have enough capital to stay in business long-term?

• Will they be around at renewal time?

  • If they close, the insurer could lose the client.

• Are their expenses reasonable?

  • Commissions should cover costs and leave room for profit and growth.

Business Plan - Elements of the Due Diligence Review

Insurers review the producer’s business plan to assess long-term potential and alignment.

• Growth Record

  • Consistent premium growth and strong financials = good sign

  • Missed targets or low renewal retention = red flag

• Future Growth Strategy

  • Does the plan match the insurer’s goals?

  • Rapid growth that hurts service or increases losses = concern

• Ability to Manage Growth

  • Can they handle added expenses, staffing, and structure changes?

  • What impact will growth have on the insurer short and long term?

Business Processes - Elements of the Due Diligence Review

Insurers look at how the producer runs their day-to-day operations right now.

• Organizational Structure

  • Is it efficient and well-managed?

  • Not too flat or too top-heavy — supervisors should have a manageable number of staff.

• Operational Efficiency

  • Can staff handle daily tasks smoothly?

  • Do things still get done if someone is away (e.g., backup plans)?

• Preparedness for Disruptions

  • Are systems in place to avoid delays when staff are absent?

  • Smooth, consistent service = strong business processes

Staff - Elements of the Due Diligence Review

Insurers assess both the number and quality of a producer’s staff.

1. Qualified Staff Matters

   • Staff should be skilled, trained, and follow proper guidelines.

   • Important especially if the insurer grants underwriting authority.

2. Regulatory Principles (from Canadian regulators):

   • Client First – Always act in the client’s best interest.

   • Honesty & Integrity – Be fair, transparent, and not misleading.

   • Disclose Conflicts – Be open about potential conflicts of interest.

   • Recommend Suitable Products – Match products to client needs.

3. Operational Efficiency

   • Can staff handle tasks like quoting, issuing policies, endorsements, and collections quickly and accurately?

4. Training & Cross-Training

   • Is staff kept up to date? Are they exposed to multiple roles/functions?

5. Impact of Key Staff Leaving

   • If account managers leave, will clients follow them?

   • Could this cause a loss in business?

Computer Systems - Elements of the Due Diligence Review

Insurers evaluate the producer’s tech setup to ensure it’s modern, compatible, and efficient.

• Is the tech up to date?

  • Outdated systems can slow down service and create issues.

• Who provides and supports the systems?

  • Insurer, producer, or a third party?

  • Who handles maintenance and tech support?

• System compatibility?

  • Can the producer’s system work smoothly with the insurer’s (e.g., for quoting, accounting)?

• Efficiency in transactions

  • Fast, accurate quoting = more business.

  • Can payments and updates be posted in real time?

• Error handling

  • If there’s a system error, who fixes it?

  • Delays or mistakes can impact financial reports and compliance.

Other Insurers - Elements of the Due Diligence Review

• Who else does the producer work with?

  • Are those insurers direct competitors or do they offer different products?

• How competitive are those other insurers?

  • Do they have better rates or easier eligibility?

  • Can the insurer compete or offer something unique?

• What makes the insurer stand out?

  • Better commissions, authority, financial strength, or support?

• Mutual evaluation

  • The producer also evaluates the insurer:

    • How many other producers does the insurer work with in their area?

    • Is there an opportunity for exclusivity?

What are the disadvantages (Cons) of granting underwriting authority to a producer ? - "My Lazy Risky Rabbit Often Acts Funny In Exams"

1. M – Misalignment of Interests

2. L – Loss of Control

3. R – Risk of Inadequate Oversight

4. R – Resource Demands

5. O – Operational/Cultural Clashes

6. A – Audit & Compliance Challenges

7. F – Financial Burden

8. I – Inexperience or Poor Performance

9. E – Exit Strategy Complexity

Misalignment of Interests - the disadvantages (Cons) of granting underwriting authority to a producer

• Producers want volume/commission

• Insurers want profit

• Leads to risky business

Loss of Control - the disadvantages (Cons) of granting underwriting authority to a producer

• Insurer loses direct control

• Risk of guideline deviation

Risk of Inadequate Oversight - the disadvantages (Cons) of granting underwriting authority to a producer

• Producers may exceed authority

• Lack of control = financial loss

Resource Demands - the disadvantages (Cons) of granting underwriting authority to a producer

• Needs dedicated staff

• Must justify costs

Operational & Cultural Clashes - the disadvantages (Cons) of granting underwriting authority to a producer

• Producer may not fit insurer’s culture

• Causes miscommunication

Audit & Compliance Challenges - the disadvantages (Cons) of granting underwriting authority to a producer

• Needs regular audits

• Poor auditing = higher risk

Financial Burden - the disadvantages (Cons) of granting underwriting authority to a producer

• High commissions & costs

• Program becomes too expensive

Inexperience or Poor Performance - the disadvantages (Cons) of granting underwriting authority to a producer

• New producers lack systems/staff

• Bad underwriting harms portfolio

Exit Strategy Complexity - the disadvantages (Cons) of granting underwriting authority to a producer

• Transition is difficult

• Can cause disruption