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

Intermediaries and Insurers

Introduction

• The term "producer" refers to any person or entity that sells insurance and related services.

• Producers have dual legal responsibilities:

  • To the insurance companies they represent.

  • To the consumers they serve.

• Producers must act in the best interests of their clients when acting as insurance advisers.

• Some provinces and territories require different licenses for agents and brokers.

• Other jurisdictions do not distinguish between agents and brokers, requiring all producers to be licensed as agents.

Intermediaries and Insurers

Learning Objectives 1

·       Describe the different types of sales agents and explain how they operate

Introduction

• Prior to technological advancements, it could take up to 15 days to get a basic insurance quote.

• Today, insurance quotes for property and automobile products can be provided in just a couple of minutes.

• In Canada, insurance is rapidly evolving to meet consumer demands.

• Insurance is readily available to the public through multiple distribution channels, including independent brokers, direct writers, and agencies.

• There are more than 35,000 licensed intermediaries in Canada.

• This section focuses on insurance sales intermediaries such as agents, brokers, and wholesalers.

• It highlights their formal relationships with insurers.

• The section examines how insurers screen and select producers.

• It discusses considerations for insurers entering and managing relationships with producers.

• Considerations include provisions in contracts between insurers and agents, brokers, or wholesalers.

• Sales intermediaries are identified as "producers," referring to entities that bring the insured and insurer together in a contractual relationship.

• The producer may be an agent or a broker.

Agents

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

• Types of Agents:

  • 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.

  • 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.

  • Exclusive (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.

  • 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.

Examples – 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.

• 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.

Brokers

• 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.

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.

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.

Wholesaler’s 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).

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.

Program Business

• Wholesalers mitigate market cycles by forming niche programs:

  • Professional liability for veterinarians.

  • General liability for roofers, nightclubs, hospitality industry.

  • Property/liability packages for bed and breakfasts.

• Process:

  • Wholesalers negotiate contracts with insurers.

  • Provide underwriting expertise and distribution.

  • May handle claims or work with third-party administrators.

• Insurers can also develop programs:

  • Create underwriting/rating guidelines.

  • Partner with wholesalers for distribution.

Direct and Broker-Market Insurers

• Direct Writers:

  • Sell insurance directly to the public, without intermediaries.

• Broker-Market Insurers:

  • Use brokers as intermediaries.

• Dual-Channel Insurers:

  • Some insurers operate both direct and broker-market companies.

  • Concerns:

    • Brokers worry direct-writing subsidiaries may bypass them.

    • Insurer must ensure no info-sharing or competition between divisions.

    • Brokers may withhold client details to protect their business.

Number of Producers Representing an Insurer

Introduction

• Insurers must determine how many producers will distribute their products.

• Relying too heavily on a few producers increases risk, especially if the insurer does not own the expiration lists.

• Agencies or brokerages with control over expiration lists can leverage this to negotiate better terms.

• The challenge is balancing premium generation with offering reasonable terms and conditions.

More Is Not Necessarily Better

• Having too many producers is not always advantageous.

• Managing an excessive number of producers increases operational costs:

  • Due diligence reviews

  • Contract maintenance

  • Premium collection

  • Managing loss ratios and claims

  • Billing producers

• More producers require additional resources, such as:

  • Actuarial analysis for profit and loss projections

  • Underwriters to manage producers

  • Marketing staff to maintain relationships

• Insurers often find that 80% of their producers generate only 20% of their premium, while 20% of their producers generate 80%.

• Optimizing the producer network reduces costs and increases efficiency.

• Benefits for producers:

  • Higher premium volume producers benefit from lower impact of a single large loss.

  • Closer relationships with insurers lead to better underwriting alignment and risk placement.

  • A strong partnership fosters book growth and sustainability.

Selecting Producers

• Insurers vary in how they choose producers:

  • Head office selection

  • Branch-level selection

  • Business development units

  • Production underwriters with dual underwriting and sourcing roles

• Despite variations, common selection processes exist.

Business Plan Alignment

• Insurers align producer selection with their business plans:

  • Defines target locations, lines of insurance, and risk classes.

  • Guides the type of producers sought (e.g., large brokerage firms for Fortune 1000 accounts, regional producers for rural business).

Due Diligence Review

• Ensures prospective producers align with insurer objectives.

• Key elements of the review:

  • Network Analysis – Market presence and distribution capability.

  • Ownership – Structure and stability.

  • Financial Analysis – Profitability and financial health.

  • Business Plan – Growth strategy and alignment with insurer goals.

  • Business Processes – Operational efficiency and compliance.

  • Staff – Experience and expertise.

  • Computer Systems – Compatibility with insurer technology.

  • Other Insurers – Existing relationships and potential conflicts.

• A thorough review helps establish a strong foundation for a successful insurer-producer partnership.

Network Analysis

To ensure the production force meets the insurer’s objectives, underwriting teams assess both current and potential producers based on various criteria.

Producer Assessment Considerations

• General qualities: Honesty, integrity, no license suspensions or market losses.

• Performance metrics:

  • Premium volume

  • Average account size

  • Loss ratio

  • Profitability

Key Questions for Underwriters

• Is the producer aggressive and looking to expand?

  • Evaluate past premium writings, growth, and profitability.

  • Assess future growth prospects.

• Can the producer grow with the insurer?

  • Can staff be trained on new products?

  • Does the producer sell similar products from competitors?

• Can the producer sell the insurer’s full product range?

  • Home and auto insurance are common.

  • Assess ability to sell niche products (e.g., kidnap and ransom insurance).

• What is the producer’s mix of business?

  • Large accounts vs. small accounts with many transactions.

  • Industry specialization may influence business focus.

• Will the producer support and work with the insurer?

  • Retaining good business is crucial.

  • Assess renewal retention history.

  • Examine ability to sell at higher prices if rate increases occur.

• Can the producer work effectively with the insurer?

  • Collaboration is essential.

  • Ensure producer does not attempt to dictate terms.

  • Assess loyalty to the insurer.

• What are the producer’s human resources practices?

  • Staff quality and reputation in the industry.

  • Investment in training, benefits, and work environment.

• What makes customers loyal to the producer?

  • Possible factors:

    • In-person proposals

    • Loss control services

    • 24-hour claims reporting

    • Educational seminars

  • Full-service operations offering multiple insurance and financial services.

• Will the producer allow insurer-client contact?

  • Relationship building with clients can strengthen retention.

  • Important for mid-sized and large accounts.

• Can the insurer delegate insurance functions to the producer?

  • Includes underwriting, claims handling, policy administration, and accounting.

  • A negative response does not preclude collaboration but requires further review.

Ownership Considerations

• Corporate structure and longevity of business

• Capital support from another insurer

  • Could create a conflict of interest.

  • Needs to be managed properly.

• Non-insurance investors

  • Terms of investment and financial stability impact.

  • Consideration of preferred shares and dividend obligations.

• Controlling interest

  • Non-insurance ownership may affect direction and management.

• Subsidiary or branch operation

  • Parent company sale or acquisition impacts producer stability.

  • Relationship with the insurer could be disrupted if parent company changes strategy.

• Impact of recent ownership changes

  • New owners’ objectives (e.g., profit-driven vs. long-term stability).

Financial Analysis

• Producer’s capital sufficiency

  • Ensures long-term viability.

  • Important if insurer plans to delegate functions.

• Producer’s financial stability at renewal time

  • If producer fails, insurer risks losing business.

• Expense structure

  • Commission should cover expenses and generate profit.

  • Ability to reinvest in the business is crucial.

Business Plan Evaluation

• Growth record

  • Strong premium growth and financial statements are favorable.

  • Look for planning consistency and actual achievements.

• Future growth strategy

  • Should align with insurer’s strategy.

  • Rapid expansion should not compromise loss ratio or service.

• Handling increased business from growth

  • Growth brings increased expenses and structural changes.

  • Assess short- and long-term impacts on the insurer.

Business Processes

• Organizational structure

  • Should balance efficiency and decision-making authority.

  • Managers should have a proper span of control.

• Adequacy of resources

  • Ability to handle workload effectively.

  • Cross-training for coverage during absences.

• Efficiency of everyday policies and procedures

  • Smooth operations contribute to insurer stability.

Staff Considerations

• Qualifications and experience

  • Especially important if underwriting authority is granted.

• Training and compliance

  • Continuous training and adherence to underwriting guidelines.

• Service and technical standards

  • Speed of processing quotes, policies, endorsements.

  • Collections handling and cross-training.

• Key personnel departure impact

  • Strong client relationships can lead to client migration.

  • Assess contingency plans.

Computer Systems

• Technology assessment

  • Suitability for insurer’s products.

  • Compatibility between producer’s and insurer’s systems.

• System providers

  • Who supplies and maintains hardware/software?

• Operational efficiency

  • Speed of quote generation can impact winning accounts.

  • Administrative functions (e.g., accounting) must be seamless.

• Financial reporting

  • Accuracy in financial reporting affects insurer's P&L and regulatory compliance.

Other Insurers

• Producer’s existing insurer relationships

  • Direct competition concerns.

  • Assess how eligibility criteria and pricing compare.

• Competitive advantages

  • Higher commissions, stronger financial rating, authority to handle claims.

• Market exclusivity

  • If insurer has no other relationships in the region, producer may benefit from exclusivity.

Granting Underwriting Authority

Learning Objective 3

Describe what an insurer considers when granting underwriting authority to a producer.

Introduction

• Insurers sometimes grant producers authority over underwriting and other insurance functions.

• Insurers must be comfortable with the arrangement and have oversight mechanisms in place.

• Considerations include trust, monitoring, and control measures.

Establishing Tasks

• Insurers need confidence and trust to grant underwriting authority successfully.

• Without clear guidelines, professional relationships can deteriorate.

• Some insurers believe only their trained underwriters should handle underwriting, potentially causing resentment among producers.

• Underwriting authority granted to a producer is similar to decentralizing underwriting from a head office to field offices.

• Insurers implement audits and controls to maintain oversight when granting authority.

• Producers aim to generate as much business as possible for commission and fees.

• Insurers prioritize writing profitable business over volume, leading to potential conflicts of interest.

• Insurers benefit from producers’ expertise but must maintain oversight.

• A balance between authority and control must be maintained.

• Insurers must evaluate risks associated with outsourcing underwriting.

• A risk management and monitoring program should be implemented if outsourcing materially affects the insurer.

• Each insurer has its own processes for granting underwriting authority.

Example—Underwriting Authority for Forestry Equipment

• An MGA (Managing General Agent) and an insurer had an agreement to offer forestry equipment coverage.

• The insurer granted underwriting authority to the MGA due to its expertise.

• The insurer later ended the agreement, forcing the MGA to find a new insurer.

• The new insurer lacked knowledge of forestry equipment but refused to yield underwriting authority.

• The new insurer misinterpreted bordereau data and demanded explanations, causing tensions.

• The MGA’s commission was 29% of premiums, but the insurer’s total program costs reached 36% of premiums, making it expensive.

• The insurer found the arrangement too costly and outside its business culture.

• The program was discontinued the following year.

Planning for Implementation

• A plan should be in place for managing and overseeing the entity granted underwriting authority.

• Weaknesses identified in the due diligence review must be addressed.

• Corrective actions and audit plans should be agreed upon by both parties.

• Insurers may limit the producer’s underwriting authority temporarily.

• Restrictions may include the type of risks bound, premium size, or other criteria.

Example—Automation

• A producer’s computer rating system was modified to send large premium submissions to a referral underwriter at the insurance company.

• Some producer underwriters may be qualified for greater underwriting authority based on the due diligence review.

• The implementation plan may include:

  • Training seminars

  • Regular audits with specified frequency

  • Business process adjustments to align with insurer standards

• The plan should specify what happens after the producer starts writing the insurer’s business.

Example—Verification

• Reports from the Management Information System (MIS) may be developed for monitoring purposes.

• Reports may include daily policy-bound summaries with type, limits, and premium details.

• Underwriters may require notification of certain loss types or large reserves.

• Actuaries may conduct periodic profitability analysis beyond the annual review.

• Identifying and dedicating resources for monitoring is essential.

• Regular communication between all parties ensures smooth plan execution.

Employing Audit Controls

• Insurers should implement audits and controls over a producer’s underwriting authority, similar to their field offices.

• Monitoring levels should match those of the insurer’s field underwriters.

• Well-performing producer books may require less monitoring than underperforming ones.

• Newly launched producers need more control due to:

  • Limited premium volume

  • Lack of an established distribution network

• Some insurers avoid new producers, while others invest in them if they have strong systems and personnel.

• Proper planning and exit strategies help manage risks with new producers.

Assigning Resources

• Producers with underwriting and claims authority will have limitations on their authority.

• Producers need a dedicated insurer contact for assistance.

• Insurers allocate resources to managing large producer accounts, including:

  • Account managers

  • Referral underwriters

  • Claims personnel

  • Policy administration staff

  • Loss control personnel

  • Legal counsel

• Insurers must ensure that the profit margin justifies the resources allocated.

• Some producers require daily consultations, increasing resource demands.

• The insurer must evaluate whether the business justifies the expense of dedicated resources.

Complying with Insurer Standards

• Producers with underwriting authority must understand the insurer’s philosophy and culture.

• Understanding the insurer’s underwriting guidelines helps in decision-making.

• The insurer must provide clear authority levels and expectations.

• If policy administration authority is granted, the insurer must provide administrative standards.

• Standards may include:

  • Reporting requirements for monitoring purposes

  • Audit guidelines to ensure compliance with insurer standards

Summary

• Agency Model:

  • Some insurers rely on an agency model to distribute products.

  • Includes company-employed agents who are salaried and may receive bonuses or commissions.

  • The insurer that employs company agents owns the client expiration list.

• Independent Agency Model:

  • Independent agents are entrepreneurial, managing their own office and expenses.

  • They may be paid by commission or a mix of salary and commission.

• Exclusive Agents (Captive Agents):

  • Work exclusively with one insurer but remain independent.

  • A contract outlines who owns the client list and whether the agent can place business elsewhere (first right of refusal).

• Independent Brokers:

  • Independent businesses with contracts to sell products from at least two insurers.

  • Brokers help find risks that meet the insurer’s underwriting appetite and are paid a commission.

• Wholesalers:

  • Specialize in placing hard-to-place or substandard risks.

  • Includes Managing General Agents (MGAs) and Managing General Underwriters (MGUs).

  • Insurers may use a combination of distribution models, such as direct writing and broker channels.

• Partnering with Broker Channel:

  • More is not always better for insurers; strategic alignment with independent brokers is crucial.

  • Insurers may form strategic partnerships or protect distribution with limited partners.

• Evaluating Brokers:

  • Insurers consider a broker’s distribution territory, experience, licensing, and current book of business.

  • Insurers examine the broker’s mix of personal, commercial, and specialty lines.

  • Insurers assess if the broker is expanding or at capacity and who owns the brokerage, including any non-insurance investors.

• Financial Analysis:

  • Insurers review the broker’s financial health, business plan, growth potential, policy count, and gross written premium.

  • A review helps determine long-term growth potential with the insurer.

• Broker Staff:

  • Insurers assess the broker’s staff, including licensing requirements, training capability, and experience.

  • They also consider the reliance on key producers for new and existing business.

• Producer’s Computer Systems:

  • Compatibility with the insurer’s systems is essential for speed and cost-efficiency in business operations.

• Other Insurers and Financing:

  • Insurers need to know what other insurers the producer is working with and under what terms.

  • They also check if another insurer is supporting the producer with financing options.

• Granting Underwriting Authority:

  • Giving underwriting authority allows producers to underwrite risks on behalf of the insurer, a decision not to be taken lightly.

  • Producers often have specialized knowledge and experience, which can be beneficial for insurers.

  • However, granting underwriting authority can lead to overproduction for higher commissions.

• Considerations for Underwriting Authority:

  • Insurers must set guidelines and rules to avoid breakdowns in the relationship.

  • Guidelines include the type of risk and the amount of business a producer can underwrite.

  • These guidelines should be outlined in an agreement.

• Monitoring and Auditing:

  • Insurers must manage, monitor, and audit the risk the producer underwrites to ensure profitability and adherence to the insurer’s underwriting guidelines.