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.