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.