CAIB 4 - Chapter 5

Brokerage Agreements with Insurance Companies

• Brokerage agreements outline the terms and conditions between brokers and insurance companies.
• Agreements often include provisions for authority, ownership of expirations, billing procedures, commissions, termination, hold harmless clauses, Privacy Act (PIPEDA), EDI provisions, and other clauses.

Authority

• Insurance companies provide brokers with rules, rates, and guidelines for underwriting risks.
• Companies may limit the types of risks brokers can place due to poor historical loss experience.

Ownership of Expirations

• Brokerage ownership of expirations allows them to control client insurance placements.
• Insurance companies may claim ownership in specific cases such as unpaid premiums.

Billing Procedures

• Two main billing methods are agency bill and direct bill.
• Agency billing involves brokerages billing clients and remitting payments to insurers.
• Direct billing allows insurers to bill clients directly, reducing administrative tasks for brokerages.

Commissions

• Commissions typically range from 10% to 20% and are negotiable.
• Rates are often tied to brokerage performance.
• Insurance companies may offer bonus commissions for specific lines of business.

Termination

• Agreements often require 90-180 days’ notice before termination.
• Insurance companies can terminate agreements due to poor sales or loss ratios.
• Rehabilitation clauses allow brokerages to correct issues before termination.

Hold Harmless Clause

• Protects brokerages from liability for acts of the insurance company.
• Indemnifies against issues like failure to follow procedures or errors in billing.

Privacy Act (PIPEDA)

• Brokerages and insurers must comply with the Personal Information Protection and Electronic Documents Act (PIPEDA).
• Both parties agree to protect client information.

EDI Provisions

• Define liability for data loss during electronic transmission.
• Require brokerages to maintain hard copies of key documents.

Other Provisions

• Common other provisions include arbitration clauses for dispute resolution and joint promotion programs and technology sharing.

Profit Sharing Agreements

• Offer incentives for brokerages that meet specific criteria.
• Key elements include volume requirements, loss definitions, and profit calculations.

Profit Sharing: Key Considerations

• Key considerations for profit sharing agreements are:
  • Business volume: The volume of business generated with the insurer
  • Loss definitions: How losses are defined and calculated for profit sharing purposes
  • IBNR charges: How incurred but not reported (IBNR) claims are factored into the profit sharing calculation
  • Growth vs. profitability: Whether the agreement prioritizes growth or profitability

Selecting Insurance Markets

• Selecting the right insurance company is critical for broker success.
• Compatibility with the insurance company is essential.
• Mismatches can damage client relationships.

Key Considerations for Selecting an Insurance Company

• Key considerations for selecting insurance companies are:
  • Marketing Philosophy and Practices: The company's approach to marketing should align with the broker’s.
  • Claims Services: The efficiency and effectiveness of the insurance company's claims handling process.
  • Policyholder Services: The quality and range of services provided to policyholders.
  • Financial Stability: The insurer’s financial strength, based on factors like reserves and solvency ratings.
  • Underwriting Procedures: The consistency and efficiency of the insurer's underwriting processes.
  • Technology: The insurer's adoption of technology to facilitate business and ensure efficient communication and online interaction.

Marketing Philosophy and Practices

• The insurer's approach to marketing should align with the broker's corporate focus.
• Clear goals for volume of business, consistency in quality, and compensation models are important.

Claims Services

• The quality and efficiency of claims handling are important.
• Brokers and insurers should have a process for addressing disputes and streamlining the claims experience.

Policyholder Services

• Effective policyholder services include:
  • Ease of policy submissions
  • Premium financing options
  • Efficient policy issuance and renewal processes
  • Clear communication regarding policy changes
  • Excellent customer support and risk management services

Technology

• The role of technology in improving brokerage-company relations is increasing.
• Electronic data interchange (EDI) can improve efficiency, and staying current with technology trends is vital.

Financial Stability

• Selecting financially sound companies is crucial.
• Government monitoring of solvency provides insight into the insurer's financial position.
• Brokerages need to review financial strength reports and publications.

Underwriting Procedures

• The location of underwriting decisions, consistency in underwriting guidelines, competitive rate levels, and the competency of underwriting staff are critical.

The Number of Insurance Companies to Represent

• There is no set number of insurance companies brokers should represent.
• The goal is to meet client needs and avoid representing too many companies and achieving efficiency.

Attracting an Insurance Company Appointment

• Brokerages often initiate contracts with insurers.
• Insurance companies evaluate brokerages against specific criteria.
• Strong presentations and differentiation are crucial for success.

Factors Influencing Insurance Company Appointments

• Factors affecting insurance company appointments include:
  • Premises: The location, accessibility, and image of the brokerage's physical premises.
  • Financial Information: The brokerage's financial health, profitability, and collection practices.
  • Type and Mix of Business: The types of risks covered by the brokerage and its compatibility with the insurer's book of business.
  • Other Insurers: The brokerage’s relationships with other insurers and the balance of its insurer portfolio.
  • Loss Experience: The brokerage’s claims history and loss ratios.
  • Human Resources: The expertise, education, and experience of the brokerage's staff.
  • Business Plan: The brokerage's strategy for growth, retention, and client development.
  • Errors & Omissions Claims Record: The number and severity of errors and omissions claims filed against the brokerage.

Presenting the Brokerage

• Brokerage presentations should be well-organized, tailored to the insurer, and highlight key strengths.
• A well-prepared prospectus enhances appointment chances.

Broker-Insurance Company Relations

• Achieving harmonious relations between brokers and insurers is crucial for providing insurance products to consumers.
• Open communication is critical, and brokers face challenges when insurers provide incomplete or inaccurate underwriting information.

Channels of Communication

• Informal Channels of Communication: Personal interaction with insurer reps or informal correspondence.
• Formal Channels of Communication: Newsletters, bulletins, and advisory councils facilitate communication.

Special Programs & Enhanced Authority

• Special programs grant brokers more authority in underwriting, claims, and policy issuance.
• Increased responsibilities foster a stronger relationship based on trust and respect.