Module 1 Section 2 the Institutes "Marketing"

compensation for brokers and independent agents

-A flat percent commission on all new and renewal business submitted -A contingent or profit-sharing commission based on volume or loss ratio goals

Benefits of an MGA

-A low fixed cost -Specialty expertise -Assumption of insurer activities

Benefits of of using the internet as an insurer

-Reduced costs for underwriting and claims-processing services because of lower overhead arising from automated operations -Streamlined business practices—the need for fewer employees to conduct direct sales -Increased brand awareness -Broadened marketing potential -Lead-generation and cross-selling opportunities for all products, not just property-casualty insurance

methods of prospecting

-Referrals from present clients -Referrals from strategic partners, such as financial institutions and real estate brokers -Advertising in multimedia and direct mail -Interactive websites -Telephone solicitations -Cold canvass

Producer (or insurance agent)

-this and agent are synonymous terms in an insurance context -The terms "broker" and "sales representative" are also used for special categories of producers -an agent engages in an agency relationship with a principal. In insurance, the principal is often an insurer.

Sponsorship marketing

A trade group sponsors an insurer in approaching a customer group. The sponsor participates in the profitability of the program.

general insurance producer functions

-Prospecting -Risk management review -Sales -Policy issuance -Premium collection -Customer service -Claim handling -Consulting

Actual Authority

-can be implied or express -Authority (express or implied) conferred by the principal on an agent under an agency contract.

direct bill

-primarily used in personal insurance sales

Loss run

A report detailing an insured's history of claims that have occurred over a specific period, valued as of a specific date.

cold canvas

Contacting a prospect without an appointment.

Mass marketing or mass merchandising

Insurers design an offer for their policies to large numbers of targeted individuals or groups.

Affinity Marketing

Insurers target various customer groups based on profession, interests, hobbies, or attitudes.

agent to principal (legal responsibilities of a producer)

Laws of agency -Be loyal to the principal. -Obey the principal's lawful instructions. -Exercise a reasonable degree of care in actions on behalf of the principal. The agent must act as a reasonably prudent person would under the same or similar circumstances. -Account promptly for any of the principal's money that the agent holds. Under the duty of accounting, the agent is responsible to the principal for all of the principal's money and property that comes into the agent's possession. -Keep the principal informed of all facts relating to the agency relationship. This is the duty of relaying information. -insurance agent's right to make insurance coverage effective and any limitations on that right. The contract also specifies how the agent is to handle funds, including stipulations on how and when the agent must remit premiums to the insurer. Insurance agency contracts usually give the agent the right to employ subagents, who may act on behalf of the insurer according to the terms of the agency contract.

Statement basis (agency bill)

The insurer sends a statement to the producer showing the premiums that are due. The producer is obligated to pay the premiums indicated as due or to show that the statement is in error.

main insurance distribution systems

-Independent agency and brokerage marketing system -Exclusive agency marketing system -Direct writer marketing system

apparent authority

-A third party's reasonable belief that an agent has authority to act on the principal's behalf. -based on appearances and includes all the authority that a reasonable person acquainted with the customs and nature of the business could reasonably assume the agent has. -It generally arises in one of two overlapping circumstances: A principal grants less authority than agents in the same position in that business usually have. The method of operation of the principal's business differs from that of other businesses of the same kind in the principal's are

mixed marketing system

-An insurer's use of more than one marketing system or distribution channel. -requires consideration of several issues: 1) Maintaining consistent customer communications 2) Providing a consistent customer experience 3) Matching the type of insurance with an appropriate distribution system and channel

Producer's trade associations

-Most independent agents are members of the Independent Insurance Agents & Brokers of America (IIABA), the National Association of Professional Insurance Agents (PIA), or both. The IIABA is often called the "Big I" because of the prominent letter "I" in its advertising logo. (In some states, IIABA and PIA have consolidated to form one state insurance agents' association.) -The Council of Insurance Agents and Brokers (CIAB) includes independent agents and brokers associated with large agencies or brokerage firms that primarily handle commercial insurance. -Many managing general agents are members of the American Association of Managing General Agents (AAMGA), which, like agents' and brokers' associations, also provides various services to its members.

Customer service continued

-Responding to billing inquiries -Performing customer account reviews -Engaging in field underwriting, such as obtaining loss reports, insurance credit scores, and motor vehicle reports -Answering questions regarding existing coverage and additional coverage requirements -Corresponding with premium auditors and risk control representatives

Insurers view financial institutions as beneficial strategic partners because of these qualities:

-Strong customer base -Predisposition to product cross-selling -Strength at processing transactions -Efficient use of technology for database mining geared to specific products and service

Prospecting (functions)

-Virtually all producers do this. -Prospecting involves locating persons, businesses, and other entities that may be interested in purchasing the insurance products and services offered by the producer's principals. -Large agencies and brokerages may have employees who specialize in locating prospective clients. However, a producer is typically responsible for his or her own prospecting. -Insurers might also participate in prospecting, especially in the exclusive agent and direct writer marketing systems.

Independent Agents and Brokers

-this system uses agents and brokers who are independent contractors rather than employees of insurers. These independent agents and brokers are usually free to represent as many or as few insurers as they want. -organized as a sole proprietorship, a partnership, or a corporation. Brokers shop among insurers to find the best coverage and value for their clients. Because they are not legal representatives of the insurer, brokers are not likely to have authority to commit an insurer to write a policy by binding coverage, unlike agents, who generally have binding authority.

consulting (functions of a producer)

-which they are paid on a fee basis. Such services are usually performed for insureds, but they may also be performed for noninsureds or for prospects. -Services might be provided for a fee only, or the producer might set a maximum fee to be reduced by any commissions received on insurance written because of the consulting contract. -Laws in some states prohibit agents from receiving both commission and a fee from the same client. Fees are billed separately from any insurance premiums due, whereas commissions are included in the premium totals billed.

Legal Responsibilities of a producer

3 main responsibilities -Agent to the Principal -Principal to the Agent -Responsibilities to Third Parties

Worksite marketing or payroll deduction

Employers can contract directly with an insurer or through a producer to offer voluntary insurance coverage as a benefit to their employees.

account current basis (agency bill)

The producer periodically prepares a statement showing the premiums due to the insurer, after deducting appropriate commissions, and transmits that amount to the insurer. The agency contract indicates how often the producer must submit the account current statement. The most common interval is monthly. The producer must pay the insurer when the premium is due, even if the policyholders have not paid the producer.

claim handling (function of an insurance producer)

-All producers are likely to be involved to some extent in handling claims filed by their policyholders. -Because the producer is the policyholder's principal contact with the insurer, the policyholder naturally contacts the producer first when a claim occurs. -In some cases, the producer might simply give the policyholder the telephone number of the claim department and possibly the name of a person to speak with. Alternatively, the producer might obtain some basic information about the claim from the policyholder, relay it to the insurer, and arrange for a claim representative to contact the policyholder. -Frequently, insurers issue their policies with a "claim kit" that informs their policyholders about the proper procedures and contacts. -Some producers are authorized by their insurers to adjust some types of claims. Most often, the authorization is limited to small first-party property claims. -However, a few large agencies or brokerages that employ skilled claim personnel might be authorized to settle large, more complex claims. The limitations on the producer's claim-handling authority should be specified in the agency contract.

Managing General Agents (MGA)

-An authorized agent of the primary insurer that manages all or part of the primary insurer's insurance activities, usually in a specific geographic area. -Depend on its contracts with the insurers it represents. MGAs can represent a single insurer, although they more commonly represent several insurers. -Some MGAs can be strictly sales operations, appointing and supervising subagents or dealing with brokers within their contractual jurisdiction. That jurisdiction can be specified in terms of geographic boundaries, types of insurance, or both. -A few MGAs cover large multistate territories, although frequently only for specialty insurance.

Binding Authority

-An insurance agent's authority to effect coverage on behalf of the insurer. -generally granted to the agent in the agency contract, is a form of express authority. Binding coverage is usually accomplished by issuing binders, which are agreements to provide temporary insurance coverage until a formal written policy is issued. -Binders can be either written or oral. When an insurance agent binds coverage for a new client, the agent commits the insurer to covering an exposure for, and possibly paying a claim to, a customer who is unknown to the insurer. -Binding authority involves important responsibilities for the agent, and agents are expected to use their binding authority carefully.

Direct writer marketing system

-An insurance marketing system that uses sales agents (or sales representatives) who are direct employees of the insurer. -may be compensated by salary, by commission, or by both salary and a portion of the commission generated. Because sales agents are employees of the insurers they represent, they usually do not have any ownership of expirations and, like exclusive agents, are usually restricted to representing a single insurer or a group of insurers under common ownership and management. -Sometimes a customer needs a type of policy not available from the direct writer insurer that the sales agent represents. When this happens, the sales agent may act as a broker by contacting an agent who represents another insurer and apply for insurance through that agent, who usually shares the commission with the direct writer sales agent. Insurance sold in this manner is referred to as brokered business. -largely relieved of administrative duties by their employers

Exclusive agency marketing system

-An insurance marketing system under which agents contract to sell insurance exclusively for one insurer (or for an associated group of insurers). -uses independent contractors called exclusive agents (or captive agents), who are not employees of insurers. Exclusive agents are usually restricted by contract to representing a single insurer. Consequently, insurer management can exercise greater control over exclusive agents than over independent agents. However, some exclusive agency companies allow their agents to place business with other insurers if the exclusive agency insurer does not offer the product or service needed. -compensated by giving comission -state farm esque

Policy Issuance (Functions)

-At the producer's request, insurers issue policies and their associated forms, either mailing them directly to policyholders or sending them to the producer for delivery. In paperless environments, the policies and forms may be produced on a compact disk or placed in an Internet filing cabinet along with endorsements, bills, and loss history information. Some producers use their own agency management systems to generate computer-issued policies on-site.

Risk management review family or individual (functions)

-For an individual or a family, the risk management review process might be relatively simple, requiring an interview or completion of a questionnaire that assists in identifying the prospect's loss exposures, which are often associated with property ownership and activities. -Using the results of the interview or questionnaire, the producer suggests methods of risk control, retention of loss exposures, and insurance.

Legal Responsibilities of the Principal to the Agent (legal responsibilities of a producer)

-In the case of an insurance agent, the principal's duty to pay the agent for services performed requires the insurer to pay commissions and other specified compensation to the agent for the insurance the agent sells or renews. The principal also has a duty to indemnify, or reimburse, the agent for any losses or damages suffered without the agent's fault, but arising out of the agent's actions on behalf of the principal. If a third party sues the agent in connection with activities performed on behalf of the principal, the principal must reimburse the agent for any liability incurred, if the agent was not at fault. -However, no reimbursement is due if the agent acted illegally or without the principal's authorization, even though the principal may be liable to others for those acts. -An important factor involved in this duty is the exposure of insurance agents to errors and omissions (E&O) claims, which may arise from an agent's negligent actions. For example, when an insurance agent gives a customer misleading or incorrect advice regarding the customer's insurance, the customer could bring an E&O claim against the agent if the customer suffers damage due to the agent's advice.

customer service (Functions of producers)

-Most producers are involved to some degree in customer service. For independent agents and brokers, value-added services and the personalization of insurance packages are what differentiate them in the marketplace. -For the producer of a direct writer, service might consist of providing advice, taking an endorsement request over the phone, providing coverage quotes, or transferring a policyholder who has had a loss to the claim department.

National and Regional Brokers

-National and regional brokers generally represent commercial insurance accounts that often require sophisticated knowledge and service. In addition to insurance sales, large brokerage firms may provide extensive risk control, appraisal, actuarial, risk management, claim administration, and other insurance-related services. -Large insurance brokerage firms operate regionally, nationally, and internationally. -They can tailor insurance programs for customers or groups of customers who require a particular type of coverage for multiple locations. -The brokers receive negotiated fees for the services they provide, or they receive fees in addition to commissions, subject to state regulation.

Surplus Lines Brokers

-Normally, a reasonable effort to place the coverage with a licensed insurer is required. The agents and brokers, who must be licensed to place surplus lines business in that state, might be required to certify that a specified number (often two or three) of licensed insurers have refused to provide the coverage. -In some states, agents and brokers must provide letters from the insurers rejecting the coverage. Some state insurance departments maintain lists of coverages that are eligible for surplus lines treatment without first being rejected by licensed insurers. -Some states also maintain lists of eligible surplus lines insurers, requiring producers to place business only with financially sound insurers.

agency expiration list .

-One vital distinction between independent agents and brokers and other distribution systems is the ownership of this -the record of an insurance agency's present policyholders and the dates their policies expire. -if the insurer ceases to do business with an agency, the agency has the right to continue doing business with its existing customers by selling them insurance with another insurer. -The ownership of expiration lists is an agency's most valuable asset. The agency—not the insurer—owns the business (though insureds have the right to place their business with any insurer they wish, whether with that agent or elsewhere). An independent agency has the right to sell its expiration lists to another independent agent.

Premium Collection (functions of producer)

-Producers who issue policies may also prepare policy invoices and collect premiums. After deducting their commissions, they send the net premiums to the insurers, a procedure known as the agency bill process. -For business that is agency billed, there are three widely used methods of transmitting premiums to the insurer -To give the producer some protection against policyholders' late payments, premiums are usually not due to the insurer until thirty or forty-five days after the policy's effective date. -This delay also permits the producer to invest the premiums collected until they are due to the insurer. The resulting investment income can be a significant part of the producer's remuneration -Agency billing may be used for personal insurance policies, but it is more commonly used with large commercial accounts. For small commercial accounts and the vast majority of personal insurance, the customer is usually directed to send premium payments to the insurer, bypassing the producer in a procedure known as the direct bill process.

surplus lines brokers access

-access to insurers that have the capacity to provide the needed insurance, which might not be available from insurers licensed to do business in the state. Surplus lines brokers work to ensure that coverage is placed only with eligible nonadmitted insurers, the customer's unique or unusual requirements can be met by the prospective surplus lines insurer, and the financial security of the surplus lines insurer is properly evaluated. -Surplus lines brokers, like national or regional brokers, maintain their independence, can represent multiple insurers, and are compensated based on a portion of the commissions generated by the business they write.

Independent Agency Networks

-also known as agent groups, agent clusters, or agent alliances—operate nationally, regionally, or locally and, in the majority of cases, allow their agent-members to retain individual agency ownership and independence -A business, operated for the benefit of its owner (or owners) that sells insurance, usually as a representative of several unrelated insurers.

negatives of using the internet as an insurer

-Regulation requirements—Purchases transacted completely via the Internet may not meet regulatory compliance requirements that a licensed agent consummate the sale. -Assumed cost advantage—Consumers perceive that a product bought over the Internet will be less expensive than the same product bought from a producer. These assumptions are not necessarily valid. -Competitors are only a click away—If customers do not like what they see, they are likely to click to another, more favorable, website. -Quoting capabilities—An insurer's ability to quote easily and quickly is critical, because about 50 percent of users will simply move to another website if the quoting mechanism is too complicated. -Availability of information—Many customers do not fully understand insurance products; the Internet largely eliminates intermediaries who would otherwise provide explanations and advice. Therefore, a website should maintain a frequently asked questions (FAQ) section and/or a "live contact." -Extent of services provided—The insurer or producer must determine whether its Internet presence will be sales-only or a combination of sales and service. -The informed consumer—Information about many insurance products and their prices is available to customers, shifting the customer's focus toward price rather than service. -Security concerns—Some customers are unwilling to transmit personal and financial information over the Internet. Website content—Information posted on the website must be kept fresh, interesting, and accessible.

Sales (functions)

-Selling insurance products and services is one of the most important activities of an insurance producer because it is essential to sustaining the livelihood of the agency or brokerage. -Commission on business sold is the principal source of income for producers, and the ownership of policy expirations applicable to the business sold is the principal asset of an insurance agency. -Steps in the sales process include contacting the prospective client, determining the prospect's needs, preparing and presenting a proposal, and closing the sale.

Responsibilities to Third Parties (legal responsibilities of a producer)

-The agent's authorized actions on behalf of the principal legally obligate the principal to third parties in the same way as if the principal acted alone. Therefore, from an insured's point of view, little distinction exists between the insurance agent and the insurer. -Because the agent represents the insurer, the law presumes that knowledge acquired by the agent is knowledge acquired by the insurer. -If, for example, the agent visits the insured's premises and recognizes an exposure (such as vacancy of the building) that could suspend or void the insured's policy, the insurer cannot deny a claim to the insured merely because the agent failed to communicate that information to the insurer. -According to agency law, the fact that the agent knew about the exposure means that the insurer is also presumed to know about it.

Implied authority

-The authority implicitly conferred on an agent by custom, usage, or a principal's conduct indicating intention to confer such authority - Custom is the most common source of implied authority. Agents can reasonably infer that they have authority to act according to prevailing custom unless the principal gives different instructions. Without different instructions, an agent's authority extends to, and is limited to, what a person in this agent's position usually does. -Implied authority can also apply when an agent acts beyond the usual scope of authority in an emergency. If the agent needs to act to protect or preserve the principal's property or rights but is unable to contact the principal, and if the agent reasonably believes that an emergency exists, he or she has authority to act beyond, or even contrary to, the principal's instructions. -An agent who acts reasonably in an emergency has authority to act even if the agent is mistaken about the necessity for the actions or is at fault in creating the emergency. The agent, however, can be liable to the principal for any expenses resulting from the agent's wrongful conduct.

Express authority

-The authority that the principal specifically grants to the agent. -To determine the scope of this type of authority, courts examine the goals of the agency in light of all surrounding circumstances. For example, the power to sell generally includes authority to collect payment and to make customary warranties. -However, to illustrate consideration of scope, a sales agent who has no possession or indication of ownership of merchandise has no authority to collect the purchase price. -In most commercial situations, the agent has authority only to solicit orders or to produce a buyer with whom the principal can deal.

Call centers (distribution channel)

-The best-equipped can replicate many of the activities of producers. In addition to making product sales, call center staff can respond to general inquiries, handle claim reporting, answer billing inquiries, and process policy endorsements. In some cases, a customer can begin an inquiry or a transaction on the Internet, then have a customer service representative at the insurer's call center access the Internet activity and answer the inquiry or conclude the transaction.

importance of independent agency and brokers

-The independent agency and brokerage distribution system can meet the needs of many different insurance customers and is spread geographically across the United States. -Agents and brokers may also assist their customers in establishing and managing self-insurance programs, implementing risk control measures, and determining alternatives or supplements to insurance. -Some have draft authority from their insurers to settle small, first-party loss

Trade associations (distribution channel)

-Trade associations serve their members through activities such as education, political lobbying, research, and advertising. -The advertising programs are intended to create a favorable image of association members as a group and to make the public familiar with the logos and other association symbols.

internet distribution channel

-can be used to varying degrees by all parties to the insurance transaction: the insurer, its representatives, and the customer. Interactions range from exchanges of email to multiple-policy quoting, billing, and policy issuance. -Customers also interact with insurers via Web-based insurance distributors, also called insurance portals or aggregators. These portals deliver leads to the insurers whose products they offer through their websites. -Portals benefit customers by offering the products and services of many insurance providers on one website. -Although the leads that portals generate must subsequently be screened and fully underwritten by the insurers accepting the coverage, they can increase an insurer's market share and brand awareness.

Financial institutions (distribution channel)

-can elect to market their products and services through a bank or another financial services institution, either exclusively or through additional distribution channels. -Marketing arrangements can range from simple to complex. -The prospect of diversifying into new markets appeals to many financial institutions. -In fact, some financial institutions have expanded into insurance by participating in renewal rights arrangements by which they purchase only a book of business and not the liabilities of an agency or insurer.

exclusive agency insurer handles

-handles many administrative functions for the exclusive agent, including policy issuance, premium collection, and claim processing. Exclusive agents might offer loss adjustment services similar to those offered by independent agents and brokers; however, these agents might be restricted in their ability to offer some risk management services to their customers.

risk management review businesses (functions of insurance)

-is likely to be more complex because they have property ownership, products, services, employees, and liabilities that are unique to the size and type of organization. -Substantial time is required to develop and analyze loss exposure information for a large firm with diversified operations. -A loss run report can guide the producer in helping the business owner develop risk management plans, track the results of current risk management efforts, identify problem areas, and project costs. Loss runs include, at a minimum, lists of losses and their total cost. -More comprehensive loss runs provide details that can lead to additional questions and suggest areas of risk management improvement. -For example, comprehensive workers compensation loss runs reveal lag times in reporting, creating potentially higher costs. These reports can also indicate litigation rate; a high rate can be an indication of poor communication between employers and employees or overall employee dissatisfaction.

3 widely used agency bill transmissions

-item basis -statement basis -account current basis

factors influence an agency relationship

-legal roles -legal responsibilities -scope of authority

direct response (distribution channel)

-markets directly to customers. -No agent is involved; rather the direct response relies primarily on mail, phone, and/or Internet sales. -Direct response relies heavily on advertising and targeting specific groups of affiliated customers. With direct response, commission costs, if any, are greatly reduced. -However, a disadvantage is that advertising costs are typically higher. -The customer can sometimes "opt out" and speak with a call-center customer service representative or be assigned to a local servicing office.

advantages of a producer handling claims

-quicker service to policyholders and lower loss adjustment expenses to the insurer. -Conversely, if the producer is not properly trained in how to handle claims, overpayment of claims can offset the savings.

Group Marketing (distribution channel)

-sells insurance products and services through call centers, the Internet, direct mail response, or a producer to individuals or businesses that are all members of the same organization. -Distributing insurance to specifically targeted groups is known by a number of terms, including these: affinity marketing, mass marketing, worksite marketing or payroll deduction, sponsorship marketing

Insurance Distribution channels

-the internet -call centers -direct response -group marketing -trade associations -financial institutions

Legal roles of a producer

-the principal gives the agent authority to act as its representative within certain guidelines. The principal may authorize the agent to do anything the principal can do. For example, an insurer (the principal) can authorize its agent to collect premiums from insureds for new insurance policies and then require the agent to remit those premiums (sometimes after deducting a commission) to the insurer within a certain amount of time. -The agency contract, also known as an agency agreement, is a written agreement between an insurer and an agent that specifies the scope of the agent's authority to conduct business for the insurer. It gives the agent the right to represent the insurer and to sell insurance on the insurer's behalf. The contract specifies the compensation arrangement between the insurer and the agent. It also describes how the agency relationship can be terminated. Insurance agency contracts usually have no fixed expiration date and remain in force until one party cancels the contract after giving proper notice to the other party, as required by the contract.

item basis (agency bill)

The premium (less commission) is forwarded to the insurer when the producer collects it or when it becomes due. This is the least complex of the three methods. The producer is usually not required to pay the insurer until the premium has been collected.