Beruflich Dokumente
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Assignment 4
Marketing
Assignment 5
Underwriting and Ratemaking
Assignment 6
Claims
Direct Your Learning
Marketing
Describe the key factors an insurer should evaluate during the distribu- Distribution
tion-system and distribution-channel selection process. System and
Channel Selection
Explain how states regulate insurance marketing activities in these areas: for Insurance
• Licensing Marketing
Summary
• 4.1
Marketing
In an insurance context, "producer" and "agent" are synonymous terms that Producer
refer to any person who sells insurance (produces business) for one or more Any of several kinds of
insurers. The terms "broker" and "sales representative" are also used for special insurance personnel who
categories of producers. A n agent engages i n an agency relationship w i t h a place insurance business
with insurers and who
principal. I n insurance, the principal is often an insurer. Three factors influ-
represent either insurers or
ence an agency relationship: insureds, or both.
agent to collect premiums from insureds for new insurance policies and then
require the agent to remit those premiums (sometimes after deducting a com-
mission) to the insurer w i t h i n a certain amount of time.
4.3
4.4 Property and Liability Insurance Principles
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.
Legal Responsibilities
I n an agency relationship, the agent's fundamental responsibility is to act for
the benefit of the principal. Just as the agent owes duties to the principal, the
principal legally owes certain duties to the agent. A n agency relationship also
creates responsibilities to third parties.
•
Marketing 4.5
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.
Scope of Authority
From a third party's perspective, an agent's authority can be either actual or
apparent.
Implied authority
The authority implicitly
Actual Authority conferred on an agent
by custom, usage, or
Actual authority can be express authority or implied authority. Express
a principal's conduct
authority applies not just to carrying out the principal's specific instructions, indicating intention to confer
but also to performing acts incidental to carrying out those instructions. To such authority.
determine the scope of express authority, courts examine the goals of the Express authority
agency in light of all surrounding circumstances. For example, the power to The authority that the
sell generally includes authority to collect payment and to make customary principal specifically grants
warranties. However, to illustrate consideration of scope, a sales agent who to the agent.
has no possession or indication of ownership of merchandise has no authority Actual authority
to collect the purchase price. I n most commercial situations, the agent has Authority (express or
authority only to solicit orders or to produce a buyer w i t h whom the principal implied) conferred by the
can deal. principal on an agent under
an agency contract.
Binding authority, generally granted to the agent i n the agency contract, is a Binding authority
form of express authority. Binding coverage is usually accomplished by issuing An insurance agent's
binders, which are agreements to provide temporary insurance coverage until authority to effect coverage
a formal written policy is issued. Binders can be either written or oral. W h e n on behalf of the insurer.
•
4.6 Property and Liability Insurance Principles
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 respon-
sibilities for the agent, and agents are expected to use their binding authority
carefully. See the exhibit "Binding A u t h o r i t y : A n Example."
[DA07549]
Custom is the most common source of implied authority. Agents can reason-
ably infer that they have authority to act according to prevailing custom
unless the principal gives different instructions. W i t h o u t different instruc-
tions, an agent's authority extends to, and is limited to, what a person i n 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 author-
ity to act beyond, or even contrary to, the principal's instructions. A n 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 emer-
gency. The agent, however, can be liable to the principal for any expenses
resulting from the agent's wrongful conduct.
Apparent authority
Apparent Authority
A third party's reasonable
belief that an agent has U n l i k e actual authority, a principal neither confers apparent authority o n an
authority to act on the agent nor creates it. Apparent authority is based on appearances and includes
principal's behalf. all the authority that a reasonable person acquainted w i t h 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 i n that
business usually have.
• T h e method of operation of the principal's business differs from that of
other businesses of the same kind i n the principal's area.
For example, principal Paul instructs agent A n n not to sell goods on credit if
the total credit to a customer exceeds $200, an unusual restriction i n Paul's
business. A n n sells goods on credit to Lee for $250 w i t h no actual authority to
do so. Lee, however, neither knows nor had reason to know of the restriction.
A third party could have reasonably believed that A n n had the usual author-
ity i n that situation. The authority was apparent, and Paul cannot deny it.
Broker One vital distinction between independent agents and brokers and other dis-
An independent producer tribution systems is the ownership of the agency expiration list. If the insurer
who represents insurance ceases to do business w i t h an agency, the agency has the right to continue
customers.
doing business w i t h its existing customers by selling them insurance w i t h
Agency expiration list another insurer. The ownership of expiration lists is an agency's most valuable
The record of an insurance asset. The agency—not the insurer—owns the business (though insureds have
agency's present the right to place their business w i t h any insurer they wish, whether w i t h that
policyholders and the dates
agent or elsewhere). A n independent agency has the right to sell its expira-
their policies expire.
tion lists to another independent agent.
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 custom-
ers i n 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 losses.
•
Marketing 4.9
Surplus lines brokers have access to insurers that have the capacity to provide
the needed insurance, which might not be available from insurers licensed to
do business i n the state. Surplus lines brokers work to ensure that coverage
is placed only w i t h 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 o n a portion of
the commissions generated by the business they write.
•
4.10 Property and Liability Insurance Principles
The exclusive agency insurer 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.
•
Distribution Channels
The distribution channels used by insurers and their representatives are con-
duits fot contacting and establishing communication w i t h their customers and
prospective customers.
Internet
As a distribution channel, the Internet 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 e-mail to multiple-policy
quoting, billing, and policy issuance. Customers also interact w i t h 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 Web sites. Portals benefit customers by offering the products and services
of many insurance providers on one Web site. A l t h o u g h 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. See the exhibit "Internet Benefits and Challenges for Insurers."
Call Centers
The best-equipped call centers can replicate many of the activities of pro-
ducers. In addition to making product sales, call center staff can respond to
general inquiries, handle claim reporting, answer billing inquiries, and process
policy endorsements. I n 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.
Direct Response
The direct response distribution channel markets directly to customers. N o
agent is involved; rather the direct response relies primarily on mail, phone,
and/or Internet sales. Direct response relies heavily on advertising and target-
ing specific groups of affiliated customers. W i t h direct response, commission
costs, if any, are greatly reduced. However, a disadvantage is that advertising
costs are typically higher. The customer can sometimes "opt o u t " and speak
w i t h a call-center customer service representative or be assigned to a local
servicing office.
Group Marketing
Group marketing sells insurance products and services through call centers,
the Internet, direct mail response, or a producer to individuals or businesses
4.12 Property and Liability Insurance Principles
[DA06206]
that are all members of the same organization. Distributing insurance to spe-
cifically targeted groups is known by a number of terms, including these:
•
profession, interests, hobbies, or attitudes.
• Mass marketing or mass merchandising—Insurers design an offer for their
policies to large numbers of targeted individuals or groups.
• Worksite marketing or payroll deduction—Employers can contract
directly w i t h an insurer or through a producer to offer voluntary insurance
coverage as a benefit to their employees.
• Sponsorship marketing—A trade group sponsors an insurer in approach-
ing a customer group. The sponsor participates in the profitability of the
program.
Trade Associations
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 w i t h the logos and other association symbols. See the
exhibit "Producers' Trade Associations."
[DA07561]
Financial Institutions
Insurers and producers 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. I n 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.
4.14 Property and Liability Insurance Principles
• Prospecting
• Risk management review
• Sales
• Policy issuance
• Premium collection
• Customer service
• C l a i m handling
• Consulting
Prospecting
Virtually all producers prospect. Prospecting involves locating persons, busi-
nesses, and othet entities that may be interested in purchasing the insurance
•
Marketing 4.15
individual or Family
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 i n identifying the prospect's loss exposures, which are often associated
w i t h 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.
Businesses
The risk management review process for businesses is likely to be more com-
plex 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
w i t h diversified operations.
A loss run report can guide the producer in helping the business owner Loss run
develop risk management plans, track the results of current risk management A report detailing an
efforts, identify problem areas, and project costs. Loss runs include, at a m i n i - insured's history of claims
mum, lists of losses and their total cost. More comprehensive loss runs provide that have occurred over a
specific period, valued as of
details that can lead to additional questions and suggest areas of risk manage-
a specific date.
ment 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
•
4,16 Property and Liability Insurance Principles
Sales
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 i n the sales process include contacting the prospective client, determin-
ing the prospect's needs, preparing and presenting a proposal, and closing
the sale.
Policy Issuance
A t 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. I n paperless environments, the policies and forms may be pro-
duced on a compact disk or placed i n an Internet filing cabinet along w i t h
endorsements, bills, and loss history information.
Premium Collection
Producers who issue policies may also prepare policy invoices and collect
premiums. After deducting their commissions, they send the net premiums to
Agency bill the insurers, a procedure known as the agency bill process. For business that is
A payment procedure in agency billed, there are three widely used methods of transmitting premiums
which a producer sends to the insurer:
premium bills to the insured,
collects the premium, and • Item basis—The premium (less commission) is forwarded to the insurer
sends the premium to the when the producer collects it or when it becomes due. This is the least
insurer, less any applicable complex of the three methods. The producer is usually not required to pay
commission.
the insurer until the premium has been collected.
• Statement basis—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 i n error.
• Account current basis—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 con-
tract 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.
•
Marketing 4.17
Agency billing may be used for personal insurance policies, but it is more
commonly used w i t h 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 i n a
procedure known as the direct bill process. Direct bill
A payment procedure in
which the insurer assumes
Customer Service all responsibility for sending
premium bills to the insured,
Most producers are involved to some degree i n customer service. For inde- collecting the premium, and
pendent agents and brokers, value-added services and the personalization of sending any commission
insurance packages are what differentiate them in the marketplace. For the payable on the premium
producer of a direct writer, service might consist of providing advice, taking collected to the producer.
an endorsement request over the phone, providing coverage quotes, or trans-
ferring a policyholder who has had a loss to the claim department.
Claim Handling
A l l 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 w i t h 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
w i t h . 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 w i t h a "claim k i t " that informs their policyholders about the proper
procedures and contacts.
•
4.18 Property and Liability Insurance Principles
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 person-
nel might be authorized to settle large, more complex claims. The limitations
on the producer's claim-handling authority should be specified i n the agency
contract.
Consulting
Many producers offer consulting services, for 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 com-
missions 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.
•
The key factors i n selecting distribution systems and channels are based on
customers' needs and characteristics as well as the insurer's profile. See the
exhibit "Distribution Systems and Conduits for Insurance Marketing."
[DA06250]
Insurer's Profile
A n insurer's profile—including its strategies and goals, strengths, existing and
target markets, geographic location, and the degree of control over producers
it requires or desires—frames the business and marketing environments w i t h i n
which it operates. The insurer must evaluate these key factors i n selecting
distribution systems and channels.
Insurer Strengths
Organizations evaluate their internal and external environments to assess
their strengths and weaknesses compared to external opportunities and
threats. Determining where its strengths lie, an insurer selects those distribu-
tion systems and channels that maximize its opportunities to capture market
•
share and minimize its weaknesses. I n doing so, the insurer may analyze these
factors:
ample incentive to change its approach to better address customers' needs and
characteristics.
Customers' needs and characteristics are driving factors for an insurer that is
considering changing its marketing approach or adopting a mixed marketing
approach for a new target market. If an insurer's existing distribution systems
and channels do not adequately address the customers' profiles as determined
through marketing research, the insurer is less likely to gain market share. To
make an optimum choice, the insurer carefully balances the cost of changing
its distribution systems and channels w i t h expected benefits resulting from the
new accounts it w i l l write.
Geographic Location
The geographic location of existing policyholders or target markets is a key
concern in selecting a distribution system and channels because the insurer's
fixed costs of establishing an exclusive agent or direct-writer agent in a terri-
tory are substantial. Exclusive agent or direct writer marketing systems can be
successful only when a sufficient number of prospects exist w i t h i n a relatively
small geographic area.
• A n insurer can exercise the greatest control over producers i n the direct
writer system. Under that system, the producer is an employee of the
company, and the company can exercise control over both the results
achieved and the methods used to achieve them. For example, an insurer
can specify the number and type of new applications the producer must
submit each month (results) as well as the marketing approaches the
producer can use (methods).
• Under both the agency and brokerage system and the exclusive agency
system, the producers are independent contractors; therefore, the insurer
can control only the results they produce, not the methods by which
they produce them. For example, an insurer can specify the number and
type of new applications the producer must submit each m o n t h (results).
However, the agent or broker can engage in any advertising or marketing
•
campaign to achieve those results that do not violate insurance regula-
tions or contractual agreements w i t h the insurer.
• Producers are not involved i n the direct response system. Consequently,
the insurer has complete control of its distribution system.
Other insurers value discretion i n the producers who represent them. For
example, an insurer that specializes i n church insurance or distributes insur-
ance through religious affinity groups will expect to have some control over
the producers' use of social media (Web-based sites used to exchange content
w i t h selected or broad audiences through the Internet). A producer's indiscre-
tions posted in public forums can cause an insurer to lose accounts. Therefore,
the insurer might choose a direct writer distribution system under which
producers are employees and subject to the insurer's guidelines for media use.
W h i l e the review processes for insurer licensing vary by state, all states require
property-casualty insurers to receive approval before operating w i t h i n the
state. Just as departments of insurance (DOIs) have the authority to regu-
late insurers and related entities, state laws also give them the authority to
regulate insurance producers, claim representatives, and other insurance
personnel. The compensation of insurance producers includes commissions
and salaries. Insurance producers must meet specific requirements to obtain
and maintain a license in the state(s) i n which they transact business. States
prohibit unfair trade practices such as misrepresentation and false advertising,
tie-in sales, rebating, and other deceptive practices.
Licensing
To function legally as an insurance agent, a producer must be licensed by the
state(s) in which he or she wants to sell insurance. Some states issue sepa-
rate licenses for agents, brokers, and solicitors. The titles and the authority
associated w i t h these licenses vary by state. Generally, insurance agents are
defined legally as representatives of the insurer(s) for which they sell insur-
4.24 Property and Liability Insurance Principles
ance. Brokers are representatives of the insurance purchaser rather than of the
insurer.
Some states have separate licenses for solicitors, who work for and are repre-
sentatives of agents or brokers, often as office employees, but who have less
authority than agents. Generally, solicitors can solicit prospects but cannot
bind insurance coverage. I n other states, such office employees who solicit
insurance must secure an agent's license; they are often called customer ser-
vice representatives (CSRs) or customer service agents (CSAs).
Producers' licenses generally have a specified term, such as one or two years,
and can be renewed by paying a fee specified by the state. Most states also
require producers to provide evidence that they have completed approved
continuing education courses before the state will renew their licenses.
Licensed producers are required to adhere to all laws regulating insurance
sales i n the state(s) in which they conduct business. T h e state can suspend or
revoke licenses under certain circumstances, such as engaging i n unfair trade
practices.
Insurers
By issuing a license to an insurer, a state indicates that the insurer meets mini-
mum standards of financial strength, competence, and integrity and that it
has complied w i t h the state's insurance laws and is authorized to write certain
types of insurance. Once licensed, the insurer is subject to all applicable state
laws, rules, and regulations. See the exhibit "Insurer Licensing Standards."
•
Insurer Licensing Standards
• Domestic insurers—If a domestic insurer obtains licenses in states other than its
state of domicile, it is a foreign insurer in those other states. A domestic insurer's
license generally has no expiration date. Domestic insurers usually must meet the
conditions imposed on corporations engaged in noninsurance activities as well as
some special conditions imposed on insurers. An applicant for an insurer license
must apply for a charter. The state insurance commissioner reviews the application
to see whether the applicant also meets the state's licensing requirements. An
insurer must be financially sound.
• Foreign insurers—To be licensed in an additional state, a foreign insurer must
show that it has satisfied the requirements imposed by its home state and generally
must satisfy the minimum capital, surplus, and other requirements imposed on the
state's domestic insurers.
• Alien insurers—Alien insurers must satisfy the requirements imposed on domestic
insurers by the state in which they want to be licensed. Additionally, they must
usually establish a branch office in any state and have funds on deposit in the
United States equal to the minimum capital and surplus required.
• Nonadmitted insurers—A nonadmitted insurer is typically a surplus lines insurer.
Under surplus lines laws, a nonadmitted insurer might be permitted to transact
business through a specially licensed surplus lines producer if the insurance is not
readily available from admitted insurers, the nonadmitted insurer is "acceptable,"
and the producer has a special license authorizing him or her to place such
insurance. The surplus lines producer usually must be a resident of the state. An
"acceptable" nonadmitted insurer generally must file a financial statement that the
insurance commissioner finds satisfactory; supply documentation of transactions to
state regulators; obtain a certificate of compliance from its home state or country;
and, if an alien insurer, maintain a trust fund in the U.S.
• Risk retention groups—Risk retention groups are often formed under state captive
laws, which generally maintain lower capital and surplus requirements for captives
than for traditional property-casualty insurers. Once licensed as a commercial
liability insurer under the laws of at least one state, ariskretention group can write
insurance in other states without a license by filing the appropriate notice and
registration forms with the nonchartering state. A risk retention group can write
only commercial liability insurance for its members and may not write other lines of
business. However, in a nonchartering state, a risk retention group might be subject
to some state laws, such as unfair claim settlement practice laws, and to premium
taxes. The risk retention group might also be required to become a member of a
joint underwriting association (JUA) or a similar association.
[DA07570]
Insurance Personnel
In addition to licensing insurers, state regulators also license some categories
of insurance personnel. States license many of the people who sell insurance,
give insurance advice, or represent insurers, including producers, claim repre-
sentatives, and insurance consultants.
4.26 Property and Liability Insurance Principles
Compensation
The compensation of insurance producers includes sales commissions, con-
tingent commissions, and salaries. Commissions, particularly contingent
commissions, present potential conflicts of interest among insurers, producers,
brokers, and insureds. Recent controversies related to insurer compensation
have resulted in greater state scrutiny of practices related to commissions.
Sales Commissions
Commission A n independent agency or an exclusive agency receives commissions from
A percentage of the the insurer for all insurance premiums the agency generates. A n insurance
premium that the insurer broker may receive a sales commission or fee directly from the insurer or may
pays to the agency or receive a portion of the commission from the agent who placed the insurance.
producer for new policies
Commission rates vary by type of insurance. For example, the rate may be rel-
sold or existing policies
renewed.
atively low (such as 2 percent) for large workers compensation accounts and
be at their highest (often 30 percent) for bonds. To keep premiums competi-
tive, the rates for preferred types of policies may be lower than for standard or
specialty products. Commission rates can also vary by agency.
•
Marketing 4.27
In a small agency w i t h only one agent, the entire commission goes to that
agent. I n a larger agency, a portion of the commission typically goes to the
producer who made the sale, and the remainder goes to the agency to cover
other expenses.
Usually, commissions are not fully earned at the time of a sale. I f policies are
canceled or premiums are returned to an insured for some other reason (such
as deleting or reducing coverage), the producer must also return the unearned
portion of the commission to the insurer. The commission compensates the
agency not only for making the sale but also for providing service before and
after the sale.
Contingent Commissions
Insurers sometimes provide contingent commission agreements as a form of Contingent commission
incentive compensation for producers who exceed established benchmarks agreement
for profitability and volume of business. The insurer compares the premiums A contract provision in which
received for policies sold by the agency w i t h the losses incurred under those an insurer agrees to make
supplemental payments
policies to determine whether the agency's business has earned a profit. If the
to producers based on
business sold by the agency attains a certain volume of premium and level profitability alone or on a
of profitability, the insurer shares a portion of the profit w i t h the agency. For combination of profitability,
agencies that provide insurers w i t h a steady stream of business, contingent volume, and growth in the
commissions can provide up to 10 percent or more of total agency revenues. agency's book of business
placed with that insurer.
Contingent commissions encourage agencies to sell only policies that w i l l be
profitable for the insurer. Agencies that practice careful selection can earn siz-
able contingent commissions as a result. However, over the last several years,
contingent commissions have attracted greater regulatory scmtiny, as they can
provide an incentive for a producer to direct business to insurers based on the
level of commission received from the insurer as opposed to basing placement
strictly on the best interests of the insured. A prominent scandal associated
w i t h this conflict of interests occurred i n 2004, when New York Attorney
General Eliot Spitzer accused a large insurance broker of directing business to
insurers based on excessive contingent commissions and kickbacks. Similar
scandals i n other states have led to calls for the abolition of contingent
commissions altogether and to the contemplation of state laws that would
require producers to disclose information related to their compensation to
clients. One such law enacted in 2011, New York's Insurance Regulation
194, "Producer Compensation Transparency," requires producers licensed i n
New York to offer unrequested information about their compensation to their
clients.'
•
4.30 Property and Liability Insurance Principles
SUMMARY
The legal relationship of agency empowers the insurance producer—the
agent—to act on behalf of the insurer—the principal. A n agent's authority
can be either actual or apparent. A n agent's actual authority can be express
or implied. Binding authority, generally granted to the agent in the agency
contract, is a form of express authority. Apparent authority generally occurs
when a principal grants less authority than agents usually have, or when the
principal's business operates differently from similar businesses in the area.
• Prospecting
• Risk management review
• Sales
• Policy issuance
• Premium collection
• Customer service
• C l a i m handling
• Consulting
Producer regulation occurs primarily through agent and broker licensing laws
and other state laws dealing w i t h insurance, such as unfair trade practices
laws. Insurance regulators govern the formation and licensing of insurers and
the licensing of insurance personnel. By issuing a license to an insurer, a state
indicates that the insurer meets m i n i m u m standards of competence, integrity,
and financial strength. States also license many of the people who sell insur-
•
ancc, give insurance advice, or represent insurers, including producers, claim
representatives, and insurance consultants.
ASSIGNMENT NOTE
L. T i m Dodge, "Producer Compensation Disclosure: W h a t You Need to Know,"
January 2011, www.propertycasualty360.com/2011/01/26/producer-compensation-
disclosure (accessed A p r i l 14, 2011).