Aai 83 - Agency Ops & Management

Front 1

If either the principal or the agent fails to fulfill its obligations and thereby harms the other, __________ are available to allow the injured party to recover.

Back 1

Legal remedies

Front 2

Agent’s (implied fiduciary) duties to a principal (5)

Back 2

- Loyalty
- Obedience
- Reasonable care
- Accounting
- Information

Front 3

Principal’s duties to an agent (4)

Back 3

- Agreed-on period of employment
- Compensation
- Reimbursement for expenses
- Indemnity for losses

Front 4

Producer

Back 4

An individual who sells insurance products and related services. (May be an agent or a broker.)

Front 5

Agent

Back 5

Authorized representative of an insurer

Front 6

Broker

Back 6

Authorized representative of an insured

Front 7

T or F: An independent agent in Pierre, S.D.; a sales rep for a large direct writer; an exclusive insurer’s agent in Belpre, OH; and a broker in NYC are all

Back 7

Producers

Front 8

Violation of duties subjects an agent to:

Back 8

- Discharge
- Liability for any damages to the principal (even if the agency contract does not expressly state these duties)

Front 9

Subagent

Back 9

An agent of an agent; owes the same duties to the principal that the original agent owes.

Front 10

T or F: An ‘original agent’ is responsible to the principal for any subagent’s violation of duty.

Back 10

TRUE. An ‘original agent’ IS responsible to the principal for any subagent’s violation of duty -- even if the agent has exercised good faith in selecting the subagent.

Further, a subagent owes the agent who did the hiring substantially the same duties.

Front 11

T or F: If a subagent is employed without a principal’s authority, an agency relationship nonetheless arises between the principal and the subagent.

Back 11

FALSE. No agency relationship arises between the principal and the subagent.

The principal is not liable to third parties for an unauthorized subagent’s acts; at the same time, the unauthorized subagent owes no duties to the principal.

Front 12

The duty of loyalty (agent’s duties to a principal) boils down to this:

Back 12

The agent must not undertake any business venture that competes with or interferes with the principal’s business.

The principal can claim any profits the agent realizes in dealing with the principal’s property. (e.g., any gift the agent receives form a 3rd party while transacting the principal’s business belongs to the principal.)

Front 13

Duty of obedience (agent’s duties to a principal) boils down to this:

Back 13

The agent must obey, and to perform in accordance with, a principal’s lawful instructions.

If the agent disobeys a reasonable instruction, the principal can sue for any resulting damages and can also terminate the relationship. Generally, the agent cannot challenge the instruction, unless it calls for illegal or immoral acts.

Front 14

If the principal has given ambiguous instructions, the agent owes the principal the duty to

Back 14

Exercise his or her best judgment in carrying them out.

Front 15

T or F: If harm to the agent is possible, or if an emergency arises, the agent might be justified in disobeying the principal’s instructions.

Back 15

TRUE. If harm to the agent is possible, or if an emergency arises, the agent might be justified in disobeying the principal’s instructions.

Front 16

There are 3 exceptions to the rule that an agent cannot delegate the authority granted by a principal to another person. These exceptions are:

Back 16

- Ministerial duties
- Customary appointments
- Emergency appointments

Front 17

Ministerial duties

Back 17

The routine or mechanical tasks performed by agents

Front 18

Customary appointments

Back 18

If custom and usage of a particular business involve the delegation of authority, the agent can delegate.

Front 19

Emergency appointments

Back 19

In an emergency that requires the appointment of another to protect the principal’s interests, the agent can make an emergency appointment.

Front 20

Duty of reasonable care (agent’s duties to a principal) boils down to this:

Back 20

An agent must exercise the degree of care and skill that a reasonable person would exercise under the same or similar circumstances.

An agent with special skills or training is held to the standard of care of a reasonable person possessing those skills.

Front 21

T or F: An agent’s failure to act when action is reasonably required also constitutes a breach of the duty of reasonable care.

Back 21

TRUE. It DOES constitute a breach of that duty.

Front 22

An agency contract carries an ___________ that the agent will carry out the duties of the agency with reasonable care to avoid injury to the principal.

Back 22

Implied promise

Front 23

Charles asks Marcie, an insurance broker, to obtain an automobile insurance policy with collision coverage for his car. Marcy obtains a policy and delivers it to Charles, but the policy does not include collision coverage. After Charles has an accident, he learns that no collision coverage is in force. Charles may have a _____________ against Marcie for breach of the duty of _____________.

Back 23

Cause of action; reasonable care.

Front 24

Cause of action

Back 24

A plaintiff’s legal grounds to sue a defendant.

Front 25

T or F: Reasonable care is required only when the agent is paid for the services.

Back 25

FALSE. Reasonable care is required whether or not the agent is paid for the services.

Front 26

T or F: Unpaid agents cannot be compelled to perform duties, but once they begin performance, they are held to the standard of reasonable care.

Back 26

TRUE. Unpaid agents cannot be compelled to perform duties, but once they begin performance, they are held to the standard of reasonable care.

Front 27

T or F: An agent and a principal can agree that the agent is not to be liable to the principal for ordinary negligence.

Back 27

TRUE. An agent and a principal can agree that the agent is not to be liable to the principal for ordinary negligence.

An agent, however, cannot evade liability for gross negligence. To limit the agent’s liability for gross negligence would be against public policy.

Front 28

Agent’s duty of accounting boils down to this:

Back 28

An agent must account to the principal for all the principal’s property and money that come into the agent’s possession.

As part of this duty, the agent must keep the principal’s property, including money, separate from the agent’s. If the agent commingles the property or money, then the law assumes that it all belongs to the principal unless the agent clearly proves otherwise.

Front 29

Agent’s duty of information boils down to this:

Back 29

An agent owes a duty to keep the principal informed of all facts relating to the agency; i.e., to make reasonable efforts to provide the principal with information relevant to the affairs entrusted to the agent.

Front 30

Failure to perform the duty of information makes the agent…

Back 30

Liable to the principal for any resulting loss

Front 31

T or F: Most courts impose a duty to communicate information that the agent obtains outside the scope of the agent’s employment.

Back 31

FALSE. Most courts DO NOT impose this duty.

Front 32

The basic principles of ____________, __________, and __________ form the framework of fundamental legal and business characteristics.

Back 32

Agency formation, the agency relationship, and contracts.

Operating within this framework and understanding duties reduces the number and severity of E&O claims an agent faces over a career.

Front 33

T or F: Depending on the offense, a principal can sue an agent for breach of the agency contract or in tort for harm done.

Back 33

TRUE. Depending on the offense, a principal CAN sue an agent for breach of the agency contract or in tort for harm done.

Front 34

Remedies available to a principal against an agent:

Back 34

- Requiring the agent to transfer improperly held property
- Requiring the agent to pay the value of the benefit the agent received
- Requiring the agent to pay damages for negligence or tort

Front 35

If the agent is insolvent, the principal’s best remedy is a suit to:

Back 35

Transfer the property

Front 36

If the agent has personally profited from the transaction, then the principal’s best remedy is:

Back 36

A suit for the value of the benefit the agent received.

Front 37

A suit for breach of agency contract might sometimes be a preferable remedy because

Back 37

The statute of limitations is generally longer for contract suits than for tort suits

Front 38

Principal’s duties to an agent

Back 38

- Agreed-on period of employment
- Compensation
- Reimbursement for expenses
- Indemnity for losses

Front 39

T or F: A contract to pay a salary by the month or year indicates that employment is guaranteed for the stated period.

Back 39

FALSE. A contract to pay a salary by the month or year does NOT necessarily indicate that employment is guaranteed for the stated period. (It does, however, make the parties liable for any breach of contract within that period.)

Front 40

If no compensation agreement exists, an agent is entitled to

Back 40

The reasonable value of the services rendered.

(If the contract does not mention compensation but an agent under similar circumstances would receive compensation for services, compensation is required for the reasonable value of the services.)

Front 41

T or F: AN agent who breaches agency duties is nonetheless entitled to rightful compensation.

Back 41

FALSE. An agent who breaches agency duties is not entitled to compensation.

Front 42

Duty of indemnity for losses

Back 42

The principal owes a duty of indemnity, or reimbursement, for any losses or damages the agent has suffered because of the agency and incurred through no fault of the agent.

Front 43

A principal must indemnify an agent for the expenses incurred in defending any lawsuits resulting from

Back 43

The agent’s authorized acts.

(If the expense resulted from the agent’s own intentional or negligent conduct, even though the principal directed the act, the agent is usually not entitled to indemnification.)

Front 44

Because a subagent is both the agent’s and the principal’s agent, the subagent is entitled to indemnity from

Back 44

Either of them

Front 45

Agent’s remedies against a principal

Back 45

Can sue for:

- Compensation
- Indemnity
- Reimbursement

Can also:
- obtain a court order requiring an accounting from the principal
- Exercise a lien, or right to retain possession of the principal’s goods, until the principal has paid the amounts due

Front 46

General lien

Back 46

The ability to hold the principal’s goods and papers until all accounts are settled.

Available to attorneys, bankers, stockbrokers who serve in an agent capacity

Front 47

Special lien

Back 47

Allows retention of the principal’s property until the account for the immediate transaction between the principal and agent is settled

Front 48

T or F: All independent insurance agents operate under the law of agency.

Back 48

TRUE. They do.

Front 49

The determining factor of the applicable law is:

Back 49

The type of activity in which the producer is engaged.

(The NAIC adopted this perspective in its Producer Licensing Model Act of 2000 (PLMA)).

Front 50

PLMA

Back 50

Producer Licensing Model Act of 2000. Provides for a single producer license that authorizes all producers to broker insurance for insurers or as consumer representatives under selected lines of business, such as personal lines insurance, commercial lines insurance, property and casualty insurance, or surplus lines insurance.

Front 51

Ultimately, should a producer’s activities lead to a lawsuit, the _____________ has the burden of proof in establishing whether the insurance seller is an agent or a “broker in an insurance transaction”, regardless of license type.

Back 51

Plaintiff

Front 52

The duty of _________ owed by an insurance agent to his/her principal raises some special considerations.

Back 52

Loyalty.

This is because an insurance agent has dual loyalty (loyalty to principal and loyalty to client)

Front 53

Dual agency

Back 53

A relationship in which the agent represents both a buyer and a seller to conduct a transaction between them

Front 54

If the agent is seen as unduly favoring either the insurer or the insured in a given situation, the slighted person may resort to _________ to recover its loss.

Back 54

An E&O claim

Front 55

In the usual insurance company-agent relationship, courts tend to infer that the agent’s fiduciary duties are owed to ________.

Back 55

The insurer

Front 56

Statutes in many states stipulate that insurance agents are agents of the insurer and not of the insured so that information given to the agent, or payment made to the agent, is _______ on the insurer.

Back 56

Binding

Front 57

T or F: Courts tend to recognize the dual agency status of agents and brokers as an exception to the general rule of an agent’s serving only one principal.

Back 57

TRUE. The courts DO tend to recognize this.

Front 58

The producer usually represents the insurer when:

Back 58

- Binding insurance
- Keeping records
- Collecting premiums
- Issuing and canceling policies

Front 59

The producer usually represents the insured when:

Back 59

- Suggesting and selecting coverages or insurers

Front 60

Independent agents or brokers should be careful not to violate their duties to:

Back 60

Either principal.

Front 61

When representing the insurance seller (an insurer), the producer is a

Back 61

Agent

Front 62

When representing the insurance buyer, the producer is a

Back 62

Broker

Front 63

As a matter of consumer protection, most courts and state insurance regulators have taken the position that

Back 63

The broker can be considered an agent for the insurer as well as the insured’s representative.

Front 64

___________________, rather than the strict legal relationship of the parties, often determines whether the producer is considered the agent of the insurer or the insured.

Back 64

The nature of the circumstances.

For example, most states have laws that make the broker the insurer’s legal agent for the purpose of premium collection.

Front 65

T or F: If an insurer, through its dealings, allows a broker to act so that a reasonable third party believes the broker is the insurer’s agent, then the broker is the insurer’s agent under the law.

Back 65

TRUE. If an insurer, through its dealings, allows a broker to act so that a reasonable third party believes the broker is the insurer’s agent, then the broker IS the insurer’s agent under the law.

Front 66

Another factor that can impact whether an agent represents the insurer or the insured is

Back 66

How authority is granted.

I.e., insurers grant authority to their agents by an agency contract written and executed by both principal and agent. Brokers rarely enter into written agreements with insurance buyers, but it is good practice for a broker to have a written agreement covering any fees that a customer may be charged.

Front 67

T or F: Although the broker represents the insurance buyer, it is common to find a written agreement granting binding authority between a broker and an insurer.

Back 67

FALSE. BECAUSE the broker represents the insurance buyer, it is RARE to find a written agreement granting binding authority between a broker and an insurer.

Front 68

Broker’s commission is typically a part of the

Back 68

Insurance premium.

In this regard, they are no different from agents who are paid a commission.

Front 69

Many brokers (especially when dealing with large commercial accounts) have moved away from traditional commission arrangements toward this:

Back 69

A fee system in which the customer pays for the broker’s professional services in addition to paying the insurance premium to the insurer.

Front 70

When a broker charges a fee, the insurance is usually ________

Back 70

“Written net”

That is, the premium is reduced to eliminate the producer commission. The broker is then free to negotiate a fee based on the work to be performed, irrespective of the size of the insurance premium.

Front 71

Commission v. Fee system

Back 71

Example on 1.12 for possible review

Front 72

Advantages of the fee system

Back 72

- Minimized potential for conflicts of interest (because there’s no commission)
- The fee can be an amount that covers service, overhead, and profit; in a competitive market in which premiums are shrinking, the broker’s fee may remain constant or even increase

Front 73

Disadvantage of the fee system

Back 73

Fees are visible to the insurance buyer (instead of built into the premium, as with a commission)

Front 74

Producers considering going to a fee-based system should be sure to review

Back 74

Applicable state laws and regulations before implementing such a system.

Front 75

Authority

Back 75

The agent’s legal power arising from the agency relationship.

An agent’s power to bind the principal is determined by the agent’s authority, which is derived expressly, by implication, or from the facts of the situation.

Front 76

Types of authority

Back 76

- Express authority
- Implied authority
- Apparent authority

Front 77

Express authority

Back 77

The authority that principal specifically grants to the agent through specific instructions.

Includes the authority needed to carry out acts incidental to those instructions.

Front 78

An agent receives express authority through __________.

Back 78

A legal agreement (either oral or written) granted by the principal

Front 79

Two degrees of agency, defined by the range of express authority granted

Back 79

- General agent
- Special agent

Front 80

General agent

Back 80

Has authority to perform all acts that are usual and customary in such a capacity.

For example, a construction project general manager or a stockbroker managing an investment portfolio conducts a series of transactions for a principal on an ongoing basis.

Front 81

Special agent

Back 81

Is usually restricted to performing just those acts essential to the situation.

A special agent may conduct a single transaction or a small group of transactions for the principal on a limited-term basis, such as a stockbroker asked to purchase a certain number of shares in a specific company.

Front 82

Most property-casualty insurance producers are ________ agents in the legal sense, with authority, within expressed limits, to make or to modify contracts of insurance and to perform all of the other activities necessary to the efficient operation of an insurance agency.

Back 82

General

Front 83

Insurance agency agreements define the agent’s express authority in relation to:

Back 83

- Binding and issuing policies
- Collecting and remitting premiums
- Earning commissions

Front 84

Implied authority

Back 84

The authority implicitly conferred on an agent by custom, usage, or a principal’s conduct indicating intention to confer such authority

Front 85

T or F: Implied authority is within the scope of authority granted by a principal to an agent, even though not expressly granted.

Back 85

TRUE. Implied authority IS within the scope of authority granted by a principal to an agent, even though not expressly granted.

Front 86

T or F: Implied authority can exist independently of express authority.

Back 86

FALSE. Implied authority cannot exist without express authority.

Front 87

T or F: An agent should be able to believe that any actions made in accordance with accepted custom are within the scope of the authority granted.

Back 87

TRUE. An agent should be able to believe that any actions made in accordance with accepted custom are within the scope of the authority granted.

Front 88

A producer who is in doubt about the extent of implied authority should

Back 88

Ask the principal for clarification

Front 89

T or F: Implied authority also may arise from a principal’s conduct that could be construed as intending to confer such authority.

Back 89

TRUE. Implied authority also may arise from a principal’s conduct that could be construed as intending to confer such authority.

For example, if an insurance agent has for years been able to bind property submissions without limit on value, that agent has, by implication, the right to continue to do so until the insurer expresses otherwise.

Front 90

When, through any of its employees or solicitors, an insurance agency exceeds its express or implied authority from an insurer, the agency may be liable to both the customer and the insurer for

Back 90

Financial loss cuased as a result of the exceeded authority

Front 91

Apparent authority

Back 91

A third party’s reasonable belief that an agent has authority to act on the principal’s behalf

a.k.a. “authority by estoppel”

Front 92

Authority by estoppel

Back 92

The theory that if a principal creates the appearance of authority in an agent and a third party reasonably relies on that appearance, the principal should be estopped from denying that authority.

a.k.a. Apparent authority

Front 93

Estopped

Back 93

Prevented

Front 94

Apparent authority is derived from the

Back 94

Circumstances of the situation; it’s determined by how a third party perceives the situation.

Front 95

The purpose of apparent authority is to

Back 95

Protect innocent third parties, allowing them to recover from the principal when the principal has made it appear, either intentionally or unintentionally, that the agent has authority to act.

Front 96

However, third parties cannot be absolved of all responsibility. When an agent acts in a way that appears to be adverse to the best interests of the principal, the third party has a duty to

Back 96

Determine the extent of the agent’s authority by a direct inquiry to the principal.

Front 97

Ratification

Back 97

Creation of an agency relationship resulting when a principal adopts the act of another who has purported to act for the principal and has neither power nor authority to perform the act for the principal.

Front 98

Five requirements must be met for a court to affirm agency by ratification:

Back 98

- The agent must claim to act for the principal at the time of the original transaction
- The principal must ratify the entire transaction
- The principal must ratify before the third party elects to withdraw
- The principal must have full knowledge of all of the facts
- The transaction must be legal

Front 99

If all five ratification requirements are met, the principal is

Back 99

Bound by the transaction.

The inception of the resulting contract dates from the time of the original contract.

Front 100

If the principal does not ratify the agent’s act, the result is that:

Back 100

The agent alone is liable on the specific contract not ratified.

Front 101

Independent contractor

Back 101

A person (or an organization) hired to perform services without being subject to the hirer’s direction and control regarding work details.

Front 102

If the person engaging an independent contractor begins to exert control over the contractor in the performance of the task assigned, the result is:

Back 102

The status of the independent contractor may be lost, and the parties become employer and employee.

Front 103

T or F: A principal is responsible for the actions of an independent contractor.

Back 103

FALSE. The principal is not responsible for that.

Front 104

Undisclosed principal

Back 104

Agency relationship situation in which the principal asks the agent to act as if the agent were the principal.

For example, assume a prospective land purchaser is afraid prices will dramatically increase if the owners know the prospective purchaser is in the market. The land purchaser can instruct the real estate agent to act as if he or she were the prospective purchaser, thereby hiding the true purchaser’s (the undisclosed principal’s) existence from the sellers.

Front 105

When a third party deals with an agent for an undisclosed principal and later learns of the existence of the principal – for instance, when the principal attempts to back out of the contract – the third party has this choice:

Back 105

The choice of suing either the agent or the principal for performance on the contract.

The agent is not absolved of responsibility for performance on the contract.

Front 106

T or F: A principal can be partially disclosed.

Back 106

TRUE. In this situation, the agent is instructed to acknowledge the principal’s existence but withhold the principal’s identity. The legal protection afforded to the third party is virtually the same as with an undisclosed principal; that is, if a breach occurs, the third party can sue either the principal or the agent.

Front 107

Nonexistent principal

Back 107

Used when an agent gives a third party the impression that he or she is acting for a principal when, in fact, there is no principal.

Front 108

In cases of nonexistent principals, the producer must

Back 108

Bear any loss from the time the customer reasonably believes the coverage is in force until the purported principal (or Lloyd’s underwriter, for example) accepts the submission.

Front 109

T or F: Producers are required by state laws to be licensed in every state in which they do business.

Back 109

TRUE. Producers ARE required by state laws to be licensed in every state in which they do business.

Front 110

National Insurance Producer Registry (NIPR)

Back 110

A unique public-private partnership that supports the work of the states and the NAIC in making the producer licensing process more cost effective, streamlined, and uniform for the benefit of regulators, insurance producers, insurers, and consumers.

Has eliminated many of the inconveniences that arise from a multi-state regulatory system.

Front 111

T or F: State insurance laws allow insurers to give authority to unlicensed agents.

Back 111

FALSE. State insurance laws prohibit insurers from giving any authority to unlicensed agents.

Front 112

Agency contracts tend to stipulate the automatic termination of the agency if the agent’s license is:

Back 112

- Suspended
- Canceled
- Nonrenewed

Front 113

Producers who engage in insurance business without first complying with state licensing requirements are subject to

Back 113

Prosecution and fines

Front 114

T or F: A license prevents a policyholder from suing an agent or an insurer for an error or omission.

Back 114

FALSE. Obviously it does not do that.

Front 115

To obtain a license to sell a particular type of insurance, a producer must pass a

Back 115

Written examination

Front 116

Gramm-Leach-Bliley (GLB) Act

Back 116

Included provisions that have led to greater licensing reciprocity among states.

Front 117

The ultimate goal of regulators regarding producer licensing is to

Back 117

Move beyond reciprocity and to resolve issues related to uniformity in producer licensing.

Front 118

The vision of the NIPR is to

Back 118

Provide one place for producers to go to meet all aspects of the producer licensing and appointment process using an electronic communication network.

Front 119

The NIPR developed these two items:

Back 119

- The Producer Database (PDB)
- The NIPR Gateway

Front 120

Producer Database (PDB)

Back 120

An electronic database consisting of information relating to insurance producers that links participating state regulatory licensing systems into one common repository of producer information.

Front 121

Key benefits of the PDB:

Back 121

- Increased productivity
- Lower cost
- Reduction of paper
- Access to real-time information
- Ability to conduct national verification of the license and status of a producer

Front 122

NIPR Gateway

Back 122

A communication network that links state insurance regulators with the entities they regulate to facilitate the electronic exchange of producer information.

Front 123

Data standards have been developed for the exchange of these 4 items through the NIPR Gateway

Back 123

- License application information
- License renewal information
- Appointment information
- Termination information

Front 124

Reasons that some states license claims representatives

Back 124

So that those who make claim decisions for insurers:

- Are aware of prohibited claim practices
- Have a minimum level of technical knowledge and skill
- Understand how to handle insureds’ claims fairly

Front 125

Claims representative licensing involves:

Back 125

- An examination
- A background check
- Ethics requirements

Front 126

T or F: Public adjusters, who represent insureds for a fee, are generally required to be licensed to ensure technical competence and to protect the public.

Back 126

TRUE. Public adjusters, who represent insureds for a fee, ARE generally required to be licensed to ensure technical competence and to protect the public.

Front 127

Insurance consultants

Back 127

Give advice, counsel, or opinions about insurance policies.

Some states require they be licensed, and those requirements vary by state. Separate examinations are usually required to be an insurance consultant in both life-health insurance and property-casualty insurance.

Front 128

The Independent Agent’s Guide to Agency-Company Agreements

Back 128

Guide created by the IIABA to help standardize insurance agency contracts for ease and consistency in doing business.

Front 129

The relative bargaining power of the insurer and the insured determines this

Back 129

How extensively the contract offered by the insurer is modified to favor the agency

Front 130

T or F: Agency agreements vary considerably and often alter the general duties of the principal and the agent.

Back 130

TRUE. Agency agreements DO vary considerably and DO often alter the general duties of the principal and the agent.

Front 131

Producers must understand the agency contract because

Back 131

The agency owner is liable for the conduct of producers, and a producer’s act that is contrary to the agency contract could jeopardize that contract

Front 132

The seven major provisions of agency contracts are:

Back 132

1. The term of agreement/termination
2. Rehabilitation
3. Ownership of expirations
4. Payment procedures
5. Indemnification
6. Contract amendments
7. Miscellaneous provisions

Front 133

T or F: Very few contracts set an indefinite term.

Back 133

FALSE. Many contracts set an indefinite term by allowing the insurer to terminate contract for any reason as long as the specified notice is given.

Front 134

T or F: Many agency contracts set a specific term, with automatic rollover/renewal, unless the agent violates the agreement.

Back 134

TRUE. This is also common.

Front 135

An agency contract should specify the types of agent ______ that would permit the insurer to cancel it.

Back 135

Violations

Front 136

The contract should prohibit terminations based on

Back 136

Volume or mix of business placed with the insurer.

That is, unless the insurer has clearly informed the agent of such requirements in writing sufficiently in advance of termination to allow the agency a reasonable chance of meeting the requirements. The contract should also preclude any such termination if failure to meet the requirements is caused by the insurer’s underwriting practices.

Front 137

The contract should allow termination based on

Back 137

Agency loss ratios, though only if the agency’s tendency to write consistently poor business is documented over a period of years.

Front 138

These two items should be excluded from loss ratio calculations, according to the book:

Back 138

- Shock losses (CAT storms)
- Uninsured motorist losses

Front 139

Industry practice requires that a party canceling an agency contract must give

Back 139

180 days’ written notice

This needs to include the specific reason(s) for the termination.

Front 140

Run-off provision

Back 140

An insurer contract provision allowing current customers’ policies to be renewed for a specified period after the termination of an agency’s contract.

Front 141

A mass nonrenewal (as the result of a termination) may cause confusion and hardship for the individual insureds. To allow for a smooth transition for the insured from the terminating insurer to the new insurer chosen by the agency, contracts include:

Back 141

A run-off provision

Front 142

Run-off provisions are being increasingly complicated by

Back 142

The growing number of state or other governmental restrictions on policy terminations.

Front 143

One possible solution to the complication of run-off provisions and governmental restrictions would be

Back 143

A provision continuing a limited agency contract only for policies affected by the regulation.

This provision would grant the agency control of the policy whether or not it is ultimately continued in force with the current insurer. Without such a provision, an insurer may intend to move a policy to another of its agents for servicing, in effect assuming ownership of the expiration.

Front 144

Rehabilitation clause

Back 144

Provides for a period during which the agency can work to avoid termination. The insurer agrees to make a good faith effort to determine with the agency exactly what the agency must do to retain the contract.

Front 145

Rehabilitation is based on the idea that

Back 145

Contract termination is always the least favorable resolution to an agency’s failure to fulfill an insurer’s requirements.

Front 146

In the case of agents who represent one insurer exclusively, this party typically owns the expirations.

Back 146

The insurer

Front 147

For independent agencies, ownership of policy expirations determines whether an agency is truly __________.

Back 147

Independent

Front 148

Long-term value of the agency

Back 148

The price at which it can be purchase or sold, or its value when passed on to heirs

Front 149

The long-term value of the agency is based on

Back 149

Control and ownership of the book of business.

Any restrictions or limitations on such control reduce the agency’s value.

Front 150

Ownership of a book of business by _______ is well established by court cases.

Back 150

Agencies; however, the specific wording in contracts often varies.

Front 151

Some contracts allow insurers to claim ownership from the agency if

Back 151

The contract is terminated for certain reasons

Front 152

Some insurers require ______________ of expirations

Back 152

Joint ownership

Front 153

Ideally, from the agency’s perspective, the contract should avoid limitations and should recognize:

Back 153

The independent agency’s clear and complete ownership of expirations under all circumstances.

Front 154

Agency bill

Back 154

A payment procedure in which a producer sends premium bills to the insured, collects the premium, and sends the premium to the insurer, less any applicable commission

a.k.a. statement billing

Front 155

Direct bill

Back 155

A payment procedure in which the insurer assumes all responsibility for sending premium bills to the insured, collecting the premium, and sending any commission payable on the premium collected to the producer.

Front 156

Agency billing is typically used for

Back 156

Large commercial accounts

Front 157

Agency billing also gives an agency these benefits:

Back 157

- Control of the funds
- Possible significant investment income on the premiums invested between the date collected and the date paid to the insurer

Front 158

Nearly all personal insurance is billed with this method

Back 158

Direct billing; also, a growing percentage of small and medium commercial business is direct billed.

Front 159

Indemnification section of an agency contract

Back 159

Should delineate when the insurer will indemnify or defend the agency or hold the agency harmless if the claim arises solely or partially through the insurer’s error.

Front 160

An agency should avoid any contract clause that bases insurer indemnification of an agency on a ___________ standard.

Back 160

Contributory negligence liability standard.

Front 161

Contributory negligence

Back 161

Means that an individual who contributes to his or her own injury should not recover damages for that injury. With contributory negligence, even if the agency is even 1 percent at fault, the insurer has no obligation to indemnify the agency for any of the claim.

Front 162

A fairer method than contributory negligence is this standard:

Back 162

Comparative negligence

Front 163

Comparative negligence standard

Back 163

Holds the agency responsible for its percentage of responsibility for the claim and holds the insurer responsible for the remainder.

Under this standard, fi the agency is found 1 percent at fault, the insurer will still indemnify and defend for the other 99 percent of the claim.

Front 164

________ of E&O claims is just as important as indemnification for them

Back 164

Defense

An agent should verify whether the contract requires the insurer to provide legal defense for the agent in an E&O claim. If not, the agent should make sure that E&O coverage is adequate for this purpose.

Front 165

Contract amendments section of an agency contract

Back 165

Because the agency’s ability to establish long-term plans is based on the stability of its contracts, the ease and frequency of amending the terms are vital.

Front 166

T or F: Many contracts allow the insurer to amend – with an average of 90 days advance notice – regardless of the agency’s consent.

Back 166

TRUE. However, this is not ideal for agents. An agency might seek out a revised provision allowing for amendment by mutual agreement to give the agency longer notice of changes. (180 days minimum advance notice should be requested.)

Front 167

Miscellaneous provisions section of an agency contract

Back 167

Contains provision relating to arbitration and to the procedures to follow upon sale of the agency

Front 168

Arbitration clause

Back 168

A clause in an agency contract that provides a formal method for the agency and insurer to resolve disagreements arising under the contract.

Front 169

Generally, the rules of this organization are followed in an arbitration situation.

Back 169

The American Arbitration Association, or AAA.

These rules include the selection by each party of an independent representative (called an arbitrator).

Front 170

T or F: The decision of the arbitrators is binding but not final.

Back 170

FALSE. The decision of the arbitrators is binding and final on both the agency and the insurer.

Front 171

When an agency is sold, the buyer may be basing a percentage of the agency’s value on the insurer’s extending its contract to the new owner. To address this, a contract may specify that:

Back 171

The insurer must be given reasonable notice of any impending sale, and if the insurer does not plan to appoint the new owner as an agent, the insurer will at least continue the contract for a specified time to allow the new owner to move the business to another insurer.

Front 172

If provided in a separate agreement, the provisions for changing the commission schedule follow the same guidelines as

Back 172

Those for the contracts themselves

Front 173

Requiring a minimum 12-month interval before a given commission rate can be changed gives the agency’s financial planning some

Back 173

Stability

Front 174

To keep premiums competitive, the commission rates for preferred types of policies may be ____ than for standard or specialty products.

Back 174

Lower

Front 175

T or F: Commission rates / schedules may be negotiable.

Back 175

TRUE. They might be. The agency should be certain to discuss with the insurer exactly what criteria will lead to a better commission schedule. Conversely, the agency should also learn what criteria or actions will lead the insurer to lower commission rates.

Front 176

Contingent commission agreement

Back 176

A contract provision in which an insurer agrees to make supplemental payments to producers based on profitability alone or on a combination of profitability, volume, and growth in the agency’s book of business placed with that insurer.

Front 177

Contingent commission bonuses can provide up to _________ of total agency revenues

Back 177

10 percent or more

Front 178

Factors to be considered by a producer negotiating a contingent commission agreement:

Back 178

- The qualifying volume requirement
- Lines of insurance included and excluded
- How the insurer calculates income
- How losses are defined
- Whether a stop-loss provision applies to exclude claims over a certain dollar amount
- How profit is to be calculated
- When profit sharing commission will be paid to the agency
- Whether the commission is subject to arbitration
- What happens if the agency contract is terminated

Front 179

______________ make it difficult for agencies to determine the best contingent commission agreement option.

Back 179

Changing market conditions

Front 180

Because of changing market conditions and other questions/factors, insurers and agents should regularly review contingent commission agreements in an ongoing effort to provide

Back 180

The optimal mix of reward and incentive intended

Front 181

For agencies that participate in contingent commission agreements, the IIABA, NAIC, and other industry governing bodies recommend

Back 181

Full disclosure of payment arrangements between insurers and producers and between producers and their customers.

Front 182

In forming an agency, the ________ selects the agency’s legal form of business organization

Back 182

Principal

Front 183

To help the agency reach its goals, a legal form should be selected that

Back 183

Matches the agency’s structure and daily operations AND best sutis both the business and its owners

Front 184

Three legal forms of business organization that apply here:

Back 184

- Sole proprietorships
- Partnerships
- Corporations

Front 185

Sole proprietorship

Back 185

A form of business in which one person owns the business assets and is personally liable for the business’s debts

Front 186

Advantages of sole proprietorships

Back 186

- All profits are included in the owner’s income and not taxed separately
- Limited capital requirements
- Require a minimum degree of legal formality to establish themselves as a new business
- Be his/her own boss

Front 187

Only requirements that must be met for operating an insurance agency as a sole proprietorship:

Back 187

- Obtaining a license issued by the state insurance regulatory authority
- Making a filing in compliance with fictitious trade name regulations if the sole proprietor’s name is not the name under which the agency is to be operated

Front 188

Disadvantages of sole proprietorships

Back 188

- If the owner dies or becomes seriously disabled, the enterprise is terminated by operation of law
- Unlimited personal liability for debts and judgments arising from the firm’s operation
- Difficulty in raising capital
- The uncertainty of future employment for the employees and producers who are associated with, but are not owners of, the firm
- The pressure of management responsibilities (payroll, paying creditors, satisfying customer needs)

Front 189

T or F: A firm cannot begin as a sole proprietorship and later change legal form.

Back 189

FALSE. Many firms begin as sole proprietorships and later change legal form to a partnership or corporation for the reasons discussed in the following sections.

Front 190

Partnership

Back 190

A for-profit business entity jointly owned by two or more persons who share ownership and profits (or losses), although not necessarily on an equal basis.

Front 191

Advantages of partnerships

Back 191

- Not taxed separately
- Relatively easy to establish (same filing and license requirements as a sole proprietorship)
- Minimum degree of legal formality
- Sharing of management responsibilities
- Easier to raise capital than sole proprietorship
- Limited liability if a limited partner

Front 192

In a partnership, every partner has a _________ relationship with the other partners and with the business.

Back 192

Fiduciary

Front 193

A partner’s fiduciary duties are implied in

Back 193

Law; no contract can waive them

Front 194

Disadvantages of partnerships

Back 194

- Limited duration depending on the partners’ health and life
- Unlimited personal liability of each partner – even for the acts of the other partner(s)

Front 195

By law, a partnership terminates on the death or, possibly, the disability of

Back 195

Any of the partners

However, a formal partnership agreement usually provides for the automatic creation of a new partnership consisting of the remaining partners on the death, disability, or retirement of a partner.

Front 196

Two types of partnership

Back 196

- General partnership
- Limited partnership

Front 197

General partnership

Back 197

All the owners are general partners with all the rights and obligations of a partner who operates the enterprise

Front 198

Limited partnership

Back 198

Includes at least one general partner and at least one limited partner, although there can be many partners in either category.

Front 199

Advantage of being a limited partner

Back 199

The maximum personal liability of each limited partner is the value of the capital invested by that partner. (However, federal income tax laws still treat the limited partnership as a partnership.)

Front 200

T or F: The limited partnership form of business enables a firm to raise capital from outside investors who are assured of limited personal liability as long as they are not active in the business.

Back 200

TRUE. It does allow for that.

Front 201

Three types of corporations

Back 201

- Corporations
- S corporations
- Limited liability companies

Front 202

Corporation

Back 202

An entity organized under law and entitled to the same rights as a person, distinct from its owners.

Front 203

State government activates a corporation by

Back 203

Issuing a charter to the incorporators

Front 204

Once chartered, a corporation becomes

Back 204

A legal entity in and of itself

Front 205

Stockholders

Back 205

Corporation owners

Front 206

A corporation is managed by

Back 206

A board of directors elected by the stockholders

Front 207

T or F: A corporation has a life beyond that of its owners and is unaffected by the owners’ disability or death.

Back 207

TRUE. A corporation has a life beyond that of its owners and is unaffected by the owners’ disability or death.

Front 208

Liability for corporations

Back 208

The corporation offers limited liability to all owners, similar to that afforded to limited partners, so that the maximum that corporation owners stand to lose is their investment.

Front 209

Most closely held corporations (those owned by only a few stockholders) have this kind of agreement

Back 209

A written buy and sell agreement giving surviving stockholders the right and obligation to acquire the stock of a departing stockholder

Front 210

Advantages of insurance agency corporation

Back 210

- Limited personal liability for owners for the corporation’s contracts and torts
- An unlimited corporate lifespan
- Separate legal entity status
- Stockholders can easily transfer their stock
- Easier to obtain capital than partnership
- May make it easier to obtain capital because corporations can issue shares

Front 211

Disadvantages of the corporation as a legal form are:

Back 211

- The additional work required to comply with each state’s general corporation law
- The costs required to file articles of incorporation with the appropriate entity of the state in which the corporation is domiciled
- The time and expense required to document the activities of the corporation
- Corporate earnings taxed separately

Front 212

S corporation

Back 212

A small business corporation restricted to no more than 100 stockholders that elects to be taxed under Subchapter S of the Internet Revenue Code.

Front 213

How liability works for a Subchapter S corporation

Back 213

Limited liability is provided to its owners

Front 214

How tax treatments works for an S corporation

Back 214

Tax treatment is similar to that of a partnership or sole proprietorship. Profits, losses, and other tax items are passed through to the shareholders and are taxable to them on their individual returns.

Front 215

Disadvantage of being an S corporation

Back 215

Complying with a government’s S corporation laws can be time consuming and expensive

Front 216

Limited liability company (LLC)

Back 216

A form of business entity that provides its owners the limited liability of a corporation and the tax advantages of a partnership

- Limits the liability of its owners or members
- Pays taxes only on its profits

Front 217

Three major features of an LLC

Back 217

- For federal and most state taxes, the LLC is treated as a partnership (with more tax flexibility than an S corporation)
- The personal assets of the members are shielded, as in a regular corporation, from the LLC’s liabilities and obligations
- LLCs have substantial flexibility in management arrangements and sharing of economic benefits among the members

Front 218

LLCs must have a minimum of ___ members

Back 218

Two

Front 219

The business structure of choice for closely held enterprises

Back 219

LLC

It is popular with service businesses, such as engineering, real estate, and investment firms, as well as insurance agencies

Front 220

A concern of LLCs

Back 220

The work and costs incurred to comply with a state’s LLC laws

Front 221

Choosing a legal form requires the advice of

Back 221

Legal and accounting experts

Front 222

Fictitious-name filings made with the state are published in

Back 222

A newspaper in the county in which the firm is located

Front 223

Issues that determine the legal form chosen by an insurance agency

Back 223

- Extent of personal liability the owners are comfortable with
- Continuity requirements of the business
- The owner’s desire to control the business
- Taxation
- The business’s overall goals

Front 224

Advantages of an LLC

Back 224

- Limited liability to owners
- Not taxed separately
- Flexibility in sharing economic benefits

Front 225

Operating affiliations help the agency attain its goals by:

Back 225

- Reaching additional customers and prospects
- Taking advantage of new marketing opportunities
- Realizing economies of scale

Front 226

Operating affiliations

Back 226

Organizations founded primarily to assist agencies in reaching production and financial goals. They contribute to the competitive stance of an agency by providing services to the agency or making competitive products available to it.

(The IIABA and PIA are not included.)

Front 227

Operating affiliation types:

Back 227

- Independent agency networks
- Insurance company affiliations
- Specialty marketing groups
- General purpose groups
- Common identity groups

Front 228

Independent agency network

Back 228

A group of agencies that contractually link to share services, resources, and insurers to gain advantages normally available only to large regional and national brokers

a.k.a., agent groups, agent clusters, agent alliances

Front 229

Recent interest in networking has been fostered by agencies’

Back 229

- Need for information technology systems
- An awareness of the special treatment insurers offer to large agencies

Front 230

Independent agency network members often share

Back 230

- Support services
- Physical space

Front 231

T or F: Network members share each agency’s book of business

Back 231

FALSE. Each member of the group, or cluster, retains ownership of the member’s individual book of business

Front 232

An independent agency network differs from a merger in these two ways:

Back 232

1. A separate entity, the network, is created (usually as a partnership or corporation) in which shares of stock are owned by network agencies
2. Ownership of policy expirations remains separately with the participating agencies

Front 233

Advantages of a networking arrangement:

Back 233

- Network members often receive special treatment from their insurers (because of volume)
- Network members have greater influence for negotiating agency-company contracts
- Insurers deal with one entity instead of several and realize economies and efficiencies in communication and work flow
- Can bring specialists together to form a new entity that can better serve customer needs
- For the entrepreneur who values independence, the network provides an alternative to merging or selling the agency
- Allows agents to delegate certain tasks and focus instead on selling
- Can provide economies in physical space, staffing, and insurer relations
- Can allow for effective pooling of advertising expenditures
- Can provide a trial period for agents who have reservations about whether a merger is appropriate for them

Front 234

Disadvantages of a networking arrangement:

Back 234

- Independent businessowners may have difficulty agreeing on agency management issues
- Network members must share financial information with one another; results in a loss of privacy
- Members lose direct personal control of agency cash flow
- Often requires hiring an operations manager, and some agents may have difficulty delegating the administration of the agency

Front 235

For agency owners who are used to taking decisive action, the process often

Back 235

Moves too slowly.

Forming a network requires patience and perseverance, attendance at many meetings, and a tolerance for members who may lose interest in the project.

Front 236

Five activities involved in determining whether or not to join an independent agency network:

Back 236

1. Develop a questionnaire
2. Inventory insurers
3. Decide whether to move
4. Appoint start-up committees
5. Decide on a structure for the board of directors

Front 237

Start-up committees might address these issues:

Back 237

- Resources
- Finance
- Management
- IT
- Personnel

Front 238

Many network arrangements employ this rule, regardless of agency size

Back 238

One agency, one vote

Front 239

Insurance company affiliations

Back 239

Formed by insurers for the purpose of marketing specialized products, such as group commercial or personal insurance.

Usually, these orgs are set up for mass marketing programs to industry trade groups, and the insurers create the sales opportunity by directly soliciting the group or by underwriting it for one of their agents (often called an originating agent), who agrees to permit the network to make the direct sales.

Front 240

Benefit to the producer of affiliating with an insurer’s marketing organization

Back 240

The producer gains access to an exclusive product of the insurer that is not available to other agents.

Front 241

Territorial exclusivity

Back 241

Often granted by the insurer to a producer in an insurance company affiliation; it’s a right that prevents other agents from accessing sales opportunities in that defined territory. The insurer provides leads to the agency.

Front 242

For many agents, the decision to affiliate with an insurance company is

Back 242

A defensive tactic taken to prevent their competitors from acquiring the affiliation.

Front 243

Specialty marketing groups

Back 243

The primary purpose of these entities is to generate mass sales for the affiliated producer by soliciting groups at a national or regional level and by providing leads to the affiliated agencies.

These groups are independently owned mass-marketing networks with programs underwritten by more than one insurer. They earn their revenue by receiving a commission from the insurer to cover profit and the costs of the marketing programs they operate.

Front 244

General purpose groups

Back 244

The purpose of these organizations is to provide the affiliated agencies with a diverse package of resources, including educational opportunities, preferential treatment for affiliated agencies from certain insurers, a forum in which to exchange information with other agencies, and management assistance.

Feature meetings of affiliated agencies in which marketing and management information is exchanged. An annual fee paid by each affiliated agency support’s the group’s activities.

Front 245

Common identity groups

Back 245

Established to give the participating firms national or international presence and resources. Primary emphasis is account servicing.

Participants are likely to be large agencies that require reliable affiliates for local service on interstate or international accounts. Costs of operation are paid by the participating firms via an annual service fee.

Front 246

In deciding on an affiliation, a producer should evaluate these factors:

Back 246

- Services provided
- Personnel
- Exclusivity
- Fees
- Contract
- Financial strength
- [Also, reputation]

Front 247

Selection of a service should be based more on

Back 247

Services that are currently being provided than on those that are promised for some time in the future

Front 248

A producer who is considering affiliation must check these:

Back 248

References given by those in the support organization to be certain not only that the people are reliable but also that they are experienced insurance professionals.

Front 249

Producers considering affiliations should determine and be comfortable with the organization’s _________ and __________.

Back 249

Financial strength, stability

The best way to determine this information is to talk to the top personnel about the organization’s business philosophy, financial performance over time, and current financial status.

Front 250

Insurance producers have a responsibility to obey the laws and ________ that govern their business activities.

Back 250

Regulations

Front 251

T or F: Regulation of insurance rests with the federal government rather than the states.

Back 251

FALSE. Regulation of insurance rests with the states rather than the federal government. This is largely the result of the McCarran-Ferguson Act (Public Law 15), a federal law passed in 1945.

Front 252

Federal laws apply to insurance only to the extent that

Back 252

State regulations do not apply

Front 253

No federal legislation enacted since ____ has attempted to specifically regulate the relationship between policyholders and privately owned insurers.

Back 253

1945

Front 254

Dodd-Frank Wall Street Reform and Consumer Protection Act

Back 254

Created the Federal Insurance Office within the Department of the Treasury. The office monitors the insurance industry for gaps in regulation and whether underserved communities have access to affordable insurance.

Requires states to participate in the national insurance producer database.

Front 255

Securities and Exchange Commission (SEC) exception

Back 255

Because of an exception in the securities laws, the SEC does not have regulatory authority over the sale of most life insurance. To sell these products legally, a producer must hold a federal securities license (because these products are considered ‘securities’ thanks to the Supreme Court) and abide by federal regulations. (P&C insurance does not have any investment features that would subject it to federal securities laws)

Front 256

Federal Emergency Management Agency (FEMA)

Back 256

Created to prepare the nation for all hazards that can potentially cause major loss of life and of property and to effectively manage federal response and recovery efforts after any national incident. In managing and administering the NFIP, FEMA sets the insurance rates, coverage limits, and eligibility requirements for flood insurance.

Front 257

Department of Transportation (DOT)

Back 257

DOT regulations affect insurance because they specify limits of insurance that commercial truckers must carry in different cargo and usage circumstances.

Front 258

The Motor Carrier Act of 1980

Back 258

Substantially increased the effect of DOT regulations on insurance sales. A producer who insures commercial vehicles must be aware of applicable DOT regulations and provide a trucker with all prescribed insurance.

Front 259

Fair Credit Reporting Act of 1970

Back 259

Enforced by the Federal Trade Commission; purpose is to protect consumers from the disclosure of inaccurate and arbitrary personal information held by consumer reporting agencies and to establish procedures for reporting and correcting credit record mistakes.

Front 260

The Fair Credit Reporting Act of 1970 requires insurers to

Back 260

Inform an insurance applicant in advance if it intends to order various consumer reports.

An applicant can challenge the information in the report. Also, because insurance agencies and brokerages submit insurance applications, the producer may be responsible for providing appropriate notice to the applicant that various consumer reports may be obtained as part of the application process.

Front 261

T or F: Some states have their own fair credit reporting acts with more stringent disclosure requirements than the federal law.

Back 261

TRUE. Producers must comply not only with federal law but also with state laws in such cases.

Front 262

Gramm-Leach-Bliley Act

Back 262

a.k.a. the Financial Services Modernization Act of 1999

Allows banks, insurance agencies, and brokerages to have ownership interest in one another, a right that did not exist previously in all states. Additionally, the act requires all financial institutions, including insurance agencies, to establish policies about how to collect and disclose nonpublic personal financial information about customers.

Promotes affiliation and diversification in the nation’s financial banks, insurers , and brokerage firms. Includes privacy requirements that protect consumers’ personal financial information held by financial institutions.

Front 263

Electronic Signatures in Global and National Commerce Act (ESIGN)

Back 263

From 2000

- Declares the validity of electronic signatures for interstate and international commerce (including insurance transactions)
- Prohibits denial of the legal effect of certain electronic documents and transactions signed with an electronic signature
- Clarifies the circumstances under which an electronic record satisfies any statute or regulation that mandates a record in writing

Front 264

USA Patriot Act

Back 264

2001

Requires financial institutions to establish anti-money-laundering programs; however, P&C and health insurers and insurance agents and brokers are exempt. The requirements DO apply to life insurers but not to life insurance agents.

Makes it harder for terrorists, other criminal entities, and individuals to engage in money-laundering activities

Front 265

Sarbanes-Oxley Act

Back 265

2002

Criminalizes many corporate acts, including accounting abuses, that were previously relegated to various regulatory authorities.

Tightens internal accounting controls and holds company executives responsible for financial misdeeds; designed to reduce conflicts of interest between external audit firms and the companies they audit; designed to increase the independence of board members.

Front 266

CAN-SPAM Act

Back 266

2003

Commercial email messages, unless exempt, should include a notice that the message is an advertisement or solicitation, and provide an opt-out option.

Insurance producers who have already established business with current customers and are electronically corresponding regarding insurance transactions or the general insurance relationship are exempt from the act.

Front 267

Telemarketing and Consumer Fraud and Abuse Prevention Act

Back 267

1994

Prohibits repeated calls or prolonged conversation by telemarketers; limits calls to between 8 am and 9 pm daily; requires telemarketers to reveal their identities and the purpose of the call

Front 268

Do Not Call Implementation Act

Back 268

2003

Authorized the FTC to implement and enforce the do-not-call provisions of the Telemarketing Sales Rule and to impose fees on telemarketer violations to pay for the national do-not-call registry.

Front 269

In the book, state regulating agencies are referred to as

Back 269

Insurance departments

Front 270

The individuals who head insurance departments

Back 270

Commissioners

Front 271

Five areas of state regulation that directly affect producers:

Back 271

- Licensing laws
- Unfair trade practices acts
- Unfair claims settlement practices acts
- Regulations governing the handling of premiums
- Regulations governing dealing with suitable insurers

Front 272

Producers who operate without a license are subject to these types of penalties:

Back 272

- Civil
- Criminal (possibly)

Front 273

The majority of states have adopted this act to address licensing.

Back 273

The NAIC’s Producer Licensing Model Act

In doing so, they have replaced the license classifications of agent and broker with the single license classification of “producer”

Front 274

T or F: Most states require separate licenses for insurance agencies that operate as corporations, partnerships, or other legal entities.

Back 274

TRUE. Most states DO require separate licenses for insurance agencies that operate as corporations, partnerships, or other legal entities.

Front 275

Most jurisdictions require a license in order to conduct the following “transactional” activities:

Back 275

- Solicit applications for insurance
- Negotiate before a contract of insurance is executed
- Execute a contract of insurance
- Transact any insurance matters subsequent to executing the original contract

Front 276

States that have implemented the NAIC’s Producer Licensing Model Act have standards for:

Back 276

- Who should be licensed
- License classifications
- Lines of authority
- License applications

Front 277

Licenses generally have a term of

Back 277

1 or 2 years

They are usually renewed with payment of a fee

Front 278

In 1978, the NAIC adopted a model regulation establishing requirements for this:

Back 278

Continuing education; however, states requiring continuing education set their own standards

Front 279

Countersignature laws

Back 279

Laws that require all policies covering subjects of insurance within a state to be signed by a resident producer licensed in that state.

All but a few states have eliminated these laws.

Front 280

Provisions of countersignature laws may require that the resident producer be paid

Back 280

Some fraction (usually 25 to 50 percent) of the total commission.

Front 281

Countersignature laws are being eliminated because

Back 281

- Some regulators believe they are archaic and unnecessary
- Some courts believe them to be unconstitutional restrictions on interstate commerce

Front 282

Every agency and brokerage should have a current copy of

Back 282

The state insurance code (or know where to find it on the Internet).

This code is an important reference tool for determining acceptable actions and agency procedures.

Front 283

Unfair trade practices

Back 283

Methods of competition or advertising or procedures that tend to deprive the public of information necessary to make informed insurance decisions.

Front 284

Individuals engaging in any unfair trade practices may be subject to:

Back 284

- Cease and desist orders
- Loss of licenses
- Heavy fines

Front 285

Unfair trade practices common to the NAIC Model Act (which has been adopted in some form by all states):

Back 285

- Misrepresentation and/or False Advertising
- Defamation
- Boycott, Coercion, or Intimidation
- Twisting
- Rebating

Front 286

Misrepresentation and/or False Advertising

Back 286

An insurer’s written or oral statement that does not accurately describe an insurance policy’s coverage or benefits

Front 287

Defamation

Back 287

A false, malicious, or abusive written or oral communication that harms another’s reputation or character

Front 288

Boycott, Coercion, or Intimidation

Back 288

The act of compelling an insurance consumer to purchase from a particular producer or insurer

Front 289

Twisting

Back 289

The unethical act of persuading a policyholder to cancel or replace a policy solely to sell another policy, without regard to possible negative consequences to the policyholder

Front 290

Rebating

Back 290

The act of providing the buyer of an insurance policy a portion of the amount of the policy premium he or she paid (or the producers’ commission) or anything of significant tangible value in return for purchasing the policy (permitted in some states, such as California and Florida under certain conditions)

Front 291

Purpose of Unfair Claims Settlement Practices Acts

Back 291

To protect insureds and claimants during the claim filing, investigation, and settlement process

Front 292

Most unfair claims practices regulations set specific _______________ for communicating with claimants and policyholders.

Back 292

Time frames.

These time frames are binding on producers as well as on insurers. Improperly handling claims can expose the agency to regulatory penalties as well as to errors and omissions claims.

Front 293

Common unfair claims settlement practices (11):

Back 293

- Knowingly misrepresenting policy provisions to a claimant or insured at the time of the claim
- Failing to promptly acknowledge pertinent communications about a claim
- Failing to adopt and use reasonable standards for settling claims
- Attempting to settle claims late and/or unfairly when the insurer’s liability has become reasonably clear
- Failing to affirm or deny coverage of a claim within a reasonable period after receiving a proof of loss statement
- Attempting to settle a claim for less than could be reasonably expected, according to public advertising material
- Failing to offer a reasonable and accurate explanation for denying a claim
- Compelling policyholders to file suit to recover amounts due them by offering them substantially less than the amounts that could be recovered by litigation
- Refusing to pay claims while conducting a reasonable investigation based on all available information
- Engaging in activities that result in a disproportionate number of complaints against the insurer received by the state insurance departments
- Failing to provide necessary claim forms promptly, including explanations about how to use the forms effectively

Front 294

In many states, if the producer collects insurance premiums, the premiums must be

Back 294

Kept in a separate trust account and must not be commingled with other personal or business funds.

Failure to comply with this requirement can subject the producer to civil and criminal penalties, including fines, loss of license, and imprisonment.

Front 295

Suitable insurer regulations

Back 295

Prohibit producers form writing insurance with insurers not licensed or admitted to do business in the state (unless the producers have special licenses to do so, or unless they broker the insurance through an individual or entity that is licensed).

Front 296

T or F: Any action of inaction on the producer’s part that impairs the insurer’s ability to handle a claim may cause an E&O loss for the agency or brokerage.

Back 296

TRUE. Any action of inaction on the producer’s part that impairs the insurer’s ability to handle a claim may cause an E&O loss for the agency or brokerage.

Front 297

T or F: In some states, producers placing business with approved, or “admitted”, insurers or with authorized unapproved, or “nonadmitted”, insurers are relieved of legal liability to their customers if the insurer subsequently becomes insolvent.

Back 297

TRUE. This regulation is based on the premise that the insurance department is responsible for determining the financial stability of the insurer before allowing it to do business in the state.

However, if a producer places business with an unauthorized insurer, the insurer’s insolvency could prompt an E&O claim against the producer. Producers should be aware of their states’ regulations about admitted and nonadmitted insurers.

Front 298

Due diligence

Back 298

The diligence an individual can reasonably expect to exercise in discharging a duty or an obligation; also, the diligence that, in turn, can reasonably be expected from that individual.

Front 299

A producer’s responsibility in using due diligence includes:

Back 299

- Determining the insurer’s legal status
- Analyzing the insurer’s financial ability to provide the purchased coverage
- Evaluating the insurer’s suitability for the customer and the customer’s loss exposures

Front 300

Management

Back 300

The set of functions, including planning, organizing, leading, and controlling resources that enable organizations to achieve their goals efficiently and effectively.

Front 301

Four functions of management:

Back 301

- Planning
- Organizing
- Leading
- Controlling

Front 302

Planning

Back 302

Identifying and selecting organizational goals and the means to best achieve those goals

Front 303

Organizing

Back 303

Establishing task and authority relationships that allow people to work together to achieve organizational goals

Front 304

Leading

Back 304

Motivating, coordinating, and energizing individuals and groups to work together to achieve organizational goals

Front 305

Controlling

Back 305

Establishing accurate measuring and monitoring systems to evaluate how well the organization is achieving its goals

Front 306

Careful planning can help you

Back 306

- Reduce costs
- Increase profits
- Allocate resources
- Achieve desired results (goals)

Front 307

____________ provides a means for the organization to progress from where it is to where it wants to be.

Back 307

Planning

Front 308

Plans

Back 308

Written records documenting the organization’s mission, goals, strategies, objectives, budgets, policies, and procedures.

Front 309

Purpose of a plan

Back 309

To minimize the degree to which an organization is surprised by unforeseen, costly events.

Front 310

T or F: Plans developed solely by senior management tend to be the most effective.

Back 310

FALSE. Plans that are developed by involving the entire organization are generally more effective than plans that are developed solely by senior management.

Front 311

An effective and efficient plan must have these four characteristics:

Back 311

- Unity
- Continuity
- Accuracy
- Flexibility

Front 312

The ‘unity’ characteristic

Back 312

Only one centralized guiding plan should be put into operation at a time to achieve the organization’s mission and goals.

Front 313

The ‘continuity’ characteristic

Back 313

Previous/existing plans should be continually modified so that they fit into a single organizational framework.

Front 314

The ‘accuracy’ characteristic:

Back 314

Managers should gather and use all available relevant information in the planning process, recognizing that inaccuracy can result from incompleteness.

Front 315

The ‘flexibility’ characteristic:

Back 315

Managers should be able to modify the plan when changes are necessary.

Front 316

Large organizations have these three major types of plans for different organizational levels:

Back 316

- Corporate plan
- Business (divisional) plans
- Functional plans

Front 317

Corporate plan

Back 317

A plan that contains senior management’s decisions relating to the organization’s goals

Front 318

Corporate plans tend to be strategic, meaning that they

Back 318

Set the overall course and direction for the organization

Front 319

Business plan (divisional plan)

Back 319

A plan that contains divisional managers’ decisions about the division’s goals and how the division will support the organization’s corporate goals.

Front 320

Functional plan

Back 320

A plan that contains managers’ decisions about the functional unit’s goals and how the functional unit will support the division’s and the organization’s corporate goals.

Front 321

Strategic goals

Back 321

Goals that are long-term, usually taking two to four years to accomplish

Front 322

Corporate mission

Back 322

A broad, concise statement of the primary corporate purpose, products, services, and markets; designed to be long-standing

Front 323

The mission, goals, and strategy expressed in a corporate plan can often provide a preliminary indication of

Back 323

The markets in which an organization intends to compete

Front 324

______________ plans reflect the strengths, weaknesses, opportunities, and threats present in the business-level environment.

Back 324

Business (divisional)

Front 325

Function (group)

Back 325

A specialized group in which individuals have similar skills or use the same resources to accomplish tasks

(e.g., marketing accounting, manufacturing, R&D)

Front 326

A goal to increase cash flow from operations by 15 percent would be a

Back 326

Business plan goal

It would support a corporate goal, such as to attain an earnings growth of 10 percent

Front 327

Seven steps in the planning process

Back 327

1. Develop a mission statement
2. Develop goals
3. Develop strategies
4. Develop objectives
5. Develop budgets
6. Establish policies and procedures
7. Monitor the plan

Front 328

The mission statement should be:

Back 328

- Broadly stated
- Needs-based (focused on the desire to meet the needs of current and potential customers)

Front 329

Sometimes organizations develop a vision statement to accompany the mission statement. A vision statement is intended to be

Back 329

An inspiring and positive description of what the organization aspires to.

It usually includes the values that guide the organization.

Front 330

Goals

Back 330

The final desired results for the planning period, whether strategic (long-term) or short term.

Front 331

“Our agency will generate $1 million in new commission income within the next three years” is an example of a

Back 331

Strategic goal

Front 332

“Our agency will decrease the amount of outstanding accounts receivable by 50 percent within the next six months” is an example of a

Back 332

Short-term goal

Front 333

To be effective, each goal or objective should possess five characteristics:

Back 333

(SMART)

- Specific
- Measurable
- Achievable
- Relevant
- Time bound

Front 334

Measurable

Back 334

Means that at the end of the period the goal can be said either to have or to have not been accomplished.

Front 335

_______________ helps to determine whether goals are achievable

Back 335

Forecasting

Front 336

Variables that might be forecasted:

Back 336

- Market size
- Growth trends
- Expenses
- Customers’ demographic characteristics
- Nature of the competition
- Economic conditions
- Regulatory practices
- and more

Front 337

Forecasts can help an agency set realistic

Back 337

Production goals

Front 338

__________ forecasts are easier to develop than _______ forecasts.

Back 338

Internal forecasts are easier to develop than external forecasts

Front 339

Effective goals have fixed _______

Back 339

Deadlines

Front 340

Strategies

Back 340

Are a series of decisions that form the foundation of organizational planning.

They should be shared throughout an organization to gain feedback and to coordinate activities. They indicate how organization plan to accomplish their missions and achieve their goals.

Front 341

Like plans, strategies can be:

Back 341

Corporate, business, or functional

Front 342

Objectives

Back 342

Milestones or intermediate steps required to achieve goals.

Front 343

Objectives always support a

Back 343

Goal.

Typically, each goal has multiple objectives. Goals and objectives share the same SMART characteristics.

Front 344

Budget

Back 344

A written estimate of operating revenues and expenses for a future period.

Front 345

A budget must

Back 345

- Be written and realistic
- Include senior management’s vision
- Include line managers’ expertise

Front 346

Two types of budgets

Back 346

- Operational budgets
- Capital budgets

Front 347

Three types of operational budgets

Back 347

- Sales budgets
- Expense budgets
- Cash budgets

These are also all short-term budgets

Front 348

Long-term budget

Back 348

Figures for 1 to 3 years

Front 349

Short-term budget

Back 349

Figures up to 1 year

Front 350

Budgeting should be more detailed in the

Back 350

Short-term

Front 351

Capital budgets

Back 351

Require a longer planning horizon than the one-year operating budgets.

Front 352

When planning for growth, an agency should forecast sales for the next

Back 352

3 years

Front 353

Expense budget

Back 353

Every major expense category should be itemized in this short-term budget; it should project when expenses will be incurred and paid.

Front 354

Cash budget

Back 354

Helps the organization determine whether it will have enough cash or liquid assets on hand to meet its financial requirements in any situation at any given time.

Front 355

Cash budget is based on this simple concept:

Back 355

Cash available minus the cash needed equals the cash balance.

Front 356

Cash available

Back 356

Determined by starting with the balance in last month’s bank account and adding to this balance the cash receipts from previous months’ bills to be collected. Also added are any liquidated investments, expected contingent commissions, or any other item that would produce cash.

Front 357

Capital budgeting

Back 357

The process of planning expenditures on assets whose returns are expected to extend beyond one year. (Office renovations, the purchase of furnishings, etc. Also includes the long-term investment of excess cash.)

Front 358

Policies

Back 358

Guidelines for making decisions and performing activities

Front 359

Procedure

Back 359

An established series of steps or instructions for performing normal and recurring activities

Can help the agency monitor and control both time and money. Usually established at the functional level.

Front 360

Procedures clearly describe:

Back 360

- What needs to be done
- In what order
- Within what time frame (if applicable)

Front 361

Management by exception

Back 361

A management concept wherein management monitors plans and may respond to results that differ from standards and/or parameters defined by the organization’s goals and objectives.

Front 362

Activities that enable people to work together effectively to achieve the organization’s goals and objectives:

Back 362

- Establishing the organizational structure, including defining relationships and designating who has authority and responsibility for various activities
- Creating a position description for each position in the organizational structure
- Establishing job qualifications for the person who fills each position
- Hiring the right number of people with the skills necessary to achieve the organization’s goals and objectives

Front 363

One of the most common organizational problems is

Back 363

The failure to clarify organizational relationships

People need to know who is responsible for what and how authority and responsibility are delineated.

Front 364

Three basic forms of organizational structure are based on delegated authority and responsibilities:

Back 364

- Line
- Functional
- Line and staff

Front 365

Line organization

Back 365

An organization that has a vertical structure in which authority flows from the top of the structure to the bottom and responsibility for delegated tasks flows in reverse.

The type of structure likely to be adopted by a small insurance agency.

Front 366

Delegating internal activities works only if delegation is

Back 366

Complete; must give sufficient authority

Front 367

Advantage of a line organization

Back 367

Simplicity

Front 368

Disadvantage of line organizations

Back 368

They are based on the presumption that the firm’s owners are competent in all phases of the business. An owner who is inexperienced or untrained in certain areas may overlook or ignore those areas to the detriment of the organization’s profitability.

Front 369

Perhaps the greatest disadvantage of a line organization

Back 369

The possibility that the owner will be unable or unwilling to stop being involved in activities that are better performed by others.

Front 370

Functional organization

Back 370

An organization in which the owner retains line authority but can staff each function with an expert in each respective area.

A functional organization can capitalize on the strengths of the line organization structure while minimizing some of its weaknesses.

Front 371

Greatest advantage of functional organizations

Back 371

They are built around experts in each field.

Front 372

The effectiveness of a functional organization depends on

Back 372

The behavior of the participants.

If good communication and negotiations occur among the functions, functional expertise within the organization can improve productivity.

Front 373

A disadvantage of the functional organizational structure

Back 373

Authority is divided, and this may create problems if an employee must report to more than one person.

Front 374

Line and staff organization

Back 374

An organization that combines certain features of the line organization (which develops employees’ general skills) and of the functional organization (which develops experts in specific fields).

Front 375

The most common structure used in mid-size and large insurance agencies

Back 375

Line and staff organization

Front 376

This structure tends to employ individuals with general skills who can contribute in many different areas

Back 376

Line organization (i.e., simple line organization)

Front 377

In a line and staff organization, each employee reports to __________ because authority and responsibility are fixed.

Back 377

Only one person

Front 378

A line and staff organization can improve these areas, for example:

Back 378

- Accountability
- Coordination
- Training

Front 379

A few disadvantages of the line and staff organizational structure:

Back 379

- Staff people may attempt to assume line authority because they want to see their ideas implemented
- Ideas that improve effectiveness and efficiency may sometimes not be implemented
- May not be possible for small organizations because they have an insufficient number of employees

Front 380

Position descriptions

Back 380

Written summaries of particular jobs in an organization

Each box in an org chart should have one

Front 381

A position description includes

Back 381

- Position in the organization
- Overall responsibilities
- Specific responsibilities
- Nature and scope

Front 382

Specific responsibilities

Back 382

Job responsibilities that form the basis on which their success or failure on the job will be measured

Front 383

Nature and scope section

Back 383

Shows how the position fits within the department associated with it.

Front 384

Those who create and review position descriptions must be aware of the legal implications of this act:

Back 384

The Americans with Disabilities Act (1990)

Front 385

Position qualifications

Back 385

Specify the requirements necessary to perform the responsibilities of the position. Should be written for an ideal candidate.

Front 386

An organization is adequately staffed when it has

Back 386

A sufficient number of employees with the appropriate skills to achieve organizational goals and objectives

Front 387

Adequate staffing is important to an organization because

Back 387

Its ability to meet short-term and long-term goals and objectives is largely based on having the right people in place at the right time to implement plans.

Front 388

Staffing is important for these additional reasons:

Back 388

- Preparing for growth
- Adapting to change
- Sustaining employee morale

Front 389

Organizations conduct several activities to maintain adequate staffing, including these:

Back 389

- Completing staffing projections
- Prospecting for employees
- Evaluating candidates
- Doing the activities above on an ongoing basis (not just when a need arises)

Front 390

Benefits of prospecting for employees in anticipation of future needs (instead of waiting until a new employee is needed):

Back 390

- It increases the odds of selecting the right person (by developing a pool of potential candidates)
- It saves administrative time, effort, and expense when a position becomes available
- It helps the organization achieve a competitive edge in the face of a shrinking labor supply

Front 391

The best way to identify potential employment prospects:

Back 391

Referrals from existing staff and other business sources

Front 392

Two advantages of referrals:

Back 392

- Finding people to interview is inexpensive
- Some pre-screening has most likely already been done by the individual making the referral

Front 393

Advantage of using reputable employment agencies to identify potential employment prospects:

Back 393

Effectiveness in screening

Front 394

Disadvantage of using reputable employment agencies to identify potential employment prospects:

Back 394

They charge a fee, which increases the total recruitment expense

Front 395

Blind ad

Back 395

An ad that asks prospects to send a resume to a post office box or a generic email address and does not list the employer’s name.

Only prospects with the required knowledge, skills, experience, and traits need to be contacted, and this approach prevents unqualified prospects from contacting the organization.

Front 396

The candidate evaluation process consists of these seven tasks:

Back 396

1. Contacting candidates
2. Reviewing the job application
3. Interviewing candidates
4. Testing candidates
5. Checking references
6. Verifying candidates’ experience and education
7. Offering employment

Front 397

This is the primary device for evaluating the candidate, and it frequently forms the basis for the manager’s questions during the in-depth interview.

Back 397

The candidate’s job application

Front 398

A good job application form that complies with federal regulations can help overcome the problems associated with

Back 398

Discrimination in hiring

Front 399

The process of interviewing candidates is significantly affected by

Back 399

Civil rights legislation, which governs the questions employers can ask job candidates.

This legislation puts the burden on the employer to ensure that the application and the interview/selection are not discriminatory on the basis of race, creed, sex, nationality, color, age, disability, or marital status.

Front 400

Americans with Disabilities Act

Back 400

1990.

Federal law that prohibits discrimination in all employment practices against qualified individuals with disabilities in organizations with 15 or more employees.

Requires employers to base employment decisions on the ability of the individual to perform the essential job functions, with or without reasonable accommodations.

Front 401

Reasonable accommodations (ADA)

Back 401

Any modifications to the work facility, the application process, the job, or the manner in which the job is performed that do not place undue hardship on the employer.

Front 402

Examples of questions that CANNOT be asked before an offer of employment has been made to a candidate:

Back 402

- Do you have any disabilities that would affect your job performance?
- How many days did you miss from work last year because of illness?
- Have you ever submitted a workers’ compensation claim?
- Have you had any major illnesses in the last five years?

Front 403

T or F: You can ask a job candidate to show how they would accomplish specific job tasks.

Back 403

TRUE. You CAN do that.

Front 404

Personal interview formats can vary from _______ to ____________.

Back 404

Formal (structured) to informal (nonstructured), depending on management’s preferences and the interviewer’s skill

Front 405

Formal interviews are designed to

Back 405

Overcome the problems many managers have in asking the right questions and correctly interpreting the answers.

Front 406

Critical views of formal interviews make this case:

Back 406

They are inflexible; standard questions do not elicit enough information

Also, recording answers can create anxiety for the candidate

Front 407

Informal, nonstructured interviews encourage applicants to

Back 407

Talk freely

Front 408

A major problem with the nonstructured interview

Back 408

It requires much more interpretive skill on the part of the interviewer to determine which information presented is relevant to the position.

Front 409

Many organizations use a format that falls between formal and informal interviews, which uses:

Back 409

Predetermined guidelines and questions that allow the interviewer a degree of flexibility.

Front 410

This type of question elicits specific answers.

Back 410

Close-ended

Front 411

To observe applicants in a relaxed setting, an employer might conduct an interview in a

Back 411

Social situation, such as at a restaurant

Might be especially useful for interviewing salespeople (since they are often required to entertain)

Front 412

Types of tests that can be used to evaluate candidates:

Back 412

- Personality or interest tests
- Aptitude tests
- Knowledge tests
- Intelligence tests

Front 413

Purpose of personality or interest tests

Back 413

Reflect positive or negative aspects of the candidate’s personality as they relate to the specific job and other employees in the organization

Front 414

Purpose of aptitude tests

Back 414

Measure the candidate’s inherent ability for selling, detail work, or other essential job functions

Front 415

Purpose of knowledge tests

Back 415

Determine how much an applicant knows about the technical aspects of the job

Front 416

Purpose of intelligence tests

Back 416

Measure a candidate’s innate intelligence

Front 417

Psychological tests are often used in these situations

Back 417

Often used in the selection process for sales-related and management roles.

Front 418

The Office of Federal Contract Compliance stipulates that tests should be

Back 418

Professionally developed and validated if they are to be used in the employment selection process.

Front 419

Purpose of testing

Back 419

To identify certain traits and qualifications that cannot be adequately measured by other selection tools.

They can lend objectivity to the evaluation process. They can also help offset the high costs of hiring and training by increasing the chances of selecting people who will be effective and satisfied in the jobs they are hired to perform.

Front 420

T or F: Relatives and friends are generally good options for objective references.

Back 420

FALSE. Relatives and friends are generally NOT OBJECTIVE references.

Front 421

Unless managers are ____________, employees will not be as effective as they could be.

Back 421

Effective leaders

Front 422

Major aspects of leadership that are most important in an insurance agency environment:

Back 422

- Motivating
- Delegating
- Managing conflict

Front 423

Motivating

Back 423

The psychological process that generates and sustains an individual’s desire to achieve

Front 424

The root of motivation

Back 424

Need

A desire to satisfy a need motivates action.

Front 425

Need

Back 425

Both what a person must have and what a person wants.

Includes physical needs (food and shelter), security needs (physical safety & economic wellbeing), social needs (status, belonging), and self-expression needs (for personal accomplishment & the opportunity to grow)

Front 426

An individual’s degree of need determines:

Back 426

- The strength of the desire
- The level of motivation
- The resultant action

Front 427

Maslow’s Hierarchy of Needs

Back 427

Often represented as a pyramid

The bottom of the pyramid represents basic needs, and the top represents self-actualization needs. The lowest level of unmet needs on the pyramid is the prime human motivator. (Only one level of needs is primarily motivational at a time.)

Front 428

Maslow’s hierarchy includes these types of needs:

Back 428

(top to bottom – I think)

- Self-actualization
- Esteem
- Belongingness
- Safety
- Basic

Front 429

Some of the more common needs in an agency setting:

Back 429

- Money
- Security
- Recognition
- Work importance and responsibility
- Status
- Advancement
- Goals
- Incentives

Front 430

Wages should adequately reflect

Back 430

The difficulty and market value of a job

Front 431

These are essentials to satisfying the need for security

Back 431

- Consistent, stable leadership
- Keeping employees informed of the agency’s financial status

Front 432

Examples of things that can provide status

Back 432

- Fringe benefits
- Physical surroundings
- Feedback
- An assigned office
- Cubicle
- Parking space
- A certain title
- A certain territory of operations
- Respect
- Esteem of co-workers

Front 433

For a goal to be effective, the length of time between the goal-setting and the probable completion of the goal should be

Back 433

Short enough for the individual to be able to visualize the result.

Front 434

Two types of incentives

Back 434

Monetary and non-monetary

Front 435

Some managers find that quarterly bonuses provide better results than one-year-end payment because

Back 435

Frequent reinforcement is more effective as a motivator than long-term reinforcement

Front 436

Nonmonetary incentives:

Back 436

- Benefits
- Ownership
- Fringe benefits
- Time off

Front 437

ESOP

Back 437

Employee stock ownership plan (a type of nonmonetary benefit, and a type of ownership)

Front 438

Fringe benefit

Back 438

“perks” – everything but salary. Typical fringe benefits in insurance agencies include auto allowance (or a company car), expense accounts, and professional organization memberships.

Front 439

____________ must also participate in creating a favorable work environment.

Back 439

Employees

Front 440

Popular incentives that some organization snow offer focus on these two areas:

Back 440

- Child care
- Elder care

Front 441

Delegating

Back 441

The art of getting work done through other people by giving them responsibility and authority to do the work

Front 442

One of the most difficult activities for many managers to handle effectively

Back 442

Delegating

Front 443

A critical error managers often make

Back 443

Doing only half of what is required for effective delegation: freely distributing responsibility for the work but retaining the authority to do the work.

Employees cannot be given the manager’s work without the authority to accomplish that work. Effective delegation means transferring the work and the authority as well.

Front 444

Key to effective delegation

Back 444

Lead by communicating clearly and concisely when delegating a task.

A manager must:
- State expected results
- Clearly define the scope of the authority and responsibility
- Facilitate the flow of information

Front 445

The _______ of command must be clearly understood.

Back 445

Chain

Chain of command: employees must know who is delegating what work to them and to whom to refer matters that exceed their authority.

Front 446

A manager should be _________ when dealing with differences that arise between employees

Back 446

Objective and impartial

Front 447

Managers can use ____________ to resolve many conflicts

Back 447

Negotiation

Front 448

Negotiation

Back 448

Involves discussing the issue in conflict and considering alternatives with the aim of reaching a mutual agreement.

Front 449

Integrative bargaining

Back 449

A form of cooperative negotiation in which the parties in conflict work together to understand their relationship, their interests, their respective perceptions, and their attitudes in order to achieve a mutually satisfactory resolution.

Front 450

Distributive negotiation

Back 450

Adversarial negotiation in which the parties compete for resources while conceding little to the negotiation process

Front 451

Five strategies for manager to use as needed in their organizations to manage conflict, facilitate integrative bargaining, and avoid the negativity of distributive negotiation:

Back 451

- Emphasize superordinate goals
- Focus on the problem, not the people
- Focus on interests, not demands
- Create new options for joint gain
- Focus on what is fair

Front 452

Superordinate goals

Back 452

Goals that both managers and employees can agree to in order to achieve a greater organizational purpose, regardless of the sources of conflict

Front 453

Although managing conflict is important, ___________ is equally important to enable the organization to reach its goals and objectives.

Back 453

Controlling an organization

Front 454

Controlling

Back 454

The function by which managers establish accurate measuring and monitoring systems to evaluate how well the organization has achieved its goals and objectives.

It includes the employee performance evaluation process.

Front 455

____________ is essential to good management.

Back 455

Control.

Control is used to influence employee behavior and is the vital follow-up to planning, organizing, and leading because it monitors the results of those functions.

Front 456

Organizations use control to:

Back 456

- Respond to events after they have occurred
- Keep staff motivated and focused on organizational goals

Front 457

The control process (four steps):

Back 457

1. Establishing performance standards against which performance is to be evaluated
2. Measuring results
3. Comparing results against chosen performance standards
4. Evaluating the results and implementing corrective action if the performance standards are not being met

Front 458

Standards usually involve:

Back 458

- Employee performance results (individually and as a group)
- Financial results
- Sales results

Front 459

Control reports

Back 459

Meant to present a comparison of performance against an established standard and to reveal improvement or decline. They should contain only key comparisons.

Front 460

Managers can evaluate organizational and individual employee results in two areas:

Back 460

(1) Outputs (e.g., a manager could measure the number of new business policies sold)
(2) Activities (e.g., the number of prospects visited)

Front 461

Questions that might be asked to evaluate performance standards:

Back 461

- Were the standards set so high that they were unattainable?
- Were the standards set so low that they were accomplished too easily?
- Did external changes (such as a major competitor’s move into the geographic area) affect the employees’ and the organizations’ ability to achieve performance standards?

Front 462

Anyone who manages or supervises employees is responsible for providing them with

Back 462

An evaluation of their performance

Front 463

Whether it shows success or a need for improvement, an evaluation must be

Back 463

Objective and accurate

Front 464

The goal-setting process should be ______.

Back 464

Collaborative. The manager and employee working together to establish goals.

Front 465

Goals for individual employees should be based on

Back 465

The organization’s overall goals and objectives.

These goals should also support established strategy.

Front 466

Factors considered in performance evaluation

Back 466

- Whether goals have been met
- Whether skill levels in areas such as written and oral communication are strong

Front 467

Formal performance appraisals should occur at least this often

Back 467

Annually

Front 468

Feedback may be based solely on the manager’s appraisal or may include input from

Back 468

Co-workers or subordinates within the same department; or, customers or insurers outside of the organization or from co-workers in other departments within the organization who frequently interact with the employee.

Front 469

Insurance agencies are primarily this type of organization

Back 469

Sales organization

Front 470

Sales management

Back 470

The planning, leading, organizing and controlling of sales efforts to achieve the agency’s strategic goals

Front 471

Agency sales manager

Back 471

Coordinates selling with other elements of total marketing programs; is responsible for the general sales force administration, setting year-to-year sales and marketing goals, planning programs to achieve those goals, and evaluating results

Front 472

Dedicating at least one employee to the agency sales manager position helps fulfill the two purposes of agency sales management:

Back 472

- To maximize the agency’s production efforts
- To promote effectiveness and efficiency when selling insurance products and providing service to insureds

Front 473

Primary purpose of agency sales management

Back 473

To maximize production efforts

Front 474

You probably don’t want to appoint your best producer to be the agency sales manager while continuing to act as a producer, because that will create

Back 474

Dual-role inefficiencies

The result is often a decrease in production; you lose the experienced producer and create dissatisfaction among the other producers because they now have an inexperienced manager

Front 475

The best solution when looking at creating an agency sales manager position

Back 475

Hiring a full-time agency sales manager who has management training and who is given no production responsibilities.

Front 476

Another option for an agency that does not have the resources or prefers not to hire an agency sales manager with no production responsibility is to

Back 476

Develop IT solutions to assist with sales management

Front 477

Agency sales management must be efficient because

Back 477

The cost of sales force management is typically the largest single insurance agency operating expense.

Front 478

Efficient sales management helps reduce or eliminate wasted time and expense resulting from

Back 478

- The duplication of effort
- Inadequate staffing or training
- Misdirected resources

Front 479

Typical features of IT systems that provide more effective and efficient sales management for an agency are:

Back 479

- Client information and customer service applications
- Interface with insurer systems
- Commission calculation and tracking
- Agency sales goals and performance
- Individual producer sales goals and performance

Front 480

Agency IT systems can increase the effectiveness of cyber-relationships with

Back 480

Insurers

Front 481

Two categories of systems for managers to choose from when considering their options for sales management systems:

Back 481

- Top-down
- Bottom-up

Front 482

An agency’s _______________ determines both the types of insurance it will produce as well as the management style and culture of an agency.

Back 482

Focus.

This focus can also determine how successful the agency will be.

Front 483

Top-down system

Back 483

A system in which management sets the long-range and annual sales goals for the agency and determines how they will be achieved.

Front 484

Process in a top-down system

Back 484

1. Producers are given specific goals to help the agency reach its overall goals
2. Management then periodically monitors producers and branch offices to ensure they are on target for achieving their goals

Front 485

An agency with a top-down sales management focus should use IT systems that

Back 485

Have a similar framework.

The types of reports available through the system would include tracking of agency and producer sales results against goals.

Front 486

Bottom-up system

Back 486

A system that uses aggregate sales information from agency units, producers, and branch offices to create overall agency goals.

Front 487

Process in a bottom-up system

Back 487

Producers and branch managers (usually in larger agencies) set both individual and agency sales goals; may involve meetings, or the flow of information from small agency units through large agency units.

Front 488

The IT systems used by agencies with a bottom-up focus must be able to

Back 488

Provide the data and reports to support this type of sales management.

Front 489

A seven-step process can be used by an agency’s managers to develop and implement a sales plan:

Back 489

1. Develop a mission statement
2. Develop goals
3. Develop strategies
4. Develop objectives
5. Develop budgets
6. Develop policies and procedures
7. Evaluate results

Front 490

Mission statement

Back 490

A broad statement of the agency’s purpose and overarching goals. It frames a vision for the agency and its producers.

Front 491

Mission statements are important because they

Back 491

Frame the beliefs and purpose of an organization’s work

Front 492

Producers are more likely to be successful if they

Back 492

Believe in the value of what they and their agency are doing

Front 493

Strategies evolve from

Back 493

The broader agency goals.

Typical insurance agency sales strategies involve premium volume, business mix, or specialization.

Front 494

Premium volume strategies

Back 494

Designed to increase the agency’s volume to a planned level

Front 495

Business mix strategies

Back 495

Involve a plan to change the mix of agency business.

For example, to decrease emphasis on sales in one area (such as commercial insurance) and increase sales in another area (such as health and disability insurance.)

Front 496

Specialization strategies

Back 496

May include growth in narrowly defined areas (e.g., professional liability insurance), or growth in a predetermined market (e.g., the agency’s current customers).

Front 497

Like goals, objectives are developed using

Back 497

SMART criteria.

Front 498

The Independent Insurance Agents of America (IIAA) Best Practices Study found that a weakness among leading insurance agencies was

Back 498

Poor sales planning.

The study also found that effective agency management was one of the keys to success

Front 499

The most common aspect of budgeting is

Back 499

To allocate money in a way that best serves the agency’s goals

Front 500

Other aspects of budgeting:

Back 500

The allocation of people and time

Front 501

As sales increase, management should plan a budget for allocating

Back 501

Additional support staff

Front 502

Examples of common policies relating to sales management:

Back 502

- Obtain a 25% down payment (minimum) to accompany all new business applications
- Transfer servicing of all commercial accounts generating premiums under $5,000 annually to the Small Accounts Unit
- Review renewal of personal insurance V.I.P. accounts with producers and CSRs; all other renewals are the sole responsibility of personal insurance CSRs

Front 503

Policies

Back 503

Define the general work rules and tell agency personnel what to do in certain situations; they help facilitate workflow and accelerate transaction processing

Front 504

Policies and procedures are often drawn from

Back 504

- Insurer recommendations
- Best practices
- Errors and omissions (E&O) insurer requirements
- The agency’s own history of proven best practices

Front 505

The result of not implementing or maintaining procedures can be

Back 505

- Duplication of effort
- Inefficient processing

Front 506

Agencies with well-structured sales management systems provide ________ procedures for producers that facilitate training and help maintain quality control

Back 506

Written

Front 507

An agency sales manage monitors an agency sales plan by:

Back 507

- Examining individual weekly and monthly production reports
- Conducting sales meetings
- Determining how results compare to the plan’s goals

Front 508

T or F: At various stages in its life cycle, an agency may have to alter its organizational structure to accommodate growth or market changes, yet remain true to its fundamental focus in sales.

Back 508

TRUE. At various stages in its life cycle, an agency may have to alter its organizational structure to accommodate growth or market changes, yet remain true to its fundamental focus in sales.

Front 509

Three steps in establishing an organizational structure:

Back 509

1. Define and assign responsibilities
2. Group responsibilities by position
3. Determine job interrelationships

Front 510

Typical organizational structures used by insurance agencies:

Back 510

- Line of business, such as commercial or personal lines
- Functional teams, such as producers, customer service representatives, IT, and accounting
- Insurer, in those agencies that place business with several key insurers
- Premium or revenue volume
- Account, such as an alphabetical or a geographical assignment of customers
- A hybrid, combining two or more of these.

Front 511

When examining an existing agency’s organizational structure, management must

Back 511

Disregard the current structure and list the responsibilities performed, regardless of existing positions or individuals handling those responsibilities

Front 512

Manager can begin defining sales responsibilities by

Back 512

Examining a producer’s job description

Front 513

Producers have eight key accountabilities that are necessary to sell to and retain customers:

Back 513

- Prospecting
- Fact-finding
- Sending the submission to the underwriter
- Preparing proposals
- Presenting the proposals
- Closing
- Providing initial customer service
- Providing long-term customer service

Front 514

Key producer accountability: Prospecting

Back 514

The sales process begins with it; producers should build and maintain a database of potential customers.

Front 515

In most P&C agencies, who is responsible for prospecting?

Back 515

Each producer

Front 516

To maximize producers’ selling time, many agency mangers have shifted prospecting duties to

Back 516

Other agency employees or to outside services

Front 517

Key producer accountability: Fact-finding

Back 517

Involves loss exposure identification, which is the basis of the customer’s needs.

May include physically inspecting the prospect’s operations and premises, completing survey forms, drawing flowcharts of operations, reviewing the prospect’s marketing materials and Web site, and researching financial statements to determine which assets need protection.

Front 518

Key producer accountability: Sending the submission to the underwriter

Back 518

The producer is ultimately accountable for obtaining premium quotations for requested coverages by submitting the information to the underwriter.

Front 519

Key producer accountability: Preparing proposals

Back 519

Can range from informal discussion of competing quotes to a formal meeting with a slide or video presentation

Front 520

Key producer accountability: Presenting the proposals

Back 520

The producer must clearly present the information – ideally using illustrations, examples, and understandable language for complex technical insurance proposals.

Front 521

Key producer accountability: Closing

Back 521

I.e., asking for the sale; vital because few people will purchase if they are not asked to make the purchase. Solely the producer’s responsibility.

Front 522

Key producer accountability: Providing initial customer service

Back 522

Includes, but is not limited to, ensuring that applications are completed and signed, collecting payment, and issuing a binder along with a binder bill.

Front 523

Key producer accountability: Providing long-term customer service

Back 523

The producer must see that the policy is delivered to the insured, plan regular contacts with the insured, and arrange for audits, if required.

Also, before policy renewal, new information on operations should be gathered and renewal questionnaires reviewed. Claims may required follow-up action. Audits and claim handling may be ongoing.

Front 524

Responsibilities associated with long-term customer service, such as audits and claim handling, should be

Back 524

Carefully assigned and supervised to meet (and, whenever possible, exceed) the customer’s expectations.

Front 525

Grouping responsibilities into positions has this effect

Back 525

Maximizes the agency’s use of the human and economic resources that support the sales management organization.

Front 526

T or F: Generally, the larger the agency, the smaller the potential for position specialization.

Back 526

FALSE. Generally, the larger the agency, the GREATER the potential for specialization.

Front 527

Production CSRs

Back 527

In some agencies, the staff is organized into teams. In an effective team, support staff may be responsible for some production as part of their responsibilities for the team’s book of business. The support staff’s accountabilities may include the retention percentage on the business they service. These “production CSRs” may eventually develop the skills and knowledge to become producers.

Front 528

Because securing the right people is key to an agency’s success, the agency manager must plan how to:

Back 528

- Staff the agency
- Make effective hiring decisions
- Provide training and development of staff members

Front 529

Four major types of staff in an insurance agency

Back 529

- Managers
- Producers
- Customer service representatives
- Administrative and support staff

Front 530

Managers

Back 530

Responsible for meeting the overall goals of the agency.

Sales managers, specifically, are responsible for meeting the agency’s sales goals and answer to the agency owner/principal.

Front 531

Producers

Back 531

Licensed to sell insurance products and are key to an agency’s success in meeting sales objectives

Front 532

CSRs

Back 532

Licensed and have extensive responsibility in providing service to customers and assisting with sales functions

Front 533

Administrative and support staff

Back 533

Perform functions that assist managers and key staff members in meeting the agency’s goals.

The typical functions performed by administrative and support staff include accounting, IT, HR, proposal and report preparation, and various other activities.

Front 534

Ratio of producers to CSRs-and-support staff

Back 534

Must be planned by the sales manager

A ratio with a high number or producers to a small number of support staff may result in producers inefficiently spending time on administrative functions. A ratio with a small number of producers to a high level of support staff may result in insufficient resources devoted to selling.

Front 535

An agency’s managers should plan for _______ in determining staffing ratios.

Back 535

Current and anticipated business needs

Front 536

Frequency with which agencies should plan their staffing levels

Back 536

At least an annual basis

Front 537

Producers are typically compensated by

Back 537

A percentage of the commissions they generate

Front 538

Support staff are typically compensated by

Back 538

A salary (although in some cases it might be a combination of commissions and salary)

Front 539

Two major reasons for hiring a new producer

Back 539

- Replace a producer who has left the agency
- Increase sales for the agency

Front 540

When hiring a replacement producer, the hiring manager should:

Back 540

- Determine why the previous producer left
- Consider the type of producer who should be hired
- Conduct an exit interview

Front 541

Managers should plan recruitment efforts toward candidates whose interest, experience, and goals…

Back 541

Align well with those of the agency.

Front 542

An agency’s managers should have a plan in place for hiring producers before

Back 542

A critical need arises

Front 543

Four major types of educational and training opportunities available for producers and other agency staff:

Back 543

- Educational organizations
- Training and continuing education
- Producer associations
- Insurers

Front 544

Educational organizations

Back 544

For example, the Institutes (AICPCU-IIA), and the organizations that offer CLU, ChFC, LOMA, etc.

Front 545

T or F: Producers are required to obtain a certain number of continuing education credits as part of state licensing requirements.

Back 545

TRUE. Producers ARE required to obtain a certain number of continuing education credits as part of state licensing requirements.

Front 546

Producer associations

Back 546

Local, state, and national agents’ associations that develop seminars, courses, and workshops to address the training needs of producers in different stages of professional development. (IIABA and PIA, for example)

Front 547

Activities involved in managing producers to achieve sales goals (6):

Back 547

- Setting performance standards
- Measuring performance results against those standards
- Using reporting and accountability systems
- Conducting performance evaluations
- Taking corrective action
- Rewarding employees

Front 548

Three most commonly used producer compensation systems:

Back 548

- Commission only
- Salary only
- Salary and commission

Front 549

Generally, the commission-only system works well with

Back 549

Experienced producers who have an established book of business.

Front 550

Under the commission-only system, generally ___ to ____ percent of the commissions the agency receives goes to the producer:

Back 550

15 to 40 percent

Front 551

The salary-only compensation system is used most commonly with

Back 551

Newly hired producers, often for a period of time such as six months or a year.

Management determines a salary, which is adjusted quarterly or annually to reflect the producer’s sales level.

Front 552

The salary-and-commission compensation system is appropriate for

Back 552

A producer who is responsible for producing new business but who still extensively services existing accounts.

Salary is paid for servicing renewals, and commission is paid for new business.

Front 553

Extra benefits

Back 553

Can include club memberships, award trips the agency wins from insurers, agency ownership, company automobiles, and expense accounts.

Front 554

Performance standards used by agencies:

Back 554

- Budgetary standards
- Sales standards
- Engineered standards
- Individual performance standards
- Judgment and experience standards
- Historical standards

Front 555

Budgetary standards

Back 555

With a current budget, agency management can easily and quickly evaluate the agency’s performance relative to budget projections

Front 556

Sales standards

Back 556

Address sales volume, product mix, commission income, and profit levels; these then establish the basis for individual performance standards.

Front 557

Engineered standards

Back 557

Based on an objective quantitative analysis of a specific work situation; they measure the potential output of individual employees or employee groups.

Front 558

Individual performance standards

Back 558

Negotiated with the employees at the beginning of the evaluation period and documented in writing to support the performance evaluation at the end of the period. Standards should be qualitative AND quantitative.

Front 559

Judgment and experience standards

Back 559

Not scientific or quantitative; they are based simply on management’s judgment and experience.

Usually, quantified standards – for example, those that can be derived from performance evaluations – are needed for comparison purposes to supplement judgment and experience standards.

Front 560

Historical standards

Back 560

e.g., benchmarks, can come from internal or external sources

Front 561

IIABA Best Practices Study

Back 561

Identifies the top 25 percent of best-performing independent agencies. The annually published findings provide agencies with benchmarks against which to compare their results.

Front 562

How performance results are measured

Back 562

By comparing the performance standards to actual results

Front 563

Most agencies measure both…

Back 563

Overall agency results and individual employee results

Front 564

A common performance evaluation process in many agencies is to

Back 564

Ask the employee to complete a self-evaluation and to use it, along with the evaluation completed by the manager, as the basis for the final evaluation.

Front 565

A performance evaluation should serve these two additional purposes:

Back 565

- Serve as the basis for the producer’s development plan
- Serve as a way to discover changes needed in the agency’s program for guiding and training sales personnel

Front 566

Corrective action may involve changes in

Back 566

- Agency goals
- Systems
- Staff

Front 567

When an individual is not performing up to the established standards, corrective action may include:

Back 567

- Training
- A change in responsibilities
- Probation or dismissal

Front 568

The sales manager should strive to develop all producers to reach the standards of

Back 568

The agency’s top producer

The top producer (or producers) should be determined based on several years of performance. Each sales manager should identify the characteristics of the agency’s top producers.

Front 569

Personal production plan

Back 569

A written document developed by a producer that describes what the producer will accomplish, how it will be accomplished, and when it will be accomplished.

Front 570

The most important part of a producer’s job

Back 570

Selling

Front 571

A personal production plan must:

Back 571

- Be consistent with an agency’s plans
- Support an agency’s plans

Front 572

A personal production plan is developed using

Back 572

The same seven steps as an agency’s plan.

i.e.,

1. Develop a mission statement
2. Develop goals
3. Develop strategies
4. Develop objectives
5. Determine budgets
6. Establish policies and procedures
7. Monitor the plan

Front 573

Agency management system software allows producers to

Back 573

- See immediately the results of their efforts
- Demonstrate accountability to the plan
- Ensure that goals are aligned throughout the organization

Front 574

An agency can combine and summarize individual production plans. If the agency uses bottom-up planning, the resulting summary provides

Back 574

Agency sales projections

Front 575

An agency can combine and summarize individual production plans. If the agency uses top-down planning, the resulting summary provides

Back 575

A basis for planning that can be revised based on management’s requirements.

Front 576

Examples of personal mission statements

Back 576

“To serve the financial services needs of the community”
“To find those people or organizations I can serve within the provisions of my agency contract”
“To provide premier risk management services to my community”

Front 577

Goals (in the context of production plans)

Back 577

Producers’ final targets for the planning period

Front 578

Typical production (or sales) planning period

Back 578

One year; should coincide with the agency’s fiscal year.

Front 579

Producers should establish _________ in every area of their accountabilities and developmental activities.

Back 579

Goals

Front 580

Once goals have been set, _________ can be developed to indicate specific ways the producers can achieve their goals and, ultimately, their missions.

Back 580

Strategies

Front 581

Qualities of a good personal production plan strategy

Back 581

- Personal
- Relate to the organization’s mission and goals
- Narrow the focus of personal activities
- Remain broad enough to allow a variety of sales activities
- Identifies specific markets for current selling activities
- Should be shared so that others in the agency can coordinate activities

Front 582

Objectives (in a personal production plan)

Back 582

Milestones toward goals and directed at accomplishing the goals they support

Front 583

Like goals, objectives should be

Back 583

SMART (specific, measurable, achievable, relevant, time bound)

Front 584

The steps in the planning process allow an agency to

Back 584

Develop plans for action

Front 585

Agency management system software can allow an agency to

Back 585

Develop templates for its producers’ personal production plans that align them with the agency’s overall strategy.

Front 586

Three levels at which goals are developed:

Back 586

- Organizational
- Agency
- Individual producers

(Hence the order of chapters 2 – 4)

Front 587

If a producer participates as a sponsor at a commercial account’s annual charity golf event, the producer’s budget plan should include

Back 587

The related expenses

Front 588

Time budgeting

Back 588

The allocation of available business-related time toward the accomplishment of the producer’s goals

Front 589

Policies

Back 589

Guidelines for making decisions and performing activities.

Policies can limit staff to a single course of action in most cases.

Front 590

Whereas policies indicate what should be done, procedures indicate

Back 590

How things should be done

Front 591

Agencies have several approaches to monitoring plans, including:

Back 591

- Self-monitoring by producers
- Monitoring by the agency principal or sales manager at weekly, monthly, or quarterly sales meetings

Front 592

Examples of information that results reports may contain:

Back 592

- Annual net commission goals
- Number of referrals received
- Number of cross-selling referrals obtained
- Number of x-dates obtained
- Number of successful contacts made
- Number of quotes issued
- Number of new policy sales
- Number of lost policies
- Annual net commissions lost

Front 593

_________ are ultimately accountable for achieving their annual production plan goals and objectives.

Back 593

Producers

Front 594

Producers who achieve their goals enable agencies to

Back 594

Achieve their goals.

Therefore, agency principals and sales managers usually are willing to assist producers in making plan adjustments if doing so improves a producer’s chances for success.

Front 595

____________ are the building blocks of an agency’s annual sales production plans.

Back 595

Individual producer plans

Front 596

Many agencies combine all their producers’ personal production plans into a

Back 596

Personal production plans summary

Front 597

Agency production plans summary

Back 597

Provides an overview of all of the producers’ goals, which should support the agency’s goals and mission.

Front 598

Agencies should share the agency production plans summary with

Back 598

All agency personnel (including claim, technology, and support staff, who assist producers in achieving annual production goals.

Front 599

A producer’s annual production goal is supported by

Back 599

- Underlying annual objectives
- Key production activities

(both are monitored monthly)

Front 600

Monthly activity analysis

Back 600

Part of an agency production plans summary; has a calculation for the number of quotes and accounts written that the producer needs to achieve the annual goal.

Front 601

A model personal production plan for a producer should possess these five characteristics:

Back 601

- Should be negotiated with the sales manager or principal to ensure that producers direct their efforts towards the type of business the agency wants to sell
- Gives a producer a set of self-directed sales activities that are derived from and support the goals and objectives
- Gives the sales manager or agency principal a convenient evaluation tool (by having specific goals and objectives)
- Assists the producer with meeting goals and objectives, helping the producer generate new business more rapidly
- Corresponds with the agency’s plan

Front 602

Independent, entrepreneurial activities encourage the producer to

Back 602

Focus on executing the production plan.

For example, producers may be involved in cross-selling and networking, referral and lead generation, and prospecting activities, all of which are self-directed.

Front 603

________ determines the size and types of business the agency can produce.

Back 603

Insurer representation

Front 604

If the agency emphasizes commercial lines over personal lines, property-casualty insurance over life and health insurance, and large over small accounts, the producer’s goals…

Back 604

Must do the same

Front 605

When preparing production plans, producers should consider the benefits of ________ as a new-business source.

Back 605

Referrals

Front 606

______________ can help producers focus on fulfilling their personal production plans, which focus on sales.

Back 606

Time management

Front 607

As a practical matter, producers spend most of their time _________________________.

Back 607

Servicing existing customers and managing their accounts, leaving little time available for selling.

One estimate is that producers spend less than one hour of selling for every four hours of nonselling time.

Front 608

Five essential time management strategies to increase the time available for selling:

Back 608

- Eliminate time-wasters
- Set priorities
- Prepare for meetings
- Plan
- Manage phone calls and emails

Front 609

Top 5 major time-wasters:

Back 609

1. Management by crisis
2. Telephone interruptions
3. Inadequate planning
4. Attempting too much
5. Drop-in visitors

Front 610

Top 6 – 10 major time wasters:

Back 610

6. Ineffective delegation
7. Personal disorganization
8. Lack of self-discipline
9. Inability to say “no”
10. Procrastination

Front 611

Top 11 – 15 major time wasters:

Back 611

11. Meetings
12. Paperwork
13. Leaving tasks unfinished
14. Inadequate staff
15. Socializing

Front 612

Top 16 – 20 major time wasters:

Back 612

16. Confused responsibility or authority
17. Poor communication
18. Inadequate controls and progress reports
19. Incomplete information
20 Travel

Front 613

Producers who establish and adhere to a sales system with a personal production plan can

Back 613

Mitigate the effects of many time-wasters

Front 614

One way to avoid a crisis situation

Back 614

Planning for the best way to keep it from occurring – such as, for insurance producers, ensuring that customers who require flood coverage are offered flood insurance well before any threat of hurricane occurs.

Front 615

To minimize telephone interruptions, the producer can

Back 615

- Use technology
- Seek the cooperation of other staff to determine priorities
- Screen telephone calls

Front 616

Important customer calls and emergency calls should be

Back 616

Handled immediately

Other calls can be referred to support staff, postponed, or expedited within predetermined guidelines

Front 617

The heart of an effective time management system is

Back 617

Setting and adhering to priorities

Front 618

Many time management systems suggest starting by

Back 618

Listing every task that needs to be done in a given amount of time; assigning priorities based on importance

Front 619

Key to any time management system is defining these terms:

Back 619

“Important” and “urgent”

The focus for producers must be on what is important.

Front 620

An important task can be defined as any task that

Back 620

Leads to accomplishing goals

Front 621

An urgent task is one that

Back 621

Demands immediate action.

Urgent tasks are typically time sensitive and involve demands on a producer’s time made by colleagues or customers. However, urgent items may or may not be the most important tasks the producer should complete to achieve his or her goal.

Front 622

Strategies for eliminating time-wasting caused by: management by crisis

Back 622

- Set and adhere to deadlines to avoid self-created crises
- Build extra time into schedules to handle unanticipated events
- Conduct an after-action review after each crisis to determine how to avoid or better manage future crises

Front 623

Strategies for eliminating time-wasting caused by: Telephone and E-Mail Interruptions

Back 623

- Forward phone calls to support staff or voice mail during certain periods to allow blocks of uninterrupted time
- Set aside certain times when you routinely ask people to call
- Designate blocks of time for returning phone calls and emails
- Create a voicemail message requesting that callers leave all information necessary to respond to the call

Front 624

Strategies for eliminating time-wasting caused by: Inadequate planning

Back 624

- List long-term goals and specify associated short-term goals or objectives with intermediate dates
- End each day by determining what you will accomplish the next day

Front 625

Strategies for eliminating time-wasting caused by: Attempting too much

Back 625

- Break large tasks into a series of small tasks
- Complete one task before you begin another

Front 626

Strategies for eliminating time-wasting caused by: Ineffective delegation

Back 626

- Make a list of recurring tasks; determine which tasks are delegable to other staff members, and make assignments
- Determine which tasks other staff members could complete after training; arrange for required training
- Conduct a staff audit to determine who is doing what, who needs additional skills, and whose responsibilities can be expanded

Front 627

Strategies for eliminating time-wasting caused by: Personal disorganization

Back 627

- Group similar tasks and perform them at the same time
- Take advantage of the agency management system software’s organizational tools
- Work on tasks for one project at a time

Front 628

Strategies for eliminating time-wasting caused by: Lack of self-discipline; procrastination

Back 628

- Select the top two or three tasks daily from your ‘To Do’ list that are important and urgent and that you dislike doing. Complete these tasks first to avoid being distracted by them throughout the day
- Complete the hardest task(s) for the day first

Front 629

Strategies for eliminating time-wasting caused by: Inability to say ‘no’

Back 629

- Select and rehearse a standard phrase you can use when asked to do something that is not your responsibility. (For example, “I can understand how you need help with this project. However, my projects are consuming all of my time.”)

Front 630

Strategies for eliminating time-wasting caused by: Meetings

Back 630

- Determine whether a meeting really is necessary
- Set goals, agendas, and time limits for all meetings
- Set aside particular times of the week for all meetings
- Start and end meetings on time

Front 631

Strategies for eliminating time-wasting caused by: Leaving tasks unfinished

Back 631

- Estimate the amount of time needed to complete a task; schedule sufficient time to complete each task; work on one task at a time to the exclusion of all others
- Maintain a running list of next tasks to be performed in all project folders; check off each task as completed

Front 632

Strategies for eliminating time-wasting caused by: Socializing

Back 632

For a week ro two, track the amount of work time you spend socializing, with whom, and where; estimate how much work time you are losing each year; avoid persons and situations that cause you to over-socialize at work

Front 633

Strategies for eliminating time-wasting caused by: Confused Responsibility or Authority

Back 633

Clarify job responsibility and authority with supervisor and any direct reports at the beginning of each performance year and new project

Front 634

Strategies for eliminating time-wasting caused by: Poor communication

Back 634

Identify who needs to be notified of what for each task

Front 635

Strategies for eliminating time-wasting caused by: Inadequate controls and progress reports

Back 635

- Develop formal procedures for complex but routine tasks
- Create checklists to ensure that processes are correctly followed
- Create an electronic template for progress reports, indicating required information

Front 636

Strategies for eliminating time-wasting caused by: Incomplete information

Back 636

Specify the information that meeting attendees will need to bring to a meeting, or provide it in advance

Front 637

Strategies for eliminating time-wasting caused by: Travel

Back 637

- Combine several visits per trip
- Set aside specific times of the month or year for business travel to minimize work disruptions at other times
- Create an action plan for each business trip, and strive to complete the plan on each trip to minimize follow-up travel

Front 638

Tyranny of the urgent

Back 638

Treating priorities as if all plans, goals, and objectives should be developed, implemented, and accomplished in one day; usually resulting from the act of constantly working only on tasks labeled “urgent”

Front 639

Sharpening the saw

Back 639

The practice of changing the focus from handling only the current emergency to spending time preparing for future needs

Front 640

B tasks

Back 640

Training, education, reflecting, planning

Front 641

For B tasks, producers should think of time spent on them as

Back 641

Investing in a long-term payoff

Front 642

A producer can increase the amount and effectiveness of time spent on A and B tasks by concentrating on selling activities during the time of day he or she feels

Back 642

Most alert and works most efficiently, i.e., peak performance times

Front 643

Producers should have a _________ in mind before any meeting.

Back 643

Specific goal

Without a goal, a meeting can extend past its usefulness.

Front 644

This can help to organize a sales call.

Back 644

A short outline of why a producer wants a customer’s or prospect’s policy expiration dates

Front 645

A good way to prepare for an important presentation is to

Back 645

Try it out on a member of the agency staff, preferably a nontechnical person.

In this way, the producer not only gets practice but also receives feedback about clarity and persuasiveness. A nontechnical person can point out when the terms used are vague or confusing.

Front 646

When making an appointment, a producer should set both a _____ time and an _____ time.

Back 646

Start, end

Front 647

A producer’s most valuable resource

Back 647

Time

Front 648

T or F: Email messages are not technically business records.

Back 648

FALSE. They ARE. For this reason, agencies, should develop office procedures and guidelines for producers to effectively and efficiently manage data files.

Front 649

Issues related to email management:

Back 649

- Email creation
- Email responses
- Email retention
- Email retrieval
- Email delation

Front 650

Issues related to email management: Email creation

Back 650

A producer can establish standard messages, use concise language, and descriptive subject lines

Front 651

Issues related to email management: Email responses

Back 651

Responses should be timely; procedures should be established to document action taken; automatic responses should be in place for nonbusiness hours

Front 652

Issues related to email management: Email retention

Back 652

Folders should be established within the email service

Front 653

Issues related to email management: Email retrieval

Back 653

Producers should save and file information including client data, correspondence, meeting notes, and coverage-related documentation; document storage guidelines should be created

Front 654

Issues related to email management: Email deletion

Back 654

Periodic review and removal of unnecessary messages is key

Front 655

Negotiation

Back 655

A process in which two or more parties discuss an issue and consider alternatives to reach mutual agreement

Front 656

Some basic negotiation rules and techniques:

Back 656

- Know the other party
- Avoid “single-issue” negotiation
- Do not push the advantage
- Deliver more than promised

Front 657

One reason people handle negotiations poorly

Back 657

They assume one side must win and the other must lose. Learning how to negotiate effectively focuses on creating the ‘win-win’ situation. Effective negotiators consider anything other than a ‘win-win’ to be a loss.

Front 658

Knowing the other party (negotiation)

Back 658

Requires determining the other person’s style of doing business and the other person’s goals

Front 659

Avoiding ‘single-issue’ negotiation

Back 659

E.g., negotiation based only on price.

Front 660

One way to avoid the ‘single issue’ trap;

Back 660

Have more issues on the table, with price being only one.

For example, the price can be lowered, but only if the prospect gives something back in another area – such as by accepting less coverage.

Front 661

Do not push the advantage (negotiation)

Back 661

Producers should not highlight the difficult position of prospects who are in a difficult position. No matter how much the situation results in the producer’s favor, the producer should not push the advantage. This benefits the producer, particularly if the insurance market later becomes more competitive.

Front 662

Deliver more than promised (negotiation)

Back 662

Always seeking to exceed customer expectations.

Giving something more than promised after negotiations are complete creates an important advantage in future negotiations with the same customers. A customer may remember an unexpected bonus far more than the details of the negotiation.

Front 663

Before deciding to represent an insurer, a producer should

Back 663

Evaluate whether the insurer’s way of doing business is compatible with the producer’s.

Front 664

The agency’s owner(s) should evaluate these seven factors before establishing a relationship with an insurer:

Back 664

- Financial stability
- Reputation
- Policyholder services
- Claim services
- Marketing philosophy and practices (including compensation or commissions)
- Underwriting philosophy and practices
- Terms and conditions of representation (the agency agreement)

Front 665

Each of the seven relationship factors is important in terms of:

Back 665

- How the agency is able to represent itself to customers
- Its overall level of profitability

Front 666

Policyholders pay premiums in anticipation of

Back 666

Being indemnified when a loss occurs

Front 667

If an insurer becomes insolvent before a loss is paid, the policyholder receives

Back 667

Nothing, except what may eventually be recovered from state-run insolvency funds established to protect against such an event.

Front 668

As producers evaluate an insurer's financial stability, they should

Back 668

- Understand the various legal implications of insurer insolvency
- Understand the role insurance regulators play in financial oversight
- Monitor insurer financial stability
- Keep customers informed about the financial stability of insurers they represent

Front 669

During the late 1990s and into the early part of the 21st century, the number of insurer insolvencies

Back 669

Increase dramatically.

Front 670

T or F: Courts in several jurisdictions have dismissed damage awards against producers for failure to use proper care in selecting an insurer.

Back 670

FALSE. Courts in several jurisdictions have allowed damage awards against producers for failure to use proper care in selecting an insurer.

However, most courts have ruled that the agency is not a guarantor of the financial condition or solvency of an insurer.

Front 671

Higginbotham & Associations Inc. v. Greer

Back 671

1987 Texas court of appeals decision

Refused to hold an agency responsible for an insured's losses resulting from an insurer's insolvency.

Front 672

Guidelines established by the court in Higginbotham & Associates, Inc. v. Greer, regarding the agency's legal duties when selecting an insurer and monitoring its financial condition:

Back 672

- The agency has an ongoing duty to place coverage with a solvent insurer
- The agency has an ongoing duty to reasonably monitor an insurer's financial condition
- The agency has a duty to disclose solvency information to the insured
- The agency has a duty to protect the insured when the risk of insolvency becomes too great

Front 673

Sources that can help an agency make a reasonable determination of an insurer's strength:

Back 673

- Financial rating services (A.M. Best)
- State insurance regulatory agencies
- The NAIC

Front 674

One of the most respected sources for insurer financial information

Back 674

A.M. Best Company

Front 675

Best's Key Rating Guide

Back 675

Displays summary financial information and ratings for more than 3000 major property-casualty insurers over a period of five consecutive years.

Front 676

T or F: A.M. Best's rating system provides an absolute measure of an insurer's strength.

Back 676

FALSE, obviously.

Front 677

Rating of C++ and C+ (A.M. Best) is categorized as

Back 677

Marginal

Front 678

Rating of B and B- (A.M. Best) is categorized as

Back 678

Fair

Front 679

Rating of C and C- (A.M. Best) is categorized as

Back 679

Weak

Front 680

Rating of D (A.M. Best) is categorized as

Back 680

Poor

Front 681

Rating of E (A.M. Best) is categorized as

Back 681

Under Regulatory Supervision

Front 682

Rating of F (A.M. Best) is categorized as

Back 682

In Liquidation

Front 683

Rating of S (A.M. Best) is categorized as

Back 683

Rating Suspended

Front 684

Reasons a company might not qualify for an A.M. Best rating:

Back 684

* Limited financial information
* Small level of surplus
* Lack of sufficient operating experience
* Dormant or run-off status

Front 685

Rating of B++ and B+ (A.M. Best) is categorized as

Back 685

Very Good

This is the lowest level of the “Secure” ratings; everything below is a “Vulnerable” rating

Front 686

Weiss Ratings

Back 686

Popular with consumer groups because it uses only publicly available data rather than figures provided by insurers.

Front 687

Demotech

Back 687

Uses its own analysis model to provide financial strength ratings for smaller, niche property-casualty insurers.

Front 688

Many state insurance regulatory agencies provide this type of information to consumers (and producers)

Back 688

Insurer financial and compliant information

Front 689

The format of an insurer's annual statement is prescribed by

Back 689

The NAIC

The goal of it is to simplify comparison.

Front 690

NAIC Insurance Regulatory Information System

Back 690

(IRIS)

Helps regulators identify potentially insolvent insurers through the use of financial ratios and tests.

The system evaluates annual statements of participating insurers and calculates twelve financial ratios. A usual range of values for each of the ratios is compared with the actual ratios.

Front 691

Two main parts of a financial statement:

Back 691

The balance sheet and the income statement

Front 692

Balance sheet

Back 692

A snapshot of an insurer's assets and liabilities at one point in time

Front 693

Assets

Back 693

Cash, stocks, securities, and real estate

May also include premium due from agents, reinsurance proceeds due, and other obligations owed to the insurer, such as notes receivable.

Front 694

Liabilities

Back 694

Balance of any notes or debts payable, claim reserves, unearned premium reserves, and any other type of debt the insurer owes

Front 695

Policyholders' surplus

Back 695

The difference between assets and liabilities

Front 696

Income statement

Back 696

(i.e., profit and loss statement)

Presents a summary of an insurer's financial activities over a period of time. It includes revenues and other income, expenses, and net income or earnings.

Front 697

Revenues and other income

Back 697

Funds the insurer receives from premiums written and investments, plus miscellaneous income

Front 698

Net income

Back 698

The difference between revenue and expenses

Front 699

Conditions that may indicate an insurer is having financial problems:

Back 699

- High loss ratios (abnormally so) compared with the industry average
- Negative operating income or cash flow
- Sale of or other reduction in assets
- Abnormal decline in policyholders' surplus
- Change in policyholders' surplus in excess of 10 percent annually
- Increase in net premiums written in excess of 25 percent, or dramatic changes from one year to the next
- Change in the insurer's investment portfolio, such as a decline in bonds, an increase in loans, movements into cash or short-term accounts, low net asset yields, or other questionable investments
- Increase in ratio of net premiums written to policyholders' surplus to excess of 3:1 and/or rising

Front 700

An increase in net premiums written in excess of 25 percent, or dramatic changes from one year to the next can indicate

Back 700

Instability in the insurer's operations

Front 701

A change in policyholders' surplus in excess of 10 percent annually can indicate

Back 701

Lower levels of surplus to absorb losses, or increasing reliance on reinsurance

Front 702

An increase in ratio of net premiums written to policyholders' surplus to excess of 3:1 and/or rising can indicate

Back 702

A reduction in capacity, perhaps from poor underwriting results – even as insurer receives short-term influx of cash

Front 703

Producers should consider these factors when evaluating an insurer's financial stability:

Back 703

- Reinsurance arrangements vary greatly and can materially affect the insurer's financial position should a catastrophic loss occur
- The producer should examine the classes of business written and the premium volume of business in each class
- The producer should determine whether the insurer has withdrawn recently from any states
- An insurer's investment selections should be reviewed

Front 704

Sudden increases in classes of business the insurer has not previously handled could indicate

Back 704

Inadequate pricing, inexperienced underwriting, or both.

Front 705

Frequent changes in accounting firms could be a sign of

Back 705

Financial trouble.

Front 706

Delayed claim payments may indicate

Back 706

That the insurer needs to preserve its cash

Front 707

Poor customer service may indicate that the insurer is

Back 707

In poor financial condition. Two or three months' policy issuance delay could cause the policyholders' surplus to be overstated on the annual statement.

Front 708

If the insurer has the lowest rates or the highest commissions, it may be seeking to

Back 708

Buy business for some quick cash.

Front 709

If independent premium finance companies will not finance policies issued by the insurer, it may mean that

Back 709

Finance companies have difficulty collecting unearned premiums from canceled policies.

Front 710

Large changes in the insurer's agency force may signal

Back 710

Dissatisfaction among current agencies representing the insurer.

Front 711

T or F: An insurer's overall size is an indication of financial stability.

Back 711

FALSE. Many small insurers, particularly those handling specialized insurance, are carefully and conservatively managed and can be more financially sound than large insurers.

Front 712

Insurance is regulated on the ______ level.

Back 712

State

Front 713

One state's regulators may have difficulty assessing the full scope of an insurer's financial problems because

Back 713

Most insurers operate in many states, with financial dealings often handled through branch offices and subsidiaries spread out among states.

Front 714

The Higginbotham case provided no guidance on

Back 714

The definition of “reasonable diligence”

Front 715

An important function of an agency's computer system is

Back 715

To produce a customer list by insurer, so that customers of the affected insurer can be contacted if necessary. (Courts are likely to consider such an action on the producer's part as reasonable, particularly if an insurer's solvency is threatened.)

Front 716

A simple disclosure form letter giving customers the necessary information should suffice as

Back 716

“Reasonable diligence” in the event of the threat of insurer insolvency

Front 717

Hard market

Back 717

The cost of insurance increases and the availability of coverage decreases

Front 718

When the market cycle turns hard, reserves often

Back 718

Decrease in relation to premiums written

Front 719

A stock insurance company can improve its policyholders' surplus by

Back 719

The sale of additional stock.

Such a sale can help keep the insurer financially healthy.

Front 720

These organizations do not have the option of selling stock to raise capital (because they have no stockholders):

Back 720

- Mutual insurers
- American Lloyds
- Reciprocal exchanges

Front 721

To improve their policyholders surplus during a hard market, non-stockholder organizations may have to

Back 721

Adopt more restrictive underwriting practices and control expenses

Front 722

________________ becomes an important part of the agency's defense, should a dissatisfied customer sue the agency.

Back 722

Documenting the producer's efforts to avoid placing coverage with a financially unstable insurer.

Front 723

Good documentation may include these actions:

Back 723

- Develop and maintain a financial information file on each insurer and wholesaler with whom the agency transacts business
- Establish an agency minimum-standard Best's rating for insurers (such as “A-” or better)
- Use advisory form letters with customers and prospects when using an admitted insurer with a Best's rating less than the agency minimum standard (or with no rating at all)

Front 724

An insurer's reputation can impact an agency in these ways:

Back 724

- Relates to how the insurer treats policyholders
- A damaged reputation can lead to insolvency

Front 725

Reputation is a key asset to an insurer because of its

Back 725

Intrinsic, intangible value and its potential to generate (or erode) future value

Front 726

T or F: A good reputation can differentiate on insurer from another, thus creating a competitive advantage.

Back 726

TRUE. It can.

Front 727

Indicators of an insurer's good reputation:

Back 727

- Its image as a good corporate citizen
- A consistent record of delivering high quality, fairly priced products and services
- Fair and efficient claim handling
- A responsive customer service department

Front 728

Policyholder services

Back 728

The non-claim-oriented service provided by an insurer, including:
- Procedural matters
- Support services
- Information technology

Front 729

Joint Agency/Company Planning Tool

Back 729

A best practices resource from the IIABA for determining key issues regarding each type of policyholder service

Front 730

Policyholder services are particularly important in relation to insurers that have

Back 730

Customer service centers

Front 731

Customer service centers

Back 731

In return for a reduced percentage commission, insurer customer service centers offer service support for functions such as providing policy information and processing endorsements. Consequently, the independent agency can focus on sales while maintaining good customer service.

Front 732

Procedural matters (in a policyholder services context)

Back 732

Relate to how easy it is to do business with the insurer.

Front 733

An important part of evaluating an insurer's information technology is considering the quality of the insurer's

Back 733

Agency interface

Front 734

Insurer's agency interface

Back 734

Provides agencies with standardized workflows for managing the insurer's sales, service, and renewals from directly within their agency management system.

Front 735

Many insurers have implemented ________ standards and are using the ________ network to move electronic data between themselves and their agency partners.

Back 735

ACORD XML, IVANS

Front 736

_____________ are an excellent source of information about an insurer's claim services.

Back 736

Previous claimants.

Informally surveying neighbors and friends can often provide insights not available from other sources.

Front 737

Marketing representatives (or underwriters serving in a similar capacity)

Back 737

Outline the insurer's philosophy and practices to the agency and screen the agency for compatibility

Front 738

How close the marketing and sales executive's position is to senior management is one indication of

Back 738

The importance that insurer places on the sales and marketing function.

Front 739

The insurer's sales and marketing staff

Back 739

Is responsible for conveying the insurer's marketing philosophy to its agencies both before and after their appointments.

Front 740

When evaluating an insurer's marketing philosophy and practice, producers should consider factors such as:

Back 740

- Type of business
- Quotas
- Production and appointment practices
- Compensation

Front 741

Generally, insurers that use the independent agency and brokerage marketing system pay __________ commissions to producers than those that use the exclusive agency marketing system.

Back 741

Higher

Direct writers tend to fall between the other two for commission on new business but pay considerably less commission for renewals.

Front 742

Most insurers offer ___________, typically as provisions added to the overall agency agreement.

Back 742

Profit-sharing agreements

Front 743

Profit-sharing agreement

Back 743

A contractual agreement that pays contingent commissions or bonuses if the insurance agency meets predetermined premium quotas, growth targets, and/or loss ratios.

Front 744

Key considerations in evaluating an insured's underwriting philosophy and practices:

Back 744

- The location of an insurer's underwriting office
- The level of the binding authority the office grants to the producer
- Underwriting guidelines

Front 745

Binding authority granted to producers usually applies only to

Back 745

Small commercial or personal accounts, and generally only after the insurance agency has shown technical ability in handling those types of insurance.

Front 746

Brokers normally cannot bind the insurer without

Back 746

Prior approval

Front 747

Rate levels

Back 747

The premium an insurer charges for its products.

Can have a considerable effect on the producer's ability to sell that insurer's products. Representing an insurer that does not maintain a competitive pricing philosophy is difficult.

Front 748

Many insurers have developed their own package policies or hybrids of policies developed by advisory organizations such as ISO or AAIS. Examples of these include:

Back 748

Packages for churches, contractors, and condominiums.

Often these package policies are developed in conjunction with one producer and are then offered to other producers.

Front 749

A final important consideration in evaluating underwriting philosophy and practices is

Back 749

Staff competence and stability, especially the avoidance of high turnover

Front 750

The terms and conditions of insurer representation are described in the

Back 750

Agency agreement.

Front 751

An insurer evaluates agencies to represent it via this process:

Back 751

By considering whether the resulting match would both serve the needs of the agency's target market and be consistent with the insurer's marketing and growth objectives

Front 752

After reviewing the insurers available for representation, determining that the agency and a particular insurer meet each other's requirements, and deciding to contact the insurer, a producer must

Back 752

Negotiate an agreement

Front 753

Generally, the factors an insurer examines when evaluating an agency include these:

Back 753

- Location and appearance
- Financial condition
- Type and mix of business
- Other insurers represented
- Loss experience
- Personnel
- Information technology (IT)
- Business plan

Front 754

Agency's formal presentation to conduct business

Back 754

A presentation designed to lead to an agency appointment

Front 755

Insurer's evaluation of an agency's financial condition

Back 755

Includes evaluation of historical operating performance, current balance sheet, and income statements for at least the previous two to three years.

Front 756

Insurers look for an agency with a consistent history of

Back 756

Profitable operation

Front 757

The agency's collection practices are of interest because an agency's poor collection record could mean that the insurer

Back 757

Might not get paid on time or that the agency might need to borrow frequently to make insurer payments.

Front 758

If the agency represents many insurers, it might indicate that the agency cannot

Back 758

Place thee required new business volume with the prospective insurer.

A high number of insurers represented may also indicate that the agency does not have a clear marketing focus.

Front 759

A prospective insurer will want to see production and loss runs for at least the last ___ years (preferably _ years) for every insurer the agency currently represents.

Back 759

3; 5

Front 760

Loss runs

Back 760

Reports detailing an insured's history of claims over a specific period, valued as of a specific date.

Front 761

If a high loss ratio is the result of a series of small losses, or if the loss frequency is always high, these might be the causes:

Back 761

Poor new business screening or poor producer underwriting practices.

Front 762

The most important asset an agency has to offer

Back 762

The agency's employees.

For this reason, the prospective insurer will request information on the backgrounds of key agency personnel.

Front 763

Before entering into a relationship that also has fiduciary aspects, an insurer should have these items available for review:

Back 763

Financial, professional, and personal references regarding the agency's key personnel.

Front 764

Insurance agencies that take full advantage of their _______________ can serve their customers more efficiently and market products and services with greater effectiveness and economy than those that do not.

Back 764

Agency management systems

Front 765

Issues an insurer typically considers regarding an agency's business plan:

Back 765

- How much new business growth is projected and in what areas?
- What is the agency's long-term business plan?
- What could the insurer provide to help accomplish that plan?
- What, therefore, could the agency provide in terms of premium volume?

Front 766

Agency perpetuation plan

Back 766

How the agency will handle any changes in management or ownership, including possible funding mechanisms; it should be included in the business plan.

Front 767

Producers can use these items to systematically sell the insurer on the agency.

Back 767

- Agency profile forms
- Agency profile packages

Front 768

Agency profile package

Back 768

Should include a cover letter that briefly describes the agency's qualifications and explains why an additional insurer is needed; will also provide info on the agency's local economic environment

Front 769

Typically, an insurer appoints agencies that express business goals and practices that are

Back 769

Similar to its own

Front 770

Producers may place insurance through wholesalers if

Back 770

Their standard markets are unable to accept a submission.

Front 771

The number of insurers an agency contracts varies by:

Back 771

- Agency size
- The type of the account's business activities
- General economic conditions

Front 772

Producers should send applications only to those insurers

Back 772

Whose goals are compatible with the agency's AND who can meet the specific insurance needs of the accounts in question.

Front 773

Factors to be considered in account placement:

Back 773

- The insurer's ability to handle the submission
- Policyholder services offered
- Price agency compensation
- Volume requirements

Front 774

Facultative reinsurance

Back 774

Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.

Negotiated on a case-by-case basis; it can be very expensive.

Front 775

By reducing or eliminating reinsurance, producers should receive:

Back 775

- A better premium
- Full percentage commission
- Full credit toward meeting the insurer's volume requirements

Front 776

Sales quotas

Back 776

New business minimums

Front 777

On large accounts, insurers customarily negotiate commissions with the

Back 777

Producer

The producer may agree to relinquish part of the compensation to reduce the customer's cost or because the work involved in servicing some large accounts may not be as extensive as it would be to handle a number of smaller accounts that may be transaction-intensive.

Front 778

Recognizing that the customer's needs come first, a producer must select an insurer based on achieving volume requirements only when

Back 778

All other factors are equal

Front 779

Wholesaler

Back 779

Any insurance entity that serves as an intermediary between an insurance retailer and the insurer.

If none of the insurers the agency represents can effectively provide what the customer needs, the producer should then approach wholesalers to place the customer's insurance through surplus lines or specialty insurers.

Wholesalers provide a variety of insurance products through different types of insurers. A single wholesaler may serve several functions in the insurance marketplace and perform different services depending on the type of insurer it represents and its relationship with the insurer.

Front 780

Managing general agent (MGA)

Back 780

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.

Front 781

Most wholesalers call themselves ______ in a general sense, while in legal and licensing terms they are either managing general agents or surplus lines agents, usually holding both types of licenses in states where the MGA license is offered.

Back 781

Brokers

Front 782

An MGA is granted authority by an insurer to

Back 782

Act on its behalf in executing insurance transactions.

Front 783

Advantages for insurers of operating through MGAs

Back 783

- Limit fixed costs (because they do not have to staff and support a branch office)
- Offer expertise in particular markets
- Often design insurance programs in collaboration with the insurers they represent
- Perform functions such as claim administration, information management, risk control and risk management services, underwriting and marketing services, policy insurance, and premium collection.

Front 784

Program underwriting managers

Back 784

Similar to MGAs, but their authority may be limited to accepting submissions from agencies on an insurer's behalf for specific types of customers on a program basis.

Front 785

Surplus lines agent (or surplus lines broker)

Back 785

A wholesaler who places insurance policies with nonadmitted (surplus lines) insurers.

These agents/brokers are not admitted to do business in a particular state but are approved to write surplus lines by state regulations. Can be a retailer that places its own customers' insurance with a surplus lines insurer it directly represents, or it can be a wholesaler that places surplus lines insurance referred to it by a retailer.

Front 786

The surplus lines broker system provides insurance for customers that require:

Back 786

- High limits of insurance
- Unusually broad or specialized coverage
- Coverage for an unusual, unique, or unfavorable loss exposure

Front 787

Producers also use wholesalers to

Back 787

Protect loss ratios and relationships with represented insurers

Front 788

Typically, producers should select a wholesaler (or multiple wholesalers) that performs these functions:

Back 788

- Provides access to insurers and services that the producer's customers need
- Represents financially sound insurers
- Provide prompt, courteous, and efficient service
- Employ experienced and knowledgeable staff
- Belong to a trade organization for wholesalers
- Maintain appropriate licenses
- Maintain and provide evidence of errors and omissions insurance

Front 789

Trade organizations for wholesalers

Back 789

American Association of Managing General Agencies (AAMGA) or the National Association of Professional Surplus Lines Offices (NAPSLO)

Front 790

The key to placing business with a wholesaler

Back 790

The wholesaler's ability and knowledge of the insurers it can access to place accounts.

Front 791

Because of the specialty nature of the wholesale market, it is generally necessary for a producer to

Back 791

Establish relationships with more than one wholesaler.

Front 792

Sometimes a wholesaler will have a special relationship (such as an MGA contract) with one insurer; this will provide

Back 792

Faster quotations and placement of coverage

Front 793

The increased complexity of many business has prompted small agencies to use wholesalers, especially during

Back 793

Hard markets.

Traditionally, only the large independent agents and brokers used wholesalers.

Front 794

Reduced market capacity among standard insurers has this effect on wholesalers

Back 794

It increases marketing opportunities for insurance wholesalers

Front 795

Many states allow insurance to be placed with a nonadmitted insurer only after the producer

Back 795

Has tried to place the coverage with admitted insurers.

Front 796

Several states have ________ through which all surplus lines business must be routed.

Back 796

Stamping offices

Front 797

Stamping offices

Back 797

Audit surplus lines transactions and oversee the activities of eligible and potentially ineligible insurers.

Front 798

Control is also exercised through the mandatory licensing of surplus lines agents and brokers, who are accountable for __________________ on this type of business

Back 798

Federal and state premium taxes

Front 799

Avoiding E&O difficulty when selling and servicing surplus lines insurance requires careful attention to

Back 799

product differentiation, the insurer relationship, and the overall transaction.

Front 800

Reasons why E&O claims reported to liability insurers increase when a producer deals in surplus lines insurance.

Back 800

Policy forms are different; the producer's relationship with the insurer is different; more parties are involved in the transaction

Front 801

Surplus lines laws are designed to protect licensed insurers from

Back 801

Unfair competition

Front 802

Various state statutes contain some or all of these requirements regarding surplus lines:

Back 802

- Certification by the agent that coverage is not available from an admitted insurer
- Affidavit signed by the policyholder acknowledging policy placement with a surplus lines insurer
- Affidavit signed by the producer indicating that the policy was not placed with a surplus lines insurer to gain price or policy form advantage
- Prohibition on use of surplus lines insurance placement to gain a price advantage
- Certification by the producer that coverage was rejected by at least three admitted insurers

Front 803

The purpose of the insurer-producer partnership

Back 803

To provide insurance protection

Front 804

These help facilitate open communications between producers and insurers

Back 804

Special insurer programs and joint agency-insurer planning

Front 805

Agency advisory council

Back 805

Typically composed of selected producers who work for or represent the insurer. Typically meet regularly to discuss policy decisions that affect eh agency production force.

The success of a council is directly related to the insurer's intent when it establishes the council.

Front 806

Major criticism of the agency advisory council approach

Back 806

It reaches only selected producers.

To help solve this problem, many insurers notify all their producers before council meetings to allow input from every concerned agent.

Front 807

Commission reductions or stricter underwriting guidelines are usually announced in one of these ways:

Back 807

In person by sales representative or by letter

Front 808

A few insurers include producers as members of their

Back 808

Board of Directors

Front 809

Ways in which communications are fostered among producers and insurers

Back 809

- Informal channels
- Formal channels
- Special insurer programs
- Joint Agency-Insurer Planning

Front 810

Special insurer programs (a.k.a. Special agency programs?)

Back 810

Give certain agencies more responsibility and authority for underwriting, claims, and policy issuance. In return for an in acknowledgement of the extra work, the agency may receive additional compensation.

Although these experimental programs have received mixed reviews from the insurers and agents participating in them, the mutual respect of one side for the other seems to have increased.

Front 811

The IIABA Joint Agency/Company Planning Tool

Back 811

Provides a strategy for building a successful relationship between the agency and the company.

It includes a format for merging an agency's production goals with an insurer's production plans so that the joint planning process can support clear and measurable goals based on mutual agreement between agency and insurer executives.

Front 812

The ultimate goal of joint planning

Back 812

To build a collaborative planning relationship, leading to an understanding of each party's strengths, abilities, and goals.

Front 813

Good joint planning can produce results such as

Back 813

Improved client service, higher retention rates, an dincreased prodcutivity.

Front 814

Factors that have contributed to an unfavorable public view of the industry:

Back 814

- Negative press
- Consumers' negative experience with insurers
- The complexity of insurance contracts

Front 815

A well-crafted advertising campaign can help agents overcome the perception that insurance is

Back 815

A commodity (that is, undifferentiated, except by price, and interchangeable with another product of the same type).

Front 816

Three types of advertising

Back 816

- Image advertising
- Product advertising
- Institutional (nonproduct) advertising

Front 817

Image advertising

Back 817

Creates an image or perception of an advertiser's products and services, rather than focusing solely on the products or services themselves.

Front 818

Image advertising is especially important in insurance because

Back 818

Consumers are purchasing the intangible promise that a claim will be paid if a future covered loss occurs

Front 819

Product advertising

Back 819

Generates sales by promoting a company's goods or services

Front 820

Institutional (nonproduct) advertising

Back 820

Designed to sell ideas through the promotion of an organization's mission or philosophy.

In an institutional advertising campaign, sales generation may not be as important as, for example, informing consumers that the organization supports charities.

Front 821

A combination of these two types of advertising can lead to public awareness of, interest in, and ultimately, acceptance of the producer, the agency, and the agency's products and services.

Back 821

Product advertising and institutional advertising

Front 822

To be effective, an advertising message must be

Back 822

Consistent and repetitive until, ideally, the consumer take action.

Front 823

Only ads that are carefully constructed to reach the target audience have a chance to be

Back 823

Noticed

Front 824

Ad campaign

Back 824

A series of different ads with a single purpose

Usually take a campaign to establish an idea in the consumer's mind that will be converted into action. Repetition is the key.

Front 825

Ways in which advertising can be used by agencies:

Back 825

- To sell a new name and public image to current and prospective customers
- As a competitive tool
- To maintain current customer relationships and develop new ones

Front 826

Before initiating an advertising campaign, an insurance agency should

Back 826

Perform a strategic market analysis of its current business environment.

Front 827

After a strategic market analysis, and insurance agency should

Back 827

Consider goals for its advertising campaign

Front 828

Types of goals for an advertising campaign

Back 828

- Enhancing awareness of its name
- Informing consumers of specialty market expertise
- Identifying buyers' interest in specific products
- Associating the image with a better-known entity
- Enhancing the image of the insurance industry

Front 829

Steps for performing a Strategic Market Analysis

Back 829

1. Identify the target markets.
2. Fit the target market and advertising campaign to the marketing plan.
3. Identify specific marketing goals for the advertising campaign.
4. Perform a SWOT analysis
5. Put the analysis results in writing. Thereafter, update the analysis if necessary, but only after reviewing each of the preceding steps.

Front 830

Target market

Back 830

A defined segment or group within a market on which a company focuses its marketing activities.

Front 831

SWOT analysis

Back 831

A managerial planning exercise used to identify organizational strengths and weaknesses and environmental opportunities and threats

Front 832

When assessing internal strengths and weaknesses, agencies should determine

Back 832

Whether they have adequate internal resources to take advantage of the opportunities the advertising campaign may bring in

Front 833

At the conclusion of the strategic market analysis, the insurance agency must determine

Back 833

Whether the advertising will support its goal of increasing sales.

Front 834

Brand

Back 834

A set of characteristics that differentiation the organization from its competitors

Front 835

Keys to enhancing name awareness or recognition through advertising

Back 835

- Repetition of the advertising message
- Variation of the media used to present it

Front 836

An advertising message must be

Back 836

Consistent and repeated to consumers

(so they remember not only the product or service but also its benefits)

Front 837

Psychologists have found that a person needs to hear or see something a minimum of ___ times before the message is memorized.

Back 837

Three

Front 838

A campaign advertising an agency's or a producer's expertise in a particular specialty market is usually directed to a ____ rather than to the general public

Back 838

Target market

(The same is true of a name awareness campaign.)

Front 839

Specialty identification advertising is intended to reach

Back 839

Specific prospects not necessarily familiar with the insurance agency, its products, or its services

Front 840

Specialty market advertising campaigns are typically limited to

Back 840

Medium-to-large-size insurance agencies.

Small independent firms are usually not specialized in one particular product and may not want to spend their advertising dollars on one type of business.

Front 841

By identifying buyers' interest in specific products, an insurance agency can

Back 841

Emphasize product offerings for which it has a competitive advantage or a service.

The advertising campaign should answer the buyer's question: “What's in it for me?” Responses to such campaigns can affirm buyers' interest, or lack of interest, and agencies should modify their campaigns accordingly.

Front 842

Insurance agents can also identify with the insurers they represent by producing

Back 842

advertising and marketing materials in partnership with them or by linking to their websites.

In turn, insurers can direct business to their independent agents through the use of agency locators on their web sites.

Front 843

T or F: If an insurance agency has a business relationship with a bank, an investment firm, or another type of financial services provider, then identifying with the agency's financial services partner could form the basis of an effective advertising campaign.

Back 843

TRUE. If an insurance agency has a business relationship with a bank, an investment firm, or another type of financial services provider, then identifying with the agency's financial services partner COULD form the basis of an effective advertising campaign.

Front 844

______________ emphasize to the public valuable service that insurance provides to individuals and communities in distress.

Back 844

Service-oriented ads

i.e., ads that highlight an agency's response to catastrophes, earthquakes, fires, tornadoes, and hurricanes to illustrate prompt and compassionate claim service and the importance of proper insurance.

Front 845

The success of an agency's advertising campaign depends on

Back 845

The time and money it can commit to it

Front 846

A ___________ should be attached to each advertising goal.

Back 846

Profit goal

Front 847

Agencies typically allocate a ______ budget item for advertising each year and allocate _______ for campaigns as opportunities arise.

Back 847

Lump-sum; specific funds

Front 848

The percentage of net revenue spent on advertising generally ______________ as the size of the agency increases.

Back 848

Decreases

Front 849

These types of agencies usually spend less on advertising than their independent agency counterparts because they are included in the national advertising programs of their sponsoring companies.

Back 849

Direct writers and exclusive agencies

Front 850

The budgeting method an agency uses for advertising depends on the agency's

Back 850

- Marketing plan
- Management's business philosophy
- Geographic location
- Available funds

Front 851

Five methods insurance agencies typically use to establish advertising budgets:

Back 851

- Affordable (all-we-can afford) method
- Percentage-of-sales method
- Competitive parity method
- Return on investment (ROI) method
- Objective and task method

Front 852

Affordable method (a.k.a., 'all-we-can-afford' method)

Back 852

An advertising budgeting method with which an organization focuses all its internal resources on operations and production and allocates what remains to advertising.

Front 853

Percentage-of-sales method

Back 853

An advertising budgeting method with which an organization bases its budget on a percentage of sales of the product.

(Is a more focused method than the affordable method.)

Front 854

An agency using this budgeting method does not consider specific advertising goals or budget for them.

Back 854

The affordable method

(Consequently, the chances are high for overspending or underspending.)

Front 855

Advertising's primary goal

Back 855

To increase sales.

Front 856

The affordable method of advertising budgeting is typically used by

Back 856

Small insurance agencies, and large agencies that are not focused on marketing

Front 857

A modification of the percentage-of-sales method uses ________ rather than past sales to determine advertising direction.

Back 857

Future sales

With this method, the ad budget is based ons ales projections for the coming year, either as a percentage of those projections or as an industry standard percentage.

Front 858

Advantages of the percentage-of-sales method

Back 858

- Simple for insurance agencies to establish
- Simple to use

Therefore, it is one of the most commonly used budgeting methods among organizations.

Front 859

Main disadvantage of the percentage-of-sales method

Back 859

If it is based on past sales, the current year's advertising budget is generated by the prior year's sales; therefore, sales stimulate advertising when advertising should stimulate, and help generate, sales.

Using future sales overcomes this disadvantage.

Front 860

Other disadvantages of the percentage-of-sales method

Back 860

- The agency does not consider its plans for the coming year in setting the advertising budget
- A decrease in sales over time will trigger advertising budget decreases precisely at the time when advertising and promotion may reverse negative sales results

Front 861

Competitive parity method

Back 861

An advertising budgeting method with which an organization assesses the competitive environment and uses the amounts spent by its major competitors as benchmarks.

The idea: this type of budget-setting takes advantage of the collective wisdom of the marketplace and creates relative stability among marketplace competitors.

Front 862

Three disadvantages of the competitive parity method

Back 862

- Does not have an aggressive sales focus (it is defensive and based partly on the sometimes erroneous assumption that the competition's spending is effective)
- It overlooks advantages that one insurance agency may have over another
- There is no guarantee that competitors will not adjust their budgets, thereby damaging marketplace stability.

Front 863

Although the competitive parity method is simple to use, it is best used in combination with

Back 863

One or more other methods of setting an advertising budget

Front 864

Return on investment (ROI)

Back 864

An advertising budgeting method with which an organization treats advertising expenses as investments and monitors its advertising results to determine investment returns.

Front 865

A disadvantage of the ROI system

Back 865

Evaluating advertising using only sales provides incomplete results.

Insurance agencies can consider additional metrics (agreed-upon standards of measure used to indicate progress or achievement), such as expansion into a new market, name awareness, brand identification, and image enhancement.

Front 866

Objective and task method

Back 866

An advertising budgeting method that involves three steps: defining the advertising communication (media) objectives, determining the strategies needed to attain them, and estimating the costs associated with executing the strategies.

The total advertising budget is the sum of these costs.

Front 867

When an advertising budget is established by the objective and task method, the advertising goal is to:

Back 867

Generate sales.

Front 868

This method of establishing an advertising budget is used by the majority of advertising firms in the United States.

Back 868

The objective and task method

Front 869

After determining the goals and budget for its advertising campaign, an agency next decides whether it will enlist assistance in devising and implementing the campaign. There are three primary sources of support for this:

Back 869

- Advertising agencies
- Insurers
- Agents' associations

Front 870

Similar to insurance producers, advertising agencies are usually paid in this manner

Back 870

On commission

Front 871

Media companies pay the advertising agency

Back 871

A percentage commission, which is included in the fee paid to the media company by the insurance agency doing the advertising

Front 872

How much you should spend on your advertising is for _____________ to determine.

Back 872

Marketing professionals

Front 873

Advantage of using an advertising agency

Back 873

The staff has professional expertise, objectivity, and commitment to the process.

Front 874

Disadvantage to relying exclusively on advertising professionals

Back 874

They do not know the intricacies of the insurance business.

Agencies using an advertising agency must work closely with them to achieve desired results.

Front 875

To avoid pressure to spend more than it can afford, the insurance agency should establish its advertising and public relations budget

Back 875

Before contacting an advertising agency.

Front 876

If there is an identifiable consumer need, it would be tot he agency's advantage to be

Back 876

The first local insurance agency to promote this product.

Front 877

For insurance agencies that cannot afford the services of specialized advertising agencies and that prefer not to invest their advertising dollars in a general advertising agency relationship, advertising support can be provided by

Back 877

The insurers they represent

Front 878

Cooperative (co-op) advertising

Back 878

A means of sharing the cost of producing and placing advertisements.

Front 879

Many insurers have co-op plans but are hesitant to publicize them or freely distribute them for these reasons:

Back 879

- Insurance agency commitment (insurers do not want to invest in agencies that are not committed to advertising and that are unwilling to follow the ad campaign with a sizable sales effort)
- Booked new business (insurers do not want to create a program for agencies that will not give them a specific portion of the new business generated by the advertising campaign
- Spread-of-risk (insurers may not want to increase their writings in certain geographic areas)
- Available resources (insurers may not have the resources required to create individual programs for each individual agency)

Front 880

A typical co-op advertising program may offer agents

Back 880

A dollar-for-dollar match on approved advertising costs up to a set amount.

In addition to funding, the insurer may provide prepackaged radio spots, printed advertising slicks, and additional professional support.

Front 881

Trusted Choice

Back 881

IIABA marketing brand designed to inform consumers of the value independent agents bring to the insurance relationship, specifically in the areas of product choice, coverage customization, and client advocacy.

Offers marketing support to agencies.

Front 882

Classes of media that agencies might use for advertising:

Back 882

- Print
- Radio and television
- Digital interactive
- Direct mail
- Out-of-home
- Supplementary media items

Front 883

A single use (one-off) print advertisement can be costly; however, an with ________ can be cost effective.

Back 883

Negotiated frequency-of-use discounts

Front 884

With newspaper ads, producers can provide ____________ that other media cannot accommodate.

Back 884

Details about their agencies or products

Front 885

Newspapers provide

Back 885

Flexibility (because ad size, other factors can vary)

Production costs are low, and the format can be changed frequently and quickly.

Front 886

Readers of these publications are technical or managerial professionals who typically are more receptive to detailed ads that deliver a specific message about the products and services .

Back 886

Specialized magazines, journals, and other periodicals that serve the interests of particular industries.

Front 887

Radio advertisement benefits

Back 887

- Can reach a significant section of the population
- Can target listeners according to a variety of criteria (station, programming, timing)
- Production costs are relatively low compared to TV
- Can be especially effective in metropolitan areas

Front 888

Television advertisement benefit

Back 888

- Help create name and image identification

Front 889

Disadvantage of TV ads

Back 889

- Expensive

Front 890

This factor is very important with radio and TV ads

Back 890

Frequency

Front 891

___________ offer subscribers scores of channels and sell affordable advertising time on many cable TV networks.

Back 891

Local cable systems.

Local access TV networks also offer an opportunity for the local agent to purchase advertising time and may even make prepackaged production facility resources available so that an agent can produce a consumer affairs-type program of 15 to 30 minutes that can be aired on the local cable access network.

Front 892

Components of an effective internet marketing strategy:

Back 892

- Featuring the agency's website address in all agency literature and advertising
- Linking the agency's website to its affiliate insurer websites and agent locators
- Advertising the agency's website (through links or banner ads) on partner websites (such as car dealers, financial services firms, or mortgage brokers)
- Linking the agency's website to national, regional, and local agent and professional associations; linking to their agent locators; or advertising on their websites
- Collaborating with affiliated insurers in Internet lead-generation advertising programs
- Establishing and/or encouraging a virtual community of site users that allows them to interact with each other and with agency representatives
- Creating and integrating cell phone applications that link to the website and promote the agency's brand

Front 893

For the average insurance agency, _______ may be the preferred way to reach prospective customers.

Back 893

Direct mail.

It offers selectivity, simplicity, and flexibility – a particular producer can mail anything at any time and in whatever quantity desired to focus on particular marketplace segments.

Front 894

Reply instrument

Back 894

A major part of any direct mail campaign; a postcard or other document that helps the producer gather information on prospects, gain feedback, and build a mailing list database.

Front 895

Probably the most important part of the direct mail advertising campaign

Back 895

Developing a mailing list

Front 896

Sources for mailing list development:

Back 896

- Telephone directory
- Subscription lists
- Club, trade, professional, service, and alumni organization lists
- Newspaper listings and public records
- Mailing list brokers and lead-generation services

Front 897

Out-of-home media can reach consumers using many subclasses, including:

Back 897

Most importantly:

- Billboards
- Transit signs
- Telephone directories

Also:

- Movie theaters
- Bus shelters
- Subways
- Trade shows
- Sports stadiums

Front 898

Billboards

Back 898

Reach a general audience and leave a fleeting impression. (Same with transit signs.) Primarily build name recognition.

Most effective when integrated with other media, such as radio or TV.

Front 899

Supplementary media items

Back 899

Promo items such as pens, golf tees, mugs, or memo pads

Front 900

Two variations of the supplementary media item gift:

Back 900

- Durable gift (such as a computer mouse pad)
- Consumable gift (such as food; may be less expensive)

Front 901

Rebating

Back 901

Offering anything of value, other than the insurance itself, to an applicant as an inducement to buy or maintain insurance.

Front 902

Free advertising can result from these sources:

Back 902

- Press releases
- Published articles
- Media appearances
- Public speeches and seminars
- Community outreach

Front 903

A press release should contain:

Back 903

- The name and contact information of a person who can provide additional information
- A release date
- An attention-getting headline
- A lead paragraph that conveys the “who, what, where, why, and how” of the story
- Subsequent paragraphs elaborating on the opening paragraph

A press release that includes this complete information is most likely to yield a published item.

Front 904

Integrated marketing communications

Back 904

The process of coordinating an agency's media messages, marketing mix, and other business functions so that the agency's stakeholders and prospects receive consistent, coordinated marketing information.

Front 905

_______________ of informational seminars is another way to direct a message to a particular group the agency wants to serve.

Back 905

Agency sponsorship

Front 906

An agency's public image is a reflection of

Back 906

The brand built by its marketing and honed by the reputation it develops through interaction with internal and external stakeholders.

Front 907

An agency's image is also shaped by its

Back 907

- Advertising
- Physical location
- Interior design
- Personnel
- Promotion

Front 908

Physical location (image factor)

Back 908

A large, commercially oriented brokerage located in a prestigious downtown office building may present a favorable image to the medium-to-large commercial and industrial entities that constitute the firm's clients and prospects.

Front 909

Regarding image and personnel, ________ is as important as professional and technical ability.

Back 909

Friendly, courteous concern

Front 910

Most new business is derived from

Back 910

Referrals that are generated by satisfied customers

Front 911

Promotional advertising

Back 911

An advertising program directed towards a targeted group, designed to generate immediate sales of specific products or product lines.

Front 912

Efficiently and effectively using an agency's ____________ together with promotional advertising can enhance an agency's marketing strategy.

Back 912

Management system.

Conversely, hap-hazard promotion can be counter-productive.

Front 913

A frequently used method of communicating with customers

Back 913

To include a brochure or letter with every piece of outgoing mail.

Front 914

T or F: Independent agents have found that promotional advertising campaigns help sell their agencies to insurers.

Back 914

TRUE. Frequently, large sales organizations prepare separate brochures specifically for insurers.

Front 915

T or F: Insurer-agency agreements usually require producers to obtain advance approval for any advertisement that includes the insurer's name or mentions its specific products.

Back 915

TRUE. Violation of such a provision could result in termination of the agency agreement as well as possible civil action for breach of contract.

Front 916

Public relations resembles advertising in that it

Back 916

Involves communication of a desired image.

Front 917

Public relations differs from advertising in

Back 917

How the image is projected – it takes a longer, broader view of the importance of a firm's reputation and image as a corporate asset.

Front 918

Public relations

Back 918

A communications program designed to manage an organization's image and reputation by creating constructive relationships with various groups of people.

Front 919

Broad goal of public relations

Back 919

To earn the public's acceptance and confidence

Front 920

One of the most important requirements of agency public relations

Back 920

Being informed about the insurance industry.

No amount of civic involvement will compensate for lack of knowledge and the inability to serve the public as promised. An agency's producers and support staff should have a basic understanding of the insurance mechanism and detailed knowledge of the areas directly affecting their jobs.

Front 921

Requirements of an effective public relations campaign:

Back 921

Agencies and producers are:
- Informed about the insurance industry
- Ethical
- Responsible citizens of the community.

Front 922

____________ place the producer in a position to solicit business and establish contacts that may result in new accounts.

Back 922

Community activities (e.g., memberships in the Rotary or Lions Clubs or the Chamber of Commerce)

Front 923

Certain public relations activities have a cost attached, but usually the real cost is

Back 923

Time

Front 924

Because the benefits of public relations may be delayed or indirect, public relations activities can be a source of

Back 924

Friction between those who place more value on community activities and image-related activities and those who place more value on traditional business activities.

Consequently, an agency's management must determine the optimum amount of time for producers to spend in PR, understanding that every contact made during the course of public relations activities can become a client or lead to a referral.

Front 925

In addition to adding new customers, an agency can contribute to its growth by

Back 925

Making new sales to existing customers

Front 926

Internal growth

Back 926

Growth of new sales to existing customers

Front 927

T or F: Most insurance customers prefer to do business with one producer at a time – typically the producer who sold them their policy.

Back 927

TRUE. They do prefer that, typically.

Front 928

Advantages of internal growth:

Back 928

- Commissions increase at little expense when the premiums on a policy are increased.
- When the premium base is increased on existing accounts, the overall loss ratio of the agency, in the absence of a catastrophe, typically improves
- If the agency's account service representatives can be shown that they are, in effect, counseling individual customers regarding their insurance, pricing, and risk management alternatives, their jobs can be enriched, leading to greater job satisfaction.

Front 929

Potential prospects for internal growth in an agency's existing customer base:

Back 929

- “One-policy” personal lines accounts
- Commercial accounts that may lack some coverages or have some of their insurance policies through other agencies.

Front 930

Good prospects for new personal lines accounts:

Back 930

Executive officers or key employees of commercial customers.

This is because they already have demonstrated confidence in the producer.

Front 931

Prospect list based on existing accounts can be constructed in one of these two ways:

Back 931

- Built manually
- Generated electronically

Front 932

Approaches to promoting internal growth by upgrading existing accounts:

Back 932

- Commit to an insurance-to-value program to ensure customers' property values and liability limits are current with inflationary trends
- Broaden coverage provided to the customer
- Offer additional policies as a customer's loss exposures change or new products become available
- Use account selling by offering policies a customer has purchased through other agencies
- Offer fee-based services

Front 933

The ___________ should establish the basis on which policy-limit adjustments for inflation are made.

Back 933

Agency

Front 934

A majority of property-casualty insurers use guides or software produced by Marshall & Swift/Boeckh that help

Back 934

Establish property values against which property limits can be compared and adjusted.

Front 935

Guides that help agencies establish insurance-to-replacement-cost values do some based on these types of factors:

Back 935

- Location
- Type of construction
- Square footage
- Additions for attached garages, fireplaces, basements, and so on

Front 936

Each account should be periodically reviewed to determine whether liability limits are adequate in light of

Back 936

- Recent liability judgments
- The insured's assets and activities
- Overall loss exposures

Front 937

Tactics an agent might do to help insure to value:

Back 937

- Establish recommended minimums of liability coverage (above any state-required limit)
- Increase all liability limits to levels necessary to comply with the underlying limits of an umbrella policy

Front 938

One of the most disquieting aspects of insurance production

Back 938

Telling an insured that a claim is not covered

Front 939

Advantages of writing the broadest coverage appropriate whenever possible:

Back 939

- Some claims are paid on behalf of or to customers that would not otherwise be covered
- When an 'open perils' policy is sold, the insurer must cover any claim submitted unless the policy form specifically excludes the claim
- Broad coverage can be written at no administrative cost to the agency, thereby increasing the profit almost in direct proportion to the size of the commission
- Errors & omissions claims are minimized because customers have fewer gaps in coverage.

Front 940

Examples of broadened coverage

Back 940

- The open perils (“special”) forms in both personal and commercial lines
- The difference in conditions (DIC) form

Front 941

Examples of additional policies that a producer can use to develop accounts include

Back 941

- Personal and commercial umbrellas
- Employment practices liability
- Directors and officers liability
- Pollution liability

Front 942

The best prospect is

Back 942

The customer already on the books.

Front 943

Benefits of 'writing the entire account'

Back 943

- Customer's coverage is better coordinated, with fewer gaps or overlaps
- Possibly simplified, single-bill accounting

Front 944

Account selling

Back 944

The producer identifies existing customers who have purchased additional policies from other agencies and offers to evaluate those policies using the producer's own insurers and risk management providers.

Front 945

To identify prospects for account selling, producers do this:

Back 945

Review all accounts for coverage needs not currently insured through the agency, and then send letters based on existing policy expiration dates to solicit new business related to those policies.

Front 946

X-dating

Back 946

Just another term for 'expiration dating', or account selling

Front 947

Purpose of charging fees for certain services

Back 947

- Offsets the reduction in income from reduced commissions
- Compensates the producer for additional services performed

Front 948

In many cases, producers charge fees for services that insurance agencies have

Back 948

Traditionally performed as part of the commission received for the sale of insurance, such as risk management and claim handling.

Front 949

T or F: All states permit licensed producers to charge fees.

Back 949

FALSE. Not all states permit licensed producers to charge fees. Some states prohibit a producer from charging a fee in addition collecting a commission on the sale of the same insurance product to the same customer.

Front 950

Where producer fees are permitted, the producer should always disclose the following to the customer:

Back 950

- The fees charged
- The services provided

Front 951

An agency grows externally by

Back 951

Adding new customers

Front 952

External growth is promoted by this function

Back 952

The sales function.

Front 953

The sales function is supported by these producer accountabilities:

Back 953

- Prospecting
- Fact-finding
- Sending the submission to the underwriter
- Preparing and presenting proposals
- Closing
- Providing both initial and long-term customer service

Front 954

A producer begins the process of external agency growth by conducting these 3 activities:

Back 954

- Prospecting
- Fact-finding to determine the potential customers' needs
- Submitting accounts to underwriters

Front 955

Prospect

Back 955

An individual (or organization) from whom a producer solicits business.

Front 956

Prospecting involves these steps:

Back 956

- Qualifying suspects into prospects
- Creating prospect profiles
- Building a prospect database and keeping it current

Front 957

In most P&C insurance agencies, ___________ are responsible for prospecting.

Back 957

Producers

Front 958

The prospect inventory begins with ______

Back 958

“Suspects” – individuals or organizations that meet certain customer qualifications established by the agency or producer.

Front 959

The number of suspects is

Back 959

The total pool available for a particular marketing focus.

For example, a marketing focus may be made up of individuals who own homes in a specific geographic area.

Front 960

The transition from suspect to prospect is a process of elimination, sometimes referred to as the

Back 960

Sales funnel

Front 961

Suspects can generally be qualified into prospects by a screening process that asks questions such as:

Back 961

- Do they need the product?
- Are they acceptable from an underwriting viewpoint?
- Will they pay premiums promptly?
- Can the producer arrange to meet with them?
- Are they the right type of market for the agency or producer?
- Are they likely to buy the targeted product?

Front 962

After compiling the prospect inventory, the producer creates these:

Back 962

Prospect profiles

Front 963

Profiling

Back 963

Gathering desired information about customers and prospects.

Profiling gives the producer sufficient personal and, where applicable, business information to organize activities leading to prospect contact.

Front 964

The profile for a personal lines prospect could include these data:

Back 964

- Personal information (name, birth date, address and contact info, marital status, and family members)
- Ownership of property
- Education
- Occupation, including employer's name, title, and nature of work
- Social groups, membership, and affiliations
- Hobbies, interests, and recreational activities
- Name of current producer and expiration dates of current policies

Front 965

The profile information for a business prospect could include this data:

Back 965

- Company name, address, contact information, and website
- Type of business and products or services
- Size of business, including assets, sales, number of employees, and payroll
- Type of organization and management
- Credit rating
- Prominent execs and other key people
- Business operating policies
- Terminology unique to the business
- Major income and expense items
- Competition
- Current producer, years insured with that producer, any reasons to expect dissatisfaction with current producer, and expiration dates of current policies

Front 966

The more that is known about an agency's prospects, the better a producer can

Back 966

- Identify their needs
- Segment the market

Front 967

Sources of information for prospect databases:

Back 967

- Centers of influence
- Referrals
- The Internet, social networking, websites, and other social media
- Direct mail
- Cold calls
- Natural contacts
- Personal observation
- Information directories
- Commercial mass marketing

Front 968

Center-of-influence prospecting

Back 968

A process of meeting people through other people of influence.

Front 969

A producer develops centers of influence from

Back 969

Personal and business encounters

Front 970

Centers of influence

Back 970

People who are known and respected in their own sphere of activity and alert to changing situations that would make people good insurance prospects.

Front 971

The most common types of referrals

Back 971

- Sought-after referrals
- Engineered introductions

Front 972

Sought-after referral

Back 972

Results from a producer's request to a satisfied customer for recommendations of neighbors, friends, competitors, or related organizations.

Front 973

Engineered introduction

Back 973

Results when the producer has identified and qualified a commercial prospect but needs an introduction to a key individual in the prospect's organization.

Front 974

Natural contacts

Back 974

Individuals with whom producers come in contact in the normal course of their work or personal activities.

Front 975

People may be more likely to buy from a producer with whom they have

Back 975

Common interests

Front 976

Personal observation

Back 976

e.g., being on alert for possible prospects, and noticing a “sold” sign on a vacant lot, dwelling, or building – it might alert an observant producer to the opportunity to inquire and obtain sufficient information to generate suspects or prospects

Front 977

A producer can be introduced to a prospect through linked connections on _________, a professional networking site.

Back 977

LinkedIn

Front 978

Joint advantage of the Internet and direct mail

Back 978

- They qualify prospects through the use of questionnaires and loss exposure surveys rather than in person
- They offer access to people who would otherwise remain unknown to the producer.
- They can improve producer workflow and planning by encouraging the producer to establish a system of follow-up to direct mail or Internet campaigns.

Front 979

These forms of prospecting can be done either online or by direct mail:

Back 979

- A preapproach letter
- Giveaways
- Print or email newsletters

Front 980

Preapproach letter

Back 980

Designed to sell the prospect on the idea of scheduling an interview. Suggests that the producer has an idea of interest and value to share with the prospect and states a specified time that the producer will phone for an appointment or visit.

Front 981

Giveaways work especially well for ______ prospects.

Back 981

Personal lines

Front 982

Print or email newsletters promote ___________ rather than serve as a direct source of prospects.

Back 982

Public relations

Front 983

Cold calls can be effective:

Back 983

- For new producers
- For experienced producers during slow referral periods

Front 984

Do Not Call registry

Back 984

Prohibits calls to numbers listed on the registry unless the caller has an established business relationship with the person listed.

Front 985

Producers can improve the effectiveness of their cold calls to businesses through thorough preparation that includes:

Back 985

- Research the business on the Internet
- Studying its operation and competitive environment
- Matching the business in advance to prospective insurers

Front 986

Mailing list organizations

Back 986

Can provide information on a broad or specific basis, tailored by agency request.

Front 987

Commercial mass marketing

Back 987

Conducted by membership organizations or by insurers that develop insurance programs for specific business entities.

Organizations in similar types of business, such as dry cleaners, often form trade associations, in part to gain the economic influence to obtain favorable consideration for insurance, which they then market to their members. Such organizations usually have producers who are members or who represent insurers to market association-sponsored programs to association members. The association provides a membership list to the marketing organization, and the marketing organization assigns these prospects to the appropriate member producer.

Front 988

Fact-finding

Back 988

Involves identifying a prospect's loss exposures in order to offer insurance based on the prospect's specific needs.

Front 989

Fact-finding activities

Back 989

- Physically inspecting the prospect's operations or premises
- Interviewing the employer and key staff members
- Researching financial statements to determine which items of value need protection.

Front 990

By demonstrating strong risk management skills in identifying, assessing, and analyzing a prospect's loss exposures, a producer can

Back 990

Position himself or herself as a valuable risk management resource

Front 991

A.M. Best Company's Best's Underwriting Guide

Back 991

An online service that describes the hazards, loss exposures, and underwriting considerations of nearly 600 commercial and industrial operations

Front 992

Submission

Back 992

Designed to persuade the underwriter to offer coverages and pricing terms that sell the account.

Front 993

Underwriters who regularly receive submissions from a producer are likely to accept as many as possible if the producer

Back 993

Understands and accepts occasional declinations

Front 994

Underwriters typically cooperate with producers who

Back 994

They know and trust

The producer can build trust by providing complete information; being open and honest in communication builds trust.

Front 995

Open communication between a producer and underwriter should be

Back 995

Reciprocal

Front 996

Sales proposals arise when a producer's prospect indicates interest in

Back 996

Becoming a customer

Front 997

_______________________ can make preparing and presenting new business proposals more efficient.

Back 997

Establishing a general format for all new business proposals

Front 998

________________ provide and store proposal formats.

Back 998

Agency management systems

Front 999

Purposes of effective proposals:

Back 999

- Informing the customer of recommended coverages and their premium costs
- Reinforcing the agency's corporate identity
- Projecting the agency's image
- Demonstrating the amount of work the agency performs on the customer's behalf

Front 1000

Information in a proposal for new business:

Back 1000

- The identities of the prospect, agency, and insurer
- Loss exposures to be treated
- Insurance or other risk management techniques recommended to treat those exposures
- Premium

Front 1001

Agency management system proposal formats include these elements:

Back 1001

- Cover page
- Introduction
- Section for each type of coverage (including limits, conditions, and definitions)
- A coverage and premium summary
- A concluding section selling the agency

Front 1002

Sections of a proposal that specify how the information on which the proposal is based was gathered and analyzed

Back 1002

Coverage sections

Front 1003

A proposal demonstrates producer ___________ by detailing how premiums and the producer's commission are determined.

Back 1003

Transparency

If the producer's income is based on fees rather than commission, the proposal explains how fees are generated on the account.

Front 1004

The proposal is designed to serve as the basis of the customer's file if the prospect becomes a customer. This approach serves two purposes:

Back 1004

- It is a labor-saving and quality-control device for the agency
- Is a tool for renewal processing

Front 1005

Whatever system or format is used, the proposal should be:

Back 1005

- Easy to read
- Easy to present
- Help the producer to close the sale

Front 1006

When presenting a proposal, this tactic encourages the prospect to pay attention to the producer's presentation and not be distracted by the cost.

Back 1006

Including the premium summary as a separate page

Front 1007

________ is important in presenting the proposal to the prospect; the prospect must be able to understand what the presenter is saying.

Back 1007

Clarity

Front 1008

Very few individuals will buy if they are not in some way asked to...

Back 1008

“make the buy”. That is, to close.

Front 1009

Closing, or asking for the sale, is often considered part of

Back 1009

The proposal presentation

Front 1010

Initial customer service

Back 1010

Service after a sale, provided by the agency, which includes:
- Completing and signing applications
- Collecting a deposit or down payment on the premium
- Issuing a binder along with a binder bill

Front 1011

T or F: You should always be willing to leave a proposal with the prospect.

Back 1011

FALSE. Whether to leave the proposal with the prospect is a decision the producer must make based on the prospect.

Front 1012

Long-term customer service

Back 1012

One the policy has been issued, it must be delivered, audits may need to be arranged, periodic contacts with the customer should be scheduled, and filed claims will require follow-up action.

Front 1013

Prior to policy renewal date, these actions need to be taken:

Back 1013

New info on operations should be gathered and presented to the underwriter

Front 1014

T or F: Initial service on renewals is the same as it is on new business.

Back 1014

TRUE. Initial service on renewals IS the same as it is on new business.

Front 1015

The agency should assign as much service work as possible to ___________ in order to maximize the producer's sales time.

Back 1015

Support staff

Front 1016

T or F: Every type of communication between an agency and its customers or prospects is to some extent a sales tool.

Back 1016

TRUE. Every type of communication between an agency and its customers or prospects IS to some extent a sales tool.

Front 1017

The quality of printed and electronic communication reflects

Back 1017

The quality of the agency

Front 1018

By including basic proposal information on the customer's billing statement, the bill can

Back 1018

Act as a proposal

Basic proposal information would include the customer's, insurer's, and agency's identity; the loss exposure to be treated; the recommended coverage; (though not in detail,) the premium

Front 1019

The more important the primary piece of mail,...

Back 1019

The less attention is paid to the secondary communication.

Therefore, key mailings should go out from the agency without additional sales messages.

Front 1020

The form of collateral literature should be determined by these two factors:

Back 1020

- The market
- The message

Front 1021

T or F: Collateral literature can be sent to a large, undifferentiated market.

Back 1021

TRUE. It CAN be sent to a large, undifferentiated market.

Front 1022

Envelope stuffers are aimed primarily at

Back 1022

Reinforcing corporate identity.

However, they can be costly to produce, and because they promote no specific action by either customers or agency personnel, their effectiveness is difficult to measure.

Front 1023

The form of collateral sales literature that producers are most likely to be directly involved with is

Back 1023

A letter to accompany renewals.

Some producers consider the time they spend writing these letters equivalent to time spent on cold calls or following up on referrals.

Front 1024

A renewal letter should

Back 1024

- Have a specific goal
- Be addressed to a specific audience

Front 1025

The goal of a renewal letter will determine

Back 1025

- What it says
- How it is said
- How it looks

Front 1026

In general, ___________ are the most effective direct-mail sales tool.

Back 1026

Personal letters

Front 1027

For a form letter, a producer would write

Back 1027

A general letter appropriate for all its recipients

The letter should be clear and brief.

Front 1028

The primary purpose of a renewal letter is still to

Back 1028

Provide the premium statement that accompanies the letter.

Front 1029

The final paragraph of a renewal letter should either:

Back 1029

- Call for a specific action the producer intends to take, or
- Inform the customer of a specific action the producer intends to take

Front 1030

A form letter can be transformed into a personalized letter in several ways, such as by modifying:

Back 1030

- The manner in which the recipient is addressed
- Using the recipient's name in the body of the letter
- Refer to the customer's specific occupation

Front 1031

Unless the number of renewal letters issued throughout the year is extraordinarily large, the producer should

Back 1031

Sign each one personally

Front 1032

Producers can gain and maintain competitive advantage through these two activities:

Back 1032

- Market segmentation
- Target marketing

Front 1033

Understanding market segmentation and target marketing enables producers to conduct these activities:

Back 1033

- Develop association programs
- Design special insurance products or approaches
- Target niche markets

Front 1034

Market

Back 1034

A collection of sellers and buyers of products and/or services

Front 1035

Market segmentation

Back 1035

The process of identifying and dividing the groups within a market that share needs and characteristics and that will respond similarly to a marketing action.

Front 1036

Marketing

Back 1036

The set of business activities (including planning, pricing, and promotion) that directs the exchange of goods and services in an effort to meet the needs and goals of individuals and organizations.

Front 1037

Target marketing

Back 1037

Focusing marketing efforts on a specific group of consumers.

Front 1038

___________ and ____________ are innovative marketing approaches that can help consumers differentiate the producer from the competition

Back 1038

Market segmentation and target marketing

Front 1039

Four common bases of market segmentation:

Back 1039

- Behavioristic segmentation
- Geographic segmentation
- Demographic segmentation
- Psychographic segmentation

Front 1040

Behavioristic segmentation

Back 1040

The division of a total consumer market by purchase behavior.

Front 1041

The basis for behavioristic segmentation

Back 1041

The satisfaction customers seek from products

Front 1042

Behavioristic segments are determined by a variety of variables that provide marketers with clues about who their customers are, why they buy, and how they consume. These are:

Back 1042

- User status
- Usage rate
- Purchase occasion
- Benefits sought
- Loyalty status

Front 1043

User status

Back 1043

The customer's or potential customer's current relationship to a particular product.

e.g. nonuser, ex-user, potential user, first-time user, regular user

Front 1044

Usage rate levels

Back 1044

- Light user
- Medium user
- Heavy user

Front 1045

This type of commercial class might be considered a 'heavy user' of insurance products

Back 1045

Contractors; they spend a relatively large percentage of their income on insurance and bonds.

Front 1046

Purchase occasion classifications

Back 1046

- Regular occasion
- Special occasion (e.g., a contractor that has won a large construction contract is likely to purchase heavy equipment)

Front 1047

Benefits sought (behavioristic segmentation)

Back 1047

- Economy
- Convenience
- Reliability
- Prestige

Front 1048

Loyalty status

Back 1048

A producer may seek to identify people who have brand loyalty to the producer's insurer in order to target a marketing program to them.

Front 1049

Key variables for geographic segmentation

Back 1049

- Region
- County size
- Climate
- City size
- Density (urban, suburban, or rural)

Front 1050

Voluntary geographic segmentation is usually chosen in order to

Back 1050

Reduce administrative and distribution costs

Conversely, geographic segmentation may be non-voluntary if it is legally restricted.

Front 1051

Legal restrictions that keep regional insurers out of some states:

Back 1051

- The requirement to file required papers and post appropriate bonds before beginning operations
- The expense of developing new business from producers
- Establishing a new group of producers
- Adjusting to the local competitive atmosphere

Front 1052

Many producers face geographic restrictions, usually imposed by

Back 1052

State licensing laws or the agency's contract with its insurer(s)

Front 1053

Producers should consider _____ and _____ when choosing their geographic segment or territory.

Back 1053

Expenses; number of prospects

Front 1054

Generally, the larger the premium and the greater the number of prospects involved, the _______ the territory that can be considered (for geographic segmentation)

Back 1054

Greater

Front 1055

Demographic variables

Back 1055

- Age
- Gender
- Education
- Occupation
- Ethnicity
- Income
- Family size
- Family life-cycle

Front 1056

A variable used to segment commercial lines insurance markets

Back 1056

Type of business by asset size (or by Standard Industrial Classification, or SIC)

Front 1057

Increasingly, demographic variables are combined with _____________ to select target markets for advertising.

Back 1057

Geographic segmentation.

This technique is called geodemographic segmentation.

Front 1058

This area is one rapidly growing market for which insurers must develop demographically based marketing strategies that may differ from strategies developed for other cultures.

Back 1058

The Far East

Front 1059

Insurers who wish to tap the Far East market must pursue these objectives

Back 1059

- Adjusting and expanding distribution strategies amid shifting demographics and consumer buying patterns.
- Developing strategies to shape and comply with the heightened pace of local and global regulatory and accounting developments.
- Developing dependable capital sources required to support accelerating business growth.

Front 1060

Takaful

Back 1060

A form of insurance based on Islamic principles.

Front 1061

This would be an appropriate demographic variable for producers specializing in estate planning for life insurance or for an agency located in a retirement community.

Back 1061

Age

Front 1062

Scheduled personal property endorsements or personal inland marine floaters could be marketed to people with this demographic characteristic.

Back 1062

High-income

Front 1063

In these types of occupations, the people in those occupations are candidates for difficult-to-place professional liability insurance.

Back 1063

Attorneys and physicians

Front 1064

In these types of occupations, the professional loss exposure could be endorsed to a homeowners policy.

Back 1064

Beauticians and teachers

Front 1065

Stages of the life-cycle (a demographic segmentation variable)

Back 1065

- Young, single
- Young, married, no children
- Young, married, youngest child under age 6
- Young, married, youngest child age 6 or older
- Young, unmarried, with children
- Older, married, with children
- Older, unmarried, with children
- Older, married, with no children under age eighteen
- Older, single
- Other

Front 1066

An agency located in a geographic area with a relatively small population can realize significant profits with this kind of target marketing.

Back 1066

'Type of business' segmentation.

Front 1067

Psychographic segmentation

Back 1067

Divides a market by individuals' values, personalities, attitudes, and lifestyles.

Front 1068

Producers should develop their target market selections based on

Back 1068

Which segments hold the most economic potential AND on their agencies' overall marketing plans.

Front 1069

3 ways in which markets are approached by marketers

Back 1069

- Undifferentiated
- Differentiated
- Concentrated

Front 1070

Undifferentiated market

Back 1070

The entire market of buyers for any particular type of product or service.

For example, to a firm in the sugar business, all sugar users make up the undifferentiated sugar market.

Front 1071

T or F: Marketing to an undifferentiated market is generally economical.

Back 1071

TRUE. It is generally economical. It uses media that have broad appeal.

Front 1072

Marketing to an undifferentiated market generally uses this type of media

Back 1072

Media that have broad appeal; these are particularly useful in building strong brand identification for a product or service in the minds of potential customers.

Front 1073

Treating markets as _______ is common in P&C insurance.

Back 1073

Undifferentiated

Front 1074

Advantages to positioning yourself as a generalist

Back 1074

- Book of business is spread over many lines and many insureds, helping to offset excessive losses in any one area
- Advertising can be basic

Front 1075

Disadvantage to positioning yourself as a generalist

Back 1075

By treating all customers in the same general manner, an agency or producer may overlook those with specific needs

Front 1076

Differentiated market

Back 1076

A market that contains a number of marketing segments, each with its own characteristics requiring separate marketing strategies.

Front 1077

Market segment

Back 1077

A portion of the market that has special characteristics and similarities that set it apart from the total market.

Front 1078

Two marketing approaches that an organization can use for a differentiated market:

Back 1078

- Operate in and sell a special product to one or more of the differentiated markets
- Choose a different marketing approach for each market (many agencies choose this approach)

Front 1079

Disadvantages to marketing to a differentiated market

Back 1079

- Can be expensive
- Requires the producer to have more knowledge than a producer in an undifferentiated market
- Higher promotional costs
- Higher costs of handling specialized products and services

Front 1080

Concentrated target marketing

Back 1080

A target marketing strategy by which marketers target a segment of a total market with the intent to capture a large or concentrated share of that segment

Front 1081

Key distinction between a segmented market and a concentrated market is

Back 1081

The marketing approach used.

When selling to a concentrated target market, the seller does not attempt to address the entire market with special products or approaches and also does not limit its market to a small, well-defined market segment. Rather, the seller focuses its resources and efforts on serving the identified large subunit or share of that segment of the total market. Because concentrated target markets require some specialization by the seller, total costs can be reduced, and advertising can be used to appeal to buyers in the concentrated target markets via media that specialize in those markets.

Front 1082

The key to market segmentation

Back 1082

Determining what type of similarity is desired among prospects in the seller's market

Front 1083

Advantages of specialization to the producer

Back 1083

- Can become a recognized expert; can gain technical expertise in a narrow area
- Can give the producer confidence in that segment

Front 1084

Advantages of specialization to the agency

Back 1084

- Educating and training efforts may be more efficient (if staff are required to learn technical and administrative procedures for only one business segment)
- Relationships with insurers and underwriters can improve due to the producer's expertise
- Can use advertising dollars more efficiently (using specialty trade magazines)
- Enhanced ability to recruit – if an organization employes someone from outside the insurance industry, the new producer can rapidly become productive in a speciality, saving the agency the time and expense required for training

Front 1085

When considering specializing advertising to a target market, an agency's producers should first do this:

Back 1085

Inquire at the marketing departments of insurers the agency represents.

Front 1086

Part of the success of the direct writer and exclusive agency marketing systems can be attributed to

Back 1086

Their use of a targeted approach, e.g., the fact that producers are trained in only one computer rating system, perhaps only part of the portfolio, etc.

Front 1087

The producer specializing in a target market faces potential disadvantages:

Back 1087

- Too specialized; cannot serve others' needs
-

Front 1088

T or F: An agency with a significant percentage of its business in one target market can find itself in financial peril if suddenly only a few insurers are willing to accept that segment of business and if, of those that do, the premiums are high.

Back 1088

TRUE. An agency with a significant percentage of its business in one target market CAN find itself in financial peril if suddenly only a few insurers are willing to accept that segment of business and if, of those that do, the premiums are high.

Front 1089

A producer's production plan should allow time to study the market segment and to provide

Back 1089

Appropriate products for the segment

Front 1090

In planning market segmentation, producers should consider these factors:

Back 1090

- Technical resources
- Type of products sold
- Age of product
- Market segment competition

Front 1091

In the independent agency and brokerage system, the producer may be restricted by

Back 1091

The agency's technical resources.

However, these producers can select insurers with products designed for a specific market segment and the technical resources to support those products.

Front 1092

If a product is standard and offered by every insurer, it is a ___________ product.

Back 1092

Homogeneous.

It makes sense in this case to treat the market as homogeneous and not attempt market segmentation.

Front 1093

The more a particular product can be modified, the better it is suited to __________.

Back 1093

Segmentation.

Front 1094

Depending on the scope of the product, or when a new type of product is introduced, it may be best to treat markets as _______________.

Back 1094

Undifferentiated.

For example, when the business auto coverage program was introduced, it applied to practically all commercial insurance buyers. It was intended to reach the broad business auto market. Producers, recognizing that practically all commercial accounts on the books could use the BAC, targeted them all with the new product.

Front 1095

As a product matures, certain disadvantages of targeting the basic product to small group of customers become apparent. At that point, ____________ become an appropriate marketing strategy.

Back 1095

Product differentiation or market segmentation and targeting

Front 1096

If the producer's primary competitors are using specialization and market segmentation, the producer should

Back 1096

Use the same marketing strategy. (The reverse, however, is not true.)

Front 1097

Association program marketing

Back 1097

A type of targeted marketing that producers can perform to increase sales and capture market share.

Front 1098

Associations

Back 1098

Groups whose members are bound together through shared special interests (business, professional, educational, civic, or other)

Front 1099

Associations are ready-made ___________.

Back 1099

Target markets

Front 1100

For a marketing program to be successful, association groups should possess four key elements:

Back 1100

- Homogeneous membership
- Attractive class of business
- Willingness of insurers to provide coverage
- Strong association endorsement

Front 1101

Association programs offset the reduced premium by offsetting these expenses for the insurer

Back 1101

Underwriting expenses; the exposure units are similar with associations. No individual should greatly influence the performance of the group because of its size or its exposures.

Front 1102

Many association groups are formed with a __________ as the base.

Back 1102

Special product.

e.g., contractor business policies or church policies have special coverages designed to fit the unique loss exposures of these customers.

Front 1103

One disadvantage of the association group approach

Back 1103

The possibility of losing the association endorsement because of a change in association management or leadership.

Once the work of putting the association program together has been accomplished, another producer – one who is in favor with the current management or leadership – can easily step in and duplicate the program. Association endorsement of a target market is a plus but does not always guarantee a successful program.

Front 1104

When an association group is local, the __________ usually has exclusive rights to sell the program to the group members.

Back 1104

Originating producer

Front 1105

Most association groups with national eligibility are marketed through

Back 1105

Local agents

Front 1106

Benefits to the producer of an association program:

Back 1106

- Marketing costs are reduced through the association's endorsement
- New prospects and referrals can result as the producer develops expertise in dealing with the association's focus

Front 1107

Benefits of an association program to the participating association members:

Back 1107

- Access to loss control recommendations
- Premium reductions or group dividends

Front 1108

Benefits of an association program to the participating insurer:

Back 1108

- Having easy access to a large number of prospects in a preferred business class can improve its loss ratio
- Increase in Inflow of new business premium
- Increased loss control consciousness can improve loss experience

Front 1109

The results of market segmentation can be optimized with ____________.

Back 1109

Product targeting

Front 1110

Product targeting

Back 1110

The development of a product or service for the special needs of a market segment (or the emphasis of the features of a product or service that fit the needs of a market segment).

Front 1111

Producers who target products use these tactics:

Back 1111

- Product targeting techniques
- Needs profiles
- Target market terminology during sales calls

Front 1112

Product targeting techniques involve designing

Back 1112

- Special insurance products
- Special approaches to market segments
- Both of the above

Front 1113

One way to target a market segment is to use a special insurance product. Examples:

Back 1113

- Animal mortality coverage
- Animal embryo coverage

Front 1114

Some agencies join _____________ to have access to special products.

Back 1114

Marketing affinity groups

Front 1115

T or F: Generally, special approaches to market segments offer producers more difficult opportunities to target markets.

Back 1115

FALSE. Generally, these approaches (such as joining an affinity group or associating themselves with insurers who offer special products) are easier; producers need not spend a great deal of time or effort finding a special insurance policy or endorsement. Rather, they can direct their energy toward finding new ways of selling to potential customers in the market segment.

Front 1116

The purpose of market segmentation

Back 1116

To find common characteristics of a group of people or organizations that respond to a marketing effort.

Front 1117

To determine unique insurance needs of the target market, the producer should

Back 1117

Perform a risk management analysis and recommend necessary policies, endorsements, and services where appropriate.

Front 1118

Targeting based on needs has this effect:

Back 1118

It separates a market segment from the total market. When product features are applied to customer needs, they become product benefits for customers.

Front 1119

In a competitive marketplace, the most potent weapon at a producer's disposal often is:

Back 1119

Data about the target market

Front 1120

Data mining

Back 1120

The process of extracting hidden patterns from data

Front 1121

The producer must examine the insurer's policies to see which coverages are available and which are excluded, because:

Back 1121

Target market segmentation, based on the proposed customers' insurance needs, may generate unique loss exposures.

Front 1122

An insurance product consists of

Back 1122

Policy and service

Front 1123

When offering a cooperative program, the producer and insurer should

Back 1123

Sign a written memorandum recording the agreement.

Front 1124

In an insurance sales call, the producer should take extra care to use language and examples that are meaningful to the customer and should avoid

Back 1124

Insurance industry jargon

Front 1125

Understanding the segment's terminology also helps the producer develop

Back 1125

Examples to illustrate how various coverages can manage the customer's loss exposures.

Front 1126

Niche market

Back 1126

A small segment of a total market. Niche marketing presents an opportunity for an agency to distinguish itself in a crowded market by developing an expertise in an area that its competitors may lack.

Front 1127

Effective niche marketing has these benefits:

Back 1127

- Can improve an agency's reputation
- Can increase its referral business
- Can reduce its competition
- Can increase its visibility and efficiency

Front 1128

Some factors producers may consider in identifying niche markets as they construct niche market customer profiles include:

Back 1128

- Commission level (the producer or agency should determine the minimum commission level acceptable for the niche market)
- Account size (the minimum to maximum acceptable size of a niche market account varies by agency preference, agency resources, and producer expertise)
- Growth potential (the potential niche market should present an opportunity for expansion and development
- Competition level (should allow room for the producer or agency to enter it)

Front 1129

Once a niche market is identified, the producer should determine whether or not it can be _________.

Back 1129

Profitable

Front 1130

To determine whether or not a niche market will be profitable, a producer should consider these issues:

Back 1130

- Ability to identify individual prospects within the group
- Prospects' need for my product, service, or opportunity
- Ability of the prospects to pay for what I'm offering
- Ease of delivering my sales message to these prospects under favorable circumstances
- Is the group large enough to produce the volume needed

Front 1131

The key to niche marketing

Back 1131

Market penetration

Front 1132

Two important factors that affect market penetration:

Back 1132

- Building customer relationships
- The sponsoring insurer

Front 1133

The smaller the niche market, the...

Back 1133

Smaller the margin for error

Front 1134

If a producer offers a good product but at an unreasonably high price, he or she may experience this result:

Back 1134

An inability to penetrate the niche market due to pricing

Front 1135

Nothing in recent history has had a greater effect on how an insurance agency conducts its daily business than

Back 1135

Advances in information technology

Front 1136

Information technology

Back 1136

A system that helps produce, manipulate, store, communicate, and distribute information.

Front 1137

Purposes of IT in an agency's overall strategic business plan:

Back 1137

- Supporting and linking key agency business functions
- Supporting customer services
- Supporting sales
- Maximizing efficiency
- Reducing errors and omissions (E&O) loss exposures

Front 1138

Most agency management systems integrate these two functions

Back 1138

- Agency administration
- Agency business prospecting based on target markets

Front 1139

Suspect

Back 1139

A user the agency suspects might be interested in insurance

Front 1140

Agency databases enable agency personnel to mine the agency's customer data for

Back 1140

Cross-selling opportunities

Front 1141

Premium accounting systems

Back 1141

(Often included in agency management systems)

These help agents improve their collections and premium processing and provide financial reporting that assists with the agency business.

Front 1142

Real-time processing

Back 1142

Enables agency personnel to instantly access information on the customer in the insurer's files and respond immediately to customer requests.

Front 1143

Items a real-time system provides agencies with:

Back 1143

Detailed customer information on:
- Quotes
- Billing inquiries
- Claim inquiries
- Loss runs
- Policy information
- Endorsement information
- Other requests

Front 1144

With real-time functionality, agency personnel can enter client data once into an agency management system that can then

Back 1144

Interface with multiple insurers' systems.

Front 1145

Real-time __________ influence customer expectations.

Back 1145

Workflows.

Customers expect immediate responses from web-based self-service systems and agency contacts.

Front 1146

Any _________ that personnel can provide will help build positive customer relationships.

Back 1146

Value-added services

Front 1147

Through the use of IT, agencies have come to maximize their....

Back 1147

Profit potential

Front 1148

Reasons why agencies that apply IT in their operations, particularly real-time workflows, typically have higher profit margins than agencies using older technology or manual systems:

Back 1148

- Improved operating efficiencies
- Reduced transaction costs
- Lower overall labor costs
- Higher per-employee revenue
- Increased new business sales
- Improved account development

Front 1149

The benefits of technological advancements that proactively manage customer accounts, suggest products to meet insureds' changing needs, and increase personal interaction with customers all ultimately translate to

Back 1149

Customer retention (and, therefore, improved profits, because it costs more to prospect new customers than to retain existing ones)

Front 1150

Database tools in real-time systems enable agencies to

Back 1150

Refine their marketing processes.

Agency personnel can mine the agency database, segmenting both customers and prospects based on specific criteria.

Front 1151

What factor has made web development a viable medium for agency sales, service, and support?

Back 1151

The costs involved have declined.

Social media is free, and interface options for savvy agency personnel, combined with intelligent web design, can foster the success of agency branding initiatives.

Front 1152

Research confirms that agencies that embrace technological advancements experience this effect:

Back 1152

They benefit from improved insurance sales and retention.

Front 1153

In addition to supporting more effective selling, IT tools help agencies monitor their own financial performance and enhance profitability through better

Back 1153

- Analysis
- Budgeting
- Development

The results is a more desirable and stable book of business.

Front 1154

Real-time workflow and one-stop process meet the overall goal of agency management to

Back 1154

Maximize agency productivity and efficiency

Front 1155

Single entry, multiple use

Back 1155

The process by which CSRs enter data into a system only once and then use it for multiple purposes, such as to update insurers' data files or to populate an insurance claim form.

Eliminates redundancies by updating customer files throughout the system.

Front 1156

Benefit of one-stop processing

Back 1156

It eliminates delays and possible confusion when work processes involve multiple people handling the same piece of business.

Front 1157

Real-time technology gives agency employees immediate, continuous access to

Back 1157

Accurate, up-to-date customer information

Front 1158

How IT helps agencies reduce errors and omissions (E&O) loss exposures

Back 1158

By standardizing office procedures (including those relating to policy processing, claim handling, and customer documentation)

Front 1159

These practices reduce the likelihood of an error or omission that might lead to an E&O claim:

Back 1159

- Proper use of well-designed agency procedures by all personnel
- Mining agency data to locate up-selling and cross-selling opportunities among existing customers (can help avoid E&O claims that can occur when an agency suggests coverages or products that fail to provide the protection that clients need)

Front 1160

T or F: Courts have made email dates and times, along with other computer transactions, admissible as evidence in errors and omissions cases if witnesses can attest to facts related to the record.

Back 1160

TRUE. Courts HAVE made email dates and times, along with other computer transactions, admissible as evidence in errors and omissions cases if witnesses can attest to facts related to the record.

Front 1161

Because of the rapid pace of change in IT, agency owners and managers must recognize that IT planning is a __________ process.

Back 1161

Dynamic and ongoing

Front 1162

When developing an IT plan, an agency should complete these steps to ensure alignment with its business strategy:

Back 1162

1. Review current IT needs
2. Identify new and emerging IT requirements
3. Prioritize needs according to budget and strategy
4. Finalize the plan

Front 1163

The first step in any IT plan is to review the current IT needs of the organization by identifying these elements:

Back 1163

- Stakeholders
- Business processes that involve stakeholders
- IT that currently supports those business processes
- The agency's overall IT needs (e.g., software that supports the required IT products)

Front 1164

An insurance agency should begin IT planning by

Back 1164

Compiling a list of its internal and external stakeholders

Front 1165

By developing a _________ of each stakeholder, the agency will better be able to match stakeholders' IT needs to products in a later step.

Back 1165

Brief profile

Front 1166

Compiled demographics in a stakeholder profile should include:

Back 1166

- Age range
- Gender
- Geographic location
- Knowledge, skills, and abilities
- Preferences

Front 1167

Agencies may find it helpful to consider stakeholders who are either _________ or _________.

Back 1167

Customer-facing or insurer-facing

Front 1168

One prominent example of an external stakeholder

Back 1168

An insurer's underwriter.

An underwriter might need agency personnel to have access to agency/company interface application for real-time access or upload and download capability to synchronize updates in the insurer's system with the agency management system.

Front 1169

Another crucial external stakeholder is the

Back 1169

Customer

Front 1170

One internal stakeholder is the agency's accounting staff. Which of these IT products would most likely meet the needs of accounting staff in a typical insurance agency? (Choose all that apply):

a. Email and other electronic communications.
b. ACORD forms
c. Accounting software
d. Reporting software
e. Banking interface software and login
f. Prospecting information

Back 1170

Answers a, c, d, and e are most likely to meet the IT needs of agency accounting staff.

In some agencies, accounting uses the agency management system that includes integrated accounting functions. (Note that this list is not complete. Depending on the IT capabilities and accounting job function, accounting staff might need insurer interface and web communication capabilities similar to that of an agency CSR. Accounting staff generally would not need access to ACORD forms or prospecting information.)

Front 1171

The second step in IT planning

Back 1171

Involves identifying new (to the agency) and emerging IT requirements.

Front 1172

Identifying new and emerging IT requirements entails

Back 1172

Reviewing the internal and external stakeholders identified in Step 1, plus any new or emerging stakeholders and their profiles.

Front 1173

New and emerging IT can be categorized as any one of these three types:

Back 1173

- Requests
- Demands
- Requirements

Front 1174

Requests

Back 1174

Involve IT products or capabilities that stakeholders would like to have but that would results in no negative consequences if the agency fails to provide them.

Front 1175

Demands

Back 1175

Similar to requests, except that not meeting demands could have negative consequences for the agency.

Front 1176

Generally, stakeholders' IT demands are driven by

Back 1176

IT available form the agency's competition.

Front 1177

Requirements

Back 1177

Stronger than demands and are usually based on strong benefits or disadvantages to the stakeholder. If a stakeholder's IT requirements are not met, the agency will certainly suffer negative consequences.

Front 1178

Third step in IT planning

Back 1178

Prioritize needs according to the agency's business objectives and strategies and the initial budget.

Front 1179

Final step in IT planning (with 5 substeps)

Back 1179

Finalize the plan. This includes:

- Purchasing and implementing the IT identified in Step 3
- Planning and implementing the training needed for the IT
- Evaluating the success of the implementation
- Making any changes needed to improve the IT's effectiveness or use
- Reviewing and modifying the IT plan

Front 1180

When selecting an upgrading an agency management system, an agency must realize that

Back 1180

Purchasing the most popular system brand will not ensure its success.

Front 1181

Agency/company interface

Back 1181

Provides electronic data exchange and communications between agencies and insurers. It offers efficiencies and other benefits to agencies.

Front 1182

The ultimate goal for agency/company interface:

Back 1182

Single-entry multiple-company interface (SEMCI)

Front 1183

SEMCI

Back 1183

Single-entry multiple-company interface; it is a method of using one information technology (IT) system, typically an agency management system, to enter data only once so that it can be transmitted to multiple insurers or used for other designated purposes.

Those purposes might include quoting, policy issuance, or claim submission.

Front 1184

True SEMCI would

Back 1184

Immediately synchronize the data between the agency management system and the insurer's system. (No system has achieved this, although some are close.)

Front 1185

Agency/company interface supports these overall agency goals:

Back 1185

- Reduce information input errors when completing policy and customer information
- Eliminate duplicated work processes by agency and insurer personnel
- Reduce costs for the agency and the insurer
- Improve the relationship and communication between the agency and the insurer
- Improve customer service
- Improve the competitive position of agencies and their insurer partners

Front 1186

The external result of agency/company interface

Back 1186

Improved customer service

This ultimately provides the greatest benefit to the agency. It increases customer retention and, by enhancing the agency's reputation, promotes sales.

Front 1187

Real-time interface

Back 1187

An electronic technique that enables agency personnel to access insurers' policy information files for customer information and requests.

Front 1188

Upload

Back 1188

The feature that copies information from an agency management system to an interface system for transmission to an insurer.

Front 1189

Download

Back 1189

An electronic transmission that synchronizes all of the agency's data with the insurer's data.

Occurs after the insurer's daily policy system processing and, usually, during off-peak hours when telecommunications rates are lower (so cost-efficiency is improved). Usually early in the morning, so the agency's data is updated when the agency opens for business.

Front 1190

Partial download

Back 1190

Offered by some agency/company interfaces; allows the agency personnel to deliver certain products immediately to their clients, such as quotes

Front 1191

ACORD

Back 1191

The Association for Cooperative Operations Research and Development; has advocated for and succeeded in implementing standardization of insurer information systems.

This standardization helps improve electronic transmissions between agencies and insurers whether or not they interface through third-party providers.

Front 1192

Cloud computing

Back 1192

Any web-based service that makes data available on demand and that provides for expansion of user capabilities.

Front 1193

Way in which cloud computing complements agency/company interface:

Back 1193

By allowing web-enabled access to insurer's policy databases.

Front 1194

Other benefits of cloud-computing

Back 1194

On a fee basis, is less costly than purchasing and maintaining server hardware and software; is more cost-efficient for agencies

Front 1195

Even for small-volume agencies, real-time and download service costs are typically offset by

Back 1195

The cost-efficiencies derived from using the services.

Front 1196

Industry organizations that have emerged as major supporters of agency/company interface:

Back 1196

- ACORD
- The Agency Council for Technology (ACT)
- IVANS
- Vertafore
- Applied Systems

Front 1197

ACORD

Back 1197

A global, not-for-profit insurance industry organization that has played a key role in the evolution of interface processes in the property-casualty and life insurance industries.

Front 1198

ACORD was originally organized to

Back 1198

Standardize paper forms used for routine insurance transactions.

Front 1199

AUGIE

Back 1199

ACORD User Groups Information Exchange

An ACORD-sponsored user group that acts as a forum for agents, brokers, insurers, vendor user groups, and trade associations working together to improve agency productivity and efficiency.

Front 1200

ACT

Back 1200

Agency Council for Technology; associated with the IIABA; ACT provides an open, action-oriented approach to critical IT issues and helps coordinate interface efforts.

Front 1201

IVANS, Vertafore, and Applied Systems are this type of organization

Back 1201

Third-party providers that offer services for P&C insurers and other businesses.

They integrate industry-standard data exchange systems with various agency management systems and assist agencies and insurers with tools such as agency/company interface, real-time processing, and download and upload capabilities.

Front 1202

IT-related resources that IVANS, Vertafore, and Applied Systems provide agents access to include:

Back 1202

- Printable and electronic insurance forms
- Benchmark tools
- Human resource information tools
- IT resource tools
- Electronic newsletters
- Training and education
- Direct marketing services
- User groups

Front 1203

User groups

Back 1203

Groups of technology users who share common interests and concerns

Front 1204

Most agencies can group their information needs into three categories:

Back 1204

- Strategic
- Managerial
- Operational

(Going down that list, each requires more detailed information than the last.)

Front 1205

Hierarchy of Agency Information Needs: categories, top to bottom (pyramid-style)

Back 1205

Top: Strategic
Middle: Managerial
Bottom: Operational

Front 1206

Hierarchy of Agency Information Needs: Strategic

Back 1206

- Performance
- Decision Support/Modeling Tools
- Competition
- Industry
- Economic Factors

Front 1207

Hierarchy of Agency Information Needs: Managerial

Back 1207

- Sales Management
- Budgets and Financial
- Workflow Tracking
- Employee Performance

Front 1208

Hierarchy of Agency Information Needs: Operational

Back 1208

- Prospects
- Customers and Policies
- Rating
- Claims
- Premium Accounting
- Standardized Forms and Templates
- Employees
- Training and Development
- Administration

Front 1209

Strategic information

Back 1209

Data an agency collects that form the basis for the agency's strategic planning.

Can include internal information about agency performance and external information, including information about competitors, the insurance industry, and economic factors.

Front 1210

Agency management can use internal and external strategic information in this manner

Back 1210

As input for benchmarking tools and decision support and modeling tools to assist in strategic planning

Front 1211

Internal reports typically relate to

Back 1211

Financial and productivity measures

Front 1212

Benchmarking tools

Back 1212

Used by senior management to evaluate how the agency is performing relative to its competition

Front 1213

Modeling tools

Back 1213

Apply predictive analytics, which use historical and current facts to predict an outcome.

These tools enable senior management to test the financial outcome of strategic changes they could make within the agency operation.

Front 1214

From a strategic perspective, some of the most important information stored in the agency's database is

Back 1214

Why a customer moved an account from the agency or why a quotation was not accepted.

Front 1215

Types of managerial information:

Back 1215

- Sales management
- Budgets and financial
- Workflow tracking
- Employee performance

Front 1216

Unique to agencies (compared to other businesses) regarding financial information:

Back 1216

The fiduciary role with the insurer and the insured. In this role, the agency must maintain funds collected from customers separately from operating accounts until the funds are remitted to the insurer.

(This additional facet of financial management requires special expertise. Information systems are used to support and manage all budget and financial reporting, including the agency's separate fiduciary accounting.)

Front 1217

Workflow

Back 1217

An IT system that provides electronic tracking.

Front 1218

Producer performance is usually measured based on information regarding these factors:

Back 1218

- Commission levels
- Hit ratios
- Attainment of production goals
- Retention of existing business
- Quality of submissions

This info is readily available through an agency management system.

Front 1219

Operational information

Back 1219

Data needed to conduct the agency's daily activities.

It can include information on prospects, customers and policies, rating, claims, premium accounting, standardized forms and templates, employees, training and development, and administration.

Front 1220

Prospect information in an agency management system can be especially helpful to these types of producers

Back 1220

New producers and producers new to a market segment, enabling them to learn about the segment's needs.

Front 1221

Stored prospect information provides this benefit to the agency:

Back 1221

It can easily be compared to insurer preferences.

Some agency management systems automate these comparisons and recommend insurers.

Front 1222

How can prospect information be used in market segmentation?

Back 1222

Info in agency management systems can be mined for selection by segments based on similar characteristics.

Front 1223

The ____________ with which an agency responds to a prospect's or customer's request for a premium quotation can often make the difference between writing and not writing the account.

Back 1223

Promptness

Front 1224

Comparative raters

Back 1224

Real-time agency/company interface that works in conjunction with some third-party providers to enable agencies to produce multiple quotations with various insurers, using different limits and coverages and without duplicating the input information.

Front 1225

Proprietary rating IT

Back 1225

Rating IT developed by or on behalf of an individual insurer for that insurer's use and for the agent's use, with the insurer's permission.

Front 1226

Generally accessing the insurer's policy rating system by logging into it from the insurer's website or a mobile device are inefficient approaches because

Back 1226

Information must be entered in the agency's and the insurer's IT systems.

Front 1227

Claim __________ can be produced from the agency management system after a daily download process has synchronized it with the insurer's data.

Back 1227

Histories

Front 1228

Download eliminates the need for

Back 1228

Duplicate entry of claims

Front 1229

Premium accounting, one part of transaction processing, is completed by the CSR when

Back 1229

A policy, an endorsement, or a premium audit is received.

Front 1230

Most formal agency correspondence with prospects, customers, and insurers is generated using

Back 1230

Electronic form letters from the agency management system

Front 1231

When account servicing issues occur, electronically dated forms and correspondence can help determine....

Back 1231

At what point a problem occurred; they might also point to a cause.

Front 1232

Employee information that is included in a database helps...

Back 1232

Streamline human resource management.

Front 1233

Benefits of IT systems for training

Back 1233

IT systems enable agencies to deliver employee training and development in a consistent manner without requiring another employee to serve as a trainer.

Front 1234

Agencies use agency management systems to

Back 1234

Collect and process customer and prospect data.

This enables them to increase sales to new and existing customers.

Front 1235

Agency management systems range from simple to complex and include these types:

Back 1235

- Integrated agency management systems
- Insurer proprietary management systems
- Manual management systems

Front 1236

Integrated agency management systems

Back 1236

The vast majority of agencies uses these; they are designed to integrate with other IT, such as the Internet, agency/company interface, and social media interface.

Front 1237

Insurer proprietary management systems

Back 1237

Some agencies use these; they are developed and maintained by an individual insurer.

Agencies are required to have a separate computer dedicated to transacting business with that insurer using that insurer's management system. This approach is usually inefficient and requires dual entry of information.

Front 1238

Manual management systems

Back 1238

For smaller-premium agencies that do not use computers, and that generally use direct billing to handle their accounting needs. They keep paper files.

Front 1239

T or F: Less than half of independent insurance agencies use real-time upload and commercial lines download capabilities.

Back 1239

FALSE. MORE than half do. Over 95 percent use personal lines download capabilities.

Front 1240

Nearly ___ percent of agencies using IT use insurer's portals developed for agencies.

Back 1240

45 percent.

Front 1241

Nearly ____ percent of agencies surveyed believed that their agency achieved significant productivity improvements by implementing new technology.

Back 1241

50 percent.

A slightly lower percentage believed that strong Internet performance is the greatest technology challenge they face.

Front 1242

Many agency management systems offer _____________ that uses analytical, forecasting, and reporting tools to enhance sales potential.

Back 1242

Integrated workflow software

Front 1243

T or F: Using an agency management system for account development is both more effective and can reduce an agency's E&O loss exposures.

Back 1243

TRUE. As a third benefit, it enhances the producer's and the agency's professional image.

Front 1244

T or F: ACORD applications and other forms are generally included in the agency management system.

Back 1244

TRUE, they are generally included.

Front 1245

An agency management system is useful in these areas:

Back 1245

- Sales management
- Customer database management
- Claim management
- Transactional filing
- Electronic filing and document imaging
- Rotational servicing
- Electronic workflow/routing

Front 1246

Most agencies that use document imaging do this:

Back 1246

They scan paper correspondence and forms immediately upon receipt in the agency and index them for storage with the customer information in the agency management system.

Front 1247

An agency can use accurate, up-to-date claim information three ways:

Back 1247

- Loss histories sorted by customer and by type of coverage enable the agency to automatically generate detailed claim information for use in renewing a customers coverages
- The agency can produce internal reports showing the loss ratios of each customer
- The agency can produce reports that show loss ratios by insurer and type of business for use in negotiating with insurers.

Front 1248

Transactional filing

Back 1248

a.k.a., t-filing

Allows an agency to eliminate the time and expense required to file paper policy requests and correspondence in individual customer files and encourages agency personnel to locate paper documents using the agency management system.

Front 1249

Transactional filing involves creating two types of paper files:

Back 1249

- A permanent paper file is created for each customer and is stored alphabetically. (These files contain signed apps, appraisals, financial statements, etc.)
- A second file, the actual transactional file, is also created. (This file contains one division for each day of the year, so that all time-sensitive docs are filed by the transaction date.)

If and when the paper file needs to be retrieved, agency personnel can determine the transaction date from the agency management system and locate the paper support document based on that day's transactional file.

Front 1250

E-filing

Back 1250

Allows for dated electronic communications to be linked to the customer's records in the agency management system for ready access

Front 1251

Front-end scanning of documents (i.e., as they are received) ensures that

Back 1251

All correspondence is immediately available through the agency management system

Front 1252

Agencies that rely on e-filing and document imaging experience these benefits:

Back 1252

- Improved workflow
- Reduction in storage needs for paper documents

Front 1253

T or F: In some states, original paper documents must be retained for a minimum period.

Back 1253

TRUE. You probably think that one was obvious. It was.

Front 1254

Rotational servicing

Back 1254

The automatic routing of an incoming customer call to any CSR who is not already assisting a customer.

Also uses the agency management system.

Front 1255

The ultimate goal of rotational servicing

Back 1255

To handle service requests quickly and immediately.

Front 1256

An insurance agency must structure its customer service organization so that it does this:

Back 1256

Effectively and efficiently retains current customers and attracts new ones.

Front 1257

An agency’s customer service organizational structure must do these two things:

Back 1257

- Promote productivity
- Facilitate efficient work processing

Front 1258

A carefully constructed, well-managed organizational structure accomplishes these two things:

Back 1258

- Reduces duplication of effort
- Delegates as many tasks to customer service representatives (CSRs) as they are qualified to handle

Front 1259

An important part of an agency principal’s or manager’s job, regarding customer service organizational structure, is

Back 1259

To recognize the need for change when the existing structure becomes ineffective and no longer supports agency goals.

Front 1260

Steps that agency principals and managers should take when evaluating how well the customer service organizational structure supports the agency’s business plan:

Back 1260

1. Determine the customer service goals that are essential to success and build the organizational structure around them
2. Build linkages between customer service functions to coordinate delivery of customer service.
3. Determine the degree of authority necessary to manage each customer service function and to what extent authority is centralized and decentralized.
4. Determine whether some customer service tasks can best be done by someone outside the agency (outsourced).

Front 1261

Three tasks that should be completed to create a customer service organizational structure that promotes productivity and facilitates efficient work processing:

Back 1261

- Perform an organizational structure analysis
- Select a customer service organizational structure
- Monitor the customer service organizational structure

Front 1262

Four steps in an analysis of customer service organizational structure:

Back 1262

1. Identify tasks
2. Group and rank tasks
3. Delegate the necessary authority so that each task can be effectively performed.
4. Coordinate the various job positions that perform customer service tasks and communicate the responsibilities for the tasks.

Front 1263

Identifying customer service tasks helps the agency determine…

Back 1263

The scope and nature of its customer service.

Front 1264

Delegation is essential because

Back 1264

It allows sales personnel to concentrate on sales

Front 1265

Reasons managers fail to delegate:

Back 1265

- Managers believe they can perform the job better than anyone to whom they could delegate it
- Managers lack confidence in the employees and their skills
- Managers lack the ability to direct others
- Managers have not implemented controls to monitor performance of delegated tasks

Front 1266

Suggested response for failure to delegate due to: believing they can perform the job better than anyone to whom they could delegate it

Back 1266

Having the managers perform customer service tasks is not as economically efficient for the agency as having employees directly responsible for customer service performing them.

Front 1267

Suggested response for failure to delegate due to: lacking confidence in the employees and their skills

Back 1267

Managers should provide employees with training, new tools, or additional resources needed to perform the tasks.

Front 1268

Suggested response for failure to delegate due to: lacking the ability to direct others

Back 1268

Agency principals should assess managers’ leadership, management, and supervisory skills and provide training, if necessary.

Front 1269

Suggested response for failure to delegate due to: having not implemented controls to monitor performance of delegated tasks

Back 1269

Performance management systems should be implemented to determine whether remedial action is necessary

Front 1270

One way in which an organization communications responsibilities

Back 1270

Through an org chart, which illustrates reporting relationships and organizational structure

Front 1271

A well-designed org chart indicates

Back 1271

- How customer service tasks are grouped
- Where authority and communication originate

Front 1272

Customer service work has traditionally been structured in one of two major ways:

Back 1272

- By line of business
- By function

(In can be structured in a combination of both ways.)

Front 1273

In fact, the best customer service organizational structure for a particular agency may be the one that is organized by

Back 1273

Both line of business and by function

Front 1274

Structuring customer service by line of business typically creates three divisions:

Back 1274

- Personal insurance
- Commercial insurance
- Life insurance, health insurance, and employee benefits

Front 1275

Profit center

Back 1275

A division within an organization that is responsible for generating its own revenue and paying its own expenses with the aim of generating its own profit.

Front 1276

Examples of possible profit centers within an agency:

Back 1276

- Risk management
- Loss control
- Claim administration

Front 1277

T or F: Many agencies divide accounts by the expertise required to handle the account.

Back 1277

TRUE. For example, personal and small commercial accounts usually require about the same level of customer service expertise, and, in fact, many of the coverages are similar. (They are often called ‘basic accounts’ and can generally be handled by the same CSR.)

Front 1278

Some agencies use ____________________ to serve their personal insurance accounts so that they can focus internally on organic sales and growth.

Back 1278

Customer service centers.

(These agencies continue to provide direct service for large commercial accounts and select commercial lines accounts that generate over a certain volume in revenue.)

Front 1279

Advantages of organizing customer service by line of business

Back 1279

- Follows traditional divisions of the insurance business
- Simplifies training and education (because employees focus on insurer policies, rates, and UW guidelines for the specific business they handle)

Front 1280

Disadvantages of the line of business organizational structure

Back 1280

- It often requires duplicate customer service functions. (Described as a MAJOR disadvantage.)
- Can also impede the flow of information among divisions
- It can deter management and CSRs from focusing on one customer’s total needs (instead, needs tend to be viewed separately by each division)

Front 1281

An agency should have procedures in place to notify all divisions when a customer experiences a…

Back 1281

Major life event

Front 1282

Advantages of the functional structure

Back 1282

- CSRs develop specialized expertise in their functions
- Employee training is simplified because it is focused for each employee

Front 1283

Common “functions”

Back 1283

Marketing, sales, claims, and accounting.

Front 1284

Major disadvantage of a functional structure

Back 1284

Processing customer transactions involving a life insurance policy, for example, can be entirely different from processing those involving a property or liability policy, and employees need different skills to handle these transactions efficiently.

Front 1285

To address the major disadvantage of a functional structure, agencies often do this:

Back 1285

Combine a functional structure with a line of business structure.

Front 1286

Typical functional structure for large agencies

Back 1286

Those with slightly more commercial business than personal or life insurance usually have separate marketing, sales, claim, and accounting functions for personal insurance and life insurance but retain line of business structures for commercial, personal, and life insurance.

Front 1287

Cross-functional work team

Back 1287

A customer service organizational structure in which all customer service functions are contained in a single business unit.

Every team member is responsible to and for every other member. Are results-oriented. The team as a whole reports to another agency employee who has line authority over them. Used by some medium and large agencies.

Front 1288

Once a customer service organizational structure has been selected and implemented, a customer service manager must:

Back 1288

- Monitor its effectiveness in light of changing workflows
- Revised procedures and job positions when necessary
- Ensure that job positions are properly coordinated

Front 1289

A customer service manager should be involved in his function:

Back 1289

Human resources management

Front 1290

To accomplish customer service structure monitoring most effectively, an agency must…

Back 1290

Have someone with the designated responsibility and authority to manage customer service.

Front 1291

As the agency grows, it becomes more difficult for it to function smoothly without a customer service manager. At that point, it may be advisable for an agency principal who functions as a customer service manager to

Back 1291

Separate and assign the customer service management tasks so that he or she can focus on sales and/or other management tasks.

Front 1292

A primary customer service function an agency offers is

Back 1292

Support services

Those include processing communications, managing information, and preparing documentation

Front 1293

Initial communications create

Back 1293

Critical first impressions

Handling customer interactions politely and promptly is crucial.

Front 1294

Voice mail systems should always offer the customer the option to

Back 1294

Speak to a representative; they should also inform the customer of this option early in the answering message.

Front 1295

Voice mail presents this E&O concern:

Back 1295

The outgoing message needs to clearly state the agency’s office hours, including when the office will reopen, because the increasing use of cell phones and other mobile devices may lead customers to expect to be able to contact agency personnel at any time of the day or night, particularly to report claims.

Front 1296

Agencies should have these guidelines for processing voice mail:

Back 1296

- Specify the time within which voice mail messages should be answered
- The required frequency for checking the system for messages
- Protocol for outgoing voicemail messages

Front 1297

Disadvantages of electronic communications:

Back 1297

- The nearly instantaneous response capability of email may contribute to more errors or misunderstandings than the deliberative process typically associated with composing a formal letter
- Email recipients also may be more inclined to ignore or delete electronic correspondence than printed correspondence (creating problems if documentation is needed)

Front 1298

Once a mail is opened, agency personnel should stamp the date and time on the agency copy of the documents. This is because…

Back 1298

The date is important for defense if an E&O claim is made or if a customer has a question about service. Date stamping also helps staff prioritize their work.

Front 1299

_______________________ is fundamental to good information management.

Back 1299

Timely and accurate entry of information

Front 1300

“Managing” account information is another phrase meaning

Back 1300

Storing and retrieving account information

As an act, it can affect all employees’ productivity.

Front 1301

Information that is any of these 3 things can cost an agency time and money and interfere with customer service:

Back 1301

- Not easily accessible
- Out of date
- Inaccurate

Front 1302

Policyholder information agencies should store:

Back 1302

- Records of open and closed claims
- Pending transactions or suspense records
- Policy expiration information
- Accounting data

Front 1303

Parts of a customer’s electronic file:

Back 1303

- Applications
- Correspondence
- Billing information
- Accounting information

Front 1304

These items are often scanned and attached to the customer’s electronic file:

Back 1304

- Policies
- Photographs
- Appraisals
- And similar documents

Front 1305

Supports service functions

Back 1305

- Processing communications
- Managing information
- Preparing documentation

Front 1306

This practice is often best for preparing policy-related documentation

Back 1306

Using computerized templates that standardize common agency documents.

Contributes to good customer service and reduces agency transaction costs.

Front 1307

Policyholder information systems (6)

Back 1307

- Active filing system
- Dead filing system
- Claim filing system
- Pending filing system
- Expiration filing system
- Policyholder accounting filing system

Front 1308

Contents of an active filing system

Back 1308

All policies and related information for active policyholders

Front 1309

Considerations for an active filings system

Back 1309

Transactional and electronic filing and agency/company interface greatly enhance and agency’s ability to electronically maintain customer information.

Front 1310

Contents of a dead filing system

Back 1310

Expired and canceled policies

Front 1311

Considerations for a dead filing system

Back 1311

May be needed for legal or regulatory reasons; such files are kept 3 to 5 years

Front 1312

Contents of a claim filing system

Back 1312

Information about individual claims

Front 1313

Considerations for a claim filing system

Back 1313

Usually stored electronically as part of the policyholder’s file

Front 1314

Contents of a pending filing system

Back 1314

Requests for policies or endorsements sent to insurer, claim filings, or information requests to insured that require action

Front 1315

Considerations for a pending filing system

Back 1315

Electronic systems include calendars and generate reminders when action is necessary.

Front 1316

Contents of an expiration filing system

Back 1316

Policy expiration dates

Front 1317

Considerations for an expiration filing system

Back 1317

Storage system must provide an accurate and complete record of expiring policies to ensure that renewals are processed on time

Front 1318

Contents of a policyholder accounting filing system

Back 1318

Accounting files for each insured

Front 1319

Considerations for a policyholder accounting filing system

Back 1319

The accounting department usually handles this policyholder information, although CSRs generally handle the invoicing when processing a policy or an endorsement.

Front 1320

Technical service functions (3)

Back 1320

- Marketing and sales transactions
- Claims
- Accounting

Front 1321

The technical service function of sales and marketing encompasses:

Back 1321

- New business
- Renewals
- Endorsements (policy changes) and adjustments

Front 1322

Many agencies use their agency management systems to prepare _____________ and to _____________.

Back 1322

Proposals; maximize proposal value.

Front 1323

How many days before renewal does a producer typically update the client document and order the renewal?

Back 1323

60 days

Front 1324

After a producer receives the insurance placement order (with proposed changes, if any, as agreed upon) from the client, ___________ are prepared.

Back 1324

Binders

Many agencies deliver invoices with these binders; others bill when the policy itself is delivered.

Front 1325

CSRs must review new policies for accuracy by

Back 1325

Checking rating, classification, and coverage information against the original application, the proposal, and the binder and verifying policy limits and premiums.

E&O claims can result when policies do not provide all the insurance coverages outlined in the initial proposal.

Front 1326

Reasons why placing new business on the books is almost more expensive for an agency than renewing existing business:

Back 1326

- The cost of processing new business applications
- Higher first-year commissions
- Higher attrition rate among new business

Front 1327

An agency’s profitability is traditionally tied to…

Back 1327

The percentage of business renewed.

Front 1328

When are policy expiration lists generated and distributed?

Back 1328

90 to 120 days before the renewal date.

(This is how the renewal process begins.)

Front 1329

T or F: Most personal insurance policies, including automobile and homeowners, are directly billed and automatically renewed through the insurer.

Back 1329

TRUE. Most personal insurance policies, including automobile and homeowners, ARE directly billed and automatically renewed through the insurer.

Front 1330

Many agencies use ___________ provided by insurers or trade associations to assist in renewal review.

Back 1330

Checklists

Front 1331

This industry group has prepared 58 checklists for reviewing the coverage provisions of personal and commercial insurance policies.

Back 1331

International Risk Management Institute (IRMI)

Front 1332

Broker of record letter

Back 1332

A written statement signed by a policyholder or prospect advising an insurer that a particular producer (the broker of record) acts as the insured’s representative in all dealings with that insurer.

A producer may use such a letter when working with a new customer, to negotiate with an insurer on behalf of an existing customer, or to negotiate with an insurer on behalf of a prospect.

Front 1333

T or F: A broker of record letter is a creation of statute/regulation.

Back 1333

FALSE. A broker of record letter is NOT a creation of statute or regulation, and no formal producer notification procedures refer to the use of such letters. When a policyholder authorizes a new broker of record, the insurer usually notifies the former producer of the change.

Front 1334

Examples of types of policy changes

Back 1334

- Completing change request forms
- Sending form letters to the customer
- Issuing binders or certificates of insurance
- Producing invoices

Although most of these processes may be automated through agency management systems, data must be entered accurately and all transactions must be documented in the system.

Front 1335

Claims are typically handled at the _________ level.

Back 1335

Insurer

Front 1336

Good claim service requires treating each person who has a claim with

Back 1336

Sympathy and concern

Front 1337

T or F: Occasionally, producers may need to intercede with the insurer’s claim representative on the insured’s behalf.

Back 1337

TRUE. This is why, although producers are not typically involved in claims, they should be advised and kept informed of the status of their insureds’ claims involving large or complex losses, lawsuits, questionable coverage, or other unique or questionable circumstances or if a claim has been denied or disputed by the insurer.

Front 1338

Written loss reports frequently use one of these forms and are usually submitted in this manner.

Back 1338

ACORD Loss Notice forms; submitted electronically.

Front 1339

The agency claim file can be closed after…

Back 1339

The claim representative receives a check or draft for the insured or after other insurer notification that the claim has been settled on behalf of all involved parties.

Front 1340

No sale is complete until the agency has…

Back 1340

Recorded and collected the premium and commission for the business sold.

Front 1341

T or F: Most agency accounting is automated within the agency’s management system, working with the carrier’s system and the agency’s bank.

Back 1341

TRUE. Most agency accounting is automated within the agency’s management system, working with the carrier’s system and the agency’s bank.

Front 1342

Agencies use three systems of billing:

Back 1342

- Agency bill
- Direct bill
- Premium finance plans

Front 1343

All personal lines accounts and many commercial lines accounts use this form of billing:

Back 1343

Direct bill

Front 1344

Agency bill system

Back 1344

An insurer billing system that requires the agency to perform certain premium handling tasks, including invoicing and crediting, collecting premiums, investing premiums, and remitting premiums, to companies (less any applicable commissions)

Front 1345

Premium float

Back 1345

An arrangement that allows an agency to collect insurer premiums; invest the premiums and generate earnings on the premiums payable to the insurer; and forward premiums, minus any earnings generated, to the insurer when the insurer account is payable.

Front 1346

Direct bill system

Back 1346

A payment procedure in which the insurer assumes all responsibility for sending premium bills to the insured, collecting the premium, and sending any commission payable on the premium collected to the producer.

Front 1347

Independent agencies and brokerages still use this system for a portion of their business

Back 1347

Agency bill

Front 1348

After the invoices or credit memos have been prepared and issued, most of the other functions associated with the agency bill system become the responsibility of this group:

Back 1348

The accounting department

Front 1349

A major drawback of the agency bill system

Back 1349

The agency is responsible for paying the premium to the insurer if it has not been collected from the insured.

Front 1350

A primary advantage of agency billing

Back 1350

It allows the agency to generate additional revenue from investing premium dollars while they are in the agency’s possession.

Insurers usually do not expect the agency to remit the premiums until 30 or 45 days after policy or endorsement issuance. If the premiums are collected on time or even ahead of the effective date, the agency may invest premiums for as long as two months or more. (This arrangement is called “premium float”.)

Front 1351

Some large agencies add as much as ___ percent to their annual gross income through prompt collections and premium float investment.

Back 1351

5 percent

Front 1352

Agencies usually pay premiums (minus any commissions due to the agency) to insurers with this frequency

Back 1352

Once a month

Front 1353

Account current

Back 1353

The agency’s own statement.

Agencies usually pay premiums (minus any commissions due to the agency) to insurers once a month, along with either an insurer-prepared statement or the agency’s own statement (called the “account current”).

Front 1354

This system relieves agency personnel of the responsibility of invoicing, tracking, collecting, and remitting premiums, which can be both costly and time consuming.

Back 1354

The direct bill system.

Front 1355

Disadvantages of the direct bill system

Back 1355

- It eliminates the premium float and can therefore affect an agency’s cash flow
- Can create extra work for agency personnel when it is not functioning properly or when insureds send their payments late

Front 1356

T or F: The time the direct bill system saves agencies probably outweighs its disadvantages, particularly if an agency has a large personal lines book of business.

Back 1356

TRUE. The time the direct bill system saves agencies probably DOES outweigh its disadvantages, particularly if an agency has a large personal lines book of business.

Front 1357

T or F: Agencies using the direct bill system create invoices and make payments to insurers.

Back 1357

FALSE. Agencies using the direct bill system do NOT create invoices OR make payments to insurers.

Front 1358

T or F: Most insurers have established premium finance plans that allow insureds to pay small premiums in installments.

Back 1358

FALSE. Most insurers have established premium finance plans that allow insureds to pay LARGE premiums in installments.

Front 1359

As premiums grow and cash flow becomes a greater concern, ______________ are becoming more popular.

Back 1359

Premium finance plans.

Front 1360

The producer and customer decided whether the premium will be financed at this time:

Back 1360

At the time of the sale of a policy (or sometimes as part of the proposal).

They then sign a contract.

Front 1361

T or F: For a premium finance plan, generally, the agency must collect the premium down payment and submit it to the insurer with the insurance application and premium finance plan contract.

Back 1361

TRUE. For a premium finance plan, generally, the agency MUST collect the premium down payment and submit it to the insurer with the insurance application and premium finance plan contract.

After that, the agency is no longer responsible for collecting premiums (unless it is an in-house finance plan) or remitting premiums to the insurer because the finance company handles these tasks. Either the finance company or the insurer sends the commissions to the agency, either in advance for the entire year or as each premium installment is received.

Front 1362

This is an important aspect of the accounting function

Back 1362

Generating accounting reports used to process and record financial transactions.

(The records on which accounting reports are based are also used to generate financial and management reports, which are given to agency principals and managers.)

Front 1363

Two standard reports that do directly affect the management of customer services:

Back 1363

- Statement of account
- Aged accounts receivable report

Front 1364

Statement of account

Back 1364

A monthly statement providing the customer with a summary of the outstanding premiums owed to the agency.

Front 1365

Aged accounts receivable report

Back 1365

A report used to determine which customers are behind in paying their premiums; usually generated in thirty-day past-due increments.

Not sent to the customer.

Front 1366

Analyzing aged accounts receivable can have a substantial effect on an agency’s net income because

Back 1366

Collection problems can be identified before the agency develops bad debt on accounts that accrue earned but uncollectible premiums.

Front 1367

Things that can jeopardize an agency’s sales and customer retention

Back 1367

- Service issues
- Workload backlogs

Front 1368

A key productivity factor in most agencies is

Back 1368

Technology

Front 1369

Benchmarks

Back 1369

Can help determine whether the agency has too few or too many employees; helps assess customer service quality and performance levels and target areas for improvement.

Front 1370

__________________________ provide the means to measure dimensions related to productivity, such as transactions per employee, time per transaction, and premium/revenue per employee

Back 1370

Agency management systems

Front 1371

Common benchmarks

Back 1371

- Number of accounts handled per CSR
- Commission generated per CSR
- Revenue per employee

Front 1372

Benchmarks should be tempered by these two types of differences:

Back 1372

- Business mix differences (e.g., commercial commissions versus personal commissions)
- Territorial differences (e.g., insurance costs by state)

Front 1373

Insurance agency productivity problems can arise from several major causes, including these

Back 1373

- Lack of information technology/agency management system functionality
- Improper organizational structure
- Unsuitable employees
- Poor training
- Insufficient direction and control of employees
- Poor employee morale
- Inefficient processes
- Backlogs

Front 1374

Insufficient direction and control of employees

Back 1374

A productivity issue; i.e., a sound performance evaluation system can eliminate substantial duplication and wasted time.

Front 1375

Financial management

Back 1375

The effective management of assets, liabilities, capital structure, revenues, and expenses.

Front 1376

Agencies make financial decisions by going through these activities:

Back 1376

- Assigning financial management responsibility
- Creating strategic and financial plans
- Benchmarking

Front 1377

In small agencies, ___________ typically has financial management responsibility, usually with the assistance of _______________.

Back 1377

The owner; a bookkeeper.

Front 1378

In small agencies, owners must find ways to effectively manage ______ while also _________.

Back 1378

Finances; making sales.

Front 1379

Large agencies might employ these types of positions to handle financial management functions.

Back 1379

CFO, VP of Finance, or Controller

Front 1380

Functions of a financial manager (e.g., CFO, VP of Finance, or Controller)

Back 1380

- Manage the receipt and disbursement of funds (accounts receivable and payable)
- Coordinate investments
- Provide financing reports to management
- Allocating funds to current and fixed assets
- Obtaining the best mix of financing alternatives
- Negotiating with vendors
- Making investment decisions

Front 1381

An agency’s strategic plan should be based on its established ___________________.

Back 1381

Mission statement and overall vision.

Front 1382

Mission statement

Back 1382

A broad expression of an entity’s goals.

Provides info on who the customers are and how the agency meets those customers’ needs.

Front 1383

The complexity of an agency’s strategic plan will vary based on…

Back 1383

The size of the agency

Front 1384

An agency’s strategic plan should be based on an analysis of these three things:

Back 1384

- The organization’s core competencies
- The experience of its employees
- Its current and prospective customer base

Other factors of note:
- Current competitive environment
- Available insurers
- Any demographic, sociocultural, legal, technological, and economic trends

Front 1385

Elements of a final strategic plan

Back 1385

- Business mix (percentage of personal, commercial, or other lines sold)
- Financial goals (profit targets and expense levels)
- Process for how success will be measured (including internal and external benchmarks)

Front 1386

Income statement

Back 1386

The financial statement that reports an organization’s profit or loss for a specific period by comparing the revenues generated with the expenses incurred to produce those revenues.

Important in identifying sources and amounts of income and expenses.

Front 1387

Balance Sheet

Back 1387

The financial statement that reports the assets, liabilities, and owners’ equity of an organization as of a specific date.

Indicates current financial condition.

Front 1388

Cash flow statement

Back 1388

An accounting statement that presents the sources and amounts of cash inflows and outflows over a time period.

Illustrates the movement of cash into and out of the agency.

Front 1389

Financial planning is the act of

Back 1389

Developing and reviewing financial statements (i.e., annual budget, balance sheet, income statement, cash flow statement)

Front 1390

Budget

Back 1390

Indicates what the agency anticipates spending and the project revenues based on the strategic plan

Front 1391

Sources of revenue for an agency

Back 1391

- Commission payments
- Interest income
- Other income

Front 1392

Sources of expense for an agency

Back 1392

- Salaries
- Employee benefits
- Rent
- Depreciation

Front 1393

At minimum, an agency must generate a level of cash flow that…

Back 1393

Meets day-to-day operating expenses.

To generate positive long-term cash flow, the agency must continue to generate revenue while controlling expenses.

Front 1394

Financial ratio analysis

Back 1394

Evaluates the agency’s financial performance and strength.

Front 1395

Ratios typically evaluated in financial ratio analysis:

Back 1395

Those in the general areas of profitability, liquidity, and efficiency.

Front 1396

Benefit of financial ratio analysis

Back 1396

Provides insurance professionals with easily comparable standard measures of performance and is one of the most popular methods used to evaluate an organization’s financial performance and to compare organizational performance to industry benchmarks.

Front 1397

Benchmarking

Back 1397

The process of comparing results to industry standards or best practices.

Front 1398

Agencies use benchmarking to

Back 1398

- Evaluate their own performance
- Identify opportunities for improvement

Front 1399

External benchmarking

Back 1399

Comparing the agency’s actual results with results from similar businesses in the same industry.

Front 1400

Internal benchmarks

Back 1400

Standards of comparison set within the agency.

(They may be based on past agency performance and past budgets.)

Front 1401

_______________ are the most frequently used internal benchmarks.

Back 1401

Past performance benchmarks.

Compares the agency’s performance during a current period with that of the same period in the prior year.

Front 1402

Comparing actual results with project results and benchmarks identifies:

Back 1402

- How the agency is performing
- What revenue and expense trends exist
- What specific areas need attention in light of the agency’s goals

Front 1403

Variances

Back 1403

When the agency’s results are higher or lower than average results for the industry. E.g., higher-than –expected expense levels or lower-than-projected revenues might trigger inquiries and further analysis.

Front 1404

Revenue control

Back 1404

Involves:
- Legal and regulatory compliance (such as properly handling premiums received as payment for insurance policies)
- Properly managing both earn and unearned commissions on accounts (if policies are not billed directly by the insurance company)

Front 1405

Expense control

Back 1405

Involves:
- Properly managing the agency’s accounts receivable
- Effectively controlling expenses by establishing internal controls for personnel costs and other accounting costs
- Carefully measuring, analyzing, and then reducing expenses where appropriate

Front 1406

One of the types of considerations a financial manager must make:

Back 1406

Income tax considerations

Legal form of ownership, employee benefits plan, etc. all create the need for income tax considerations to be made

Front 1407

An agency’s asset valuation can be based on intangibles such as

Back 1407

- Goodwill
- Customer retention factors
- Expertise of staff and management
- Other factors

Front 1408

Valuation factors for an agency

Back 1408

- The agency’s organization and efficiency of operations
- The quality of its financial information
- The type of business it produces
- The results of that business
- The key employees available to the business
- The type of valuation method applied to the book of business

Front 1409

Agencies control revenue by establishing proper handling procedures for:

Back 1409

- Premiums received
- Unearned commission reserve accounts
- Return commissions on brokered policies

Front 1410

Premiums have these two components:

Back 1410

- The commission (which the agency earns, and in which it has an interest)
- The remainder of the premium (which is due to the insurer for providing insurance coverage)

Front 1411

Anticommingling laws

Back 1411

Present in some states; these are state laws that prohibit depositing funds (premiums) due to insurers into agency operating or personal accounts – i.e., commingling of funds.

Ultimately, these prohibit an agency from commingling the insurer’s share of premiums with agency funds. They specifically state that the agency has a fiduciary obligation to the insurer for such funds.

Front 1412

Courts have interpreted an agency’s legal responsibility for premiums held until they are due to the insurer in two different ways. This is the first way:

Back 1412

That agencies are acting in a fiduciary capacity for funds held.

If the agency is the insurer’s fiduciary, it is a trustee of the funds (not the owner). Some state laws may require that agencies handle funds as a fiduciary. If a choice is available, putting funds into fiduciary accounts offers the agency the advantage of having creditor protection and increased FDIC protection.

Front 1413

Courts have interpreted an agency’s legal responsibility for premiums held until they are due to the insurer in two different ways. This is the second way:

Back 1413

That agencies are insurers’ debtors.

Treating premiums as funds for which the agency acts as an insurer’s debtor gives the agency greater flexibility in cash management. However, agencies that take this approach incur more work in managing the funds. As they review their revenue control requirements, they should be aware of their states’ anticommingling laws.

Front 1414

Fiduciary

Back 1414

A person or entity that holds a position of trust, manages another person’s or entity’s affairs or funds, and has a duty to that person or entity to act in a trustworthy manner.

Front 1415

T or F: Some state laws require that premiums be deposited in a premium trust account at an approved bank.

Back 1415

TRUE. Some state laws DO require that.

Checks drawn from the trust account are permitted to the extent that the remaining balance is at least equal to the total of net premiums collected and owed to insurers, whether or not payment is immediately due.

Front 1416

If the trust account balance is lower than required, the agency is said to be “________________”

Back 1416

“Out of trust”

Front 1417

Procedure for compliance with anticommingling laws:

Back 1417

1. Establish two bank accounts (an operating account and a trust account)
2. All premiums collected are deposited in the trust account
3. When premiums are remitted to the insurer, a check equal to the commission is also written and deposited in the operating account
4. Use the operating account to pay agency expenses (such as payroll, insurance, and office supplies)
5. Use the trust account to make refunds to customers and to pay insurers, MGAs, and surplus lines brokers

Therefore, the agency never uses any money belonging to insurers for agency operations.

Front 1418

Funds in trust accounts are segregated to protect them from…

Back 1418

Claims by agency creditors.

A bank may offset a claim against funds in an agency’s operating account, but not against funds in an agency’s trust account.

Front 1419

One way in which anticommingling laws help agencies in their financial management :

Back 1419

By preventing the use of funds owed to insurers, these laws force agencies to collect their accounts receivable vigorously in order to have adequate operating funds available.

Front 1420

Another advantage of a trust account:

Back 1420

Added protection in the event of bank insolvency.

Front 1421

FDIC rules stipulate that the $250,000 FDIC insurance applies in this way to insurers to whom the agency owes premiums:

Back 1421

The $250,000 FDIC insurance applies to EACH insurer to whom premiums are owed.

However, the FDIC has sole discretion in determining whether the failed bank’s records are sufficiently clear to apply the $250K limit to multiple insurers for whom the insurance agency was holding the trust funds.

Front 1422

Producers usually treat commissions as earned revenue at this point in time:

Back 1422

When a policy is written or an initial premium is paid.

(This overstates income, however, because producers are generally required to refund commissions to insurers on return premiums to insureds, which may be due whenever policy endorsements generate a credit or a policy is canceled before expiration. Small return premiums may not create problems. However, if a policy with a large premium is canceled or if an insurer terminates an agency's large book of business, large return premiums are due.)

Front 1423

Conservative accounting

Back 1423

Requires creating an unearned commission reserve account, similar to the unearned premium reserve account that appears on insurer balance sheets.

(Insurers are legally required to include the entire unearned premium in the unearned premium reserve account. However, for the unearned commission reserve account, agencies need only create an account equal to the probable amount of commissions that may have to be refunded to insurers because of endorsements or cancellations.)

Front 1424

The amount of unearned commission reserve maintained depends on three factors:

Back 1424

1. Total amount of unearned commissions (indicates the maximum amount at risk)
2. Ratio of return commissions to total commissions for several years (shows the average experience over time)
3. Total amount of commissions on large accounts (recognizes that these commissions are more susceptible to competition than accounts and that they represent a greater loss exposure regarding unearned commission)

Front 1425

T or F: Unless the reserve is less than the entire unearned commission, no set formula for determining its amount exists.

Back 1425

FALSE. Unless the reserve is EQUAL to the entire unearned commission, no set formula for determining its amount exists.

Front 1426

T or F: In most states, brokers are required to refund return commissions.

Back 1426

FALSE. In most states, brokers are NOT required to refund return commissions. The law regards a broker as earning the commission at the time of the policy sale.

However, agencies always are obligated to refund all unearned commissions on a return premium. To help control revenue, agencies should require brokers to sign brokerage agreements stipulating return commission policies.

Front 1427

Accounts receivable

Back 1427

A current asset representing monies owed to a business by customers for goods or services rendered.

Front 1428

T or F: For most agencies, accounts receivable are the largest current asset.

Back 1428

TRUE. For most agencies, accounts receivable ARE the largest current asset.

Front 1429

T or F: Most agencies have a formal program to control accounts receivable.

Back 1429

FALSE. Most agencies do NOT have a formal program to control accounts receivable.

Front 1430

T or F: Direct writers do not have accounts receivable.

Back 1430

TRUE. They require premium payment with the insurance application.

Accounts receivable controls generally apply only to agency-billed premiums.

Front 1431

The average collection period ratio

Back 1431

Average collection period = ((Average accounts receivable balance / Total agency-billed premium) x 365)

Indicates how long it takes an agency, on average, to collect its accounts receivables.

Front 1432

XYZ Agency has $2.4 million in annual agency-billed premiums. Its average accounts receivable balance is $493,000. The collection period for XYZ can be calculated as follows:

Back 1432

Average collection period = (($493,000 / $2,400,000) x 365) = 75 days

This would indicate a lax collection policy because the agency must typically transmit payments to the insurer within 30 to 45 days. To pay insurers, the agency would have to either borrow funds or use its operating funds.

Front 1433

An agency's collection period of greater than ___ days indicates that the agency is extending more credit to its insureds than it has from the insurer.

Back 1433

45

Front 1434

To effectively manage accounts receivable, agencies must perform these activities:

Back 1434

- Evaluate accounts receivable cost factors
- Develop an accounts receivable policy
- Arrange for premium financing

Front 1435

Agencies must evaluate these accounts receivable cost factors:

Back 1435

- Surrendered opportunity cost of accounts receivable funds
- Increased accounts receivable collection cost
- Cost of borrowing to finance accounts receivable
- Increased bad debt expense
- Potential commission losses from failure to extend credit

Front 1436

Opportunity cost

Back 1436

The difference between the maximum profit that an investor could have made from an alternative investment and the profit the investor has actually made from the investment.

Front 1437

Bad debt

Back 1437

Any account receivable that is considered uncollectible.

Front 1438

Accounts receivable are an opportunity cost to the agency because...

Back 1438

Interest can be earned on accounts receivable funds

Front 1439

Determining when an account receivable becomes uncollectible is based on

Back 1439

An agency's credit policy

Front 1440

Ideally, agency credit policies should specify:

Back 1440

- When an account becomes a bad debt
- Who is the responsible party

Front 1441

When an account receivable is designated as a bad debt, it is typically eligible for special tax consideration for that year, as a _________

Back 1441

Business bad debt “write-off”

Front 1442

Bad debt expense varies directly with the ____ of accounts receivable.

Back 1442

Age

Reducing the collection period should sharply reduce bad debts.

Front 1443

Effective management of accounts receivable requires an accounts receivable policy that specifies...

Back 1443

The terms under which credit will be extended.

It should assign responsibility for implementing the credit terms. It should also state who will make collection calls and the circumstances under which the account will be turned over to a collection agency.

Front 1444

_______________ is vital to expense control and improves the long-term relationship between the agency and the customer because the payment terms are agreed to in advance.

Back 1444

Clearly specifying payment options and expectations

Front 1445

Conducting ________ on applications should also be part of the accounts receivable policy.

Back 1445

Credit checks

Front 1446

Alternative methods of paying premiums have become important because of this reason:

Back 1446

Customers are reluctant to tie up operating capital in prepaid insurance premiums.

(Customers may be more willing to purchase insurance products when presented with flexible payment methods for premium financing.)

Front 1447

Benefit of premium financing for insurers

Back 1447

They receive prompt premium payment

Front 1448

Benefit of premium financing for producers

Back 1448

They can sell more insurance

Front 1449

Benefit of premium financing for customers

Back 1449

They can make convenient payments on their insurance as they do on other purchases

Front 1450

Agencies can use any of these five premium financing methods:

Back 1450

- Agency financing
- Bank financing
- Insurer financing
- Premium finance company financing
- Captive finance company financing

Front 1451

Agency financing

Back 1451

Agencies use their own in-house premium financing.

One variation of agency financing is that premiums are paid in installments without a service or finance charge.

Front 1452

Bank financing

Back 1452

A premium financing method in which a bank enters into a premium finance agreement with the insured. The insured is required to make a down payment and to pay installments until the unpaid balance and the finance charges are paid.

(When all parties have signed the agreement, the bank advances the full premium to the insurer or the agency.)

Front 1453

Agencies should be aware that bank financing can _______ the insured's and the agency's overall credit line, and the bank's financing terms may contain ___________ that are disadvantageous to the agency.

Back 1453

Reduce; recourse provisions

Front 1454

Insurer financing

Back 1454

Many property-casualty insurers offer premium financing for policies exceeding a minimum premium.

(Often, only annual policies qualify for financing, and they require a down payment of 20 to 30 percent, with the balance paid over 9, 10, or 11 months.)

Front 1455

If the insurer also finances semiannual policies, the down payment is typically ___ percent.

Back 1455

50; the other 50 percent is paid in three monthly payments.

Front 1456

Premium finance company financing

Back 1456

Similar to bank financing; at policy inception, the premium finance company pays the insured's total premium to the insurer or agency. Insured pays a down payment to the premium finance company and the balance through one of many available installment options.

Front 1457

Benefits of premium finance company financing to the agency

Back 1457

- Prompt commission payment
- Reduced billing expense
- Reduced collection expense
- Lower accounts receivable
- Use of the money until payable to the insurer

Front 1458

Perhaps the greatest advantage of premium finance company financing

Back 1458

The variety of installment options (handles seasonal income variations well)

Front 1459

T or F: Premium finance companies offer the advantage of confidential borrowing that will not affect the insured's credit line.

Back 1459

TRUE. Premium finance companies DO offer the advantage of confidential borrowing that will not affect the insured's credit line.

Front 1460

If an insured defaults on any installment payments, the premium finance company requests that the insurer do this:

Back 1460

Cancel the policy.

(Any unearned premium is then returned to the premium finance company as collateral.)

Front 1461

The premium finance agreement contains a limited power-of-attorney clause that allows the company to request...

Back 1461

That a policy be canceled when the insured has not made a scheduled payment.

(Often this request for cancellation provides only five days' notice to the insured, rather than the standard 10-day notice of cancellation for nonpayment of premium.)

Front 1462

The provision stating that the policy can be canceled when the insured has not made a scheduled payment is probably the most important provision in the premium finance agreement because...

Back 1462

It protects the premium finance company's interest

Front 1463

Captive finance company financing

Back 1463

Must exceed a minimum dollar amount; written by captive finance companies owned or controlled by insurance agencies or agency networks. Mostly available only for annual or semiannual policies.

Front 1464

Captive finance companies

Back 1464

Owned and controlled by insurance agencies or agency networks and are operated according to their needs or demands; only policies written by the insurance agency are accepted for premium financing.

Front 1465

Saving a dollar in expenses is equivalent to...

Back 1465

Making a dollar of pre-tax net income.

Front 1466

Some agencies try to control expenses only when disbursements are made; however, this approach does not really control expenses because...

Back 1466

The money has already been spent

Front 1467

Agencies can control expenses using these approaches:

Back 1467

- Internal controls
- Expense measurement
- Expenses analysis
- Expense reduction

Front 1468

Two types of Internal controls used as a method of controlling expenses

Back 1468

- Personnel controls
- Accounting controls

Front 1469

Personnel controls

Back 1469

Include screening job applicants and prosecuting dishonest employees

Front 1470

A general indicator of a job applicant's suitability can often be obtained by...

Back 1470

Speaking with the employee's prior supervisor and asking whether the supervisor would rehire the former employee.

Front 1471

Failure to prosecute an employee when in possession of conclusive evidence of that employee's dishonesty establishes a precedent within the agency that may encourage this kind of behavior:

Back 1471

It may encourage others to commit dishonest acts.

Therefore, agencies should have written policies that specify the actions the agency will take in the event of employee dishonesty.

Front 1472

Accounting controls used as a method of controlling expenses

Back 1472

Include the organizational plan, procedures, and other records that are concerned with the safeguarding of assets and the reliability of financial records.

Front 1473

Accounting controls are designed to provide reasonable assurance that these 3 actions occur:

Back 1473

- Transactions are executed in accordance with management's general or specific authorization and control
- Transactions are recorded as necessary to maintain accountability for assets and liabilities
- Access to assets is permitted only with management's authorization

Front 1474

In addition to internal accounting controls, an independent CPA can be engaged to perform one of three levels of service in preparing agency financial statements:

Back 1474

- A compilation
- A review
- An audit

Front 1475

CPA compilation

Back 1475

The CPA compiles and reports data provided by agency management in the form of financial statements without rendering an opinion on the financial statements.

Front 1476

CPA review

Back 1476

The CPA does not provide an opinion on the financial statements, but does provide a limited negative assurance by indicating nothing has come to the CPA's attention to suggest that the financial statements are materially misstated.

Front 1477

CPA audit

Back 1477

The CPA performs enough work to be able to express an opinion that, with a reasonable level of assurance, the financial statements taken as a whole present a true and fair representation of the agency's financial position and the results of its operations for the period audited.

Front 1478

Expense measurement

Back 1478

A practical way to quantify the effect of expense control measures.

Front 1479

Assume an agency is writing $2 million in annual premiums at an average commission of 13 percent, generating gross commissions of $260,000. Assuming management earns 50 percent of gross commissions before taxes, the agency yields a pre-tax net income of $130,000. Also assume that the agency can reduce expenses by $130,000. The reduction in expenses goes directly to pre-tax net income. Describe how this illustrates the effect of expense control measures.

Back 1479

A $130,000 reduction in expenses has the same effect as $2 million in additional annual premiums for the agency.

(Consequently, this expense measurement indicates that expense reduction has about 15 times the effect of an increase in premium volume.)

Front 1480

For example, at a commission level of 20%, a $1 reduction in expenses is as profitable as this increase in premium volume:

Back 1480

$10.

At a commission level of 18%, = $11
16% = $12.50
14% = $14.29
12% = $16.67
10% = $20.00

Front 1481

Expense analysis

Back 1481

Involves developing expense benchmarks and analyzing results to assess agency performance and target specific areas for improvement.

Front 1482

A weakness of published benchmarks

Back 1482

They are averages.

By contrast, the best benchmark is established by developing a profit goal, establishing a budget, and using cost accounting to determine expense control measures.

Front 1483

Expenses can be reduced by implementing these two tactics:

Back 1483

- Sound time-management practices
- Cost accounting

Front 1484

Clear expectations save time by reducing the need to

Back 1484

Undo or redo work

Front 1485

Cost accounting

Back 1485

The systematic tracking, recording, and analyzing of an organization's expenses relative to its associated products, activities, and departments.

Front 1486

Many agencies have rejected cost accounting systems as impractical for these reasons:

Back 1486

- The expense of implementing cost accounting systems
- The burden of additional work for agency staff

Fortunately, the expense and burden of obtaining such information have decreased. Therefore, agencies should seriously consider the benefits of cost accounting.

Front 1487

One simple cost accounting technique

Back 1487

Determine the cost of the agency's time.

Front 1488

How to calculate the cost of the agency's time

Back 1488

This can be calculated by dividing the total payroll (including all employee benefits) by the number of employees (part-time employees count as one-half). Tasks are then examined based on how long they take to perform.

Front 1489

Important tax considerations for insurance agencies (3):

Back 1489

- Legal form of ownership
- Tax-advantaged employee benefit plans
- Lease arrangements

Front 1490

Disadvantage of the corporate form of ownership

Back 1490

The IRS compares the compensation of owner-employees (corporate executives) with that of corporate executives in comparable businesses and decides whether it is reasonable or excessive. Amounts found to be excessive are not deductible as business expenses by the corporation.

The corporation also pays taxes on on their salaries. Consequently, owner-employees are subject to taxation at both the corporate and the personal levels.

Front 1491

The double taxation that is disadvantageous about the corporate form of ownership can be avoided by electing __________ status.

Back 1491

Subchapter S

Front 1492

How income from Subchapter S corporations is taxed

Back 1492

It's not taxed at the corporate level but is passed to stockholders in much the same way as partnership income.

Front 1493

Tax advantage of a typical corporation

Back 1493

Tax-free group life insurance

(not available in a Subchapter S corporation)

Front 1494

The taxation for LLC (limited liability company) members is the same as for...

Back 1494

Partnership income

Front 1495

The liability for LLC members is protected in a similar manner to...

Back 1495

Employee-owners of a corporation

Front 1496

Employee benefit plans provide agencies with a means of...

Back 1496

Rewarding employee performance and attracting and retaining quality employees.

Front 1497

Six common employee benefit plans used by agencies:

Back 1497

1. Bonus plans
2. Qualified profit sharing plans
3. Employee stock ownership plans (ESOPs)
4. Deferred compensation plans
5. Section 401(k) plans
6. Stock option plans

Front 1498

Bonus plans

Back 1498

Reward employees when they achieve their goals and/or the agency makes a certain amount of profit.

Front 1499

The sooner a bonus is paid after goals are achieved or a profit is made, the __________ its motivational effects.

Back 1499

Greater

Front 1500

T or F: Annual bonuses are more effective than monthly bonuses.

Back 1500

FALSE. Monthly bonuses are more effective.

Front 1501

T or F: Bonuses based on overall agency or work group performance tend to encourage teamwork and may help make the staff work more harmoniously.

Back 1501

TRUE. Bonuses based on overall agency or work group performance tend to encourage teamwork and may help make the staff work more harmoniously.

Front 1502

Qualified profit sharing plans

Back 1502

Plans by which an employer makes special deferred sums based on the profits of the business available to all employees.

Typically averages between 15 and 25 percent of an agency employee's total compensation.

Front 1503

Benefits of a qualified profit sharing plan

Back 1503

- Unite employees in a common goal
- Encourage teamwork and cooperation
- Tax benefits

Front 1504

ESOP

Back 1504

Employee stock ownership plan; is a qualified (eligible for special tax considerations for both the employer and employee) retirement plan that provides employees to participate in their agency's growth as investors.

Front 1505

ESOPs are usually structured either as a ____ or as a _____.

Back 1505

Stock bonus plan; a combination bonus plan and pension plan.

Front 1506

T or F: With an ESOP, the employee has the right to sell the stock back to the employer for its fair market value.

Back 1506

TRUE – that is, if an employer's stock is not tradable on an established public market.

Front 1507

Deferred compensation plans

Back 1507

Plans by which an employer agrees to pay an employee in the future for work performed today.

Front 1508

Benefit of a deferred compensation plan

Back 1508

For those employees with sufficient current income, this allows them to be paid in the future under specified conditions when the employee presumably is in a lower income tax bracket.

Front 1509

IRS requirement re: deferred compensation

Back 1509

An employee who agrees to defer a bonus until retirement must agree to forfeit the deferred bonus to the employer if he or she quits. (Otherwise, the amount deferred is immediately taxable to the employee.)

Front 1510

Section 401(k) Plans

Back 1510

Allow employees to authorize their employers to reduce their salary and contribute the salary reduction to an employer-sponsored qualified retirement plan.

Front 1511

Employee contributions to a 401(k) are made on a ______ basis.

Back 1511

Pre-tax

Front 1512

T or F: Employers can deduct their contributions to an employee's 401(k) as business expenses.

Back 1512

TRUE, they can.

Front 1513

Stock option plans

Back 1513

Benefit plans that are tied to an agency's stock value and that reward certain employees based on the increase in the value of the agency's stock.

(These types of plans are rare among insurance agencies, except in very large agencies or public brokerages.)

Front 1514

How a typical stock option plan works

Back 1514

Employees are given the right to purchase stock at a specified price within a specific time period. The employer receives a corporate income tax deduction for compensation expense when the employee realizes compensation income from the stock plan.

Front 1515

One common method for decreasing income tax liabilities

Back 1515

Leasing fixed assets, such as computer equipment, rather than purchasing them.

Front 1516

Benefits of leasing arrangements

Back 1516

- Permits tax deduction of the full cost of leasing the asset
- Allows deductions for asset appreciation to be accelerated as compared with deductions for asset appreciation
- Permits 100 percent financing (making financing charges tax-deductible business expenses and conserving cash and working capital)

Front 1517

Additional benefits of leasing fixed assets (4)

Back 1517

- Permits rapid changes in equipment and reduces the risk of obsolescence
- May be more flexible because lease arrangements may contain less restrictive provisions than debt arrangements
- Does not add debt to a balance sheet and does not affect financial ratios (therefore, it may increase borrowing capacity)
- Can shift agency income to family members or key agency members who own the assets that are leased to the agency

Front 1518

T or F: Although owning an asset may often be preferable to leasing it, leasing usually offers these advantages without corresponding tax disadvantages.

Back 1518

TRUE. Although owning an asset may often be preferable to leasing it, leasing usually DOES offer these advantages without corresponding tax disadvantages.

Front 1519

Leased employees

Back 1519

Subject to the control of the agency in the same way as regular employees, but are employed by leasing contractors who are responsible for all payroll taxes, employee benefits, and (usually) workers compensation coverage.

Provides tax advantages for the agency and expense savings compared with hiring additional full-time employees.

Front 1520

Three categories of ratios that are particularly useful in evaluating an agency's financial performance and strength:

Back 1520

- Profitability ratios
- Liquidity ratios
- Efficiency ratios

Front 1521

Profitability ratio

Back 1521

A financial ratio that measures the performance of a company and indicates how well a company is achieving its profitability goals by analyzing how profit was earned relative to sales, total assets, and net worth.

Front 1522

Many problems related to profitability can be explained, in whole or in part, by a firm's ability to....

Back 1522

Use its resources effectively.

Front 1523

To be meaningful, profitability ratios must be

Back 1523

Compared to industry or other external benchmarks

Front 1524

Profitability ratios appropriate for agencies (3):

Back 1524

- Net profit margin ratio
- Return on assets (ROA) ratio
- Return on equity (ROE) ratio

Front 1525

Profit margin ratios are used for this purpose

Back 1525

To assess the ability of the firm's management to control the various expenses involved in generating sales rather than the expenses involved in cost of goods sold.

Front 1526

Net profit margin ratio

Back 1526

Net profit margin = Net income / Sales

Front 1527

Return on assets (ROA) ratio

Back 1527

Return on assets = Net income / Total assets

Front 1528

ROA ratio is used for this purpose

Back 1528

Evaluates the overall effectiveness of the firm's management

Front 1529

Return on equity (ROE) ratio

Back 1529

Return on equity = Net income / Owner's equity

Front 1530

Liquidity ratios help answer this question:

Back 1530

“Does the firm have sufficient cash and near-cash assets to pay its bills on time?”

Front 1531

Near-cash assets

Back 1531

- Savings accounts
- Certificates of deposit
- Marketable securities that can easily be converted to cash

Front 1532

Purpose of liquidity ratios

Back 1532

Used to measure a firm's ability to satisfy short-term debt obligations as they are due.

Front 1533

Liquidity ratios appropriate for agencies (4)

Back 1533

- Current ratio
- Acid test ratio
- Accounts receivable ratio
- Cash ratio

Front 1534

Current ratio

Back 1534

A liquidity ratio that indicates the company's ability to meet its short-term financial obligations, calculated by dividing current assets by current liabilities

Front 1535

The higher the firm's current ratio, the more easily the business can...

Back 1535

Meet current obligations using current assets

Front 1536

Calculation for current ratio:

Back 1536

Current ratio = Current assets / Current liabilities

Front 1537

An agency's current ratio is considered good if...

Back 1537

It equals 2 or higher.

(An agency with a ratio of 2 has twice as many current assets as current liabilities.)

Front 1538

Acid test ratio (quick ratio)

Back 1538

A liquidity ratio that provides a measure of a company's ability to meet is current obligations if it cannot sell its inventory.

Front 1539

Calculation for acid test ratio (quick ratio)

Back 1539

Acid test ratio = (Current assets – Inventory) / Liabilities

or, for insurance agencies,

Acid test ratio = (Cash + Accounts receivable + Near cash assets) / Liabilities

Front 1540

Current assets

Back 1540

- Cash
- Near cash
- Accounts receivable
- Inventory

(an insurance agency's inventory is usually negligible, so it's mostly just cash, near cash, and accounts receivable for insurance agencies)

Front 1541

Cash ratio

Back 1541

Cash ratio = Cash / Current liabilities

Front 1542

Accounts receivable ratio

Back 1542

Accounts receivable ratio = Accounts receivable / Current liabilities

Front 1543

An agency with a higher cash ratio than accounts receivable ratio has much _______ liquidity.

Back 1543

Stronger

This is part of why you can't just consider the acid test ratio when considering liquidity.

Front 1544

Efficiency ratios

Back 1544

Indicate how well a firm is using its resources; they can reveal that even profitable agencies may not be efficient and productive.

Front 1545

Efficiency ratios appropriate for agencies (4):

Back 1545

- Cost per account ratio
- Revenue per employee ratio
- Retention ratio
- Expense ratio

Front 1546

Cost per account ratio

Back 1546

Calculated by dividing office or sales costs by the number of accounts the agency handles. (Can be expressed as either office cost per account or sales cost per account):

Office cost per account = Office costs / Number of accounts

Sales cost per account = Sales costs / Number of accounts

Front 1547

Why can cost per account ratios be misleading?

Back 1547

They ignore the fact that agency costs are mostly fixed. (Therefore, most agencies can write additional accounts without increasing either sales or office costs.)

Front 1548

Cost accounting is necessary to determine...

Back 1548

Whether a policy should be written when the premium is compared to the cost of handling the particular account

Front 1549

Revenue per employee ratio

Back 1549

Revenue per employee = Total revenue / Number of employees

Front 1550

Retention ratio

Back 1550

a.k.a., retention rate

Measures the rate at which the existing book of business is renewed during a particular period (usually a calendar year)

Retention rate = (Number of existing accounts at the end of the period* + Number of new business accounts written) / Number of existing accounts at the beginning of the period

*not including any new business written

Front 1551

Factors that influence retention rates:

Back 1551

- The competitiveness of the agency's insurers
- Quality of customer service
- Economic conditions
- An insurer's willingness to write certain classes and lines of business

Front 1552

The higher the retention ratio, the more _____ the agency operations.

Back 1552

Efficient

Front 1553

Expense ratio

Back 1553

Expense ratio (insurance agencies) = Total agency expenses / (Commissions + Fee Income)

Front 1554

Because an insurance agency has little physical inventory, its value is based largely on __________.

Back 1554

Intangibles

Front 1555

Items a prospective buyer should consider when evaluating an agency for purchase include:

Back 1555

- Organizational form and operations
- Financial information
- Nonfinancial valuation factors
- Valuation methods

Front 1556

Aspects of an agency's organization that a prospective buyer examines:

Back 1556

- Legal form of ownership
- Operational organization (changing this after purchase can be expensive and time consuming)

Front 1557

Many different aspects of an agency's operations affect the agency's value. These are some issues of primary concern to prospective buyers:

Back 1557

- Companies represented
- Type of billings (agency, direct, etc.)
- Relations with customers (will they move post-purchase?)
- Errors and omissions (# of claims filed against it)
- New business potential (% of customers with only one policy?)

Front 1558

Balance sheet

Back 1558

Composed of assets, liabilities, and the owners' equity.

Front 1559

An agency's book value

Back 1559

The value of its assets on the balance sheet.

Sometimes book value is a valid measure, and sometimes it is not.

Front 1560

_____ is the most liquid asset.

Back 1560

Cash

Front 1561

The value of cash on hand and in the bank is its ________

Back 1561

Book value, which is its true value.

Similarly, short-term investments. Are also usually worth their book value.

Front 1562

The value of accounts receivable to a prospective buyer depends largely on...

Back 1562

How likely they are to be collected.

Front 1563

The value of real estate and other tangible property is shown on the balance sheet as the original purchase price minus any accumulated depreciation (for tax purposes). The result is that the book value...

Back 1563

Does not match the property's market value.

Front 1564

Any current and long-term agency liabilities _______ the agency's value if the purchaser assumes the liabilities.

Back 1564

Decrease.

For example, the accounts current, if assumed by a purchaser, decrease the agency's value because they must be paid relatively soon after agency purchase.

Front 1565

T or F: The book value of owners' equity is equivalent to the actual agency value.

Back 1565

FALSE. It is not normally equivalent to the actual agency value. An agency's purchase price includes its goodwill value of renewal business This is probably the agency's greatest asset, even though it is not listed on the agency's balance sheet, because it yields income for years to come.

Front 1566

This document is probably the most important financial document used to determine an agency's value

Back 1566

The income statement

It's so important because the agency's income-producing ability is the most important feature to a prospective purchase.

Front 1567

Sources of revenue

Back 1567

- Commissions
- Investment income
- Other revenue (fees for service, rentals, and real estate commissions)

Front 1568

These commission factors are also important

Back 1568

- The percentage of commissions to written premiums
- The trend of both actual commissions and commission percentages

Front 1569

If an agency has a history of steady investment gain as a result of investing premiums from their receipt until payment to insurers, this revenue source can ________ agency value.

Back 1569

Increase

Front 1570

An agency's expenses are a valuation factor to the extent that the prospective buyer considers them __________.

Back 1570

Uncontrollable.

Front 1571

Five types of additional financial information should be considered when determining an agency's value:

Back 1571

- Cash flow
- Billings
- Mix of business
- Loss ratio
- Tax factors

Front 1572

In determining value, the significance of cash flow is based on

Back 1572

The size and timing of cash available to make payments to previous owners.

(Buyers naturally prefer large amounts of cash to be immediately available. Conversely, an agency with a substantial amount of accounts receivable over 60 days old has a reduced value because of the increased costs to carry the receivables and the increased risk of bad debts.)

Front 1573

The fewer the billings based on premium volume, the....

Back 1573

Better

(at least as far as agency valuation is concerned; this is because the cost to bill a customer for a $25 installment payment is approximately the same as the cost to bill for a $5,000 annual payment)

Front 1574

A large number of billings may indicate that the agency

Back 1574

Finances a large percentage of business.

Front 1575

Loss ratios that are historically high (above 80 percent, for example) _____ agency value.

Back 1575

Decrease.

Front 1576

Covenant not to compete

Back 1576

An agreement in a sales contract made by the seller not to engage in insurance sales in the same geographic area as the agency for a specified period, such as 3 or 5 years.

a.k.a., a noncompete agreement

Front 1577

Section 197 intangibles

Back 1577

An IRS section with three valuations:

- The value of the noncompete agreement
- The value of the expiration list
- The value of goodwill

These items receives special tax treatment.

Front 1578

The most important nonfinancial valuation factors:

Back 1578

- Employees
- Key employees
- Geographic representation
- Subjective variables

Front 1579

One major indication of the merits of current employees, in addition to compensation, is __________.

Back 1579

The turnover rate.

If turnover is excessive, management problems may exist. If turnover appears high, a buyer should meet with the prospective seller to determine the nature and extent of any management or morale problems.

Front 1580

The greater the likelihood of losing key employees, the _____ the agency value.

Back 1580

Lower

Front 1581

Some buyers, particularly national brokerage firms, pay higher prices for agencies in geographic areas where...

Back 1581

They want to open an office..

Conversely, agencies may be worth less in areas where numerous national firms already have offices.

Front 1582

To a large extent, an agency's value is _______ and, in many cases, based on the buyer's ______.

Back 1582

Subjective; needs.

Front 1583

An agency's true value

Back 1583

What a prospective buyer is willing to pay; it is largely determined by the agency's profit potential as perceived by its buyer.

Front 1584

Three commonly used valuation methods for valuing insurance agencies:

Back 1584

- Traditional method
- Discounted present value method
- Publicly traded brokers multiple of earnings method

Front 1585

Traditional method of valuing agencies

Back 1585

Valuation that uses a multiple of commissions rater than net earnings. Agencies were said to be worth form one to two times annual commissions.

Front 1586

Two major shortcomings of the traditional method of valuing agencies

Back 1586

- It fails to focus on profitability
- It fails to discount payments (i.e., a sale at 2 times commission paid out in five years at little or no interest is treated the same as an all-cash payment)

Front 1587

Discounted present value method of valuing agencies

Back 1587

Estimates the revenue that the agency's book of business will generate over a specific period.

The discounting is because the actual payments would not be received immediately. This valuation method is based on the general principle that a dollar to be received a year from now is worth less than a dollar received today.

Front 1588

Publicly traded brokers multiple of earnings method of valuing agencies

Back 1588

Based on a selected multiple of the brokerage's stated earnings.

Although publicly traded brokers are much larger than the average insurance agency, they are in some ways an assemblage of large local agencies. However, unlike a small agency, these firms often include such operations as third-party administration, risk management, and claim handling services. These significant differences between large brokerages and the typical agency make this valuation method the least appropriate for most agency operations.