Chapter 1 Industry Knowledge:

Industry Knowledge

Learning Objectives When you finish this study, you should be able to meet the following objectives: • Describe how the insurance model works and list the six functions of insurance. • Identify insurance intermediaries and discuss similarities/differences in the various roles

and functions performed by them. • Explain the dynamics of the principal and agent relationship, including the law of agency,

agency/brokerage contracts, duty of care, and fiduciary responsibility. • Describe the licensing and regulatory requirements. • Examine the role of the insurer based on the insurance company departments, insurance

company solvency, and premium payment plans. • Examine the role of insurance underwriters in accepting/rejecting risks, investing

shareholder capital and implementing the insurer’s strategic plan; including tools used to accomplish these goals. Discuss the role of the adjuster in the claims settlement process as well as explain the

impact of waiver and estoppel on claims settlement. • Discuss the concept of reinsurance, methods, and types of reinsurance, and explain the

reasons why insurers use reinsurance. • Outline the purpose and functions of the various insurance industry organizations

discussed in the text.

Contents

Basic Insurance Relationships

Functions of Insurance the Insurance Intermediary

Comparing Agents and Brokers

Roles and Functions of Insurance Intermediaries Principle and Agent Relationship

Law of Agency Agency/Brokerage Contract Duty of Care

Fiduciary Responsibility Licensing and Regulatory Authorities Role of Insurer

Insurance Company Organization Insurance Company Solvency

Payment the Role of Underwriters

Acceptance of Risk Investor of Shareholder Capital Implementation of Insurer’s Strategic Plan the Tools of an Underwriter

Underwriting Relationships with Insurance Professionals Role of the Adjuster

The Claims Department Progression of the Claim

Waiver and Estoppel Reinsurance

Why Reinsure? Methods of Reinsuring

Types of Reinsurance Industry Associations

Institute for Catastrophic Loss Reduction Groupement des Assureurs Automobiles Property and Casualty Insurance Compensation Corporation Centre for Study of Insurance Operations (CSIO) The Surety Association of Canada (SAC) Underwriters’ Laboratories of Canada (ULC) Insurance Bureau of Canada Insurance Brokers Association of Canada Canadian Independent Adjusters’ Association Canadian Insurance Claims Managers Association

Basic Insurance Relationships

Insurance means the undertaking by one person to indemnify another person against loss, or liability for loss, for a certain risk or peril as described in a policy, or to pay a sum of money or other thing of value when a specified event happens.

Definition

premium insurance A contract in which one party, the insurer, for monetary consideration agrees to reimburse another, the insured, for loss or liability for a loss on a defined subject caused by specified hazards or perils. indemnify To provide compensation for loss or expenses incurred.

Insurance is a method of collecting small financial contributions (premiums) from all members of a group, and then using that accumulated pool of money to pay funds to the unfortunate few who suffer certain identified types of losses. The “pool” is managed by the insurer. All members of the group share in the goal of restoring financial security to the individual—see Exhibit 1.1: Components of the Insurance Model. This approach makes affordable protection available to everyone in the group and allows individuals to exchange unpredictable and potentially devastating financial loss for a regular, manageable premium payment. Insurance is an effective mechanism to protect individuals against financial loss.

Exhibit 1.1: Components of the Insurance Model

Fund Income

Fund Outgo

Insurance

Fund

Premium from insureds

Claim payments

Insurance

The income of the fund must be sufficient to meet the losses paid out. Furthermore, the premium for each risk should be commensurate with that risk. Those risks more likely to have losses should pay higher premiums. Also, those insuring for higher amounts should pay higher premiums, although this does not mean higher rates.

Definition premium The price of insurance protection for a specified risk for a specified period of time. risk The chance of loss. Specifically, the possible loss or destruction of property or the possible incurring of a liability. Sometimes referred to as the subject of an insurance contract.

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On the outgo side, it is important that proper settlement of losses is made. The payment of legitimate claims is the purpose of the business, but inflated or improper claims should be refused in fairness to all insureds who have contributed to the fund.

Functions of Insurance

The six key functions of insurance are the following:

1. Spread of risk 2. Aid to security 3. Aid to credit 4. Loss-prevention activities 5. Source of capital 6. Source of employment

Spread of Risk The primary function of insurance is to spread risk the losses of the few are shared by many. There are, however, a number of supplementary functions which also enhance the economy.

Insurers aim to achieve a balance of premiums to losses and expenses by having a good spread of risk. This spread of risk can be achieved by one or more of the following, subject to practical considerations and objectives of the individual insurer:

Volume insuring a large number of risks. Diversity of type of risk—writing insurance on as many different kinds of risk as possible. If several types of risk are insured, or several classes of business are transacted, the chance for an underwriting profit is increased because a loss in one class of business may be offset by a better-than-average profit in other classes. However, there must be sufficient volume in each class to make it viable. Diversity of location writing insurance in as many different locations as practicable. The opportunity for profit increases with a greater number locations insured. In some types of insurance, particular care must be

exercised so that too many risks in one location are not insured. For example, in a crowded city where there is a fire conflagration hazard or in an area subject to severe windstorms, one would not want a concentration of buildings insured.

Aid to Security

Insurance gives peace of mind by substituting a certain premium payment in place of an uncertain loss payment. It gives an insured a feeling of security as the future can be planned with some measure of certainty. As a result, both individuals and businesses are able to avoid the need for setting aside reserves of money, which would normally be greater than corresponding premiums, to meet the financial requirements in case of a loss.

Aid to Credit

It is virtually impossible to obtain credit without having insurance on the item concerned. When you finance a car or mortgage a house, the first requirement is to arrange insurance. Granters of credit want to protect their investments. If an uninsured mortgaged house were destroyed by fire, the owner would be required to pay off the mortgage even though the house no longer existed. This would be a double hardship as the insured would also still have to provide for new accommodation.

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Loss-Prevention Activities 7 Although insurers are in the business of spreading risk and paying losses which Darise, they are vitally interested in reducing or preventing losses. This, in turn,

helps reduce not only the actual costs of insurance to the consumer, but also the inconvenience and oftentimes human suffering which results from an accident or loss.

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Examples of some loss-prevention activities carried on by insurers include the

following: .. Fire prevention research and recommendations to prevent fires and spread

of fires, improved building materials, and promotion of sprinklers and various

types of fire and smoke detectors. • Safe driving campaigns to encourage safe driving, and also to reward safe

drivers through lower insurance costs, testing of vehicles for safety, pressure on vehicle manufacturers and legislators for safety features such as seat belts in vehicles.

Source of Capital

The insurance business invests large amounts of money in the Canadian economy, in bonds and stocks and certain other securities, and in buildings and land, the latter items being mainly for their own use. Government regulations specify the types of investments not permitted to insurers, but there is still some degree of flexibility. Investments must be relatively secure and also fairly liquid.?

These large amounts of money are derived from premiums paid in advance and must be readily available to meet future losses that may arise during the period of insurance; another portion represents the amount estimated on claims in the process of being settled or losses which have occurred but have not yet been reported. These are all referred to as outstanding loss reserves. Money must also be available to refund premiums which have not yet been earned (unearned premium as opposed to earned premium), in case policies are cancelled. This is called an unearned premium reserve. The balance makes up the working capital.

Definition earned premium (1) That portion of premium earned or charged for the period of time a policy remained effective. For example, an annual policy paid for in advance would be one-twelfth “earned” at the end of the first full month of its term. (2) An amount calculated by taking the earned premium reserve at the beginning of the period plus the premium written

during period, less the unearned premium reserve at the end of the period. de (3) Premium actually exposed to loss.

unearned premium The part of the premium that has not been used or earned; premium representing the unexpired portion of a policy. unearned premium reserve A reserve fund of an insurance company or reinsurance company, representing the unearned premiums. )

Source of Employment The insurance industry is a source of employment for many Canadians, including self-employed owners of insurance agencies, adjusters, and employees who work in company offices of insurers, agents, brokers, or adjusters. There are many tradespeople and professionals who also are employed by the industry. One could safely say there is probably no other industry that offers such wide-ranging opportunity and variety of occupations.

onsider these examples of jobs found directly in insurance: clerical, administrative and data-entry workers, as well as computer technicians and program

ters, agents, brokers, adjusters, appraisers, risk managers, accountants.

ers,

actuaries, doctors, lawyers, writers, printers, translators, engineers, researchers, and teachers, to name but a few. Indirectly, body shops, contractors, lawyers, health professionals, and others benefit. In fact, the economy of the country is very much tied to insurance.

The Insurance Intermediary

Insurance intermediaries, known as insurance agents and brokers, are a vital link between the insurance companies and the insureds. They help in identifying insurance needs, matching those needs with products that are available, and facilitating insurance contracts to the satisfaction of both insurers and insureds.

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The contract is the agreement enforceable at law, which sets out in detail the arrangements between insured and insurer concerning premiums, the contingency insured against, and the manner and method of settling losses. The evidence of that contract is the insurance policy.)

Definition

contract An agreement or promise between two or more persons that is intended to be legally enforceable and is constituted by the acceptance by one party of an offer made to him by the other party, to do or to abstain from doing a specific act. The offer and acceptance may either be expressed or be inferred through the conduct of the parties.

The contract of insurance is between the insured and the insurer. The role of the insurance agent or broker is to act as intermediary and assist in bringing the two together in a contractual relationship by arranging the insurance contract. The duties and responsibilities of agents and brokers are defined in provincial insurance acts.

Definition agent A person who is employed or authorized to act on behalf of another. Agents can be independent or direct writers. An independent agent is one who contracts with at least two or more insurance companies to sell their insurance policies to the public and is paid a commission based on the percentage of each premium paid. This includes a fee for each policy serviced. A direct agent represents only one company and sells for only one company.

broker A licensed independent person or firm who acts on behalf of an insured in placing business with insurance companies.

An individual or firm that acts as an intermediary and assists in arranging contracts of insurance between insurers and clients is referred to as a broker. Insurance agents represent one insurer and also assist in arranging insurance contracts between applicants and insurers. The insurers they usually represent are known as direct writers. An agent may represent a single insurer that is not a direct writer, but that would rarely happen.

( Insureds are more likely to know the name of their agent or broker than the name

of their insurer. They are more likely to call their agent or broker when they have questions, a claim, or a need to buy more insurance—when they purchase a new car or a cottage, for example. Often it is the agent or broker whose empathy and knowledge help the insured through the trauma of a loss. Your capacity to assist will develop as you become more experienced and attain greater technical knowledge of policy forms and claims procedures.

Insurance intermediaries can deal with any or all of the lines of insurance, provided they are licensed to do so. Intermediaries can hold licences as a general insurance intermediary and/or a licence for life or accident and sickness insurance. When assisting clients in identifying the risks they may be exposed to, an intermediary may discover a need for insurance that the intermediary is not licensed to handle. When this happens, the professional intermediary defers to another competent licensed professional either within or outside of the agency/ brokerage to provide additional lines of insurance the client may require.)

Comparing Agents and Brokers

Both agents and brokers act as intermediaries to bring the insured and the insurer together in a contractual relationship. Both act to facilitate the purchase of the insurance policy, and both service the account. Service includes all aspects of the process, including arranging and invoicing the policy, advising the client, and facilitating the claims. As we progress through this text, we will expand our definition of this aspect of the agent’s and broker’s responsibilities.

The differences between agents and brokers lie in their differing responsibilities to consumers and insurers, in how they function, and in their relationship to insurance companies.

Insurance Agents Agents generally sell and service the insurance policies offered by a single insurer. Because of this, agents usually expect significant support from the insurer, such sales training and educational support, product knowledge, and administrativ, assistance in setting up their offices. These agents are either employ

ir offices. These agents are either employed by an insurer or operate independently on contract with only one insurer

Employed agents work directly for the insurer. These insurers are known as direct writers because they sell insurance directly to the public. The employed agents are paid a salary, or a salary with a cash bonus, or a salary plus commission based on sales. The business written—the insurance policies sold—and the client list belong to the insurer. The insurer issues and services the policies, takes care of invoices, and collects the premiums.

Independent agents operate in an entrepreneurial style, maintaining separate offices from the one insurer they deal with. These companies are known as agencies, and can vary in size from one person who is licensed and is owner of the firm to a large firm employing many people. The agency can be a sole proprietorship, a partnership, or an incorporated company. Independent agents are paid by commission or by a base salary plus commission, and they pay their own expenses. The business and client list usually belong to the insurer, and commission for new business is generally set higher to encourage production.

Insurance Brokers

Brokers are independent businesspeople. The businesses they work for are known as brokerages. Brokerage firms can vary in size from one person who is licensed and is owner of the firm to a very large firm employing over 1,000 people. Like an agency, a brokerage can be a single proprietorship, a partnership, or an incorporated company. The brokerage is paid a commission for each policy issued on behalf of its clients. In some cases, the brokerage will charge a fee to the client for services rendered, rather than taking a commission from the insurer. Depending on the terms of their employment with the brokerage, individual brokers may be paid a salary, a salary plus commission, or straight commission. The broker (or brokerage), not the insurer, owns the book of business and the client list. Thus, brokers are able to cancel a contract or arrangement with an insurer and move their entire book of business from one insurer to another.

Since brokers usually sell the policies of more than one insurer, they can provide consumers with a choice of insurance products and insurers. They determine which clients they will accept to do business with, and select products for these clients based on the strategic plan of the brokerage and the needs of the clients. Choosing the most appropriate insurer for a particular policy is called marketing.

Each insurer, or market, caters to a certain portion of potential insureds, known as a market segment. Every broker develops a plan to attract business and capture a segment of the market that will be acceptable to the insurers that the broker represents.

Table 1.1: Comparing Agents and Brokers

| Producer services

Compensation from

insurer

Status with

insurer

Client list ownership

Employee

| No

Employed agents

None

Salary alone or plus bonus and/ or commission

Independent agents

Commission or base salary plus commission

Independent contractor

No

Limited claims

Brokerage

Commission

Independent contractor

Yes

Claims, loss control, others

Roles and Functions of Insurance Intermediaries

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The intermediary can have many different names or titles: agent, broker, producer, customer service representative, or customer relations manager, among others. These titles may not encompass every aspect of the insurance intermediary’s responsibilities. Regardless of the title attributed to your position, as an insurance intermediary you may perform some or all of the following functions throughout

the course of your day-to-day business: r. Prospect for potential clients

• Qualify the client • Advise the client • Facilitate the application for insurance • Obtain instructions from the client • Negotiate insurance • Facilitate the claims process

These functions are not intended to be seen as discrete categories. As we discuss them, you will notice that there is considerable overlap between most of the functions.

Prospect for Potential Clients

There are many ways you can identify potential clients:

Target marketing: Developing a sales strategy to target a specific segment of

the population • Market segmentation: Identifying the potential insureds you could approach

based on your target marketing plan • Advertising: Advertising your services in relevant publications or by creating

a sales publication to be distributed • Cold-calling: Contacting people you have never met, to introduce yourself

and offer your services • Referrals: Selling to friends or family members of existing clients based on 2. the clients’ recommendations

When you have planned a meeting with an individual to discuss the possibility of buying insurance, you have identified a source of new business. As you will be the first point of contact for this potential client, the reputation of the industry requires that you present yourself as both professional and knowledgeable.

During your initial meeting, which may or may not be in person, you will qualify the client: that is, determine if this is a client who matches the profile your agency or brokerage has targeted. Once you are satisfied this is a client you can assist, illustrate to your potential client the ways in which insurance products are beneficial.

Since every client is different, you will likely need to tailor your sales of different coverages to best suit each client’s individual needs. Remember that you are not selling only the insurance policies, but your service as well. Emphasize the role you will play in the insurance process—you will be the one clarifying the choices of coverage available and facilitating the application process.

Should a claim arise, you will again be a source of information and aid to your client, helping to ease the process. Illustrate the role you will play in the insurance process to help your client see the value of your customer service skills not just the products you can offer.

Qualify the Client Meeting with a potential client is an opportunity for you to determine if that client is part of the market segment your company has targeted as a probable purchaser of your services. This is also the point when you assess whether you can, or want to, assist this client’s insurance needs. This initial qualifying will be based on some routine information. If you determine you can assist the client, your discussion will become more in-depth.

To learn about the client’s situation and to determine what insurance is needed, ask the potential client to describe their situation to you. Probe for clarification, if necessary. You are a trusted professional, so be discreet-comply with privacy laws and keep the affairs of your clients confidential. When you do, your clients will probably feel more comfortable and be more inclined to divulge their personal information, satisfied that it will remain private.

Advise the Client

The average consumer looks to the insurance intermediary for necessary information about insurance. Your knowledge of the insurance process and of the different coverages available is key to being able to assist your client in choosing the best coverage for his or her exposures.

To begin your assessment of the client’s exposures, you can offer to evaluate or review any current insurance policies that your client has. When reviewed in conjunction with questionnaires or surveys, this will assist you in obtaining the information necessary to identify the client’s exposures to loss. You and your client can then determine how likely it is that potential losses will occur, whether the existing coverage is adequate, and what improvements can be made to the client’s existing insurance program. The process of identifying and quantifying exposures to loss is called risk analysis.

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Definition (risk analysis Simply stated, it is the process of identifying and

quantifying exposures to loss.

When you advise your clients on appropriate types of insurance, including recommending insurance companies and specific policies or coverages, you have the opportunity to review these choices together with the client and explain the extent of coverage provided by each one. Inform your client that any quote is subject to change, depending on the client’s final information. Agents, who have only one market, would recommend the most appropriate product of that market to the client and explain the reasons for the choice.

Knowledge of the products available in the marketplace beyond those offered by the insurers you represent is part of what makes your service valuable to your client. In some circumstances, it may be necessary to ask a wholesale broker to place coverage on behalf of your client, a practice known as sub-brokering. If you are unable to provide adequate coverage through your insurer(s), and you cannot or do not wish to approach a wholesale broker, but you know that such coverage is available elsewhere, then your last resort may be to recommend that your client

it another broker or agent. Brokers and agents have an ethical duty to

advise their clients of exposures that can be insured, whether or not they themselves are able to do it even if this means that they could lose the client to another intermediary as a result.

In addition to informing your client of the overall process and the different coverages available, you can discuss how to control risk. Counselling the client on managing risk exposures is known as risk management, and includes risk-control and loss-prevention advice, as well as risk-transfer strategies. (Risk management is discussed in more detail in another study.) 5.

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Example

When recommending which home insurance policy best suits your client’s needs, you also suggest that the client install fire alarm systems and smoke detectors.

To fulfill the rest of the insurance-negotiating process, brokers and agents

• • • •

review the client’s insurance portfolio; solicit information from the client, as required; offer options to improve coverage, if possible; carry out the client’s instructions; arrange insurance coverage; arrange changes to existing coverage; and arrange for cancellation or lapsing of coverage.

• •

Facilitate the Claims Process

Often you are the first point of contact when a claim occurs. When this happens, reassure your client that you are there to assist in notifying the insurer of the claim and in explaining the claims process to the client. Then you can review the situation and offer any immediate assistance necessary, provided it does not in any way impede or jeopardize the insurer’s handling of the claim. Avoid making any comments on the validity of a claim—brokers and agents do not confirm or deny coverage. Instead, outline the basic claims process and advise your client of what to expect. A client who has just suffered a loss will likely feel more comfortable and confident about the future if he or she knows what to expect.

As a broker or agent, when a loss is reported to you, your duty is to notify the insurer promptly, If the loss is obviously not covered, such as a claim for a house fire being made against a car insurance policy, you might wish to advise your client immediately. But, as brokers and agents do not normally adjust claims,

consider instead just warning the client tactfully that you believe there is no coverage but the insurer will make the final assessment. As an advocate 01 insured, monitor the progress of the claim so that you can assist the chien, adjuster, and the insurer whenever requested. Call the client to verify that the claim is progressing to his or her satisfaction.

Brokers and agents are set apart by their ability to provide good service to their clients. Making sure that a client is satisfied is the best way to ensure that he or she will be a long-term client.

Principal and Agent Relationship

To understand the principle and agent relationship, i.e., the relationship between insurers and their brokers or agents, it is important to learn about the following: 1. Law of Agency 2. Agency/Brokerage Contract 3. Duty of Care 4. Fiduciary Responsibility

Law of Agency

To understand the relationship between insurers and their brokers or agents, it is critical to know something of the law of principal and agent (meaning all agents, not just insurance agents). This law affects all insurance agents and brokers.

First, we must define “agent.” In law, an agent is a person who is authorized to act on behalf of another. Under common law, agents are employed to secure contracts or act for their employers in contractual matters. Consequently, agents may be employees, or they may be independent businesspeople. asa w it

The Civil Code of Quebec is similar. A mandate is a contract by which a mandator (the principal) commits a lawful business to the management of another called the mandatary (the agent), who by his or her acceptance is obliged to perform it.

As intermediary in the insurance transaction, the insurance broker or agent can have two principals. The dual responsibilities of the intermediary role places obligations to act as both “agent” to the insurer, and as “principal” and “agent” for the insured at different points in the insurance transaction.

have two responsibilities: one to the insurer and the other to the client.

nes as required by law and by practice. When soliciting insurance

Definition

mandate In the Civil Code of Quebec, section 213, mandate is a contract by which a person, the mandator (the principal), confers upon another person, the mandatary (the agent), the power to represent him in the performance of a juridical act with a third person, and the mandatary, by his acceptance, binds himself to exercise the power. mandator The principal in contracts made in Quebec, in accordance with the Civil Code of Quebec. mandatary The agent in contracts made in Quebec, in accordance with the Civil Code of Quebec.

applications, describing types of coverage and policies available, and interpreting policy provisions, intermediaries act for the insurer. When providing insurance advice; carrying out specific tasks requested by a client, such as increasing coverage; and monitoring a client’s insurance needs, they act for the client.

Consumers often believe that brokers act for the benefit of the client (i.e., the insured is the principal) while agents act in the best interest of the insurer (i.e., the insurer is the principal). But the law of agency as well as many court cases have shown that both agents and brokers are responsible to both the client and the insurer at various points in time in the insurance process. Their duty to the client is to ensure that all exposures are covered; their duty to the insurers is to act within the authority granted by the insurer and to place coverage only on risks acceptable to that insurer. 3

Insurers (as principals) also have obligations to parties entering into contracts with them (the insureds) through their agents (the insurance intermediaries). When an agent makes an agreement or contract on behalf of the principal with another party, the contract is legal between the principal and the other party. The insurer as principal is legally bound to honour that contract with the insured as the other party to the contract.

Some agents and brokers, through their contract with insurers, may be authorized to issue policies and settle claims. But others may only have the authority to solicit applications and submit these for considerations. Most often, insurance agents and brokers have the authority to conduct their business affairs somewhere between these two extremes. This authority is delineated in the agency or brokerage contract.

Agency/Brokerage Contract

Brokers and independent agents enter into a contractual agreement, known as the agency contract (or brokerage contract) or agreement, with the insurers they

represent. This is a written contract that provides the broker or agent with stable access to the insurance market(s) under the defined terms and conditions. The agency/brokerage contract identifies both parties (the broker or independent agent and the insurer), and details the authority, obligations, rights, and duties of each party. The contract is the basis of the relationship between the broker or independent agent and the insurer.

Definition

agency contract A contract that allows one person to employ another to do her or his work, sell her or his goods, and acquire property on her or his behalf as if the employer were present and acting in person. The principal may authorize the agent to perform a variety of tasks or may restrict the agent to specific functions, but regardless of the amount or scope of authority given to the agent, the agent represents the principal and is subject to the principal’s control. The principal is liable for the consequences of acts that the agent has been directed to perform. Y

This arrangement is further influenced by provincial law as set out in the appropriate insurance act and by regulations administered by the provincial regulator, usually the superintendent of insurance. A well-drafted agreement will facilitate a smooth working relationship between insurers and their brokers or agents.

Brokers can have contracts with any number of insurance companies; most have contracts with several, but insurers may require a minimum annual amount of business from each of their brokers. Because of this, a small brokerage may not be able to sustain very many companies. Agents usually only contract with one company.

Duty of Care

Duty of care is a legal duty that one owes to another, arising out of the principal and agent relationship. Standards are prescribed by common law, the Civil Code of Quebec, and statute law. When acting as an insurance intermediary, perfection is not required, but a reasonable degree of care that of a reasonable competent agent—is expected. Legal precedent, in the past, has held the intermediary to the standard of care that an “ordinary” insurance broker or agent might be expected to exercise in a similar situation. Various court cases have defined “ordinary” to mean an average, responsible, well-informed professional agent. 4

Definition duty of care The obligation that a person has to exercise reasonable care with respect to the interests of others, including protecting them from harm

The current duty of care owed by agents and brokers is based on a precedentsetting case, Fines Flowers Ltd. v. General Accident Assurance Co. (1977). In this case, it was held that agents and brokers have a stringent duty to provide clients not only with information about available coverage but also with advice about forms of coverage required to meet their needs. Note the use of the word “stringent,” which is a step above ordinary.(Recent court cases have affirmed the duty owed. For example, in a New Brunswick case heard in 2001, it was found that the agent failed in an express duty to inform the insured that he did not have certain coverage (a broad-form coverage only available following an inspection and subject to insurer approval). As a result, the insured was left without proper coverage for a shed that subsequently collapsed.

Since agents and brokers act as agents for the insurance companies and as agents for the insureds at different points in the insurance process, the duty of care also shifts depending on whom the intermediary is an agent for at each point in the process. Intermediaries must balance the needs of their clients with the needs of the insurance companies.

Example An intermediary evaluating a client’s automobile exposures recommends the client purchase insurance against damage to the car itself as part of a complete insurance package. When presenting the risk to the insurer, the intermediary must disclose any special knowledge of increased exposure the client represents. In this case, the client has a history of windshield losses because the vehicle is regularly driven on unimproved gravel roads. (Unimproved gravel roads are unusual in this area of the country.) The intermediary has a duty to disclose the fact that this vehicle is regularly driven on such roads to the insurer even though it will probably result in less advantageous insurance terms for the client.

Common law, civil code, and statutory duties flow from the responsibilities assumed by intermediaries: what they say they will do, what they do, and to what extent clients have relied on statements made by them. These laws protect the rights of consumers. When it comes to analyzing to whom the duty of care is owed, the insurance professional can expect that the client’s interests should come above those of the insurer.

When making recommendations for insurance coverage, the objective of the intermediary is to provide the best insurance solutions for the client regardless of the coverages available from any one insurer.

1 Ridgewood Farms Ltd. v. Economical Mutual Insurance Co. (2001).

( Insurance intermediaries are required at all times to exercise utmost good tam

and a high ethical standard, and to operate within the scope of the contract with the insurer and within the authority of their licence. (Ethics and utmost good faith are discussed in greater detail in the study called “Ethics and Professionalism.”)

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Fiduciary Responsibility Fiduciary duty and responsibility is best defined as being responsible for providing the principal with all the information that materially affects the principal’s interest; all information that is relevant to the affairs entrusted to the broker/agent.

Definition fiduciary duty Being responsible for providing the principal with all information that materially affects the principal’s interests; all information that is relevant to the affairs entrusted to the agent. Note: The duty to inform is strengthened by the legal principle of “utmost good faith,” which governs all insurance transactions and requires brokers to disclose all material information to insurers. 4,

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At the same time, utmost good faith is an important element in fiduciary relationships and would be defined as the highest standard of integrity on part of the insured and the insurer, which would certainly include the broker/agent.

Definition utmost good faith A phrase in a legal document calling for the highest standards of integrity on the part of the insured and the insurer

The courts in North America have been considering whether a fiduciary duty is owed to insureds by insurers, brokers/agents, and adjusters. Some have reasoned that a fiduciary relationship exists between insurer and insured. The explanation is that insurers hold premiums for all of their insureds. Insurers are entrusted to manage these funds prudently to ensure that money is available in the event of a loss. A fiduciary relationship having been established, the interests of the “owner” of the funds must be respected before the interests of the trustee. It is debatable whether the insurer is actually holding it “in trust” until a claim occurs. The most stringent duty imposed on insurers has been to give at least as much consideration to the insured’s interest as their own.

Further, fiduciary duty is being responsible for providing the principal with all information that materially affects the principal’s interest; all of the information

avant to the affairs entrusted to the broker/agent. The relationship

between insured and insurer has not been considered a true fiduciary relationship in Canada due to a certain degree of conflict between the insurer and insured, but elements of it are very much present.

Although utmost good faith affects all areas of performance of the insurance contract, the major areas are disclosure by the insured when applying for insurance and the handling of claims. Then, the broker/agent has a strict obligation to pass this information along to the insurer. In law, knowledge of broker/agent is considered knowledge of the insurance company they are dealing with. If a broker has knowledge of a material fact and does not pass it along to the insurer, the insurer cannot later deny knowledge of it.

Licensing and Regulatory Authorities

Insurance companies and brokerages are business enterprises and, as such, are subject to the same laws as any other business. Incorporation, income tax, consumer protection, and employment regulations are among the areas of law that affect all businesses. However, any insurance organization is also regulated by the insurance acts of each province and such other legislation as governs insurance operations in each jurisdiction where they insure risks. By law, all insurance brokers and agents must be licensed.

Licensing requirements are protection for the consumer to ensure that those who advise the public on insurance matters are qualified to do so. The testing procedures for licensing ensure that insurance intermediaries attain a minimum standard of knowledge of the insurance business and government regulations pertaining to themselves. Most provinces require a course of study before applying for licensing. Quebec has stringent qualification requirements with respect to the number of study hours needed to obtain a licence.Z.

Role of Insurer

The following sections discuss the role of the insurer with respect to:

1. Insurance Company Organization: how insurance companies are organized. 2. Insurance Company Solvency: why it is important for the insurance

companies to be financially healthy and regulatory assessment measures. 3. Payment: how insurer companies receive payment of premiums.

Insurance Company Organization

Insurers are organized with departments to meet specific business functions. Some departments/functions are much the same as you would find in companies operating in other types of business, like administrative functions. Other departments are unique to insurers due to the type of business they do, like underwriting and claims departments. Table 1.2: Insurance Company Departments provides a high-level overview of insurance company organization. Notice that in some departments, insurers have functions spread out over head office and branch level, but other departments operate only at head-office level.

Table 1.2: Insurance Company Departments

Head Office Functions

Branch Office Functions

Insurance Company

Department Administration

• •

Depending on the size of the operation, a branch may operate its own human resources and branch training program to a lesser extent Most systems and facilities, supplies, services functions will also be present at branch level

A legal and government liaison unit • Human resources and the related functions | of staffing, employee records, payroll and employee benefits, and establishing and maintaining the company’s training program. Systems, which includes the functions of designing efficient, orderly, and systematic ways of handling work, and information technology Facilities, supplies, and services including responsibility for premises, equipment, stationery and supplies, printing of forms and policies, mailroom services, and secretarial services Keeps the books of account

• Produces financial statements and income tax returns Handles accounts payable and receivable • Manages cash flow Maintains records of unearned premium reserves and loss reserves Files statistical reports required by governments and trade organizations May also look after investments—but, large insurers may have separate statistical and investment departments

Finance Account and Investment

Usually handles the day-to-day financial transactions and accounts payable and receivable for the branch Primary function is premium accounting Generally, each accounting clerk is responsible for a number of brokers/agents and looks after collection of premiums due and reconciliation of payments with statements With direct billing—an invoice is prepared with the policy and goes directly to the customer; when payment is received it must be posted and the broker’s/agent’s account must be credited with the appropriate commission

20

… Table 1.2: Insurance Company Departments Actuarial • Analyzes the data and performs the

calculations to determine the price of various classes of insurance; they are the basic rate makers Determines the amounts of money that are adequate to cover certain required reserves Monitors an insurer’s overall financial situation and alerts management if reserves

do not meet regulatory requirements Branch

• Person responsible for the management of Operations branch operations directly supervises

branch managers Marketing, • Equivalent to sales and marketing • Agency, or departments in other businesses Production

• Develops company’s marketing policies

Establishes methods of promoting the

policies • Studies possible new markets with

objective of developing new insurance projects Sets sales targets each year and consults

with branches on how best to attain them Underwriting • Studies market trends, past experience, and •

statistics

Formulates underwriting policies • Establishes risk and class limits to serve as

guidelines for all business offered • Usually divided according to class of

business Technical • Engineers or other specialists are available Services | for consultation

Technicians inspect and report on risks involving special hazards, assist in rating, and make loss prevention recommendations which benefit the insureds and the insurer

Carries out programs designed in head office by appointing and training the sales force—agents or brokers—and keeping them informed of new coverages and policies Marketing representatives or special agents act as liaison between the insurer and the independent salesforce (brokers)

Underwrites the business produced by the sales force in accordance with head office guidelines

… Table 1.2: Insurance Company Departments Claims

• Administration and efficiency of

company’s claims service Extent to which the head office claims department exercises control over individual claims depends upon the division of authority between head office and the branch May include special investigation units (SIUs), staffed by former law enforcement officers, senior adjusters, and possible other specialists, whose function is to investigate suspicious claims?

Branch offices have considerable autonomy for dealing with claims arising within their jurisdiction, with head office acting in an advisory capacity May be permitted to deal with all claims up to a prearranged limit Where that limit is likely to be exceeded, the file would be referred to the head office, which would instruct the branch or exercise direct control of the claim through the branch Branch claims department handles the investigation, negotiation, and settlement of the claims that are within its jurisdiction, according to the provisions of the contract; adjusters contacted through it Branch may use staff adjusters, independent adjusters, or both, but their appointment and instructions would originate from this department

Insurance Company Solvency

Financial institutions provide financial security to businesses and consumers and to ensure this role is fulfilled, regulators closely monitor their solvency. A company is considered to be solvent when it is capable of honouring all its debts even if it were closed down immediately. Regulators must be satisfied that every insurer has funds that are readily available to pay expenses and claims.

Regulatory Assessment Measures Regulators assess whether reported liabilities are realistic for a company’s claims, unearned premium, and other amounts owing. Guidelines that regulators have established include the following:

Reserves Premium reserves and claims reserves are subject to annual review by a qualified actuary. Premium reserve is a test of the adequacy of premium rates and the claims reserve is a test of the adequacy of reserves held to pay outstanding claims and claims which have been incurred but not reported (IBNR). –

Receivables The collectability of accounts receivable and reinsurance recoveries (credit risk)

e reviewed. For example, regulators do not allow an insurer to treat accounts

are

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receivable outstanding for more than 65 days as assets for the purpose of calculating capital and surplus.

Investment Risk

The manner in which insurers may invest their assets is subject to regulation to ensure the safety of the capital and the appropriate level of liquidity.

Measuring Capacity

Regulators impose minimum capital requirements on insurers and that limits their capacity to write business. Capacity is the function of both capital available and extent of exposure that insurers are prepared to accept.

The level of capital and surplus must be sufficient to cover expenses, commissions, premium taxes, and claims incurred prior to policy premiums becoming earned. The insurer must be capable of weathering bad cycles in which premium income and investment income are insufficient to cover the cost of claims and expenses.

The guidelines regulators use to measure the capacity of insurers include the following: • The ratio of net premiums to equity (capital and surplus) is measured. For

an average mixed portfolio of business the premium to equity ratio might be 2.5:1. If the ratio went as high as 3:1, the regulator would be concerned. The maximum single exposure, being a maximum percentage of equity that can be put at risk on a single exposure, is assessed. For example, an insurer might be restricted to a net retention on a single risk of not more than 2 percent of its equity.)

Payment Payment is due when coverage becomes effective; there is no grace period. To manage accounts receivable, individual brokerages have their own preferred methods. Some brokerages offer incentives to their staff for prompt, full collection of premiums, such as linking a broker’s commission to the payment of the premium. In other cases, brokerages might charge the unpaid premium to the broker personally for accounts that have gone unpaid for more than 60 days (normally the contractual time the brokerage has within which to pay the insurer). Familiarize yourself with your office’s approach.

There are two basic forms of premium payment: 1. Direct bill – the client pays the insurer directly by automatic bank withdrawal. 2. Broker bill – the insured pays the broker, and the brokerage then remits the

premium to the insurer.

When a broker collects premiums, they are deposited in a trust account until they are remitted to the insurer. Remittance terms are stipulated in the broker agreement, and usually fall within the range of 30 to 60 days (though they can be shorter). In the interim between when premiums are paid and when they are remitted to the insurer, the brokerage earns interest on these monies as a supplement to its income. Thus it is in a broker’s best interest to collect premium payments promptly.

Payment Plans

In general, payment plans are offered as a customer service only. To avoid misunderstanding, make payment expectations clear, and finalize payment terms when you bind the risk. Note that no one plan is equally useful to every client. Your client’s preferences and ability to comply with the payment terms will influence which plan is employed. Correctly matching the client’s needs and abilities to the payment option will improve overall customer satisfaction by eliminating the inconvenience, cost, and probable damage to your relationship that collections activities can create. It will also increase the amount of time available for you to serve existing clients and generate new business.

Direct Billing

The insurer makes automatic monthly withdrawals from the insured’s bank account. The plan is initiated when coverage is bound. You collect a deposit equal to the initial costs including sufficient premium to pay for the first 60 days of coverage, service, and/or interest charges. Payment is constructed in this fashion to ensure that the monies received exceed the administration costs and the premium required should it become necessary to cancel the policy prior to expiry.

The direct billing system is based on the annual premium being paid within 10 months of policy inception. At the end of the policy year, the insured will have already paid a deposit for the next policy term’s coverage. The advantages to this are that the premium payment is divided equally over time, and if the policy must be terminated mid-term, the premium applicable to the period when insurance was in force has already been collected.

Under the terms of the plan the insured is expected to have the premium payment in the bank, ready for the insurer to withdraw it on the designated date. Although some insurers will allow the broker to collect late installments, the practice is discouraged and, if permitted, only a limited number of late payments are allowed. Advise your clients that missed direct withdrawal payments are kept on record for a period of three years. This record is used to determine whether the direct billing method is an appropriate payment form for future policies.

While direct billing can be convenient for the client and beneficial for the

counts receivable function is the insurer’s, not the broker’s—it has some disadvantages.

When mid-term changes to the policy amend the premium charged, the direct billing installment remains unchanged until the new endorsement is processed. If the endorsement issuance is delayed, and the policy premium is increased, this can result in a very large adjustment premium being withdrawn all at once from the client’s bank account. The increases applicable to each installment since the effective date of the endorsement are added together, and the total amount is withdrawn in a single payment with the month’s regular installment.

Usually there is no prior notice to the client of when this will be done, or of the amount of money required for the withdrawal. As a result the client has no warning of the effect this could have on his or her bank account. Subsequent direct withdrawals will be based on the new proportional monthly premium.

If there are insufficient funds in the insured’s bank account to pay an installment, the insurance company is entitled to cancel the policy for non-payment. There is generally some grace period allowed before the insurer takes this step; however, the insured cannot assume there will be an allowance made, nor can the insured assume that the policy will be reinstated once the delinquent installment has been paid.

When your clients are on direct billing, you will want to maintain contact during the policy term to remind these clients of your value—perhaps by sending a newsletter—and to provide a comprehensive review of their insurance requirements at renewal. You can also show your worth by assisting should your client suffer a loss.

Finance Companies

Finance company plans are generally only used for commercial accounts or for high-value personal lines policies. This is because a finance company usually only offers its services if an account premium is more than a certain minimum amount, for example, $5,000.

There are finance companies that specialize in paying insurance premiums, such as CAFO. Although the legal requirements for finance company plans differ by province, general procedures are similar:

• •

The finance company pays the premium in full to the broker. The broker remits payment to the insurer, according to their usual payment terms. The insured pays the finance company monthly payments comprised of the monthly premium outstanding plus interest.

Effectively the insured has taken out a loan for the premium. Finance companies accept the unearned premium in the insured’s policy as collateral. Credit is granted based on the type of policy to be financed, or (for commercial policies)

the industry the insured is in the insured’s performance in that industry, and who the insurer is. Credit is not based on the insured’s assets.

The insured, in exchange for financing, assigns his or her rights under the policy to the finance company. This means that in the event of non-payment by the insured, the finance company can request cancellation without notice to the insured. The cancellation process proceeds legally as if the insured had requested the cancellation.

Not having to commit financial resources to pay insurance premiums, or as collateral for bank loans and/or lines of credit, frees capital for the insured to reinvest in the business. This has the potential of making the business’ cash flow healthier and perhaps, because of that, the client may be open to a more comprehensive insurance program.

This payment option, like the direct billing option, also has advantages for the broker in that it transfers the accounts receivable function from the broker. In addition, since the finance company pays the premium in full immediately, the brokerage can earn interest on the premiums before remitting payment to the insurer.

Finance plans have their drawbacks too. The application process can be particularly onerous for both the broker and the insured. And, as mentioned above, not all premiums are large enough to qualify for finance company plans. Another consideration is that a finance plan allows another company access to the client. If the client becomes dissatisfied with the finance company, this could reflect negatively on the broker, since the broker arranged the financing. To minimize this risk, work with reputable finance companies whose protocols are well known to the brokerage, and maintain close contact with clients to be forewarned of any potential concerns.

Brokerage Plans Some brokerages offer their own payment plans; regulations for providing this service vary province by province. If your brokerage provides this payment option, arrange the payment plan when you write the business initially. The client will remit a deposit premium, generally a percentage of the total premium due, plus installments that are payable short term. Since brokers do not want to be personally responsible for the premium, it is usual to have the payment in full before remitting it to the insurer. Thus, it is common to allow no more than two installments.

When the premium is paid on a brokerage finance plan, the invoice to the client usually includes the premium amount, the payment terms, a service charge for the installment plan, and any overdue penalty charge that will apply should payment be late. It is useful to have these conditions recorded on the invoice in the event the account becomes delinquent or is placed in collections.

Post-dated cheques are not generally considered a satisfactory payment option. If a post-dated cheque is not honoured, it can be difficult to obtain payment in full.

Example

Your brokerage contract requires insurance premiums be remitted to the insurer at 60 days. Your client pays a deposit and gives you two post-dated cheques for the remainder of the premium. To avoid the brokerage becoming responsible for the payment, those cheques must be dated to allow sufficient time for them to clear before you remit payment to the insurer. The payment plan is arranged permitting the second post-dated cheque to be payable 45 days after inception of the policy. If the bank returns it marked non-sufficient funds (NSF), you have limited time to collect payment from your client before the premium is due to the insurer.

Brokers do not usually offer the option of making monthly payments through bank accounts. When a client wants this option, brokers normally recommend either the direct billing option or that the client approach a finance company.

Other Payment Options

Very occasionally brokers accept payment by credit card. This service can be extremely costly for the broker because credit card companies charge fees for their use, which cannot be passed on to the insured (the credit card companies will not allow it), or the insurer.

If a client has a poor payment record or the policy was cancelled for non-payment, then it is normal to insist on payment (or reinstatement of payment) in the form of a certified cheque, cash, or a money order.

The Role of Underwriters

Underwriters play a critical role in the fortunes of an insurance company and in the health of the insurance industry as a whole. Three elements define the role of underwriters:

The accepting or rejecting of risk The investing of capital The implementing of an insurer’s strategic plan

Acceptance of Risk

The most important way to define an underwriter is in terms of risk. Bu underwriter is an insurance professional employed to accept or reject risk on behalf of an insurer. Remember that the term “insurance” itself can be defined in a number of ways: for example, as a large pot into which policyholders toss their premiums; as a way to share the losses of the few among the many; or as “peace of mind” for the person who buys insurance.

For our purposes, the critical aspect of this definition of “insurance” is that objects of insurance are exposed to risk, and that entails the possibility of loss or liability for loss for prospective insureds. An insurer assumes that risk on behalf of an insured for a premium. To survive and make a profit, the insurer must offer coverage to insureds that, as a group, are likely to incur less in losses than they pay in premiums for their coverage. Therefore, the insurer must seek insureds that pose acceptable risks of loss but avoid insureds that pose unacceptable risks of loss.

An insurer needs trained professionals to choose from among the prospective insureds presented to it—that is, to accept or reject risk on behalf of the insurer. Underwriters are those trained professionals.

Investor of Shareholder Capital

The risk of loss to an insurer is the risk that its capital may be depleted by a loss for which it must indemnify an insured. Therefore, in accepting or rejecting risk on behalf of an insurer, an underwriter is in effect investing the insurer’s capital in those risks he or she accepts and declining to invest capital in those risks he or she rejects.

The implied analogy between “investing” in risk and investing as one does in stocks or bonds may seem strained. After all, to invest in stocks or bonds, one must buy them with money. In contrast, an underwriter accepts risk with merely a promise to pay in the event of an insured loss—a promise that the insurer may never have to make good on.

But provincial and federal regulators hold insurers to those promises by limiting the amounts of the promises according to the amounts of insurers’ capital. When an underwriter accepts a risk, he or she is “investing capital” in the sense that the acceptance leaves less capital available for the insurer to accept other risks. That is, an underwriter cannot accept an infinite amount of risk on behalf of an insurer. because the insurer does not have an infinite amount of capital. Therefore, the underwriter must choose between risks to help allocate the amount of capital the insurer does have.

In that sense, the underwriter “invests” scarce capital on behalf of an insurer as a stockbroker invests scarce capital on behalf of his or her clients. And like the

stockbroker, the underwriter tries to invest the capital at his or her disposal in those risks that will generate the highest rate of return, which impacts the insurer’s profitability.

Loss Ratios: Impact on Risk Insurability and the Insurance Industry An insurer’s loss ratio is the ratio of the insurer’s incurred claims to its earned premiums over a specified period. The insurer’s expense ratio is the ratio of the insurer’s acquisition costs and other expenses to its earned premiums over a specified period. The insurer’s combined ratio is the sum of its loss ratio and its expense ratio.

Definition loss ratio This is the ratio of the insurer’s incurred claims to its earned premiums over a specified period. expense ratio This is the ratio of the insurer’s acquisition costs and other expenses to its earned premiums over a specified period. combined ratio This is the sum of the insurer’s loss ratio and its expense ratio.

If an insurer’s combined ratio exceeds 100 percent, then its earned premiums have been less than the acquisition costs and other expenses it incurred to generate those premiums, and the insurer’s surplus is reduced by the difference. If the combined ratio is less than 100 percent, then earned premiums have been greater than the acquisition costs and other expenses the insurer incurred to generate those premiums, and the insurer’s surplus is increased by the difference.

The underwriter will want to carefully consider the policy limits required to properly protect the risk and consider whether the required limits can be accommodated by the insurer. Should the risk require limits higher than the limits to which the underwriter can commit the insurer, the underwriter may want to consider meeting the risk’s needs by seeking one or more partners either on a subscription policy or with reinsurance.

Definition subscription policy An insurance arrangement where one insurerknown as the lead company—issues the policy, but one or more other insurers subscribe to it or participate in covering the risk.

Implementation of Insurer’s Strategic Plan

An underwriter is an insurance professional employed to implement an insurer strategic plan; sometimes this involves the goal of profit, other times it involves growth of the insurer’s book of business. The insurer needs trained professionals to build a portfolio that reflects those considerations. That is, the insurer needs trained professionals to execute its strategic plan. Underwriters are those trained professionals.

We have seen that to survive and make a profit, the insurer must offer coverage to insureds that, as a group, are likely to incur less in losses than they pay in premiums for their coverage. To build a profitable portfolio of such insureds, the insurer needs a strategic plan. That plan will involve, for example, identifying the types of risk the insurer wants to pursue; the lines of insurance it wants to underwrite; the reinsurance it can arrange; the amounts of insurance it will offer for risks of different types and size; and the approach it will take to pricing, among other considerations.

The Importance of Profit

As we noted earlier in the text, an underwriter is an investor of shareholder capital. If the shareholders are to receive a return on their capital—value for their investmentthen the premium the underwriter charges for exposing the shareholders’ capital to risk must include some allowance for profit. Moreover, poor underwriting results have an impact on the insurer’s surplus–that is, the excess of the insurer’s assets over the sum of its liabilities and shareholders’ capital.

The effect of poor underwriting results on the insurer’s surplus can be seen by analogy with a manufacturer in the Example below.

Example If it costs a car manufacturer $15,000 to produce a certain car but it sells the car for only $10,000, then the manufacturer must finance the shortfall of $5,000 from its own resources to continue operating. If it continues to sell cars for less than it costs to produce them, the manufacturer’s resources will eventually become depleted and it will ultimately be forced out of business.

Similarly, if an insurer incurs $1.25 in losses for every $1.00 it receives in premium, it must finance the shortfall from its own resources. If it continues to

ur more losses than the premium it has received can support, then just like the car manufacturer, the insurer’s resources will become depleted and it will be forced out of business.

car

The profit we are discussing here is underwriting profit, to which an underwriter directly contributes by sound pricing of each risk. The profit that the industry has earned over the last two decades, however, has come largely from investment income.

Definition underwriting profit (or loss) This arises out of insurance operations. It is the amount by which earned premiums exceed (or fall short of) the cost of incurred claims and expenses. investment income This is income the insurer earns from investing money that the insurer has received as premium but not yet earned, as well as money it has set aside as a reserve to pay claims. 2

Investment income has often been used to offset underwriting losses and produce an overall profit for an insurer. But investment income depends on many factors beyond an insurer’s control and cannot sustain an insurer’s profitability indefinitely without attention to the insurance fundamentals that produce underwriting profit. Decisions that underwriters make about price affect the financial strength of the insurer—the price underwriters charge for insurance coverage is critical.

Underwriting Authority

To some extent, certain limits to authority are required in any company. Employees must respect the risk management controls implemented in order to protect the company. Risk management controls could involve limits to the types of coverage the company writes, limits to the locations of risk, and limits to both individual and aggregate coverage levels. For an underwriting department, consideration will be given to such measures as premium level and account size.

There should be a balance between underwriting authority levels and the functional processes of a department so that employees can possess appropriate autonomy. When authority is properly delegated, employees are empowered to handle the majority of business themselves. If the authority of most staff is so limited that no decision can be made without involving the next level of management, employees are not likely to develop as well, and perhaps less work will get done. Policyholders may view the company negatively if they perceive it to be difficult to deal with, slow to react, or ultimately, perhaps even a company with which they would rather not do business.

Insurers benefit by having efficient and effective procedures to govern how questions and decisions travel from one level of authority to the next. These procedures may depend on the reason for a referral or the complexity of the issue, and take the form of anything from a telephone call to a formal presentation by the

P

Definition

underwriting authority The policy or bond limit up to which an insurer has granted its underwriters, agents, and brokers permission to issue policies or bonds.

person seeking approval; a decision from higher authority may ultimately be required. In the case of larger, more complicated risks, formal programs may be required wherein a standing underwriting committee, composed of people from the claims, financial, actuarial, and loss control departments, is involved in the approval process.

S The Tools of an Underwriter

Making decisions is the essence of an underwriter’s work. This requires they have a wide range of knowledge and a complex mix of skills to help them understand: • the exposures to loss represented by these risks, • understand whether the insurer should insure risks that present such exposures,

and; determine what terms should be sought for insuring such risks.

Therefore, it is extremely important that an underwriter has a wide range of Product knowledge, Industry Knowledge, and Claims Knowledge.

Product Knowledge

A risk represents a need for insurance, and an insurer meets that need by providing insurance. An insurance policy balances the risk—the applicant’s need for insurance with the insurer’s need to control the risk by specifying what kinds of loss the insurer will cover and what kinds it will not.

Tailoring Policies to Meet Specific Client Needs

Underwriters identify or compose the insurance policy appropriate to the need for insurance represented by the risk. Therefore, underwriters must understand the potential obligation to the insured they are undertaking for the insurer when they agree to provide coverage using a particular policy wording. Part of that understanding includes anticipating how the policy is likely to be interpreted in a court of law. Losing court cases over policy interpretation is a hard way for underwriters to see that a policy provided coverage that was neither intended nor anticipated.

In short, the policy is the vehicle by which the underwriter accepts risk and specifies the terms of such acceptance. To be effective, an underwriter, like a claims adjuster, must understand the policy wordings that determine the rights and duties of the insurer and insured.

Not all the policies underwriters deal with will be standard policies or even policies belonging to the insurers they work for. Underwriters will often be asked to participate in a manuscript policy drafted by an outside party—perhaps an insurance intermediary, such as a broker or agent. Underwriters must be able to read and understand the manuscript policy and be able to assess the coverage it offers to determine whether they want to participate on the risk.

Definition particular / Specific needs lundue manuscript policies These are unique wordings specially drafted to accommodate the unique needs of a particular risk.

Some features of the manuscript wording are standard, while others are not standard. For example, terrorist exclusions are not standard; there are many variations. In reviewing the manuscript wording, the underwriter must be alert for any broadening, whether intentional or inadvertent, of the coverage that is offered in standard wordings.

The underwriter should also look for typographical errors, contradictions between different parts of the manuscript wording, and any lack of continuity or consistency in the manuscript. Such errors and oversights may affect how the wording of the policy can be interpreted and cast doubt on the intentions of the insurer or insurers in offering the coverage. Any ambiguity in the wording will be construed against the insurer or insurers and in favour of the insured.

An underwriter may also want to draft his or her own manuscript wording on behalf of the insurer to design coverage uniquely for a particular risk. The underwriter must always take care when drafting manuscript policies or adapting existing policies to needs other than those for which they were originally intended. A policy is a contract, and carelessly changed wordings can work against one or both of the parties to the contract.

Standard policy wordings typically reflect policy language that has been tested over the years in law, which allows an insurer some confidence that the wordings cover what they are intended to cover. Manuscript wordings are unique and untested. It takes skill to draft a manuscript wording that covers precisely what the insurer intends to cover and no more—and that is likely to withstand a court challenge to the contrary.

Industry Knowledge

A successful underwriter has a sound knowledge of the insurance market in general: typical policy wordings of different insurers, underwriting tendencies, and pricing habits of competitors. To assess a risk is in part to know whether the proposed or requested wording, price, and other terms are reasonable. The underwriter requires a context within which to assess elements of the risk, and so an underwriter must understand the practices and preferences of the insurer’s competitors as well as those of reinsurers and intermediaries. There are also regulatory and regional issues to consider, including differences among Quebec’s Civil Code and the common law applicable in other provinces which can impact underwriters.

Claims Knowledge

The record of losses that a risk has incurred in the past is a critical tool for assessing the exposure to loss that the risk represents. The record of past losses would describe not only the types of loss but also the amounts of loss. These features of the loss experience become a benchmark for assessing how reasonable the coverage and other requested terms are, as well as the price being charged.

(Loss experience is intimately connected with the pricing of a risk because the

fundamental objective of the underwriter in accepting risk is to make a profit for the insurer. Knowing the amounts of loss an insured has incurred is vital in determining how much premium is needed for the risk. To make sense of the loss experience and properly apply it to the assessment and pricing of a risk, the underwriter must understand what the loss record represents. In particular, underwriters should understand the dynamics of loss development on existing claims.

Loss Frequency and Severity

To make proper use of the loss experience of a risk, the underwriter must

understand frequency and severity as no descriptions of a risk’s loss experience;

• measures of the exposure that the risk poses or would pose to the insurer; and • determinants of the price and other terms under which the insurer might

insure the risk.

Imp

Underwriting Relationships with Insurance Professionals

Usually, underwriters work in the company of fellow employees in the office of an insurance company. In particular, they often work with other underwriters in

rent sections of their employers’ underwriting departments. They must also

with people outside of their insurance company: usually brokers and

Definition

frequency of loss This is a measure of how often losses are likely to occur in the future. Assuming the average size of loss is constant, the higher the loss frequency, the worse the loss experience. (“Exposure units” can mean whatever is appropriate to the risk—the number of automobiles in a fleet, the number of policies in a portfolio, the number of locations on a property policy, etc.) severity of loss This is the average size of losses. The larger the average loss, the higher the loss severity is said to be. And, assuming the loss frequency is constant, the higher the loss severity, the worse the loss experience. 4

sometimes insureds or applicants, as well as independent loss control inspectors, loss adjusters, and perhaps lawyers and other professionals. Information gathering and negotiation are integral to every step of the underwriting process, and negotiations take place between people. The people involved in the underwriting transaction need each other.

By their nature, all negotiations carry in them the potential for dispute and can easily end badly without the goodwill that accrues from strong working relationships. Good working relationships help the underwriter to attract and to retain quality business for the insurer. This is true not only of the underwriter’s relationships with brokers and risk managers but also of relationships with loss adjusters, loss control inspectors, and other professionals. An underwriter can benefit from good relationships with the following groups of insurance professionals:

• Other underwriters

Reinsurers • Brokers • Agents • Risk managers • The claims department • The actuarial department • The loss control department • Lawyers • Industry organizations • Customers • Other organizations and people

Underwriter Relationships with Brokers

Both underwriters and brokers want to serve the best interest of the Wisuda

ance buyer. But the broker acts on behalf of the insurance buyer to find an Msu, company willing to insure the buyer and then tries to obtain for the buyer the best terms possible. Conversely, the underwriter acts on behalf of the insurance company as a kind of gatekeeper, opening the insurer’s doors to attractive risks and closing them or at least negotiating stricter terms for less attractive risks. These differing roles in the insurance transaction can create tension between underwriters and brokers.

Example The broker needs to work with the underwriter to secure a market for the insurance that the broker’s client needs. The underwriter needs to work with the broker to secure the opportunity to provide insurance that will generate premium income for the insurer. Thus, the broker and the underwriter have a mutual interest in finding personal rapport with one another and building trust between themselves.

The underwriter must be careful not to let the relationship with the broker become adversarial, with negative implications for the underwriter’s ability to build trust with the broker and obtain the information and other co-operation the underwriter needs from the broker to properly underwrite a risk.

communication or working relationship between o

A broker is a liaison between the insurance buyer and the underwriter. An ethical broker will try to protect an insurer’s interest even as the broker pursues insurance coverage for the buyer. The broker will screen applicants, and because he or she knows which insurers will underwrite what classes of risk, the broker can direct the applicant’s business to an appropriate insurer. Given two or more insurers that would be equally suitable for the applicant, a good relationship with an underwriter might make the difference between the broker’s directing the business to that underwriter’s company and directing it to a competing insurer instead.

In a good professional relationship, information is exchanged more readily-and information is the basis for the decisions that the underwriter is charged with making. The difficulty for a newer underwriter is that, until he or she has had the opportunity to develop relationships with brokers and other professionals, the underwriter will not be told what he or she does not know or directly ask about a risk. Conversely, between a more experienced underwriter, and for example, a broker, information will be volunteered on both sides in the interest of good will and the long-term health of the relationship.

and working relationships can broaden the basis of negotiation between underwriter and broker. An underwriter might assess this aspect of

An underwriter might assess this aspect of his or her

relationships by asking, for example, how many accounts are won when he or she is not offering the cheapest price. There are likely to be several reasons for a broker to recommend an underwriter’s quote to the applicant even when other quotes might be cheaper. Ultimately, the professional integrity of the broker will require recommending the underwriter’s quote if it is in the applicant’s best interest.

The broker may have several alternatives that would serve the client’s interest equally well. A broker recommending a particular underwriter’s quote to a client often depends on the negotiations between the underwriter and broker—the strength of the underwriter’s relationship with the broker is a factor in such negotiation succeeding.

Recognizing the importance of the broker to the underwriter’s efforts to cultivate a book of business, the prudent underwriter will constantly seek to “improve the source”, educating the broker about mandatory information and answers to questions to include on submissions, which will help the underwriter assess the risk quickly and well.

Often, a broker or agent will personally inspect a risk and include a report with the submission to the underwriter. This is most frequently done for personal-lines risks or smaller commercial risks for which the premium would not justify the cost of a formal inspection. Whether the intermediary is an independent broker or an agent of the insurer, the answers sought by the underwriter are the same. The fact that a risk might be new to the broker should not portray the risk as a poor one in the underwriter’s view.

Role of the Adjuster

The insured, or the broker on behalf of the insured, reports the loss to the insurer. In special situations the loss may be reported directly to an adjuster.

Definition

adjuster One who investigates insurance claims, makes recommendations regarding the payment of benefits from insurance policies, and negotiates payments and settlements.

The insurer’s claims department personnel then records preliminary information with as much detail as possible. The policy coverage is verified: Which policy covers the exposure? Does the policy period cover the loss? Is the cause of loss an insured peril?

When the loss is not covered, the insurer will promptly advise the insured.

An adjuster will then be assigned to investigate the loss, verify the policy coverage, and deny the claim if not covered. If the loss is a valid claim, the adjuster will assess damages, negotiate as necessary, arrive at a settlement, and recommend payment.

The Claims Department

The claims department administers the loss adjustment process when a claim is presented. It is organized to deliver on the promise made to the consumer when the insurance policy was sold. Loss adjusters execute the policy obligations that arise from the risks assumed by underwriters.

The insured may have contact with the following:

• • •

Claims manager or claims superintendent Claims examiner Adjuster-telephone, staff, independent, or public

A claims manager or claims superintendent is in charge of the claims department and is responsible for the smooth functioning of the claims department. He or she is likely to be involved directly in a claim only if it is particularly complex or if a problem occurs.

The claims examiner directs the investigation of a staff adjuster or an independent adjuster, reviews the adjuster reports, and approves any claim settlement. He or she may also appoint independent adjusters to individual claims.

Adjusters represent the insurance company with respect to a claim on a policy. They may operate exclusively on the telephone to resolve claims or they may meet claimants in person and inspect the location of loss. They might be salaried employees of the insurance company or they might be independent professionals hired by the insurance company on an assignment basis.

If a claim warrants an inspection of the damage, the claim may be assigned to a staff adjuster or an independent adjuster. This individual usually handles more complex claims. The client can expect to meet with the adjuster at least once to review the damage and discuss the loss.

A telephone adjuster usually handles small, straightforward losses that do not require the adjuster to see the damaged article or to visit the loss location. The client can usually expect all contact with this type of adjuster to be made by telephone and/or mail.

When a loss occurs, the insured and the insurer may deal directly with each other in arranging the loss settlement. In such cases the insured would be dealing with a staff adjuster.

Alternatively, a qualified independent businessperson called an independent adjuster may be appointed by the insurer to assist in the loss settlement. In each case, the adjuster is the representative of the insurer.

A public adjuster is an independent businessperson who may be engaged by the insured to help in the settlement of a claim. Usually a public adjuster is hired on large claims where the amount may be in dispute, but in actual fact they are infrequently used.

Whether the claim is settled directly between the insured and the insurer, or through the use of intermediaries, the actual details of settlement must be in accordance with the terms of the contract between the insurer and the insured.

Progression of the Claim

Clients who have never had a claim before, or never had a claim requiring investigation, may be nervous or unsettled hearing that an adjuster will be visiting them. Reassure your clients that this type of investigation is a common and necessary part of the claims process, and they may see or hear from the adjuster more frequently on a complex loss.

The adjuster is there to help the client prove the claim. He or she will examine the scene of the loss and the damaged property, record the client’s description of what happened, and obtain statements of any witnesses or involved third parties. The adjuster may ask the client for a signed statement confirming the loss details. This adjuster will confirm that the loss has been caused by an insured peril, assess the damage, and work out a fair settlement of the loss.

Depending on the individual insurance company’s procedures, the loss may be assigned to an independent adjuster rather than a staff adjuster. Independent adjusters perform essentially the same tasks as an insurance company adjuster, however the authority to settle a claim rests with the insurer.

Cheques that are made payable to the insured can be sent directly to the insured or to the broker servicing the client. It is good public relations for the broker to be able to present the insured with the claims cheque. Most insurers aim to get settlement cheques out within days of receiving the adjuster’s final report.

It is possible that a third party may be responsible for all or some of the loss. If so, the insurer will initiate subrogation proceedings against that party, as is their right by law. Subrogation transfers the insured’s right of action against the party

responsible for the loss or damage to the insurer, and the insurer requires the third party to pay for the damage. Any recovery will be reflected positively in the insured’s claims record.

Cheques that are made payable to the repairer are sent directly to the payee. If an independent adjuster is involved, cheques are sent to him or her for disbursement. If the payee has legal representation, cheques are sent to the lawyer, Expenses, such as the independent adjuster’s fees, are paid by the insurer and the file is closed.

Waiver and Estoppel

The principle of estoppel is a term usually discussed in combination with waiver since the two are related legal principles. A waiver is the voluntary relinquishment of a known right; that is, someone gives something up.

An estoppel is a bar created when someone, by their action or lack of action, indicates they will not exercise a right they have.

Definition waiver The intentional and voluntary relinquishment of a known right. A waiver under a policy is required to be clearly expressed and in writing. estoppel A bar created when someone by his action, or lack of it, indicates that he will not exercise a right he has. He stops himself from exercising his right later. For example, if A owns a pen and stands by and watches B sell the pen to C, as if the pen belonged to B, then A cannot later reclaim the pen, arguing that it was his.

Example An insurer agrees to pay an automobile claim, even though the insured reported it late and had repaired the damage before the insurer had a chance to view the damage. The automobile policy gives the insurer the right to refuse to pay a claim such as this if the circumstances have prejudiced the insurer’s rights. If the insurer agrees to pay regardless, then they have waived their right to deny the claim.

In the above example, having waived their right, the insurer has created an estoppel and cannot later try to avoid a settlement based on the requirement that the claim be reported promptly; their earlier agreement to pay has barred them from relying on this.

Reinsurance

This section briefly introduces the basic concepts of reinsurance and provides some simple definitions of frequently used terms. (A detailed study of the subject is beyond the scope of this course.)

Definition reinsurance Insurance purchased by an insurance company from another insurance company (reinsurer) to provide it protection against large losses on cases it has already insured. Essentially, insurance for insurance companies. A transaction in which one party, the “reinsurer,” in consideration of a premium paid to it, agrees to indemnify another party, the “reinsured,” for part or all of the liability assumed by the reinsured under a policy of insurance that it has issued. The reinsured may also be referred to as the “original” or “primary” insurer or the “ceding company.” giving

Webster’s dictionary tells us that to reinsure is to insure again by transferring to another insurance company all or part of a liability assumed. In other words, reinsurance can be said to be the insurance of insurance companies.

Note that reinsurance may be assumed by another insurance company or by a professional reinsurance company that only deals in matters of reinsurance.

When a company reinsures its liability with another it cedes business. The amount ceded is called the cession.

Definition cede An insurer’s transferral or signing over part of an insurance risk to a reinsurer. cession That which is ceded; for example, a reinsurance item.

The amount an insurer keeps for its own account is its retention. When an insurance company or a reinsurance company accepts part of another company’s business it assumes business. It thus becomes a reinsurer.

When a reinsurer cedes part of its business to another reinsurer that is a retrocession and the second reinsurer is a retrocessionaire.

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Definition

retention The amount of liability the ceding company (primary insurer) retains for its own account. It may be a percentage or a dollar amount of each risk. retrocede (retrocession) To cede a part of a risk to another insurer or reinsurer. retrocessionaire The reinsurance company that accepts a retrocession from another company. S.

Example Indemnity Insurance Company has agreed to write a fire insurance policy on a given risk for $100,000. For one of the reasons which we will mention later, Indemnity cannot retain the full amount assumed. It asks Helpful Reinsurance Company to accept half of this amount. In effect, Indemnity is insuring part of its risk. This is reinsurance. Should Helpful decide that it wishes to cede part of the risk it has accepted, that would be a retrocession and the new reinsurer, Bountiful Reinsurance, would be a retrocessionaire.

Why Reinsure?

You may ask, why do insurers need to reinsure? There are a number of possible reasons. Insurers may reinsure for one or a combination of the following reasons.

a)

To increase the insurer’s capacity to write business Reinsurance allows the insurer to write a higher level of risk than it would be able to on its own.

1. b) To maintain a proper reserve/liability balance

Under the terms of the insurance acts, all insurers are required to maintain . reserves for unearned premiums and outstanding losses. The reserves are in the form of investments. If an insurer experiences a large increase in underwriting volume with a resultant increase in premiums and losses, it might find itself without sufficient assets to meet the new reserve requirements and the insurer may have its licence to do business suspended. One solution is for the insurer to reinsure a greater portion of new business and thus decrease its reserve requirements by transferring the liability to a reinsurer. This would be an alternative to injecting fresh capital into the business or cutting off new business until the correct balance is achieved.

Example

When an insurer has 90 risks at $100,000 each and 10 risks at $500,000, it may be reasonable to expect that one of the risks would become a loss in one year. If that loss is a $100,000 risk, the insurer could handle the claim comfortably. If a larger risk sustained the loss, the insurer could find itself in financial difficulty in paying the loss. The insurer could refuse to write the $500,000 risk, but that may give it a negative image in the eyes of the client and the broker. The best solution would be to reinsure $400,000 of the $500,000, thus keeping $100,000 on its own account. This will keep the size of the insurer’s probable losses fairly constant. When the insurer has an arrangement with a reinsurer to transfer a proportion of the risk, it can extend to its client the combined facilities of both in its own name.

1. c) To reduce the effects of a catastrophic loss

While every insurer is prepared to accept ordinary losses as a course of its business, events like tornadoes, earthquakes, hailstorms, and fires that get out of control and destroy whole city blocks may seriously strain its financial resources. Reinsurance on a catastrophe basis is available for such eventualities. This is an effective way of spreading risk among as many people as possible.

1. d) To provide stability in a fluctuating market

Reinsurance will not prevent_underwriting losses but it can smooth out the effect on the insurer’s results in any given year.

Example An insurer may determine the maximum amount of money that it is prepared to pay out in losses in a given year and reinsure anything above that amount. Naturally, it will have to pay a premium but at the same time it will know what its worst possible results could be for the year.

1. e) To enable an insurer to cease operations

For reasons other than bankruptcy, an insurer may wish to withdraw from the Canadian market or a segment of it. To do so it must remain until all business has run off and the outstanding claims have been settled. This could be a long-term and expensive proposition. An alternative solution would be to reinsure the outstanding portfolio of business with another insurer. This is not reinsurance in the strict sense but it is a transfer of risk from one carrier to another.

Methods of Reinsuring

Reinsurance may be transcated:

• •

proportionally, and; non-proportionally.

There are many sub-types of both, but for the purposes of this course, it is sufficient that you understand the central concept of these two.

Definition proportional reinsurance A type of reinsurance where the company shares losses in the same proportion that it shares premium and policy amounts. non-proportional reinsurance Reinsurance in which the reinsurer’s portion of loss depends on the size of the loss.

Proportional Reinsurance

In proportional reinsurance a percentage of the risk is transferred to the reinsurer and the reinsurer receives that same percentage of the original premium and is responsible for that same percentage of each loss.

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Example An insurer has a risk valued at $200,000 for which the original premium is $5,000 and wishes to reinsure 25 percent of this risk on a proportional basis. The insurer would transfer 25 percent of the risk to the reinsurer who would also receive 25 percent of the original premium ($1,250). In the event of a loss of $80,000, the reinsurer would have to pay 25 percent or $20,000.

Non-proportional Reinsurance

In non-proportional reinsurance there is no proportional ceding of the risk and no proportional sharing of the premium or the losses. The insurer pays all of the loss up to an agreed amount called the priority; the reinsurer then pays all or part of the loss which exceeds the priority up to a limit previously agreed upon by the two parties. The reinsurance premium charged by the reinsurer will not bear any proportional relationship to the amount of loss that the reinsurer might be called upon to pay.

The priority is that amount of any loss that the insurer will pay; in other words, it is the insurer’s retention.

Example A reinsurer agrees to pay that part of the loss which exceeds the priority of $50,000 up to an amount of a further $100,000. This is traditionally expressed as $100,000 XC (excess of) $50,000. In this case the insurer would be responsible for 100 percent of all losses amounting to $50,000 or less. Should a loss of, say, $80,000 occur, the insurer would pay $50,000 and the reinsurer would contribute $30,000 (the excess of loss).

Types of Reinsurance

There are two types of reinsurance: 1. Treaty reinsurance 2. Facultative reinsurance

Treaty Reinsurance

Treaty reinsurance is an agreement between the insurer and the reinsurer which provides for automatic reinsurance without the insurer having to submit each and every risk to the reinsurer. The treaty is a contract, usually arranged on a yearly basis and covering a whole class of risks. By it the insurer agrees to cede to the reinsurer all the risks coming within the scope of the agreement and the reinsurer agrees to accept all these risks.

Definition

treaty reinsurance An agreement between an insurance company and a reinsurer. The reinsurer automatically accepts a portion of the ceding company’s liability for a specified class or classes of business. Terms of the agreement are set forth therein; for example, premium payment, loss limits, etc. facultative reinsurance Reinsurance of risks on an individual case-bycase basis subject to acceptance or rejection by the insurer.

There is less flexibility than under a facultative agreement because the insurer must cede all risks within the class and the reinsurer must accept them all. Since it is not necessary to handle cessions on a case-by-case basis, there is little paperwork and the expense factor is considerably lower, and reinsurance is in place the moment the insurer accepts the risk from the broker.

Facultative Reinsurance

Facultative reinsurance is reinsurance placed on an individual-case basis. The insurer and reinsurer each has an absolutely free choice in arranging the reinsurance. The insurer is free to decide whether a particular risk is to be reinsured or not, and may offer the reinsurance to any reinsurer it may choose. By the same token, it is at the reinsurer’s entire discretion whether to accept any risk offered, decline it, or negotiate different terms.

This is a valuable and essential form of reinsurance and is usually used to provide capacity additional to the insurer’s treaty reinsurance facilities. However, providing each reinsurer with sufficient underwriting information, obtaining confirmation of the reinsurance placed, checking the terms agreed, processing accounts, handling each claim individually, and dealing with changes in the original risk during the term can prove very time consuming and expensive.

It should be noted that insureds have no dealings with reinsurers. All agreements and transactions are between the insurer and the reinsurer. Facultative reinsurance must be negotiated separately for each risk. A treaty is a reinsurance agreement usually arranged annually to cover a whole class of risks.

Industry Associations

Insurance has evolved as a result of the growth and development of mankind. As the industry has grown, the need for auxiliary organizations has become evident. Usually in the form of associations, these organizations provide services that complement the business of insurance. Services provided to the industry include, but are not limited to, the following:

• • •

Loss prevention Education Fraud detection and prevention Rate making Standard policy wordings Gathering of industry statistics Monitoring of legislation

Supported by industry members for whom they provide the services, these associations continue today, at times changing their objectives and structures to reflect the changing times. At one time they tended to be membership based. whereas current trends lean toward user-pay organizations in some instances.

Many times throughout your insurance career you will come into contact with one or another of the organizations described briefly in this section. It will serve you well to know their functions and areas of expertise. They exist to serve the industry and should be utilized. There are, of course, many other industry related organizations, but the ones selected for inclusion here are of the broadest interest to the largest number of industry members:

• • • • •

Institute for Catastrophic Loss Reduction Groupement des Assureurs Automobiles Property and Casualty Insurance Compensation Corporation Centre for Study of Insurance Operations (CSIO) The Surety Association of Canada (SAC) Underwriters’ Laboratories of Canada (ULC) Insurance Bureau of Canada Insurance Brokers Association of Canada Provincial Brokers’ Association : Canadian Independent Adjusters’ Association Canadian Insurance Claims Managers Association

• • •

Institute for Catastrophic Loss Reduction

The Institute for Catastrophic Loss Reduction (ICLR), affiliated with the University of Western Ontario, is an insurance industry initiative to reduce the human and financial cost of natural disasters. The Institute encourages the building of resilient communities through cost-effective techniques that enable new and existing structures to withstand severe weather and earthquake. It promotes effective insurance Brisk management practices and consumer loss-prevention measures.

Groupement des Assureurs Automobiles

Groupement des assureurs automobiles (GAA), which shares some facilities, staff, and support services with the Insurance Bureau of Canada, coordinates programs to simplify the settling of automobile accident claims in Quebec (appraisals, tasks related to the direct compensation agreement, joint accident reports, claims tracking, statistical reporting, etc.). Participation is mandatory for all private automobile insurers licensed in Quebec.

Property and Casualty Insurance Compensation Corporation

What happens in the unlikely event of the failure of a property and casualty insurance company? The Property and Casualty Insurance Compensation Corporation (PACICC) was formed in 1988 as a non-profit way for the industry to provide a reasonable level of recovery for policyholders and claimants under most policies issued by P&C insurance companies in Canada. The maximum recovery from PACICC is $250,000 in respect of all claims arising from each policy issued by the insolvent insurer, and which arise from a single occurrence. PACICC also covers à significant proportion of “unearned” premiums that may have been paid in advance. The only deductible that applies is that specified in the policy. PACICC has begun to build a pre-funding mechanism to cope with possible future insolvencies.

Centre for Study of Insurance Operations (CSIO)

The Centre for Study of Insurance Operations (CSIO) is a non-profit joint venture between the Insurance Brokers’ Associations of Canada and the majority of independent broker insurance companies as well as system (computer) vendors. “Its objective is to provide a central forum for free discussion, collection, and pooling of information and the recommendation of methods and systems designed to enhance broker and insurance company operation, and in so doing to achieve profitability for both insurance brokers and companies, and to serve Canadian consumers more effectively.

The Surety Association of Canada (SAC)

The Surety Association of Canada was established to act as the “voice of the surety industry.” Its membership comprises the bonding companies themselves along with surety reinsurers, brokers, and other businesses, such as law firms, that are associated with the surety industry. In its short history the Association has successfully negotiated better bond and contract wordings with owners across the country. In addition, SAC has established ongoing dialogues with owners and other construction industry groups and engaged in a far reaching public relations and education program aimed at improving the understanding of the suretyship process in Canada by those who are affected by it.

Underwriters’ Laboratories of Canada (ULC)

Underwriters’ Laboratories of Canada is a not-for-profit organization which operates laboratories and a certification service for the examination, testing and certification of devices, construction materials, and services to ensure that they meet certain standards. For example, if you look at your fire extinguisher you should see a label that says “ULC approved.” That means it has been tested and will do what it says it will do.

48

Exhibit 1.1: ULC – Approved Label

(UC)

UNDERWRITERS’ LABORATORIES OF

CANADA LISTED

FIRE DOOR PORTE COUPE – FEU NO. A

C RATING: 172. HR LATCH THROW TEMP. RISE 30 MIN. 250°F MAX.>

UNDERWRITERS’ LABORATORIES

OF CANADA

LISTED

DRY CHEMICAL FIRE EXTINGUISHER

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CLASSIFICATION:

120-B.C.

Insurance Bureau of Canada

The Insurance Bureau of Canada (IBC) was established in 1964, and is the national industry association representing Canada’s private p&c insurers. It is involved in the following activities:

Advocating industry positions with consumers, government, members, and other stakeholders Identifying and monitoring issues, developing policy positions, and responding to legal developments Staying on top of issues of strategic importance to the industry—in the past, these have included regulatory improvement, consumer outreach, reforming the automobile insurance system, adapting to climate change, and insurance crime

Although membership in IBC is voluntary, IBC-member companies provide most of the non-government p&c insurance sold in Canada. Companies can subscribe to any or all of the following services:

Issues management—including policy development, public affairs and marketing, legal, and regional offices Investigative services including insurance crime-related investigations, auto theft and loss recovery services, information exchange, public affairs and marketing, and legal as they pertain to investigative services

Insurance information including access to web-based business applications and other information related to automobile insurance in Canada

In addition, a large number of IBC associate members provide services to the industry. Government automobile insurers also participate with private insurers in IBC’s vehicle information programs.

As the voice of Canada’s p&c insurers, IBC lobbies the federal and provincial governments to secure changes in public policy and improvements in the business operating environment that will benefit insurers and their customers. It also campaigns on a range of issues to reduce member companies’ losses and increase public understanding of p&c insurance and operates regional consumer centres, where trained personnel answer consumer inquiries about insurance.

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The IBC’s other activities in this area include formulating industry positions on a wide range of insurance-related issues, developing model policy wordings; helping design fair and efficient claims handling protocols; commissioning research into topics of importance to p&c insurers; and tracking developments in case law and proposed federal, provincial, and territorial legislation that may be relevant to member companies.

On behalf of members and insurance regulators, IBC collects, validates, stores, and analyzes a vast amount of information in a variety of formats. This information is used for three purposes: • To support IBC’s lobbying and communications efforts • To support insurance regulators’ objective of monitoring the industry—IBC is

the service supplier to the General Insurance Statistical Agency (GISA). GISA carries out activities on behalf of insurance regulatory authorities

across Canada • To support individual companies’ business decisions by offering members a

variety of insurance crime and vehicle information programs

Insurance Brokers Association of Canada

The Insurance Brokers Association of Canada (IBAC) is a nonprofit trade association that is the national body of Canada’s organized brokers. Its voluntary membership is composed of the provincial associations which are open to membership to both the large international broker and the smaller local broker.

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The association was organized in 1921, and its goals are to elevate the status of independent insurance intermediaries through professional development and to safeguard the public interest by establishing improved standards of qualification and ethics.

Toward these goals, IBAC has developed and maintains licensing courses in most of its member associations. IBAC also maintains close liaison with government, business, and consumer groups and with insurance companies and industry organizations. It aims at improving the services provided by insurance intermediaries, safeguarding the interests of intermediaries within Canadian society, and ensuring that the public will have competent independent advice and freedom of choice in its selection of insurance coverage.

Provincial Brokers’ Associations

Insurance brokers have formed groups in many cities and districts to further their common interests and to exchange viewpoints. Provincial organizations provide a focus for these local units and represent their members’ views to insurers and governments. They also establish ethical and professional standards. Representation from the provincial associations makes up the membership of IBAC.

Canadian Independent Adjusters’ Association The mission of the Canadian Independent Adjusters’ Association (CIAA) is_to provide leadership for Canada’s independent adjusters through advocacy, education, and recognized professional standards. CIAA represents the collective interests of independent adjusters to government, industry, and the public on a provincial, regional, and national level; it provides members with training, education, and professional development opportunities; and it develops and maintains the highest standards of professionalism through a defined code of ethics and fair practice policies.

Licensed independent adjusting firms are eligible for corporate membership. Adjusters employed by such member firms must become individual members of the association.

Canadian Insurance Claims Managers Association The Canadian Insurance Claims Managers Association (CICMA) is an organization of insurance company claims managers that promotes a high standard of ethics in the handling of claims. One of its main functions is to administer the Canadian Inter-company Arbitration Agreement, which it sets up to arbitrate disputes among the companies who are signatories to the agreement. This avoids many possible cases of litigation between insurers.