Study 4 Learning Objectives

Question 1

Learning Objective 1 Explain how insurers get their products to the consumer through the independent agency and brokerage system, exclusive agency system, and direct writing system.

Answer 1

• Insureds can purchase property and casualty (P&C) insurance in different ways:
  o Independent agency system—independent contractors (agents) sell insurance on a commission or fee basis with one or more insurers.
  o Independent brokerage system—brokers sell insurance on behalf of an insurer, or multiple
  insurers, with which they have contracted to sell insurance for.
  o Exclusive agency system—agents who represent only one company, or a group of companies
  under similar management, sell insurance.
  o Direct writers—insurance company sells directly to the public.
  o “Insurtech” solutions—insurance companies use new technology to transform the way risk is insured and meet customer expectations of instant transactions across digital channels.
• Some insurers have products available through multiple channels

Question 2

Learning Objective 2 Describe how the principal–agent relationship enables one entity to legally appoint another to act on its behalf.

Answer 2

• The principal–agent relationship places obligations on agents and principals to each
  other and to 3rd parties who enter into negotiations or form contracts with them.
• Civil Code of Québec—sets out rules where a mandate is a contract by which the mandator (principal) commits a lawful business to the management of another called the mandatary (agent), who by accepting the contract is obliged to perform the contract.
• Common law (rest of Canada)—agents are employed to secure contracts or act for their
  employers in contractual matters and may be employees or independent
  businesspeople.
• Insurance agents/brokers obtain authority from agreements/contracts entered into with
  insurers (further influenced by provincial or territorial law).
  -> These contracts may be express or implied.
  -> They cover authorized business, limits of coverage, premium submission, notice of claims, and
  more.

Question 3

Learning Objective 3 Describe the obligations placed on agents and brokers and clients in the transaction of insurance by the agent–client relationship.

Answer 3

• The basic fxn of agents and brokers is to enable insurers to set up insurance
  contracts with clients.
• While doing so, they must act w/in the scope of their contract w/the insurer and authority of their licence.
• Binding authority allows agents and brokers to commit an insurer to a contract of insurance and issue an interim receipt; if a loss occurs before the actual policy is issued, but a binder has been issued, the loss is covered in the same manner as if the actual policy had already been issued.
• Premiums collected by agents and brokers and belong to the insurer and are held in trust.

Question 4

Learning Objective 4 Describe how agents and brokers are regulated in the areas of qualification, licensing, operating requirements, and renewal of licence.

Answer 4

• Insurance agencies and brokerages are regulated by the authority provided w/in the insurance act of each province or territory.
• Some provinces and territories have passed legislation providing for self-regulatory councils that oversee the licensing and operations of brokers.

- Agents and brokers are regulated in the following areas:
o Qualification
o Licensing
o Operating requirements
o Renewal of licence

Question 5

Learning Objective 5 Describe the purpose of trust and operating accounts in the operation of an agency or a brokerage.

Answer 5

• Brokers or agents are in a position of trust in their relationships to insurers, and require two bank accounts for the business:
  1. Insurance trust account
  2. Operating account
• Commission is the share of the premium for the broker or agent producing the business
• Contingent commission is extra commission paid to a broker or agent for business that produces a certain level of profitability for the insurer.