BBM 324: INSURANCE BROKERAGE NOTES CHAPTER ONE: INTRODUCTION PRINCIPAL AND AGENCY RELATIONSHIP Insurance intermediaries comprise insurance agents and insurance brokers. A broker is an individual/ parties (brokerage firm) that arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal In general, a broker is an independent agent used extensively in some industries. A broker's, prime responsibility is to bring sellers and buyers together and thus a broker is the third-person facilitator between a buyer and a seller. It is very important to realize that the law of ageney is much wider than its application to insurance agents (important as that is), An agent in this context is a person who represents a principal. In insurance, the position is made a little complex because insurance intermediaries may be described as Insurance Agents (usually representing the insurer) or as Insurance Brokers (usually representing the insured/proposer), as the case may be. Within the law of ageney, they are both agents. Insurance professionals are subject to state administrative rules and regulations and also to the legal concept of agency. We will cover the role of agency, with its associated topics of power and authority in this chapter. Remember that an authorized agent has the power and authority to act on behalf of another. The law of agency is deceptively simple in theory, but sometimes quite complex in practice. Essentially, this whole area of law is govemed by the legal principle that ‘he who acts through another is himself performing the act’. In other words, the principal is bound (for good or ill) by the authorized actions, and sometimes even the unauthorized actions) of his agent. For example when a child (agent) buys something on credit from a grocery store at his mother’s (principal) bidding, a contract of sale is created between the store and the mother so that she becomes liable to pay the price. The concept of agency is important to the relationship between an insurance professional and his/her carrier. Questions of agency also arise regarding the relationship between the insurance professional and his/her client. Finally, the relationship between the client and the insurance professional acting as a broker is unique and will also be covered in this chapter. Collins@kapkiyatDefinition Agency is the relationship which exists between a Principal and his Agent. Because it is a relationship, it may arise as a matter of fact rather than as a precise agency appointment. In legal terms, an agency relationship may be deemed to arise in certain given circumstances, The laws of agency are those rules of law which govern an agency relationship. The law of contract also has to be considered as the agent often arranges an agreement with the shird party, or performs it, on behalf of his principal. There are two contracts to consider: (a) One between the agent and the principal; and (b) Another quite different one between the prineipal and the third party. Role Distinct Insurance professionals act in three primary capacities for purposes of the law of agency. They may be captive agents, brokers, or consultants. Captive agents solicit business on behalf of their particular insurance company. Insurance broker’s act on behalf of individual clients in order to secure needed insurance coverage. Consultants provide advice as to the type of coverage needed to be obtained by a client. For this service they are paid a fee and do not depend on commissions Insurance Agent The general definition of an agent is one who is appointed by an insurer to solicit applications for 4 policy of insurance or to negotiate a policy of insurance on the insurer's behalf, An agent could also be a partnership or corporation, The entity is appointed by the insurer, and receives a written and signed contract from the insurance company. As part of this process, the insurance agent will be licensed in the Country where such contracts are to be solicited. How Agency Arises When we say that an agency relationship exists between two parties, we are, in essence, saying that the agent owes certain duties to the principal and vice versa, and that the agent has some sort of authority to bind the principal in respect of some contract or transaction to be made on the principal's behalf with another person (third party). There are a number of ways in which an agency relationship may arise These we consider below: (a) By agreement: whether contractual or not; express, or implied from the conduet or situation of the parties Collins@kapkiyat(b) By ratification: Ratification is the giving of retrospective authority for a given act. That is to say, authority was not possessed at the time of the act, but the principal subsequently confirms the act, effectively backdating approval. It can be done in writing, verbally, or by conduct. For example, an insurance agent who is only authorized to canvass household insurance business for an insurer has an opportunity to secure an attractive fire insurance risk and purports to grant the required fire insurance cover to the client, The proposed insurance contract is technically void for it has been made without authority from the insurer. However, the insurer may subsequently accept the insurance and confirm cover so that the contract becomes valid retrospectively. AGENCY BASICS A valid agency relationship between an in surance professional and an insurance carrier rests on two fundamental principles. These principals are the concepts of power and authority. The agent receives power to sell insurance on behalf of a carrier through his/her agency agreement. Through this agency agreement the insurance professional is given the power to contractually bind the insurance carrier. This principal of power is extremely broad An agent also derives his/her authority from the agency contract. The agency contract usually authorizes the agent to + Solicit insurance applications ‘ Describe the various coverage offered by the insurance company + Collect needed premiums to initiate the insurance coverage NB; One must remember that the power and authority granted by the agency agreement is not the same as obtaining a state license. TYPES OF AGENT AUTHORI Y The agency contract will spell out clearly the express authority, which is granted to an insurance professional by the insurance company. The agency relationship, which binds the insurance company, can also be created by using implied authority, apparent authority and ratification The issue of authority is related to, but distinct from, the issue of agency relationship. Where a certain act done by A purportedly on behalf of B will be binding on B, A is said to have B’s authority to do it; but that does not necessarily mean that there is an agency relationship, or a full agency relationship, between them, which will, for instance, entitle A to reimbursement by B of Collins@kapkiyatexpenses incurred on behalf of B. The various types of authority that an agent may have are considered below: 1. Actual Authority The authority of an agent may be actual where it results from a manifestation of consent that he should represent or act for the principal, expressly or impliedly made 10 the agent himself by the principal. This type of authority is easily identified from the terms of the agency contract. This, type of authority is the simplest to understand because it is specifically spelled out under the agency contract and granted to the insurance agent. An example would be giving the insurance agent authority to describe appropriate coverages. An actual authority can be an express actual authority or an implied actual authority: press actual authority is an actual authority that is deliberately given, verbally or in writing. © Implied actual authority One enters into the "gray" area of agency law when dealing with implied authority. An agent has authority to act on the insurance company’s behalf when he/she reasonably believes that such authority has been given. For example, the insurance company cannot possibly list out all details of the express authority given to the agent, Thus, implied authority is evident. This authority is granted by the insurance company to the agent but is not written in the contract, Probably the best example of implied authority is the use of a conditional receipt. When the agent accepts a check from an applicant for insurance, he/she is binding the cartier to make every effort, within Reason, To Insure the Applicant. 2. Apparent authori The authority of an agent may be apparent instead of actual, where it results from a manifestation of consent, made to third parties by the principal. The notion of apparent authority is essentially confined 1o the relationship between the principal and a third party, under which the principal may be bound by an unauthorised act of the agent of creating a contract or entering into a transaction on behalf of the principal. Suppose an underwriting agent has been expressly forbidden by his principal from accepting cargo risks destined for West Aftica. In contravention of this prohibition, the agent has on several occasions verbally granted temporary cover to a client for such risks purportedly on behalf of the principal, each time followed by issuance of policies for them by the principal to the client, Because of such past dealings, future similar Collins@kapkiyatacceptance by the agent may be binding on the insurer on the basis of apparent authority to the agent, 3. Authority of necessity In urgent circumstances where the property or interests of one person (who may possibly be an existing principal) are in imminent jeopardy and where no opportunity of communicating with that person exists, so that it becomes necessary for another person (who may possibly be an existing agent) to act on behalf of the former, the latter is said to have an authority of necessity so to act and becomes an agent of necessity by so acting even though he has not acquired an express authority 10 do that. The implications are that: by exercising such an authority, the agent creates contracts binding and conferring rights on the principal, and becomes entitled to reimbursement and indemnity against his principal in respect of his acts. Besides, he will have a defence to any action brought against him by the principal in respect of the allegedly unauthorised acts. For example, when a person is very ill in hospital, a neighbour and friend volunteers and gives help, by assisting with domestic arrangements at his home. This includes payment of the renewal premium for his household insurance. As a result, he will probably be unable to refuse repaying the neighbour for the premium, as the neighbour will almost certainly be considered an agent of necessity. Secondly, he will probably be unable to declare the insurance void and demand a retum of premium from the insurer. Thirdly, it is unlikely that the insurer will be able to deny claims under the policy on the grounds that the policy was renewed without his authority 4. Agency by estoppel Where a person, by words or conduct, represents or allows it to be represented that another person is his agent, he will not be permitted to deny the authority of the agent with respect to anyone (third party) dealing with the agent on the faith of such representation. Despite the binding effect of the acts of the agent done in such circumstances, this doctrine, agency by estoppel, does not generally create an agency relationship unless, say for example, the unauthorised act of the agent is subsequently ratified. In other words, the operation of this doctrine only concems the relationship between principal and third party Note: The doctrine of apparent authority is distinct from the doctrine of estoppel. The first doctrine applies where an agent is allowed to appear to have a greater authority than that actually conferred on him, and the second doctrine applies where the supposed agent is not authorised at all but is allowed to appear as if he was, Collins@kapkiyatRatification Ratification is simply the validation of an unauthorized act. At times, insurance professionals sell products which they are not licensed to sell. In these situations, the insurance company is not, obligated to honor the insurance professional's acts, However, if the company does issue the policy, this is called ratification. Ratification needs five elements: 1. The person (insurance professional) who performed the act must have purported to act on behalf of the principal (the insurance company). 2. The insurance professional must have represented himself/herself as an agent of the insurance company. 3. The client must have believed he/she was dealing with an authorized agent of the insurance company. 4. Only the principal in whose name the action was taken can ratify the agent’s action. 5. The principal must ratify the entire transaction not just parts. Duties Owed by Agent to Principal These may be summarised as follows: (a) Obedience: The agent has to follow all lawful instructions of his principal, strictly or as best as is reasonably possible (b) Personal performance: The agent is not allowed to delegate his authority and responsibilities, to others (subagents) unless he has authority to do so (c) Due care and skill: The law does not demand perfection, and an agent is normally only required to display all reasonably expected skills and diligence in performing his duties. Whilst his principal may be bound by his lack of care, the principal may in tum reclaim from the agent in respect of a loss caused by the lack of care. (d) Loyalty and good faith: The agent’s obligations of loyalty and good faith are governed by several strict rules of law, the no conflict rule being one of them, (e) Accountability: The agent has to account for all moneys or other things he receives on behalf of his principal. He also has to keep adequate records relating to the agency activities Collins@kapkiyaties Owed by Principal to Agent These may be summarised as follows: (a) Remuneration: The agent is entitled to receive commission or other remuneration (such as bonus) as agreed. The principal has to pay within a reasonable time or any specified time limit, as the case may be. (b) Expenses, efc.: The principal, subject to any express terms in the agency agreement, has to reimburse the agent for costs and expenses properly and reasonably incurred by the agent on behalf of the principal; e.g. legal defence expenses paid by a claims settling agent, (©) Breach of duty: The agent may take action against the principal for the latter's breach of obligations to him. Termination of Agency There are a number of ways in which an agency agreement can be brought to an end. These include: (a) Mutual Agreement: Generally speaking, all agreements may be terminated by mutual agreement, on terms agreed between the parties (b) Revocation: Subject to any contract terms as to notice and/or compensation, either the principal or the agent may revoke (i.e. cancel) the agreement during its currency. (c) Breach: If either the principal or the agent commits a fundamental breach of contract, the other party may treat the contract as ended (with a possible right of compensation). For example, an exclusive agent, upon discovering that the principal, in breach of a contract condition, has appointed a second agent before the expiry of the agency agreement, may terminate performance immediately and sue the principal for any loss of the profit expected from performing the agreement during the remainder period (d) Death: Because an agency relationship is a personal one, the death of either the principal or the agent will end the agreement, Should either party be a corporate body (company), its liquidation will have the same effect. (€) Insanity: If either the principal or the agent becomes insane so that he no longer can perform the agreement, the agreement will automatically come to an end, (0) legality: If it happens that the agency relationship or the performance of the agreement is no longer permitted by law, this will automatically end the agreement, Suppose a British company (buying agent) has a contract with a company (principal) incorporated and domiciled in another country whereby the buying agent will purchase in the United Kingdom stuffs like wheat, steel, Collins@kapkiyatsulphur and other chemicals on behalf of the principal. On the outbreak of a war between the two countries, this agreement will, in the English law, automatically end for illegality (g) Time: Ifthe agreement is for a determined period, it will terminate at the end of such period Collins@kapkiyatCHAPTER TWO: REGULATION AND LEGAL IMPLICATIONS OF AGENCY/BROKERAGE All civilised societies recognise that a financial service as important as insurance must be subjected to some form of supervision or control. This is a sensitive area, since on the one hand it is not good for society to ‘strangle’ any kind of worthwhile business activity with excessive controls. On the other hand, left totally unsupervised, the huge amounts of money involved with insurance have over the centuries proved irresistible to fraudsters and irresponsible people, to the great harm and detriment of the societies affected A measure of balance is therefore to be sought. That balance, to some extent, is achieved by a judicious mixture of statutory (Govemment) regulation and self-regulation, where representatives of the industry itself exercise discipline and oversight. THE INSURANCE ACT CHAPTER 487 REVISED 2013 This very important piece of legislation, with its amending statutes, provides the framework for the prudential supervision of the insurance industry in Kenya, In fact, it covers not only the supervision and regulation of insurers, but also that of insurance intermediaries such as brokers The IRA is the insurance regulatory authority and an autonomous government institution created through an act of parliament. It started its operations in May 2007 replacing the former department of insurance. It is charged with regulating, supervising and developing the insurance industry in Kenya headed by the Board of Directors and run by the commissioner of insurance who is the CEO. BROKERS ORGANIZATION The Association of Insurance Brokers of Kenya (AIBK) is the umbrella Professional Association for all Insurance Brokers in Kenya, The body has evolved since inception in 1970 when it was referred to as Association of Insurance Brokers of East Africa (AIBEA), serving Kenya, Uganda and Tanzania before becoming a Kenyan affair after the dissolution of the East African Community in 1977. With a membership of 170 from all the registered Insurance Broker Companies in Kenyan market, spread all over the country and 9 board members. The body has continued to articulate policies and matters pertaining to the welfare of the Members and insuring the public at large Collins@kapkiyatThe Association is a stakeholder of the Insurance Industry and has representation on the Insurance Education and Training Trust (ITET) which runs The College of Insurance, The Insurance Industry Rating Committee and The Policy Holders Compensation Fund Board. Management of Insurance Agents Generally, insurers are to ensure that insurance agents comply with the law and all relevant Codes. Specifically, insurers should give attention to the following: (a) Registration: all insurance agents must be registered under the provisions of the Insurance Companies Act revised 2013 (6) Complaints: proper procedures should be in place to deal with complaints against insurance agents (©) Adequate Support: insurers should ensure that insurance agents have adequate support to perform their duties efficiently. (4) Miscellaneous: insurers must not seek to limit their liability for the actions of their insurance agents and should ensure as far as possible that the insurance agents act fairly and honestly The agency contract between an agent and an insurance company includes four legal Implications: 1. The agent represents the interests of the insurance company. This means that the agent's legal responsibility and obligation are to the insurance company not to a potential client. We will discuss these agent obligations a bit later. 2. The agent is given power to act on behalf of the insurance company. The agent can create legal liability for the insurance company under the insurance contract. 3. The acts of the insurance agent are considered acts of the insurance company. When a debit agent collects premiums, this is considered collection by the insurance company. 4, Knowledge of the insurance agent is considered to be knowledge of the insurance company. If the agent has knowledge of health matters pertinent to the issuance of insurance, it is assumed that this information is also available to the carrier. Collins@kapkiyatObligations of the Agent to the Insurance Company ‘The agency agreement spells out the contractual obligation of an insurance agent to his/her carrier, Most importantly, the agency agreement establishes a fiduciary relationship between an insurance agent and the insurance company. The agent must always act in the best interest of the carrier, 1, Obligation of loyalty ‘An agent must act solely for the benefit of the insurance company in all matters connected with his/her agency agreement. 2. Obligation to avoid conflicts of interest This area has different meaning depending upon whether an insurance professional is a captive agent or an independent agent. Captive agent will be held to a stricter standard. For example, a captive agent cannot serve two carriers selling competing products at the same time. It is possible for a captive agent to sell products not offered by his/her own carrier but sold through another carrier An independent agent represents both the carrier and the client at different points in the transaction. The client is represented during the selection process. Once a determination has been made in regard to the coverage to be selected, the independent agent owes the carrier his loyalty during the application, underwriting and recording keeping process. 3. Obligation to obey This obligation is very important in today’s litigious environment. Many insurance companies have strict instructions in regard to solicitation of business and client communication. These instructions limit the types of illustrations being used and the types of letters being sent to prospects. Obviously these new instructions are being issued to protect both the agent and the insurance company and should be obeyed. 4. Obligation of careful solicitation A goal of any insurance company is to cover as many insureds as possible. Another important factor is for the agent to seek out those prospects who can pay both the initial and future premiums. Some companies pay on the advanced annual payment schedule, which creates temptation to some agents, Receiving seven or eight months’ commission as the first commission can lead to high policy lapse ratios (not to mention high agent tumover rate). The agent should always attempt to write quality business for the insurance company. Collins@kapkiyat5. Obligation to perform with skill and care An agent must execute his/her duties with the level of skill ordi ly possessed by individuals ‘engaged in the same type of business. An agent is obligated not to engage in business in which he/she is not capable of performing. If the agent is dealing in an area with which he/she has little experience, it would be best to bring in a specialist 6. Obligation of full disclosure of information ‘An agent has an important duty to make full disclosure of all pertinent information that will affect the approval process of the application to the insurance company. The agent's obligation is to alert the company of facts about the applicant known to the agent Full disclosure is evident at two stages of the application taking stage. First, during the application process and second, during the claim process for example, in a life insurance situation, the agent must list the applicant as a smoker even if the applicant states "he only smokes occasionally. The main point is that the agent is the field underwriter. The insurance agent must act on the insurer's behalf. The agent should "take the information" and avoid making any judgments. 7.01 mn of business transaction execution This obligation arises most frequently in regard to premium payments and submission of applications. If the premium is not transmitted within a reasonable time frame, the possibility exists that a policy could lapse. This will place the client in a position of vulnerability. However, it also places the insurance company in a prone position as it could lead to charges that the company is obligated to honor any claims due to questionable behavior of its agent. The insurance company is also placed into a situation of risk if an application is not submitted on a timely basis. In most cases, a binding receipt has been given to the client as part of the application process. This makes the insurer liable for claims until the application has been formerly acted upon, Without the application, the insurance company cannot either accept or reject thus being able to protect itself from liability. 8, Obligation to account for premiums Many agents are authorized by their insurance companies to collect the initial premium payments, in order to hasten the underwriting process. Payment to an agent is considered payment to the agent's insurance company. Obviously, any funds collected are held in trust. Keep in mind, most Countries consider it illegal to co-mingle premium dollars with personal funds, It is sound Collins@kapkiyatbusiness practice to maintain a separate bank account for the handling of premium dollars to avoid any hint of impropriety There are three additional areas of possible abuse concerning the fiduciary obligations that agents face. These situations are replacement, use of free look provision, and rebating, REPLACEMENT. Replacement of previously purchased insurance may or may not be valid depending upon individual client needs and circumstances, This area has been highly regulated as abuses by agents can have serious implications for insurance companies In general, replacement of a policy should not be executed where it is clearly disadvantageous to the client. Replacement is also ill advised where it is used by an agent as a systematic method of obtaining new business, ‘The proper steps to take when a replacement situation arises should be * Be sure to provide the client with a written comparison showing the advantages and disadvantages of retaining the old policy versus obtaining the new coverage. * Provide the insurance company with all requested information regarding the replacement on the insurance application. By determining client needs through proper questioning and fact-finding skills, the need to replace will be diminished. Coordinated with a systematic prospecting system the need for replacement will be eliminated. ABUSE OF FREE LOOK RULES Most states mandate that insurance prospects be given a "free look. State laws give an insurance prospect 10-20 days to decide if they wish to accept the insurance policy as issued. The purpose of this "free look" provision is to protect consumers from high-pressure sales tactics. If the consumer declines the coverage within the allowed period, he/she is entitled to a full refund, The "free look" period begins from the date of policy delivery. Agents should remember that their basic fiduciary duties to their insurance companies are always paramount. Abuse of "free look" is violation of the fiduciary role that the company has bestowed on the agent. Collins@kapkiyatABUSE OF REBA’ f RULES Rebating is knowingly permitting, or offering to make, or making, any contract or agreement as to such contract other than is plainly expressed in the issued insurance contract. However, most agents know rebating as paying, allowing, or giving, or offering to pay, allow, or give, directly or indirectly, as an inducement to an insurance contract, any rebate of premiums payable on the contract. In competitive situations, a rebate can "make" or "break" a sale. When an agent offers to rebate part of his/her commission to a client in order to make a sale, the agent is violating his/her fiduciary duty to the insurance company, Classification of Insurance Agents When an individual plans to buy an insurance policy, the first thing that he would need to do is to get in touch with a reliable insurance agent. Insurance agents are those individuals who specialize in marketing and selling different policies on behalf ofan insurance company. The policies that these insurance agents sell range from life insurance to health insurance to sualty and proper disability, long-term care, short-term care, Insurance agents are primarily of two types — independent insurance agents and captive insurance agents. A captive agent belongs to a particular company and sells products offered by that company alone. An independent agent has no such mandate and is free to choose whichever company’s product he will sell. There are certain things to keep in mind before one can settle for an agent. A captive agent usually has lesser options as compared to independent agent. He will sell only the policies of the company he works for; whereas an independent agent may have a lot of options for interested individuals. One needs to carefully study what the agent is trying to sell, All agents receive some sort of a commission from their company. This results in most agents promoting the products of those companies only that pay them a handsome commission So, when considering an agent one must first understand whether the insurance agent is selling a product because he has the client's interest in mind or his own. Trust is the next big thing that ‘comes into play. Be it a captive agent or an independent one, he must be trustworthy. If not then buying from him is not worth it Collins@kapkiyatAdvantages of independent insurance agents: 1 They are usually associated with more than one insurance agency at the same time. They can offer a wider range of products to choose from, They have greater options to suit an individual's needs and allow individual buyers to compare products from amongst a wide range of insurers. They have no mandate that they need to sell products of a particular company only. They are entitled to receive commissions from all the insurance companies whose products they can sell. Disadvantages/challenges of independent insurance agents: 1 They may tend to promote only those products/companies that fetch them higher ‘commissions. ‘They may not always have the benefit of the insured’s family in mind, since they are mainly commission based. Advantages of a captive insurance agent: They are mainly salary based. 2. They draw their resources from the parent company. 3. They may have a direct access to the reinsurance market 4. They are entitled to wider employee benefit options Disadvantages/challenges faced by captive agents: 1, They may be prohibited from selling other products than those of the parent company. 2. There may be loss of clientele if parent company decides to discontinue selling a certain product as a result of it being unprofitable. 3. Agents may be forced to promote certain policies over others by the parent company. Collins@kapkiyat‘Comparison between independent agents and captive agents: Independent Agent Captive Agent 1.[s ina position to give competitive prices to [1. Can quote product price only from the clients company under whose payroll he is 2. Is not beholden to any particular company. 2. Is beholden to a particular company. 3. Can offer policies from other insurance 8. Must restrict himself to promoting only ‘companies to suit client’s unique needs. particular products of a particular company. 4. They are commission based 4. They are mainly salary based. 5. They are not entitled to wider employee 5. They are entitled to wider employee benefits, benefits but only commission. Succeeding as an Insurance Agent The one business skill that every individual in the insurance industry needs to master is, knowing how to attract customers to the business, Individuals who lack in this skill see a downfall in their career very quickly. Having good business skills do not always help. You may have excellent business skills but knowing how to attract and keep the customers with the company will help get better gains for long term. No matter whether you are an independent insurance agent or a captive agent, to have a successful and thriving business you need to have enough customers who will buy your products regularly. Competition is massive and in order to survive in this competition you simply need to be the best. There are tell-ale signs that can identify you as a successful insurance agent. Collins@kapkiyatAn insurance agent must be: + Achievement oriented + Self-dependent + Focused on work + Selfmotivating + Committed + Diligent When attracting clients, there are 2 important components — one is to understand the fact that your clients will be attracted by who you are and the second by your depth of knowledge. Hence, you must have a very good knowledge of your products, the services that you can provide and a good knowledge about the industry is also important, The question now is how you would enhance who you are. Improving communication skills is the key phrase here. Not just that, you will also need to improve your social skills and your integrity too. When you can be thought of as someone with good people skills that means you: + Can communicate clearly + Have a good and positive attitude + Show interest in others + Can be related to + Can do what you promis + Have and show respect for people + Are professional in attitude Another key component in attracting customers to your business is to actually getting out. This ‘means that you can interact on a one-to-one basis and people can see you and get attracted to you afier getting to know you. You have a better chance of convincing your clients to purchase your produets than you would have if you did the same from behind a desk. The magic formula hence is to improve your people skills and interact personally with more and more people that you want 10 attract to your business, Collins@kapkiyatCHAPTER THREE: RI COMPANY -ATIONSH! P OF A BROKER TO AN INSURANCE The role of a broker differs from that of an agent. A true broker is in the business of bringing insurance buyers and sellers together. A broker acts in the interest of the insurance applicant in regard to the procuring of insurance and filling out the insurance application, However, a broker acts on behalf of the insurance company when collecting the insurance premiums and delivering, the policy, There are many large brokerage firms in Kenya, such as ION Minet that play an important part in the placement of property and liability insurance, These firms often specialize in placing large, multinational corporate 2 counts and pride themselves on their knowledge of highly unusual insurance markets, In exchange for assisting the applicant to obtain insurance coverage, the broker receives a commission from the insurers with whom coverage is placed BROKERS DUTIES As stated, a brokers primary responsibility is to his/her client. Brokers serve their clients by finding the appropriate insurance coverages to meet the clients needs. In addition to serving their clients, brokers are held to the same standards as agents I terms of their responsibilities to the general public. In other worlds, because the business of insurance requires honesty and good faith, the broker is prohibited from engaging in any marketing practice that involves unfair competition or a deceptive act. Like agents, in most states brokers are required to undertake a program of continuing education to remain knowledgeable and current in areas that pertain to insurance principles, coverages, laws and regulations in order to retain their license. Collins@kapkiyatCHAPTER FOUR: THE ROLE THAT INSURANCE AGE! COUNTRY’S INSURANCE SYSTEM /BROKERS PLAY IN A Learning Objectives After reading this Chapter one should have a better understanding of + The role of the agent + What agents do for their clients + How both carriers and consumers benefit from the use of insurance agents + How insurance agents get paid NOTE: The term “agent” in this executive summary is intended to be synonymous with “broker” and “consultant” in so much as these terms are often used interchangeably by consumer and business clients. What agents do for their clients Professional agents work for the consumer and can offer and explain the differences between a variety of different health products from many different insurance carriers, ‘The independence of the agent is an important concept to understand. By being independent, the agent is able to better serve his/her clients by offering insurance products and services that fit their clients’ financial and coverage needs and objectives. Also, since clients may end the relationship at any time, the agent is motivated to help the client decide on the best possible plan for his or her needs, and provide ongoing service after the sale. As a representative to both individual consumers and business organizations, an insurance agent generally will + Evaluate the insurance plan needs of the individual or business + Explain the details of different plans and compare costs + Make specific recommendations and tailor plans to suit needs as well as budgets + Review the plans periodically to update coverage and maintain affordability + For businesses, communicate the facts about various benefits packages to employees + Serve as the consumer's advocate and advisor in dealing with insurance companies, doctors, hospitals, and govemment agencies. This involves servicing claims, and providing advice about compliance with regulations. Collins@kapkiyatHow both carriers and consumers benefit from the use of insurance agents Agents are used extensively by the insurance industry to market insurance and related products. There are several very good reasons for this which is beneficial to the consumer. First, the use of agents is cost effective for insurance carriers. Agents are not employees of rriers - but are instead independent contractors for the carriers. Carriers do not have insurance the associated costs of an employee, costs such as benefits, expense reimbursement, ete when they use an agent. They simply have the fixed cost of the agent's commission. The commission is, paid for as long as the policy is in force, and is usually either the same percentage or fixed fee Each year. Second, agents clearly fill a different role from the salaried employees of an insurance carrier. The agent first and foremost represents the interests of consumers and is able to offer and explain the differences between a variety of different insurance products from many different insurance cariers. ‘Third, whether one’s professional insurance advisor is an agent, broker, or consultant, professional insurance advisors are the critical link between consumers and the insurance companies and other third party. They provide and service insurance products while at the same time educating and advising clients on how to best manage risk and make informed purchasing, decisions. Finally, ongoing changes in the types of products and services that are offered in the private insurance market make the agent’s role increasingly important to individuals and. small businesses so that they clearly understand their options and make informed decisions How insurance agents get p: Agents have strong financial and professional incentives to consistently provide their clients with quality products, advice, and service. How agents get paid varies by the segment of the insurance market Collins@kapkiyat+ In the individual market agents are compensated on a commission basis that is typically based on a percentage of premiums. In the small group market (i.e., 2-50 employees) agents get paid either based on 1) a percentage of the premiums paid for coverage that is typically subject to a sliding scale, or 2)a flat fee/rate per member per month. + In the large group market (50 + employees), commissions with carriers or fees paid by health plan sponsors are negotiated. + The individual and small group market commission rates are published rates and therefore are not negotiable, and the trend over time has been toward a lowering of rates, The commission and fee arrangements in the large group market, as stated above, are negotiated, and competition among agents for clients is an effective market mechanism for keeping these costs in line for employers. Consulting Services + Provide an annual written renewal report detailing experience analysis and projection of claims and fixed costs, reserve needs, and funding rates for the client’s experience-rated or self sured plans, + Represent the client with carriers and other vendors in the negotiation of contract renewals with respect to all employee benefits lines of coverage sponsored by the client for its employees and their dependents. + From time to time review the levels and types of employee benefit coverage’s offered by the client, and make recommendations for changes where deemed appropriate while keeping in mind any constraints with respect to such because of collective bargaining + Make recommendations relative to self-insuring any lines of coverage currently provided by the client as insured lines. + In the case of self-insured health plans, advise the client on specific and aggregate stop loss coverage, including appropriate deductible levels and competitive costs. + Analyze claim experience, trends, and anomalies + Monitor claims experience for claims that exceed the stop loss deductible levels and work with the health plan carrier or third party administrator (TPA) to ensure accurate and timely reimbursement to the client. + Assist in resolving claim disputes. Collins@kapkiyal+ Recommend cost containment strategies and techniques to the client on all employee benefit lines. + Provide periodic updates on legal issues and regulations as such updates relate to the client’s operations and lines of coverage + Recommend changes in benefit design and administrative arrangements when appropriate in light of changes in the health care and employee benefits industries + Provide advice with respect to maintaining overall financial and rate stability. Brokerage Services + Secure timely renewal quotations from all insurers and service providers contracted by the client, + Negotiate with carriers and other third party claims administrators to secure the lowest possible fixed cost rates and to maximize discount levels with the provider network(s) that are under contract with the client. + In the case of self-insured health plan clients, secure bids and make recommendations for the placement of stop loss coverage + Prepare specifications, take and analyze bids, and make recommendations for the replacement or addition of any employee benefit plans. + Be responsible for the timely and successful transition of any coverage or administrative services due to a change in carrier or service provider for the client, Administrative Support Services + Provide training and support for the client’s administrative staff in the area of employee benefit administration + Provide assistance with employee or plan sponsor problems in the areas of claim payments, billing, eligibility, or enrollment. + Provide assistance with compliance issues. * Actively monitor the carriers’ and other service providers’ levels of performance + Provide other assistance and advice as requested or needed Collins@kapkiyatInsurance agent vs Broker Insurance is a subject matter of solicitation. If you are looking for an insurance poliey for your business, you need right advice and information. Normally this responsibility is fulfilled by a person who is either an insurance agent or a broker. You are not concerned with the terminology as long as you are getting the right information. Sometimes it becomes very confusing if it were to be asked to choose from an insurance agent and a broker. Both insurance agent as well as a broker brings business for an insurance company as they sell policies of the company to the people. If both are doing the same duty, why have different designations? The answer to this conundrum lies in the subtle differences between their functions, duties as well as obligations, Insurance Agent Insurance agent is the person who has been authorised by an insurance company to carry out its business on its behalf. This legal authority means the agent can sell the financial products of the company to the people by making a contract between a person and the company. An agent is not, an employee of the insurance company which means that he is not on the payrolls of the company. He rather receives a commission from the company when he sells its financial products. He can be having other sources of income or could be doing other jobs. He disseminates information about the products of an insurance company and convinces people about the need of any insurance policy. Broker A broker works independently, and though he sells insurance policies, he is at best on the side of the client, not the insurance company. He is a qualified person as he passes the relevant course to obtain a license to work as a broker. He is a person who has knowledge of financial products of ‘many companies in the market. He assesses the needs and requirements of a person or a business and helps him with just the right financial product. Brokers help businesses develop specific insurance plans for the employees and then find an insurance company that accepts the plan. Thus a broker matches clients with insurance companies Difference between Insurance Agent and Broker When one looks superficially, an insurance agent and a broker look like identical as both of them, appear to be selling insurance policies. The main difference between the two entities lies in the relation these persons have with the insurer and the insured. An insurance agent is designated by Collins@kapkiyalthe insurance company to sell its product by convincing people and gets commission from the company whereas a broker matches the needs of a client with the products available with any of the insurance companies. Both however need a license to carry out their business in a state. Businesses require custom made products to fulfil their needs such as employee benefits. Brokers are better suited to match their needs with insurance companies. This is why brokers are better suited for commercial insurances, whereas insurance agents are better suited for personal insurance. Collins@kapkiyatCHAPTER FIVE: [S/BROKERS, EXPLICIT AND IMPLIED AUTHORITY OF AGE AGENT LIABILITY — DUTIES & STATUS, Basic Agent Duties The agent/broker generally assumes duties normally found in any agency relationship. The primary obligation here is to select a company and coverage and bind the coverage (if the agent has binding authority, e.g. property/casualty agents) However, since clients typically request coverage, the basic duty may expand to include the agent deciding whether the requested coverage is available and whether the insured qualifies for it ‘The mere existence of an agency relationship, or the simple selling of insurance, imposes no duty on the agent/broker to advise the insured on specific insurance matters. Duty also does not require the broker/agent to secure complete insurance protection against any conceivable loss the insured might incur, but there may be a duty to explain policy options that are widely available at a reasonable cost. An agent’s duty to provide correct coverage is not triggered by a client’s request for “full coverage” because that request is not a specific inquiry about a specific type of coverage. In other words, just because a client asks for full coverage an agent may not be liable to provide it. However, if a client requests a specific type of coverage, the agent is responsible to see if it is available and determine if the client qualifies. An insured is also entitled to rely on an agenv/broker’s advice on the meaning of policy provisions, However, a client's reliance may be unjustified when the advice given by the agent “is in patent conflict with the terms of the policy” It is a clear legal responsibility of agents to understand the difference between two products that he is attempting to sell. Whether an agent has an affirmative duty to inform a client of possible gaps in coverage depends on the relationship of the parties, specific requests of the client and the professional judgment of the agent. Once a policy is issued, traditionally theories of legal conduct provide that an agent does not, have the duty to ferret out, at regular intervals, information which brings the policyholder within provisions of a policy. In essence, it seems the courts have been more concerned about general agent duties to inform clients of appropriate coverage at the time of sale. Collins@kapkiyatRecent departures from this theory includes a case where an agent was found liable for failing to determine that the insurance policy was no longer needed by the client. In another example, an agent assured his client that the limits of the policy continued to meet his needs when they actually fell short (ie, agent duties may also include informing clients their coverage is appropriate after the sale) Although each case stands on its own, the underlying determinant of “after sale” duty may be the “special relationship” that exists between client and agent (e.g. an agent handling the client's, uume a higher standard of care) business for an extended period of time may a: These are the basic agent responsibilities. Agents are not precluded from assuming additional responsibility, which they normally do in most client transactions, When a lawsuit arises, however, it is the client’s burden to show that greater duty is the result of an express or implied agreement between agent and client where the agent has taken more responsibility. In most instances, the facts of the particular case determine whether the court finds a greater duty has been assumed. The law of agency The Law of Agency is a universal area of the law that determines producer status and specifically binds the agent/broker for his acts and his omissions or errors. Simply stated, the law of agency, for most states, establishes many categories of insurance agents and concludes that the authorized acts of the agent automatically create duties and obligations an agent must follow. These responsibilities occur between agents and principals (insurance companies) and as between agents and third parties (clients or intended beneficiaries). ‘An agency relationship begins when agents are granted authority to operate by expressed, implied or apparent agreement. This can be created by contract or agreement or it can take the form of casual mutual consent, What is interesting about the business of insurance is that most agents start out as an agent for the client, when coverage is requested, and then become an agent for the company, when business is placed. As you will see later, the exact status you occupy when a problem occurs affects your liability exposure. A person who markets insurance is typically referred to as a producer. The insurance market and many state laws describe different kinds of producer: - general agents, local agents, brokers, surplus or excess general agents, local agents, brokers, surplus or excess-line brokers or agents Collins@kapkiyatGeneral Agents The general agent assumes many responsibilities, greater liability and usually incurs higher business expenses. As a result, they are typically paid the highest commissions, In the property/casualty field, many sales agents with general agent contracts do not serve all the functions of a general agent but are important enough to their insurers to receive general agent commissions In all lines of insurance, general ageney contracts, or similar classifications, are frequently awarded as a competitive device to obtain or retain a particularly outstanding agent or firm, Local Agents The local agent represents the insurer. He or she may represent more than one company. Cc mmission schedules are typically lower for local agents because they do not usually perform technical services usually reserved for the general agent or branch/regional office; such as underwriting, policy implementation, claims support, etc., and are subject to a lower level of liability than other agent categories The local agent is principally a sales representative of the insurer who acquires business and counsels clients. Brokers Theoretically, brokers are agents of insurance buyers and not of insurers. Their job is to seek the best possible coverage for clients. This is can be accomplished in a direct manner with the broker acting as salesperson or through a network of agent contacts, Premiums paid by clients include the cost of commission paid to the broker by the insurance company, so the client indirectly pays the commissions of both the broker and agent In the liability/casualty area, some brokers maintain a loss-control staff to help counsel clients on safety and prevention matters thereby aiding clients to secure a lower premium. In a sense, these brokerage firms act as insurance and risk managers. Surplus Brokers / Agents Sometimes a client will seek a highly specialized coverage not written by an insurer licensed in a home state, Examples might be an unusually high excess liability plan, auto racing liability, strike insurance, oil-pollution liability, ete. To handle these limited lines of coverage with "non- admitted” insurers, states typically license surplus or excess line agents and brokers, Collins@kapkiyatSolicitors Another type of producer is the solicitor who usually cannot bind the insurer or quote premiums. The solicitor seeks insurance prospects and then handles the business through a local agent, broker, branch office or service office. Producers can also be classed as actual agents/brokers (those given express or implied authority), or ostensible agents/brokers (those whose actions or conduct induces others to reasonable believe they are acting in the capacity of an agent/broker). An agent binds his principal when he acts within the scope of his authority. The exception is when an agent and an insured are proved to have colluded with intent to defraud an insurance company. In such a case, the principal or nsurer is not culpable or bound by the policy. Insurance companies always attempt to tightly define or narrow the authority of agents to limit their exposure to agent wrongdoing. In practice, however, the law generally considers the agent and the insurer as one and the same, even though the agent works as an independent contractor. So, the insurer is most often legally responsible for the acts of the agent and is regularly sued by third parties (clients of the agent) who feel they have been wronged. Of course, when a policy ‘owner sues his insurance company, agents are often named for various breaches of duty between client and agent. Agent liability may also exist where insurance companies sue their own agents, Insurance companies and errors and omission carriers alike exercise their right to sue an agent under various legal theories, typically for indemnity of any judgment losses they may have incurred through a policy owner claim. Insurance Producer Status ‘When marketing insurance, the agent may assume the character of a mere sales representative or the specified agent of the client. As mentioned earlier, agents generally start out representing the client who requests coverage and then become the agent for the company when business is placed, Other than brokers, agents rarely retain principal status throughout a transaction. When a dispute occurs and a producer’s status cannot easily be determined the courts usually rule in the direction of agency relationship. This bias is commonplace for two reasons: 1) It is easy to establish that an agent is representing his insurance company since there is typically a pre-existing, written agency contract between the parties (the agent and the insurer) his relationship is distinguished from a principal- agent relationship where the client requests, that the agent accomplish a specific result (such as "BuyKshs.150,000 of coverage from XYZ. Company". Collins@kapkiyat