Direct Marketing. INSU 2500 Chapter 5 Insurance Occupations. E-Commerce. Insurance Marketing and Distribution

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1 Direct Marketing INSU 2500 Chapter 5 Insurance Occupations Sept. 12 & 14 Insurance companies sell insurance directly to consumers. No middleman; no branch operation. Examples: Mail solicitations, E-commerce (internet/ ) solicitations, cold calls (telephone), Example: GEICO, AIG Direct, Unitrin Direct. 3 Insurance Marketing and Distribution Insurance Marketing: product development, training, advertising and other activities that help in the sale of the insurance product. Agents sell most of the insurance by contacting buyers personally. E-Commerce Convenience (i.e., 24-7). Cost-cutting; efficiencies. Price comparisons/shopping. Little or no human interaction. Auto and term life insurance are popular on the internet. Why? 2 4 1

2 INSURANCE OCCUPATIONS Insurance Agent Loss Adjuster Underwriter Actuary Lawyer (Read on your own) Other Occupations (Read on your own) LAW OF AGENCY Duties of the agent: Loyalty Not to be negligent Example: The same as before policy To obey instructions Duties of the principal: Pay the agent for services rendered Meet other contractual obligations (training, expense reimbursement, etc.) 5 7 AGENT Agent s Authority Agent: a person authorized to act on behalf of another person called the principal. Ex: Board of Directors, insurance agents, MLB players agents, etc. Agency Law: Scope of authority Sets forth and limits agents' actions. Duties of an agent Loyalty, honesty, 6 Agents receive authority from principals in several ways: An agency agreement (actual authority) express (written) authority contract spelling out the rights and duties of all the parties to the contract. Incidental authority all steps implied and necessary to be taken to complete normal activities. Apparent/implied authority: lack of express authority. Example: Premium submission. Ratification 8 2

3 Insurance Brokers An agent with limited authority to find insurance for the buyer. Works for the insurance buyer and earns a commission which is a percentage of the premium charged to the buyer. Used extensively in commercial insurance and deals regularly with company risk managers. Compare and Contrast Agents & Brokers Similarities: Distribute insurance products. Compensate on commission (usually). May be paid on fixed salary in some cases. Must be licensed by the state insurance commissioner. Because of the Gramm-Leach-Bliley Act, agent licensing requirements must be uniform in all states Comparison of Agents and Brokers AGENCY RELATIONSHIP consumer agent company BROKERAGE RELATIONSHIP consumer broker company Questions: Who does the agent work for? Who does the broker work for? Who has the binding authority? 10 Agents vs. Brokers Differences: Agent represents INSURER Has binding authority on the insurer. Handles both personal and commercial accounts. Broker represents BUYER No binding authority Usually handles only commercial accounts. 12 3

4 P&L Agents and Brokers Direct Writers vs. Independent Agents: Direct writers work for one insurer as a commissioned employee. Example: GEICO, State Farm, All State, Independent agents own their own business and may represent many different insurers. They are compensated on a commission basis. Typical commission is 15% of premium but varies by type of insurance DISTRIBUTION OF INSURANCE Property and Liability Direct Writers Employee / Agent usually paid by salary + Commission Lower Price Standard Contracts Independent Agents Represents several companies Own the business! Paid commissions More service Local help Select company

5 Life Insurance Agents and Brokers They can be direct writers or independent agents. Direct writers are being used more frequently in life insurance marketing. Commission basis is different than in property and liability insurance. Life insurance companies usually appoint general agents (branch manager) who are given authority to recruit and train agents for a specified territory. Soliciting agents, generally run their own business, are soliciting agents. Life brokers work the same way as PL brokers. Matching buyers with sellers. 17 LOSS ADJUSTERS or Claims Investigator Loss adjusters make the product perform - pays the claim Steps in adjusting a claim Investigate the losses. Determine if policy covers Covered perils? Recommend denial or payment of claim Determine amount of the loss Pay the claim 19 DISTRIBUTION OF INSURANCE Life Insurance The Claim Handling Function Company General Agent or Branch Manager Soliciting or Special Agents Branch manager has control of territory and recruits and trains soliciting or special agents Life insurance agents can never bind coverage - authority limited power to bind remains at the home office 18 Overly liberal claims settlement procedures may be as bad as stingy claims settlement procedures. Claims settlement problems are generally more complex in property and liability insurance than in life insurance. The claims adjuster must be able to interpret accurately the meaning of insurance policies 20 5

6 Claim Adjusters Employee (Private) Adjuster Independent Adjuster (Adjustment bureau): Not an employee of an insurance company. Public Adjuster: An agent of insured to help insured receive fair settlement. Does not represent the insurer! Note: How do we apply the concept of Principal-Agent to adjusters? 21 Reservation of Rights Used when insurers do not know if claim is covered so insurer reserves rights to deny but proceeds as if the claim is covered with the right to later deny coverage if it is correct to do so. Not denials of coverage! 23 Why hire adjustment bureaus? To make the claim process more efficient and more convenient. Example: Specialized Services Examples: 22 UNDERWRITER Typically a home office employee who selects and rates, or else rejects, applications for insurance. An important part of the selection process is classification and rating (pricing) the exposure. This involves experience and judgment, in both life and property insurance with the goal to categorize and price correctly. 24 6

7 Underwriting One of the primary purposes of underwriting is to reduce adverse selection against the insurance company. Fair rates should be charged so that each group of insureds is not subsidized by other groups. The underwriter makes decisions based on criteria established by the company management. The underwriter is influenced by subjective considerations. 25 ACTUARY Develops statistics and classifications for insurance rates. Reviews past and projected future results. Involved in product development. Regulatory compliance issues. Calculation of participating dividends. 27 Life Insurance Underwriting Life insurance underwriters must use judgment in assessing the health, occupation, and moral history of the applicant. Health records come from applicant's doctor and the MIB (Medical Information Bureau). The use of genetic information is currently controversial. LAWYER Lawsuits Wording of insurance contracts Deal with regulatory agencies General advice and counsel

8 Other Occupations Financial administrators Accountants, Financiers, Managers, Statisticians, Economists Architects, Engineers Doctors, Health Care Professionals Marketing, Advertising Personnel Administrators, Law Enforcement Computer System Operators and Software Authors Question #2 A broker: a. Is the agent of the insured. b. Is the agent of the insurance company. c. Is neither the agent of the insurance company or the insured, but his or her own agent. d. Is never used in life insurance Question #1 The definition of agent is: a. A person working for another person. b. A person authorized to act for another person. c. A person signing a contract for another person. d. A person substituted to another person s rights and duties. 30 Question #3 Independent loss adjusters: a. Technically are agents of the insurance company whose loss they are adjusting. b. Technically are agents of the insured. c. Are neither agents of the insurance company or the insured, but independent of both. d. Are independent of the insurance company, but only until the claim is settled. 32 8

9 Question #4 A waiver is : a. a condition in property insurance. b. a condition found only in life insurance. c. a condition found in both life and property insurance. d. the intentional abandonment of a known right. Question #6 An insurance company whose agents are also employees of the company is called a: a. direct writer b. casualty underwriter c. comprehensive insurer d. investor-owned company Question #5 If an insurer ratifies an agent s action it means: a. the agent is fired b. the agent is promoted c. the agent acted illegally, but the insurer must pay the fine d. the agent acted beyond the scope of authority, but the company agreed to accept the results 34 Question #7 The organization that collects data on insurance applicants is the: a. CIA b. CBS c. MIB d. FCAS 36 9

10 Question #8 If an insurance agent were to give legal advice to a client this would be: a. a required part of the job b. a crime c. only a problem if the advice were incorrect and led to a client s loss d. a violation of the Fair Trade Act 37 10