Exclusive Agents, Direct Writers, Excess and Surplus Lines Brokers, Agency Premium Billing, and General Functions of Insurance Producers: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Insurance Operations, Regulation, and Statutory Accounting, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:

Myhr, A.E.; and Markham, J.J. Insurance Operations, Regulation, and Statutory Accounting (Second Edition). American Institute for Chartered Property Casualty Underwriters.

2004. Chapter 3, pp. 3.12-3.17.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-49-1. Which of the following statements about the typical responsibilities of excess and surplus lines (E&S) brokers to comply with state regulations are true? More than one answer may be correct.

(a) As E&S brokers are not insurers, they are not subject to insurance regulations and codes.
(b) E&S brokers are typically required to maintain records of each insurance transaction and provide them to state insurance regulators upon request.
(c) E&S brokers must typically maintain a surety bond in a certain minimum amount; this amount is virtually always a fixed figure and is not dependent on the amount of business transacted by the E&S broker.
(d) If an E&S broker receives an application for insurance, he/she may, under most state laws, place coverage immediately, without regard for whether that application was previously submitted to standard/admitted insurers.
(e) E&S brokers are typically required to have both a general property-casualty license and a surplus lines license within the state in which they operate.
(f) In the notice that E&S brokers are required to provide to insureds, it must be stated that the insurer with whom coverage is being placed is subject to guaranty fund protection.
(g) E&S brokers are responsible for remitting taxes on premiums collected to the appropriate state agency.

Solution S5-49-1. This question is based on the discussion in Myhr and Markham, p. 3.12. The following answers are correct:

(b) E&S brokers are typically required to maintain records of each insurance transaction and provide them to state insurance regulators upon request.

(e) E&S brokers are typically required to have both a general property-casualty license and a surplus lines license within the state in which they operate.

(g) E&S brokers are responsible for remitting taxes on premiums collected to the appropriate state agency.

Choice (a) is not correct; E&S brokers are subject to many insurance regulations and codes, since they place business with insurers.

Choice (c) is not correct; the minimum surety bond amount required is typically a percentage or portion of the insurance transacted by the E&S broker within a given time period, such as a year.

Choice (d) is not correct; according to Myhr and Markham, p. 3.12, the "E&S broker must have proof that the application for insurance was rejected by standard insurers; proof is frequently in the form of an affidavit that cites the insurers who rejected the application, the date of rejection, and the name of a contact at each rejecting insurer."

Choice (f) is not correct; in the notice that E&S brokers are required to provide to insureds, it must be stated that the insurer with whom coverage is being placed is not subject to guaranty fund protection, which is the case for all states except New Jersey. In New Jersey, state-specific requirements would apply.

Problem S5-49-2. Which of the following statements pertaining to the exclusive agency marketing system in insurance are true? More than one answer may be correct.

(a) Exclusive agents can be compensated by salary.
(b) Exclusive agents can be compensated by commission.
(c) Commissions paid by insurers to exclusive agents typically do not depend on whether the business being placed is new business or renewal business.
(d) Exclusive agents are mostly limited to selling policies of a single insurer.
(e) Sometimes exclusive agents may place coverage with other insurers, if the company which the agents represent does not offer the product or service that a customer requires.
(f) Just like independent agents, exclusive agents most often own the expirations of the insurance policies which they transact.
(g) If an insurer's agency contract with an exclusive agency specifies that the agency will own the expirations of the insurance policies which they transact, and the contract is terminated, the expirations will typically continue to be owned by the agency.

Solution S5-49-2. This question is based on the discussion in Myhr and Markham, pp. 3.12-3.13. The following answers are correct:

(a) Exclusive agents can be compensated by salary.
(b) Exclusive agents can be compensated by commission.
(d) Exclusive agents are mostly limited to selling policies of a single insurer.
(e) Sometimes exclusive agents may place coverage with other insurers, if the company which the agents represent does not offer the product or service that a customer requires.

Choice (c) is not correct; insurers typically pay exclusive agents a higher commission rate for new business than for renewal business. This serves as an incentive to attract new business.

Choice (f) is not correct; most exclusive agents do not own the expirations of insurance policies; rather, the insurer retains this ownership.

Choice (g) is not correct; if an insurer's agency contract with an exclusive agency specifies that the agency will own the expirations of the insurance policies which they transact, and the contract is terminated, the ownership of the expirations will typically revert to the insurer.

Problem S5-49-3. Which of the following statements pertaining to the direct writer marketing system in insurance are true? More than one answer may be correct.

(a) The direct writer system uses sales agents that are employees of the insurers for which they sell coverage.
(b) Because the direct writer system uses employees of insurers to sell coverage, it is not common for commissions to be paid to the sales agents under this system.
(c) Sales agents in the direct writer system perform extensive administrative functions for their employers.
(d) Direct writer producers can be both employees and independent contractors.
(e) Direct writer producers do not typically have ownership of insurance policy expirations.
(f) Direct writer producers are similar to exclusive agents in terms of the limitations on which insurers they may represent.
(g) Direct writer producers are essentially the same as managing general agents (MGAs).

Solution S5-49-3. This question is based on the discussion in Myhr and Markham, p. 3.13. The following answers are correct:

(a) The direct writer system uses sales agents that are employees of the insurers for which they sell coverage.
(e) Direct writer producers do not typically have ownership of insurance policy expirations.
(f) Direct writer producers are similar to exclusive agents in terms of the limitations on which insurers they may represent.

Choice (b) is not correct; sales agents under the direct writer system are often compensated via salaries, commission, or a combination of both.

Choice (c) is not correct; sales agents under the direct writer system are typically relieved of administrative responsibilities by their employers.

Choice (d) is not correct; direct writer producers are employees and not independent contractors.

Choice (g) is not correct; managing general agents are intermediaries between insurers and independent producers, whereas direct writer producers are employees of the insurers which they represent.

Problem S5-49-4. Myhr and Markham, p. 3.15, discuss three methods, widely used by agencies of insurance producers, for transmitting premiums to the insurer:

1. The item basis
2. The statement basis
3. The account current basis

Each of the following situations below represents the application of one of these methods. Match the situation to the method of which it is an example. Also specify, for each situation, what would happen if the premium is not received from the insured by the agency by the premium's due date. Would the agency need to forward the premium to the insurer anyway?

(a) An insured pays a premium to the agency before its due date. As soon as the agency receives the premium, it forwards the premium to the insurer.
(b) Once every specified time period, the agency prepares a statement, wherein the premiums due to the insurer are shown. The agency then subtracts from those premiums the commissions due to the agency and forwards the remaining amount to the insurer.
(c) The insurer periodically sends the agency a bill showing how much premium is due for a given time period. After receiving the bill, the agency forwards the required amount of premium to the insurer.

Solution S5-49-4.

Situation (a) is an example of 1.the item basis. Under this method, the agency is not required to forward to the insurer premium that has not yet been received from the insured.

Situation (b) is an example of 3. the account current basis. Under this method, the agency is required to forward to the insurer premium at regular intervals, even if it has not yet been received from the insured.

Situation (c) is an example of 2. the statement basis. Under this method, the agency is required to forward to the insurer premium at regular intervals, even if it has not yet been received from the insured.

Problem S5-49-5. Give the specified number of examples for how many insurance producers are involved in each of the following functions:

(a) Customer service (give 3 examples);
(b) Claim handling (give 2 examples);

(c) Consulting (give 1 example).

Solution S5-49-5. This question is based on the discussion in Myhr and Markham, pp. 3.16-3.17. The following possible answers are provided in the text, but other answers may be possible:

(a) The following customer service functions are often performed by producers of insurance:

1. Independent agents/brokers often personalize insurance packages.

2. Direct writers often take endorsement requests over the phone.

3. Direct writers often provide coverage quotes.

4. Direct writers often transfer policyholders who have had losses to the claims department.

5. Producers can respond to billing inquiries.

6. Producers can perform customer account reviews.

7. Producers can engage in field underwriting (e.g., obtaining loss reports, motor vehicle reports, insurance credit scores, and other information).

8. Producers need to be able to respond to questions from policyholders about existing and additional coverages.

9. Producers "facilitate contacts between policyholders and insurer personnel, including premium auditors and loss control representatives."

(b) The following claim handling functions are often performed by producers of insurance:

1. Many insureds will contact the producer first when a claim occurs.

2. The producers often need to transfer insureds to the claim department or to obtain some basic information about the loss from the insured and later relay this information to the insurer.

3. Many producers have insurer authorization to adjust small claims. Most often, this authorization only pertains to first-party liability claims, but it sometimes also extends to third-party liability claims.

(c) The following consulting functions are often performed by producers of insurance:

1. Many producers offer consulting services in exchange for a fee. These services can be offered to insureds, or, less frequently, to non-insureds or prospects.

See other sections of The Actuary's Free Study Guide for Exam 5.