Independent Agents and Brokers in Insurance: 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).

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. 3.3-3.11.

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

Problem S5-48-1. Which of the following statements about independent insurance agents and brokers are true? More than one answer may be correct.

(a) Independent agents are employees of the multiple insurers whom they typically represent.
(b) Independent agents and brokers own the expirations of the policies they place with insurers and other producers.
(c) Most agency contracts do not clearly state that independent agents and brokers own the expirations of insurance policies; rather, this is assumed as a matter of custom.
(d) A flat commission on all business submitted is one way in which independent agents and brokers are typically compensated.
(e) A substantial advance fixed payment, which is not based on the volume and profitability of business submitted by the agent or broker and which suffices to pay the salary of the agent/broker for the time period in question, is one way in which independent agents and brokers are typically compensated.
(f) A contingent or profit-sharing commission based on meeting goals related to volume or profit is one way in which independent agents and brokers are typically compensated.
(g) Independent producers, such as independent agents and brokers, often provide risk management advice to their customers.

Solution S5-48-1. This question is based on the discussion in Myhr and Markham, p. 3.7. The following answers are correct:
(b) Independent agents and brokers own the expirations of the policies they place with insurers and other producers.
(d) A flat commission on all business submitted is one way in which independent agents and brokers are typically compensated.
(f) A contingent or profit-sharing commission based on meeting goals related to volume or profit is one way in which independent agents and brokers are typically compensated.
(g) Independent producers, such as independent agents and brokers, often provide risk management advice to their customers.

Statement (a) is false because independent agents are independent contractors, not employees of the insurers they represent.

Statement (c) is false because the agents'/brokers' ownership of policy expirations is clearly stated in most agency contracts; however, even if it is not stated, it may still exist as a matter of custom or law.

Statement (e) is false; typical payments to agents and brokers are typically dependent on the volume of business submitted, and are often dependent on the profitability of such business.

Problem S5-48-2. Which of the following statements about national and regional brokers are true? More than one answer may be correct.

(a) Personal lines insureds are part of the typical target market for national and regional brokers.
(b) Large commercial lines insureds are part of the typical target market for national and regional brokers.
(c) Insureds who desire specialized coverage or a particular type of coverage for multiple locations are part of the typical target market for national and regional brokers.
(d) As compensation, national and regional brokers only receive commissions and no fees.
(e) As compensation, national and regional brokers only receive fees and no commissions.
(f) As compensation, national and regional brokers can receive both commissions and fees.
(g) The compensation received by national and regional brokers is subject to regulation in the various states in which these entities operate.

Solution S5-48-2. This question is based on the discussion in Myhr and Markham, p. 3.9. The following answers are correct:

(b) Large commercial lines insureds are part of the typical target market for national and regional brokers.
(c) Insureds who desire specialized coverage or a particular type of coverage for multiple locations are part of the typical target market for national and regional brokers.
(f) As compensation, national and regional brokers can receive both commissions and fees.
(g) The compensation received by national and regional brokers is subject to regulation in the various states in which these entities operate.

Choices (d) and (e) cannot be correct if (f) is correct. Choice (a) is not correct, because small personal lines insureds typically purchase their insurance directly from the insurer or through independent or exclusive agents, not through brokers.

Problem S5-48-3. Which of the following statements about independent agent networks are true? More than one answer may be correct.

(a) Independent agent networks can operate on a local scale.
(b) Independent agent networks can operate on a national scale.
(c) Independent agent networks typically take over ownership of the member agencies and have a rigorous top-down corporate command structure.
(d) One of the benefits an independent agent network can offer to its members is the generation of additional sales income.
(e) One of the benefits an independent agent network can offer to its members is the reduction in the official number of competitors on the market, leading to higher profits for each remaining competitor.
(f) One of the benefits an independent agent network can offer to its members is expertise in financial planning services.
(g) One of the benefits an independent agent network can offer to its members is the ability for agents to also be brokers with regard to the same insured.

Solution S5-48-3. This question is based on the discussion in Myhr and Markham, p. 3.9. The following answers are correct:

(a) Independent agent networks can operate on a local scale.
(b) Independent agent networks can operate on a national scale.
(d) One of the benefits an independent agent network can offer to its members is the generation of additional sales income.
(f) One of the benefits an independent agent network can offer to its members is expertise in financial planning services.

Choice (c) is not correct, because independent agent networks typically allows agent-members to keep their independence and ownership of their agencies.

Choice (e) is not correct, because independent agent networks do nothing to reduce the number of competitors; instead, they are a means for existing agencies to collaborate with one another.

Choice (g) is not correct, because it would be a conflict of interest for the same individual to serve as an agent (representing an insurer) and a broker (representing an insured) for the same insured - and this is the case irrespective of whether the individual is a member of an agent network.

Problem S5-48-4. Which of the following statements about managing general agents (MGAs) are true? More than one answer may be correct.

(a) MGAs serve as substitutes for producers who sell insurance.
(b) MGAs serve as substitutes for insurers in performing investment and actuarial functions.
(c) MGAs serve as intermediaries between insurers and producers who sell insurance.
(d) An MGA is typically a subsidiary of either an insurer or an insurance producer.
(e) A single MGA most commonly represents several insurers.
(f) MGAs can serve as de facto branch offices for insurers.
(g) MGAs' activities are not regulated in most states.

Solution S5-48-4. This question is based on the discussion in Myhr and Markham, p. 3.10. The following answers are correct:
(c) MGAs serve as intermediaries between insurers and producers who sell insurance.
(e) A single MGA most commonly represents several insurers.
(f) MGAs can serve as de facto branch offices for insurers.

Choices (a) and (b) are not correct; MGAs may perform some of the functions of insurers and producers, but they are typically not substitutes for either. While MGAs do collaborate with insurers on a variety of insurance functions, actuarial and investment functions are typically not among those.

Choice (d) is not correct; MGAs are typically independent firms that contract with insurers and producers.

Choice (g) is not correct; most states regulate MGAs' contracts and activities.

Problem S5-48-5. Which of the following statements about excess and surplus lines (E&S) brokers are true? More than one answer may be correct.

(a) Most states require a reasonable effort to place coverage with an admitted insurer before coverage can be placed through E&S insurers.
(b) Most E&S insurers deal directly with the producer who wants to place coverage with an E&S insurer.
(c) Most E&S insurers deal with the producer who wants to place coverage with an E&S insurer through an intermediary - the E&S broker.
(d) One advantage for producers of using E&S brokers is that E&S brokers have extensive access to excess and surplus lines insurers.
(e) E&S brokers are useful in placing coverage for typical personal lines loss exposures that would also be written in the admitted market.
(f) E&S brokers are useful in placing coverage for loss exposures that require a tailored insurance program.
(g) One of the functions of E&S brokers is to help evaluate the financial security of an E&S insurer.

Solution S5-48-5. This question is based on the discussion in Myhr and Markham, pp. 3.10-3.11. The following answers are correct:

(a) Most states require a reasonable effort to place coverage with an admitted insurer before coverage can be placed through E&S insurers.
(c) Most E&S insurers deal with the producer who wants to place coverage with an E&S insurer through an intermediary - the E&S broker.
(d) One advantage for producers of using E&S brokers is that E&S brokers have extensive access to excess and surplus lines insurers.
(f) E&S brokers are useful in placing coverage for loss exposures that require a tailored insurance program.
(g) One of the functions of E&S brokers is to help evaluate the financial security of an E&S insurer.

Choice (b) cannot be correct if choice (c) is correct. Choice (e) is not correct, because if a coverage can readily be placed on the admitted market, placing it with excess and surplus lines insurers is typically not permitted.

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