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Unfair Claim Practices Laws

These laws are state laws that specify claim practices that are illegal. The prohibited claims practices usually include

· Misrepresentation of pertinent facts or insurance policy provisions relating to the coverage at issue in a claim.

· Failure to acknowledge and promptly respond to communications with respect to the claims arising out of insurance.

· Actions that compelled an insured to sue to recover amounts due under insurance policies by offering amounts that are substantially lower than the amounts ultimately recovered in legal actions brought by such insureds.

· Refusing to pay claim without first conducting reasonable investigation based on all available information.


CHAPTER: 6 CLAIMS

Liability Insurance Claims

Liability Claim handling can be complex for several reasons. In liability claims, the claimant is a third party who has been injured (bodily injury) or whose property has been damaged by the insured. While it is not always easy to determine the amount of loss in the property damage liability claims, the problem becomes even more complex when the loss involves bodily injury or death.

The following points concentrates on the issue of legal responsibility, which lies at the heart of the liability claim handling process: -

Step 1: Investigation

After receiving the first report of injury or damage, the claim representative must gather more detailed information relating to the liability claim. The amount of loss will be relevant only if the loss is covered under the insured’s policy, if the insured is legally responsible for the loss. The claim representative’s initial emphasis must be on determining how much and why the loss have occurred and whether it appears that the insured is responsible.

· Determining how the loss has occurred and assessing the situation

· Verifying Coverage

Step 2: Valuation

When bodily injury is involved, determining the amount of damage often depends on the medical reports and the opinions of the attending physicians. Properly evaluating this medical report is critical in determining the amount of damages and is a distinguished factor in settlement of claims. The evaluation aspect of bodily injury claims requires experience and skill.

Damage refer to a monetary award that one party is required to pay to another who has suffered loss or injury for which first party is legally liable.

Legal liability might involve following type of damages: -

· Compensatory Damage

· Punitive Damage

Compensatory Damage includes both special and general damages that are intended to compensate a victim for harm actually suffered.

Special Damages Specific, out of pocket expenses are known as special damages. In case of bodily injury claims these damages usually include hospital expenses, Doctor and miscellaneous medical expenses, ambulance charges, prescriptions and loss to wages for the time spent away from the job during recovery.

General Damages are compensatory damages awarded for losses such pain and suffering, that do not have a specific economic value.

Punitive Damages are damages awarded by a court to punish wrong doers who, through malicious or outrageous actions, cause injury damage to others.

Step 3 Negotiation and Settlement

While the award for damages might result from court decisions, a very large percentage of liability cases are settled out of court through negotiations between the claim representative and the claimant or the claimant’s attorney. If negotiations do not bring about a settlement, the claimant has option of suing for the alleged damages. The court then decides who is responsible and determines the value of the injury or damage.


CHAPTER: 6 CLAIMS

Step 3: Negotiation and Settlement

After the valuation process is complete, the final part is to arrive at a claim amount which shall be mutually negotiated and settled between the parties to the insurance contract.

The two other factors that can affect insurer’s cost for property claims: -

· Subrogation

· Salvage rights

Subrogation is an insurer’s right to recover payment from a negligent third party. When insurer pays an insured for a loss, the insurer assumes the insured’s right to collect damages from a third party responsible for a loss.

Salvage Rights are the rights of the insurer to recover and sell or otherwise dispose of insured’s property on which the insurer has paid a total loss or a constructive total loss.

Constructive Total Loss exists when a vehicle (or other property) cannot be repaired for less than its actual cash value minus the anticipated salvage value.


CHAPTER: 6 CLAIMS

What is the value of the damaged property?

Once the claim representative has verified coverage and identified the valuation method specified in the policy, the valuation process began. He must use some guidelines to determine both replacement cost and actual cash value. Personal property and real property present different valuation problems.

Personal Property

In case of replacement cost method the claim representative will buy the exact style and brand of the damaged property if the property is not obsolete. If the party no longer available, he identifies the closes substitute in style and quality and uses that substitute’s value as replacement cost. For actual cash value however depreciation must be estimated.

Real Property

The replacement of the real property can be usually determined by using three factors: -

· Square footage of the property

· Quality of construction

· Construction cost per square foot

In case of partially damaged property, the claim representative usually prepares a repair estimate or obtains repair estimates from one or more contractors. Replacing the property when a partial loss had occurred involves restoring the property to its previous state as closely as possible.

For policies specifying Actual Cash Value method, claim representative estimates depreciation of real property using methods similar to those used for estimating depreciation of personal property. In some claims, payment of ACV takes place immediately, and payment of remaining amount takes place once the actual repair or replacement is completed.


CHAPTER: 6 CLAIMS

How does the policy specify that the property be valued?

All property insurance policies include a valuation provision that specifies how to value covered property at the time of loss. The most common property valuation methods are: -

· Actual Cash Value

· Replacement Cost

· Agreed Value

Actual Cash Value is the replacement cost of the property minus depreciation.

Depreciation is the allowance for physical wear and tear or technological or economic obsolescence.

Replacement Cost is the cost to repair or replace the property using new material or like kind and quality with no deduction for depreciation.

Agreed Value is a method of valuing property in which the insurer and the insured agreed on the value of property at that time of policy is written, and that amount is stated in the policy declarations and is the amount the insurer will pay in the event of total loss to the property.

In commercial lines of insurance, in some policies, the term agreed value has a different meaning and relates to the amount of insurance that the insured must carry to avoid a penalty for underinsurance.


CHAPTER: 6 CLAIMS

Property Insurance Claims

Step 1: Investigation

When a claim representative receives the initial report of a claim, he or she must investigate to gather further information relevant to the loss. This investigation is necessary to determine the cause of loss, to assess the damage, and to verify the coverage.

Determining the cause of loss and assessing damage

For a property insurance claim investigation involves visiting the site to inspect the damaged property in determining the cause of loss and assessing the damage occurred. Investigation must reveal sufficient information to verify whether the coverage exists under the policy and the physical condition of the property before the loss occurred. Assessing damages involve such activities as valuation of the property damaged by verifying the market value, bills of purchase, other books of records, etc., as required on a case-to-case basis.

Verifying Coverage

In addition to determining the facts surrounding the loss the claim representative must determine the coverage provided by the policy will pay any or all claims submitted.

Following are the checklist of questions which forms part of verifying the coverage: -

· Does insured has an insurable interest in the property?

· Is damaged property covered under the policy?

· Is the cause of loss covered under the policy?

· Do any additional coverages, endorsements or limitations on coverage apply?

Step 2: Valuation

For a claim representative the valuation of loss can be most difficult aspect of settling property insurance claims. In order to indemnify the insured according to the policy provisions, the claim representative must be able to answer two questions: -

· How does the policy specify that the property be valued?

· Based on that specification, what is the value of the damaged property?


CHAPTER: 6 CLAIMS

Internal Claim Administration

Many organizations have developed self insurance plans to cover part or all of the loss exposure. This involves handling of the claim through establishing an internal claim department or by hiring third party administrator.

A Self Insurance Plan is an arrangement in which an organization pays for its losses with its own resources rather than purchase an insurance. However, organization might choose to purchase insurance for losses that exceed a certain limit.

Internal Claim Departments

If an organization is large enough, it might establish separate claims department who possess skills and experience to handle many different types of claims. However, for certain classes of insurance like Workmen Compensation, Product Liability, etc., such companies will resort to professionals.

Third Party Administrators

The growth of self insurance plans has created a need for third party administrators who agree to provide administrative services to other businesses that have self insurance plan in handling their claims. Large independent adjusting firms sometimes function as TPAs for self insured business in addition to providing independent claims handling services to the insurers.

Claim Handling Process

The claim handling procedures can vary widely depending on the type of claim involved. In case of liability claims it takes years to settle and in case of property claims it might take few months to settle despite the unique challenges and variations in case to case.

There are three steps that are involved in processing most claims: -

· Investigation

· Valuation

· Negotiation and Settlement.

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Types of Claim Representatives

Several different types of people participate in claim handling, depending on the circumstances. They are: -

· Staff Claim Representatives (inside and outside)

· Independent Adjusters

· Agents

· Public Adjusters


Staff Claim Representatives

A Staff Claim Representative in an insurance company performs some or all of the insurance claim handling activities.

An inside claim representative is an employee who handles claims that can be settled, usually by telephone or letter, from inside the insurer’s office. They handle claims that are clearly either covered or not covered and that do not involve questions about the circumstances or validity of the claim. If a third party is involved the inside claim representative might use a tape recorder to take statements about the loss from the insured, the claimant and any witness after obtaining their permission to tape their statements.

An Outside claim representative (field claim representative) is an insurance company employee who handles claims that cannot be handled easily by phone or mail. They spend much of their time visiting the scene of loss, intervene witnesses, investigating damage and meeting with the insureds, claimants, attorneys, and other persons involved in the claim.

Independent Adjusters

They are independent claim representatives who offer claim handling services to insurance companies for a fee. These independent adjusters can be either self employed or work for an independent adjusting firm.

Agents

An agency usually receives the first notification of a claim. Depending upon the size of the office, the agency can have one person, several people or a department responsible for handling claims.

If an agent has a draft authority, he or she might actually settle claims.

Draft Authority is an authority expressly given to an agent by an insurer to settle or pay certain type of claims by writing a claim draft upto a specified limit.

A Draft is similar to a check, but it requires approval from insurance company before the bank will pay it.

Draft Authority is given to agents because insurance companies have found that allowing agents to handle small or routine claims results in both expense saving and increased goodwill. Since agent is a person who gets all the relevant information about the claim the delay and expenses involved in contacting the insurance claim staff are eliminated. This results in reduction in the claim handling expenses both by the agent and the insurer and it contributes to more competitively priced product.

Public Adjusters

A public adjuster is a person hired by the insured to represent the insured in handling a claim. Usually insured hires a public adjuster either because of claim is complex in nature or because of loss negotiation are not progressing satisfactorily.


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Responsibilities of the Claim Representative

The adjuster or the claim representative has the following responsibilities in the processing of a claim which are as under: -

· To respond promptly to the submitted claim

· To obtain adequate information

· To properly evaluate the claim

· To treat all parties fairly.

Respond Promptly to the Submitted Claim

When a claim is reported, the claim representative need to respond to the claimant and guide him in a manner which shall facilitate claims process. He should empathically, that in the event of a claim, the loss experience might have been painful, frustrating, agonizing, or even embarrassing.

Obtain Adequate Information

Next in the process is to obtain adequate information pertaining to the claim to enable its processing. A claim representative must verify whether the claim is covered under the insured’s policy. If a question of coverage exists and insurer wishes to investigate, then a reservation of rights letter might be sent to the insured.

A reservation of rights letter is a notice sent by the insurer to an insured advising that the insurer is proceeding with investigation of a claim but that the insurer retains its right to deny coverage later.

A reservation of rights letter serves two purposes:

· To inform the insured that a coverage problem might exist

· To protect the insurer so that it can deny coverage later, if necessary.

Properly Evaluate the Claim

Valid and accurate information enables the claim representative to evaluate the claim. This evaluation hinges on two critical elements of the claim handling process:

· Whether the claim is covered according to policy provisions

· If the claim is covered, the dollar amount payable under the policy.

Treat All Parties Fairly

Throughout the claim handling process, the claim representative must remember that a loss often produces strong emotions. Hence, he should ensure that those losses which are covered as per the policy provisions are promptly and quickly paid and vice versa.


CHAPTER: 6 CLAIMS

CLAIMS

For insurance purposes, a claim is a demand by a person or business seeking to recover from an insurance company for a loss that might be covered by an insurance policy.

A claim representative, also called an adjuster, is a person responsible for investigating, evaluating and settling claims.

A claimant is anyone who submits a claim to an insurance company. In some cases, particularly in liability claims, the claimant is a third party that has suffered a loss and seeks to collect for that loss from an insured. In other cases, particularly in property claims, the claimant is the insured (the first party).

The first party to an insurance contract is the insured. (Although the second party is technically the insurer, the term second party I rarely used in insurance).

A third party to an insurance contract is a person or business that is not a party to the contract but who might assert a claim against the insured.

Insurance professionals generally use the term claimant to refer to a third party who submits a claim under an insured’s property. This text uses the term claimant to refer to a third-party claimant.


CHAPTER: 6 CLAIMS

Evaluating Underwriting Options

In evaluating each application, an underwriter faces three options:

· Accept the application without modification

· Reject the application

· Accept the application with modifications.

And finally implementing the Underwriting Decision.

The third option requires the greatest amount of underwriting creativity. This can happen by modification of coverage, rates, terms, conditions of the policy, by arranging adequate reinsurance facility, implementation of loss control measures, etc.,

Monitoring the Underwriting Decision

Monitoring of the Underwriting Decision involves: -

· Reevaluation of decision in relation to claims – The fact that an insured has a serious loss or several losses is not necessarily an indication that the underwriter made a bad decision.

· Recommendation of additional loss control measures.

· Where there is a request for coverage changes underwriter must carefully evaluate each and every change and should make a decision.

· Modifying coverage, rate, terms and conditions as and when need arises.

· Finally cancel or rejection of renewal depending upon the experience on the particular account.

Regulation of Underwriting Activity

Two important examples of the regulation of underwriting activity are:

· Prohibition of unfair discrimination

· Restrictions on cancellation and non renewal

Prohibition of Unfair Discrimination

Unfair discrimination involves applying different standards or methods of treatment to insureds who have the same basic characteristics and loss potential.

According to state insurance laws, unfair discrimination is prohibited as an unfair trade practice.

Restrictions on Cancellation and Non-renewal

Most state requires that insurers notify the insured a specified period (such as thirty days) before a policy is to be cancelled or non-renewed.

This notice is intended to give the insured an opportunity to replace the coverage.

Generally, restrictions of this kind help insurance to serve its purpose of providing protection for policyholders.

However, such restrictions also limit the speed with which an underwriter can stop providing coverage for an insured who has become undesirable.

CHAPTER 5 : UNDERWRITING

Making the Underwriting Decision /Hazards

To make an underwriting decision, the underwriter should gather and analyze information to determine what hazards the applicant presents.

Hazards are condition that increase the chance of a loss occurring.

Analyzing Hazards

An underwriter must evaluate four categories of hazards:

· Physical hazards

· Moral hazards

· Morale (attitudinal) hazards

· Legal hazards

Physical Hazards are tangible characteristics of property, persons, or operations that tend to increase the probable frequency or severity of loss.

Moral Hazards are dishonest tendencies in the character of the insured (or applicant) that increase the probability of a loss occurring.

Morale Hazards (also known as attitudinal hazards) involve carelessness about, or indifference to potential loss on the part of an insured or an applicant.

Legal Hazards are characteristics of the legal or regulatory environment that affect an insurer’s ability to collect a premium commensurate with the exposure to loss.

Hazards in a legal environment might include court decisions that interpret policy language in a way unfavorable to insurers.


CHAPTER 5 : UNDERWRITING

Gathering Underwriting information

Underwriting Information forms parts of the important element based on which underwriters make decisions. Underwriters derive information from several sources: -

· Producers – may supply additional information such as a personal evaluation of the applicant.

· Consumer investigation reports – Several independent reporting services investigate and provide background information on prospective insureds.

· Government records – such as Motor Vehicle Records, court records and public information also provide underwriting information.

· Financial rating services – There are firms involved in Credit rating business and provide such relevant information.

· Inspection reports – Loss control representatives of insurance company inspect the premises and operations of insurance applicants.

· Field marketing personnel – Field personnel often provide additional insights to the underwriters based on their personal observation.

· Claim files – Claim files maintained by insurance companies also provides valuable information in forming decisions as to renewal of insurance.

· Production records – The record of the producer who brings in business also gives information, which affects decision making.

· Premium audit reports – A premium auditor provides such information as whether the premium charged is adequate, etc., after examining insured’s book of records.

· Applicant’s or insured’s records – Valuable information can also be sought from insured’s records, appraisals, bills of sale, balance sheet and income statement.


CHAPTER 5 : UNDERWRITING

Delegating Underwriting Authority

An underwriting authority is the limit on decisions that an underwriter can make without receiving approval from someone at a higher level. The amount of authority given to each underwriter usually reflects the underwriter’s experience, the job title and responsibilities, and type of insurance handled. With some insurers underwriting authority is highly decentralized i.e., Underwriting Management delegates extensive underwriting authority to the personnel in the field offices. Other insurers are highly centralized with many or all final underwriting decisions are being made in the home office.

Many insurance companies also grant some underwriting authority to the agents who represent the company called frontline underwriters, these agents make the initial decisions regarding applications and then forward to the company underwriter those applications that meet underwriting guidelines.

Making and enforcing Underwriting Guidelines

Underwriting Management develops the guidelines that line underwriter’s views in underwriting process. Underwriting guidelines and bulletins explain how underwriter should approach each application. The guidelines list the factors that should be considered by the underwriter for each type of insurance, desirable and undesirable characteristics of applicants relative to those factors, the insurance company’s overall attitude towards the applicants that exhibit those characteristics.

Monitoring the results of underwriting guidelines


Monitoring the results of Underwriting Guidelines includes taking steps to ensure that the underwriters are following guidelines in that underwriting objectives are being met. If the guidelines are not followed there is no evidence as to whether they will work. An underwriting audit attempts to determine whether underwriters are following the guidelines. If the guidelines are being followed it is necessary to determine whether they are having the desired results.

The Underwriting Process

An underwriting decision must be made on every new insurance application as well as on the renewal policies. The Underwriting process comprises the following steps: -

· Gathering the necessary information

· Making the Underwriting Decision

· Implementing the Decision

· Monitoring the decision


CHAPTER 5 : UNDERWRITING

Underwriting Management

The role of insurance company’s underwriting management involves various responsibilities: -

· Participating in the overall management of the insurance company

· Arranging Reinsurance

· Delegating underwriting authority

· Making and enforcing underwriting guidelines

· Monitoring the results of the underwriting guidelines

Participating in Insurance Company Management

The head of insurance underwriting department participates with other members of the insurance top management team in making broad business decisions regarding the company’s objectives and how it plans to meet those objectives. Given a top management consensus on the insurer’s broad goals and how its capacity should be allocated, underwriting management must decide how underwriting activities can contribute to these goals.

Arranging Reinsurance

Another aspect of Underwriting Management is arranging reinsurance. There are two broad categories of reinsurance i.e., Treaty Reinsurance and Facultative Reinsurance.

Treaty Reinsurance

It is an arrangement whereby an reinsurer agrees to reinsure automatically a portion of all the eligible insurance of the primary insurer. There is no individual selection of policies. Treaty requires that primary insurer is required to reinsure and reinsurer must accept all the business covered by the treaty.

Facultative Reinsurance

This involves a separate transaction for each reinsurance policy and it is not an automatic binding between the primary insurer and the reinsurer that is the reinsurer evaluates individually each policy that is asked to reinsure.


CHAPTER 5 : UNDERWRITING

Determining Policy Terms and Conditions

Selection and Pricing are intertwined with the third underwriting activity – determining policy terms and conditions. The insurer must decide what type of coverage it will provide to each applicant and then charge a premium appropriate to that coverage. Insurance Advisory Organizations develop policy forms using standard insurance wording. These policy forms are referred as standard forms that contains standardized policy wordings. Some insurers develop their own standard forms that they use in policies for their insureds.

Monitoring Underwriting Decisions

Underwriters periodically monitor the hazards, loss experience, and other conditions of specific insureds to determine whether any significant changes have occurred. Since underwriting decisions involve an assessment of loss potential, hazards and other conditions must be reviewed periodically.

Monitoring also applies to underwriting decisions on entire book of business. A book of business also called as portfolio can refer to all policies in a particular territory or to all policies providing a particular type of insurance business. A book of business can also refer to all policies of an insurance company or agency or as a whole.

CHAPTER 5 : UNDERWRITING

Type of Rates

In determining the appropriate premium to charge for coverage, insurers use either class rates or individual rates.

Class Rates

They are also called manual rates or rates that apply to all insureds in the same rating category or rating class. Insureds with similar loss exposure are grouped into similar rating classes.

Class Rates have traditionally been published in rating manuals – books used by underwriters, raters and producers in pricing individual policies. Many insureds within a rating class have loss characteristics that might not be fully reflected in Class Rate.

Merit Rating Plans modify class rates to reflect these characteristics. Merit Rating serves two purposes: -

· It enables the insurer to fine tune the class rate to reflect certain identifiable characteristic of a given insured.

· It encourages loss control activity by rewarding safety conscious insureds with lower premium or rate than those who do not participate in loss control.

Individual Rates

Individual Rates are also called Specific rates are used for commercial property insurance on unique structures. The rate is developed only after detailed inspection of the structure and its contents. Each Individual Rates reflects characteristics such as building construction, its occupancy, public and private fire protection and external exposure.

Judgment Rates

It is a type of individual rate is used to develop a premium for a unique exposure for which there is no established rate. With judgment rating, the underwriter relies heavily on his or her experience.


CHAPTER 5 : UNDERWRITING

Adverse Selection Considerations

Adverse Selection is a situation that occurs because people with greatest possibility of losses are the ones most likely to purchase insurance. Adverse Selection normally occurs if the premium is low related to the loss exposure.

Capacity Considerations

Capacity refers to the amount of business an insurer is able to write usually based on the comparison of the insurer’s written premium to the size of the policyholder’s surplus. An insurer must have adequate policyholder surplus to be able to increase in the volume of insurance it writes.

Insurers attempt to protect their available capacity in three primary ways: -

· Maintaining a spread of risk

· Optimizing the use of available resources

· Arranging Re-insurance

Maintaining a spread of risk

Since every insurer has limited capacity insurance companies must allocate their available capacity. By spreading their risk among various type of insurance and different geographical areas, insurance companies reduce the chances that overall underwriting results will be adversely affected by large number of losses in one type of insurance or one territory.

Insurance companies allocate capacity by setting limitations on the amount of insurance they write for any one insured.

Optimizing use of available resources

Various resources of an insurance company shall include financial resources, physical resources such as building, office equipment and human resources which include underwriters, claim representatives, producers and service personnel.


Optimizing use of available resources means that an insurance company shall use all its resources to make a profit from the line of business which it specializes. For instance, an insurance company will not generally write farm business from applicants who have little or nil experience in the same because of non availability of expertise towards intricacies of the business.

Arranging Reinsurance

Reinsurance is a contractual agreement whereby one insurer, the primary insurer, transfers some or all of the loss exposures from policies written for its insureds to another insurer, the reinsurer.

If the reinsurance is readily available, insurance company can increase the number of new policies they write by transferring some of the premiums and loss exposures to the reinsurers. Thus the availability of reinsurance can affect an insurance company’s to write business.

Pricing Coverage

The Underwriting pricing objective is to charge a premium that is commensurate with the exposure. Commensurate means showing an appropriate relationship. A premium is commensurate with the exposure when the appropriate relationship exist between the size of the premium and exposure assumed by the insurer.

Premium Determination

Rate is a price of insurance charged per exposure unit, and an exposure unit is a measure of loss potential used in rating insurance. The premium is determined by multiplying the rate by number of exposure units.


CHAPTER 5 : UNDERWRITING

UNDERWRITING

Underwriting is the process of insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made.


An Underwriter is an insurance company employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage and determines policy terms and conditions.

Underwriting Activities

Underwriting includes the following activities: -

· Selecting insureds

· Pricing Coverage

· Determining Policy terms and conditions

· Monitoring Underwriting Decisions


Selecting Insureds

Insurers must carefully screen applicants to determine which one is desirable to insure. If insurers do not properly select policyholders and price coverages, some insureds might be able to purchase insurance at prices that do not adequately reflect their loss exposures. The underwriting selection process is not limited to the underwriters but also include producers and underwriting managers. Insurance company receives applications, but not all applications result in issuance of policies. An insurance company cannot accept all applicants for two basic reasons: -

· The insurer can succeed only if he selects applicants who are as a group present loss exposure that are proportionate to the premiums that will be collected. In other words, insurers try to avoid adverse selection.

An insurer’s ability to provide insurance is limited by its capacity to write new policies.

CHAPTER 5 : UNDERWRITING

Regulation of Insurance Producers

Licensing Laws

To function legally as an insurance agent, a producer must be licensed by state or states in which he or she wishes to sell insurance. These laws vary by state and change periodically. Some states have several different licenses including license for agents, brokers and solicitors.

Some states such as California, has separate license for solicitors who work for and are representatives of agents or brokers, often has office employees, and who have more limited authority than agents. Generally, solicitors can solicit prospects but cannot bind insurance coverage. In other states, the solicitors are often called customer service representatives or customer service agents who must secure an agent’s license.


Licensed producers are required to adhere to all laws regulating insurance sales in the state or states in which they conduct insurance business.


Unfair Trade Practices Laws

These are State Laws that specify certain prohibited business practices. These laws typically prohibit various unfair trade practices such as


· Misrepresentation and false advertising

· Tie-in-Sales

· Rebating

· Other deceptive practices

Misrepresentation and false advertising

It is an unfair trade practice for insurance agents to make issue or circulate information that does any of the following: -

· Misrepresents the benefits, advantages, conditions or terms of any insurance policy.

· Misrepresents the dividends to be received on any insurance policy.

· Makes false or misleading statements about dividends previously paid on any insurance policy.

· Uses a name or title of insurance policies that misrepresents the true nature of policies.


Tie – In – Sales

It is unfair trade practice for a producer to require that the purchase of insurance be tied to some other sale or financial arrangement, i.e., a practice referred to as tie – in – sales.

Rebating

Rebating is offering anything other than the insurance itself to an applicant as an inducement to buy or maintain insurance.

Other deceptive practices

Other than above, unfair trade practices laws prohibit other practices of insurers that are deceptive or unfair to applicants and insureds like prohibiting an insurer and its agents from making a false statement about the financial condition of another insurer.

It is also an unfair trade practice, to put false information on an insurance application to earn a commission from an insurance sale.

CHAPTER 4 - MARKETING

Compensation of Producers

While some producers receive a salary, commissions provide the primary form of compensation for producers. Two types of commissions that producers typically earn are sales commissions and contingent commissions.

Sales Commission (or simply a commission) is a percentage of the premium that insurer pays to the agency or producer for the new policies sold or existing policies renewed.

The commission compensates the agency not only for making the sale but also for providing service before and after the sale. Service provided before the sale includes locating and screening the insurance prospects, conducting a successful sales solicitation, getting the necessary information to complete an application, preparing a submission to the insurance company and presenting a proposal to the prospect. To make a sale, an agent must also evaluate the prospects’ needs and recommend appropriate coverage for the client to sell it. After the sale, the agent often handles the paper work that accompanies policy changes, billing and claim handling among other things. While the policy is getting to be renewed, the agency must again analyze the coverage needs and consider any changes in the insurance coverage.

Contingent Commissions

In addition to the commissions based on a percentage of premiums, many agencies receive a contingent commission referred to as profit sharing. It is a commission that an insurer pays usually annually to an independent agency that is based on the premium volume and profitability level of the agency business with that insurer.

Marketing Management

An important function of marketing management is monitoring agency sales and underwriting sales to ensure that both the company’s and agency’s sales and profit objectives are met.


Producer Supervision

As insurance selling is a one to one activity that often occurs in the producer’s office and insurance companies do supervise their producers by using independent agents typically known as marketing representatives who visit the independent agents representing the company. They are employees of the insurer whose role is to visit agents representing the insurer, to develop and maintain sound marketing relationships with those agents, and to motivate the agents to produce a satisfactory volume of profitable business to the insurer.

Production Underwriters are insurance company’s employees who work in an insurer’s office in an underwriting position but also travel to visit and maintain rapport with agents and sometimes clients.

Producer Motivation

Insurance companies need to motivate their producers to sell the types of insurance the companies wants to sell. Motivation comes from the programs developed in the home office by way of financial incentives that producers receive for selling of insurance products. Different ways of motivation is payment of contingent commissions, Sales contest, awards, remunerations, holiday trips, etc.,

Product Management and Development

Insurance Production is most successful when producers have a desirable product to sell at a competitive price. Usually, Insurance Company’s marketing department strives to give producers the products and the pricing they need. As the producers are involved in the sales are often first to identify a need that could be addressed by either a new policy or modifications of an existing policy as they are actually aware of the competition in the market they recommend to the marketing department regarding the product management and development.

CHAPTER 4 - MARKETING

Differences Among Traditional Insurance Marketing System

Type of marketing

What company or companies do the producer represent

Does the insurer employ the producers?

How are producers usually Compensated?

Does the Agency or Agent own the Expiration List?

What methods of sales are usually used?

Independent Agency System

Usually more than one insurer

No. The producers are employed by the agency

Sales commissions and contingent commissions

Usually Yes.

Personal Contact, Phone or internet.

Exclusive Agency System

Usually one insurer or group of related insurers

Usually No. However some producers begin as employees.

Sales Commissions and Bonus

Usually No. But the agency contract might provide for the agent’s right to sell the list to the insurer.

Personal contact, Phone or internet

Direct Writing System

Only the producer’s employer

Yes.

Salary, bonus, commissions or combinations

No.

Personal contact, Phone or internet

Direct Response System

Only the producer’s employer

Yes.

Salary

No.

Mail, Phone or internet

CHAPTER 4 - MARKETING

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