Insurance Marketing Systems

Most Insurers use one or more of the following traditional marketing systems: -

· Independent Agency System

· Exclusive Agency System

· Direct writing System

· Direct Response System

Independent Agency System An independent agency is an independent firm that sells insurance usually as a representative of several unrelated insurance companies. As an exception to the foregoing, some independent agents agree to place all or most of their business with one insurance company.

Independent Agent is a producer who works for an independent agency.

One of the main distinguished features between independent agency system and other marketing systems ownership of the agency expiration list which is the record of present policy holders, the dates that policies expire (owning the expiration means, the agency expiration list of an independent agency belongs to the agency and gives the agency the right to solicit those policy holder for insurance).

Brokers An insurance broker is an independent business owner or firm that represents customers rather than insurers. Brokers shop among insurance companies to find the best coverage or value for their clients. The Brokers are not legal representatives of the Insurer, or not likely to have authority to commit the insurer by binding coverages unlike agents who generally have binding authority.

Managing General Agencies (MGAs)

A Managing General Agency is an independent business organization that appoints and supervises independent agents for insurance companies that use the independent agency system. The MGA functions almost as a branch office for one or more insurance companies. They receive managerial commission often referred as override, which is the percentage of premium or the profits on policies, sold by producers placing business with the insurance company through the MGA.

Exclusive Agency System

An Exclusive agent is an agent that has a contract to sell insurance exclusively for one insurance company or a group of related companies. Usually, the agency contract entered into between the Insurer and the agent contains an agreement that, upon termination of agency contract the insurance company will by the expiration list from the exclusive agent. But in certain cases, an exclusive agent owns the list and has a right to sell it to another party also.

Direct Writing System

The direct writing system of an insurance marketing uses sales representatives who are employees of the insurance company.

A direct writer is an insurer that uses the direct writing system to market insurance. Such sales representatives are paid commission as well as office expenses. In this system, expiration does not belong to the sales representative and is exactly owned by the insurance company only.

Direct Response System

A direct response system includes any insurance marketing system that does not depend primarily on individual producers to locate customers and sell insurance but relays primarily on mail, phone and internet sales.

Mixed Marketing System
This is a system which refers to the use by the insurer of more than one marketing system.

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Authority of Agents

Insurance agents generally have three types of authorities to transact business on behalf of the insurers: -

· Express Authority

· Implied Authority

· Apparent Authority

Express Authority is the authority that the principal specifically grants to the agent to sell the insurance company’s product or that the agent has the authority to bind coverage upto a specified limit. Binding authority is generally granted to the agent in the agency contract and thus is a form of express authority.

Binding Authority is a power to make insurance coverage effective on behalf of the insurer; binding coverage is usually accomplished by issuing binders.

A Binder, which can be either written or oral, is a temporary contract between the insurance company and the insured that makes insurance coverage effective.

Implied Authority is the authority that arises from actions of the agent that are in accord with the accepted custom and that are considered to be within the scope of authority granted by the principal, eventhough such authority is not expressly granted orally or in agency contract.

Apparent Authority is the authority based on the Third Party’s reasonable belief that an agent has authority to act on behalf of the Principal.

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Responsibilities of an Agent and the Principal

The agency relationship, which is based on the mutual trust and confidence, empowers the agent to act on behalf of the principal and imposes significant responsibilities on both the parties.

Responsibilities of the Agent to the Principal

In an agency relationship, the agent’s fundamental responsibility is to act on benefit of the principal. The laws of agency impose five specific duties on all agents: -

· Loyalty

· Obedience

· Reasonable Care

· Accounting

· Relaying Information

Responsibilities of the Principal to the Agent

The Principal’s primary duty is to pay the agent for the services performed. The principal also has a duty to indemnify the agents for any losses or damages suffered without the agent’s fault but arising out of agent’s acts on behalf of the principal. An important factor involved in this duty is exposure of insurance agents to errors and omissions claims, which might arise from agent’s negligent action.

Errors and Omissions are negligent acts committed by a person in the conduct of insurance business that give rise to legal liability for damages. E & O Claims can also arise from the failure to act that creates a legal liability.
Responsibilities of an Agent and the Principal to Third Parties

An agency relationship also creates responsibilities to the Third Parties. The agent’s authorized acts on behalf of the principal legally obligate the principal to Third Parties in the same way as if the principal acted alone.

Thus from insured point of view, little distinction exists between insurance agent and insurance company. The Law presumes that knowledge acquired by the agent is the knowledge acquired by the insurance company. According to the agency law, the fact that the agent knew about the exposure means that the insurer is presumed to know about it.

CHAPTER 4 - MARKETING