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CII 930 Advanced Insurance Broking; Part 1

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consolidator
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have built large business from the acquisition of many small firms (i.e. brokers that tend to focus on serving other SME’s)
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broker network
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– alternative source of different services – by formal alliances – to share best practice, mutual support, – share investment cost in developing IT, web platforms, compliance solutions etc.
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market cycle
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swing of market between hard and soft market
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purchasing power parity
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takes account of the real price of items and baskets of items in an economy
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churn
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– churn is a measure of customer or employee attrition (turning around) – excessive broker competition my lead to churn – it is more expensive to maintain current business/accounts and to generate new. Cost of churn more heavily on the broker
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(price) comparison sites
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manly in use for personal lines business
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aldermanbury declaration
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– commitment to meet standards of professionalism – these standards will improve the insurance sector – brokers publicly commit to these standards – build public confidence
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hard market
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more demand of capacity than supply
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soft market
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more supply of capacity than demand
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recession
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a period of 2 or more consecutive quarters when the economy shrinks
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chartered status
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– sharpens competitive edge – enhance business performance – promote regulatory compliance – attract talent – evidence of professional status
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London Insurance Market key figures
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3,800 brokers 80% of total premium 8% direct 4% tied agents 2% inhouse broker 2% other 2% banks £30bn net premium domestic UK (plus 4bn Lloyds) 10bn Motor 8bn property 4.5bn A&H 3.3bn GL 2.7 Misc 2bn marine £25bn foreign business
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SME
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companies with turnover less than £15m
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role of the broker
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– understand the client’s business and its risk and insurance needs – designing and sourcing most appropriate insurance cover – explaining options and giving reason for advice – negotiating cost, cover and other terms to meet client needs – executing the client’s instructions – explaining the needs and behaviour of the markets to the clients – maintaining market relationships – assisting in the negotiation of claims – providing admin support
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forces behind consolidation
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– strong growth in previous period – cosy or weak management – need to increase efficiency and profitability through savings (head count reduction) – increased buying power – provide firm base for expansion into other sectors – acquisitions as a faster route to growth in revenue and profits
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new forces behind consolidation
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– cheap money / debt finance – insurers that favour consolidators by providing higher commission rate – succession problem of many small brokers – emergence of entrepreneurial leaders in small broker firms
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broker associations
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BIBA (2000 firms) LIIBA London IIB (1,100 smaller firms) SIBA Switzerland
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distribution cost
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all the cost an insurer incurs in distributing its products, eg. – commission – branch network staff cost – support of distribution channel – advert and marketing cost
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MGA
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– origin in US – known as binding authority in UK – insurer delegates underwriting and/or claims authority to a third party – insurer to enter a market without own infrastructure – reinsurer use MGA to access direct insurer markets – MGA is more efficient if volume is still small – no need for MGA of full insurance licence – brokers earn extra income with MGA and exclusive distribution of a product- – remuneration of MGA maybe tied to combined ratio targets – alternatives: scheme or panel of insurers
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direct insurers
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non standard risks
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– risks that fall outside the 90/10 rule – e.g. households with value >£50k; motorists with driving convictions – no offer for non-standard risks in direct market – this is market for brokers
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broking strategy
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– insurers request from brokers a portfolio of £100k to £250k premium to provide service – many insurers are selective with which broker they deal with – brokers select insurers that offer more commission and service (not only best terms for clients) – dealing with fewer insurers increases efficiency and decreases distribution complexity – join a broker network (increase commission, better service) – use wholesaler – set up MGA
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roll over deals
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– a broker movers entire portfolio from one to another insurer to get better broking terms – insurer increases market share and operational efficiency – reduction of competition – portfolios come as fast as the go again…
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distribution complexity
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different needs and distribution methods to cater for due to – comparison websites – direct insurers – diversified brokers, aggregators, consolidators, MGAs – insurers being selective wrt brokers
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auto rating
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production of quotes from IT-based system with minimal data, perhaps sourced from 3rd parties
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price proximation
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means a standard margin of the best prices of +/- 10-20%
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tripartite relationship
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insured – broker – insurer – broker has a paramount duty to the insured not the insurer – broker my serve anonymous market data to insurers
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rules of engagement with insurer
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– make insurer aware of client expecations – advise insurer if account is remarketed – maybe give incumbent insurer right of last call – limits of feedback to incumbent insurer – make sure deadlines are understood
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comparison websites
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– approx 17 in UK – no common standards – comparison only on price not on content – sometimes owned by the seller of compared products – these sites increase distribution complexity for insurers
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information needed to support a broking strategy
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– good database of current clients, eg SIC codes, key risk information, claims data last 3 years – understanding insurers performance towards broker – understanding of broker’s account profitability
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example of broker strategy for larger firm
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– Micro SME: auto rating, MGA, decline non standard risks – SME: MGA or panel of insurers – Medium: faclities and panel, need portfolio underwriting – upper medium: open market, defined criteria, standard term – large and global: open market, wording criteria – PA: broker facility – Excess PL: preferred online services
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example of broker strategy for smaller firm
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– Micro SME: single insurer with internet facility, no mktg – Small: panel of four insurers – private motor: facilities – HNWI: limited binder, service criteria – Medium: open market
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Insurer review meeting
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– business bound, quoted not bound, not quoted – future renewals, re-marketing accounts – new business, upcoming submissions – service issues – claims – developments at insurer and at broker – market cycle – marketing campaigns, support and funding – market research by broker
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executive director
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– agents appointed by the shareholders to look after the interests of the company – work full-time in the company – have a management responsibility
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non-executive director
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– part-time appointments selected for their expertise – attend board meetings – run sub-committees e.g. risk, audit, remuneration – independent view – they assist the executive directors
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joint stock company
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– structure of investment by individuals whose liability is limited to the value of their share
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function of the board
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– board meetings on monthly basis – review strategy – take resolutions, strategic decisions – appoint, assess and dismiss officers (CEO, etc)
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organisational structure
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– traditional hierarchical structure – matrix organisation – delayered flat hierarchies – centralised, decentralised, empowered, BPR, TQM
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segmentation
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identification of similar client groups in the market with similar behaviour and qualities. Match these clients’ segment needs with similar products and processes. criteria: – is segment large, defined, accessible, viable, profitable enough – competition, growing, shrinking, niche – location, virtual, distribution channels – special expertise, resources required
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practice structure
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staff working in a organisational structure and at the same time in a practice which cut across traditional structures and that may be organised to serve a special client segment. – similiar challenges like in matrix structure
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matrix structure
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is where conventional hierarchical structure is in place but individuals have additional functional tasks
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claims advocacy
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derived from the law of agency, the broker has a duty to serve clients in claims irrespective when a claim is made or whether teh insured is still a client of the broker roles: – full claims service, broker negotiates claims with insurer – claims principal role – consultative or advocate: notification and support – added value: advice, claim reports, – postbox claims service – no role
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business strategy
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brokers – grow business organically – target new customer groups – grow through specialisation – grow by acquisition and mergers use SWOT and PEST
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management accounts
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separate P&L can be used to drive a segment-wide approach to high quality service
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criteria for claims support
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– who pays – quality of insurers’ claims service – clients’ expectation
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first notification of loss FNOL
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insurers opened call centres to deal quickly with the FNOL
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job of the most senior manager
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– get the strategy right – select the right people, senior team – robust execution, quality, efficiency – watch the cash – keep it simple and focused no business can survive, if it needs a genius to to manage it
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Organisation of broker firms
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– need understanding of clients’ needs – strategy easy to understand and implemented – highly skilled staff, incentives – offer progressive careers – division of the business in sales, customer service, new business, consulting, broking, specialist broking, back office – LoB, private, commercial, industrial – outsourcing and off-shoring – niche specialists, pure reinsurance, consolidators, UK-only, large global, wholesale, ecommerce, – key account manager, technicians – geography, locations
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management reporting
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– financial: budget, revenue, cost, debtors, cashflow – business targets: clients won, lost, new biz pipeline, retention ratio, hit rate new business, internal audit complaints – stakeholders: staff turnover, staff feedback, client survey, insurer rating, clients at risk
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core competency
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non-core competencies may be cleaning, call centres, IT support, accounting, pay-roll and other back-office functions
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outsourcing (+/- and challenges *)
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contracting out of a service or a function that was previously performed in house by own staff + outsource co’s work for less money + focus on core competencies + gain benefits from specialisation – loss of managerial control – loss of “hey Jo” support – hidden cost * threat to IP and confidentiality * quality * credit risk, solvency of outsourcing partner * bad publicity * client relationship
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off-shoring
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outsourced function “overseas”, outside of own country usually in low labour cost; off-shoring includes outsourcing to a second and to a third party.
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project management, keys to success
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– needs of the business (aligned with vision, review bus processes..) – planning (scope and req’s, measure of success, pragmatism) – management – implementation – solutions
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buying styles
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insurance purchase can be – a distress purchase, because it is mandatory – concious risk transfer action – based on lowest price – considering long-term relationship
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hygiene factors
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business relationships
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My objective is to become regarded as a trusted advisor with whom the client can discuss business issues. good relationships cause / lead to – reduced cost (knowledge how the clients ticks) – better returns for the broker – more cross selling – better retention rates, clients may even pay higher fee if service is good – improved problem solving, identify and deal with problems before they get serious – more referrals (most cost effective source of new business)
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defining excellent service, broker services include
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– advice on insurance and market developments – detailed knowledge of markets – negotiation with insurers – checking policies and documentation – collecting premium – assisting in claims negotiations – agenda the renewal, year cycle
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client TOBA’s
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TOBA are good practice and describe scope and standard of services that the broker will offer. For larger clients there are separate SLA. TOBA inlcude: services provided, disclaimer for insurer failing, retention of records, claims support, duty of disclosure, premium, broker remuneration, cancellation, complaints, data protection, governing law, use of sub agents, insurers, conflict of interest, use of e-mail, instructions from, limitation of liability, claims against the firm
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incentivisation
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low basic salary and bonus tied to specific performance
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retention ratio
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amount of business retained after lost/non renewed business. ideal >95%
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business headwinds
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image of “Gegenwind”, upcoming issues that prevent you from achieving a goal
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client self serve
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desire and trend for clients to self-serve via web
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tripartite relationship
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broker, client, insurer
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hunters in sales process
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hunters get the energy from wining a new client, networkers, independent, excited, not always good to follow thru
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farmers in sales process
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builds and cultivates relationship within relationship, turn a customer from good to great, loyal, nurturing, collaborate in teams,
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pipeline management
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a pipeline is a desired number of developing business prospects to become clients and generate needed new business to grow at a planned rate
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cold calling management
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if there is no relationship, the oly way to start is to pick up the phone and call… 4 options, can be combined – create competitive atmosphere with league tables – incentivise staff for achieving goals – dedicate staff – contract outside
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structured selling
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miller heimann
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client satisfaction
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– early warning system of problems, solve pro-actively – improved client relationship help to anticipate – identification of own strengths weaknesses – satisfaction to be continuously monitored
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KPI
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key performance indicators (used in SLAs and incentive programs)
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KCO
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key client outcomes (used in SLAs)
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client obligations towards
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– timeliness of critical decisions, – delivery of information, – access to senior management, access to information
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annual renewal cycle
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– diary systems for renewal prompts – annual service plans – open item list – mid-term review of broker performance – policy registers – renewal report for each policy
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prospect generation
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– networking: attend seminars and conferences, organise events with topics for your clients, social and business networking – relationship bldg: use introducers, reciprocal arrangements with professional service providers, maintain relationship with job changers, with cross-directorship-holders – Marketing: run campaigns, mail shots and cold calling, ads are expensive, rather sponsorships, market research ,
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first meeting with prospect
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– confirm meeting in advance – prepare and send an agenda – collate known data about the prospect – set objective for meeting: build rapport, understand the business, get insight into insurance and RM business – have a list of questions, but let the prospect lead – listen to the max: let prospect speak – record the discussion in writing and report to the prospect – seek actions that allow repeated contact – ensure all outcome of meetings is recorded in CRM
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Overrider (contingent commissions)
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payment on the entire account basis, may be dependant on growth and profitability or retention of business with one insurer
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additional brokerage
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for collecting premium, preparing policies, claims handling
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administration fees
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added to SME business where brokerage may be low
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brokerage on net rated business
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being paid by both sides as “double agent”
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fees for services
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e.g. services to insurers like providing market and segment data
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work transfer payments
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work performed on behalf of insurer, like premium allocation and collection
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Spitzer affair
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as a consequence to the Spitzer affair, large US and UK brokers ceased taking override commission. AON reversed its decosion in 2009 and Marsh in 2010. Willis sticks to it.
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fee calculation method
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– by simple estimation – by time recording systems
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transparency
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see discussion paper dp08/2 on www.fsa.gov.uk.
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Advantages of brokerage
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– simple to operate – easy to share between brokers, tip providers – increases along with premium increase . easier for broker to negotiate income – income painless for the client – pays for work done for client and insurer
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disadvantages of brokerage
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– rates can be reduced by insurer – difficult to budget for variable commission – income linked to premium not to work done – little incentive for broker to reduce premiums – not transparent – it contributes to the total premium cost
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advantages of broker fee
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– transparent – a regulatory requirement – direct reflection of work and quality – framework to charge for extra services – meet demand of client – more professional approach – easier to budget income (for contracts that renew)
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RFP
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Request for proposal
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disadvantage of broker fee
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– produce less income than brokerage – tend not to charge for work done for the insurer – smaller brokers have advantage because of lower overhead – based on time spent, difficult to reflect added value – competition has made them too “low” – calculation of fees for smaller contracts can be difficult –