Midlands State University
Faculty of Commerce
Department of Insurance & Risk Management
Module
:
Insurance Broking IRM 404
Lecturer
:
S. Masiyiwa
“Good advice is precious”
Page 1
Chapter 1
The role of the insurance broker
1. Introduction
Although people are increasingly becoming aware of the role of insurance in mitigating some
financial hardships they encounter in life, insurance is still not a favoured purchase by most
clients and has to be sold to them in order for them to buy, hence the saying: insurance is
sold and not bought. There is therefore a real need for an intermediary (broker) to identify
and advise clients on their financial needs and the security that can be provided by
insurance.
The operations of a brokerage can range in size from a huge international firm (e.g. Aon)
down to a one person concern (e.g. Interlect). Insurance brokers are independent specialists
who place insurance business on behalf of their clients. They are expected to use
accumulated knowledge of the market to obtain the most suitable insurance policy for their
clients – not necessary the insurance policy with the lowest premium. As professionals they
are expected to exercise reasonable care and skill in the discharge of their duties. If a client
is financially prejudiced because of faulty advice, the broker can be sued for damages.
As an indication of the seriousness with which the broker’s liability is viewed by the courts,
one has only to refer to the case of Lapperman Diamond Cutting Works (Pty) Ltd v
Glenrand MIB (Pty) Ltd and another 2004 (2) SA ( (SCA). A claim for diamonds “lost” from
the cutting works was rejected by the insured. Lapperman then sued the brokers for not
informing them of the need to keep appropriate records of assets, etc. The court dismissed
the action, ruling that the broker’s responsibility does not include a duty to ensure that the
insured complies with the policy conditions.
Insurance brokers are commercial intermediaries bringing together two parties, namely, the
proposer and the insurer, for the purpose of concluding a contract. The broker receives
commission from the insurers for the business placed. Although the broker is remunerated
by the insurer and may be regarded as the insurer’s agent, the broker acts primarily as the
agent of the person seeking insurance.
1.1 Corporate brokers
Broking firms with their own sales force are a common feature of the Zimbabwe insurance
market. Some firms employ over 100 sales people and operate on national scale e.g. ZIB,
Aon, Marsh, Capitol, PIB, etc. The sales people are subject to control in much the same way
as tied agents employed by the insurer. Brokers firms pay their salespeople by way of
commission or salary or a combination of both. In some cases the sales people receive
incentive bonuses related to their own individual production.
1.2 Broker consultants
It is generally accepted that approximately 50% of all life assurance business is written by
brokers and almost all of the short term business is written by brokers. Most insurers actively
seek to have a larger share of the broker business by building relationships with their
brokers. To this end they employ consultants who periodically call on brokers to encourage
them to support the company they represent.
The primary functions of the broker consultant are:- Keeping the broker up to date with latest product innovation and policy terms
Page 2
-
Collecting completed proposal forms from the broker and processing the application
through the administration departments of the insurer as speedily as possible.
Keeping the broker up to date with latest trends and legislative changes applicable to the
business – this information will be supplied to the broker consultant by the marketing and
legal departments of the insurer
Ensuring that the broker has the insurer’s latest version of the computerised quotation
system that will assist the broker to provide from the brokers that they are delegated to.
1.3 Special role of the insurance broker
The roles of both the short term and long term broker do not differ much, although it is
common for the short term to provide a wider range of services, while long term insurance
brokers often have a need to interface with clients for many years after the policy is first
organised.
The special role of the broker can be summarised as follows:- Doing a risk assessment / needs analysis
- Selection of insurers
- Placing the risk
- Seeing to changes and updates and renewals
- Negotiation of claims
This summary embraces a multitude of different tasks and responsibilities including:- Obtaining a detailed knowledge of the client’s personal situation, business and
philosophy
- Maintaining clear records of the client’s business so that this can be explained to an
insurer and others
- Providing technical advice to the client on insurance developments in the market and the
law
- Maintaining a detailed knowledge of available markets
- Selection and recommendation of an insurer or group of insurers
- Negotiating with insurers on the client’s behalf
- Acting promptly on instructions from the client and providing written acknowledgements
and progress reports
- Providing the client with a written record of the insurance placings
- Collecting and remitting premiums (in some cases)
- Providing additional services e.g. risk management services and uninsured loss
recoveries
An elaboration of these tasks is given below:
(a) Risk assessment/ needs analysis
As professionals brokers must conduct a needs analysis for the client to enable them to
advise accordingly. With the advent and wide usage of computers in commerce, most
brokers now use computerised needs analysis systems.
(b) Selection of insurers
Most clients will have a little knowledge of more than a handful of insurers. In a market
where there are few insurers, say four, there will be little need for a broker. Most markets,
including Zimbabwe, have a large number of insurers selling various indemnities. A broker is
required in such markets to select insurers and matching and balancing their qualities with
the client’s individual needs.
The following factors must be considered:
- Quality of service
- Breath and terms of cover
- Flexibility
Page 3
-
Capacity
Geographical spread
Provision of technical advice
Price
Investment performance
Survey and risk control
Reciprocity
Financial security
Computerised facilities
(i) Quality of service
Brokers and insurers are both in business to make a profit and to achieve this objective both
must
retain existing business and also seek new sources of business. The quality of service is
critical
both in the acquisition and retention of business. Aspects of quality to consider include:- Fast and comprehensive quotations
- An efficient system of documentation
- A competent survey system
- Efficient accounting
- Suggestions for the improvement of cover
- Prompt notification of proposed changes in market practice
- Specialist services
The capacity of an insurer to deliver service depends on the quality of staff employed as well
the computer system in use. The insurer’s service should provide for the following:- It is important for an insurer to advise that he is not able to provide a quotation on the
risk. This saves time on both sides
- Documentation must be clear and without mistakes. Returning documents is time
consuming and delay will reflect as much on the broker as the insurer
- Surveys, where performed by an insurer, should take place quickly and the surveyor
should be practical with a good understanding of the client’s business
(ii) Breadth of cover
The must understand the variations between insurers so that he is able to explain them to
the client when alternative quotes are compared. While the breadth of cover as per policy
wording may be a point in favour of an insurer, the broker must not ignore the willingness of
other insurers to negotiate.
(iii) Flexibility
The latitude shown by an insurer in the policy terms and conditions and willingness to
innovate will
influence the broker in selecting an insurer, e.g., writing a risk on a burning cost method,
offering a high deductible, accepting a franchise rather than excess, high levels of medicalfree limits in group life insurance contracts.
(iv)
Capacity
Capacity requirements will differ according to circumstances. Some risks will be outside the
capacity of most insurers even with the assistance of the reinsurers. The insurer’s capacity is
decided by their perception of the risk (e.g. good, bad or indifferent) the risk (e.g. the trade,
construction, etc, the size of the insurer and the availability of reinsurance.
(v)
Geographical spread and global risks
Page 4
The geographical spread of an insurer’s offices may be an influencing factor in selection.
There may be need for international representation by the insurer where the client has
interests overseas.
(vi)
Claims service
Known lenience in the interpretation of policy wordings and conditions may affect the
broker’s choice. The broker will naturally tend to favour an insurer whom he feels is likely to
give his client the benefit of the doubt in the event of loss. Of equal importance is the quality
of the insurer’s claims service especially turnaround times in high volume claim policies e.g.
motor policies. This includes:- Speed of appointing loss adjusters
- Accuracy of documentation especially settlement cheques
- Speed of decision making
- Openness
(vii) Technical advice
The broker should consider the willingness and readiness of the insurer to support the
broker’s technical service to the client. The insurer who is willing and readily available to give
support gains a competitive edge.
(viii) Price
Price should be viewed in relation to the terms and benefits offered. The broker should use
his knowledge and experience of the market to determine whether the rate quoted is truly
competitive and if in doubt seek alternative quotations. This is important in the competitive
market for private motor insurance. For larger risks the broker will generally choose an
insurer who will offer the contract most suited to the client’s needs and then negotiate the
most advantageous terms.
In life assurance, pensions and annuity business the contracts differ in both scope and
promise. Before recommending a contract to a client, a broker needs to make a detailed
evaluation of cost vis-a-vis anticipated benefits and assumptions on which bonus prospects
are based.
It is important that a competitive price is not obtained at the expense of reduced cover
unless the client is made aware of the position. The granted discount for a large excess may
produce an apparent premium saving but the client will have to meet a large portion when
loss occurs. The broker must ensure that he is comparing like with like and take special note
of the policy wording.
The cheapest is not necessarily the best and price can be a difficult area in insurer selection.
A higher premium, where selected, should be justifiable e.g. in terms of a better contract.
(ix)
Survey and risk control
Where quotations are provided subject to a quotation, the surveys should be conducted
quickly. The arranging of provisional cover is a very useful facility but has its disadvantages
especially when the insurer later recommends improvements which exceed the value of a
premium saving. It is thus preferable for the broker to arrange surveys before cover is
granted. This helps in providing the insurer with sufficient information so that possible
improvements can be anticipated. The broker should accompany the insurer’s surveyor on
the site visit.
Smaller brokers do not normally employ their own surveyors and rely on risk control advice
given by the insurers and in such cases it is important that the insurer is able to offer advice
that reflects an understanding of the client’s business needs.
Page 5
(x)
Reciprocity
This may influence the choice of insurer, e.g. it may be deemed expedient to place the
business with an insurer who makes major purchases of goods and services from the
insured firm. There may be a tacit or explicit understanding between the parties to this effect.
Where such agreement exists, the broker still has the responsibility of making sure that all
aspects of the transaction are in the best interests of his client and of alerting the client of the
existence of better terms elsewhere.
(xi)
Financial security
The security of an insurer and his ability to meet claims as and when they fall due is of
paramount importance and should be a major factor in insurer selection process. The broker
may also use the published rating services provided by rating agencies. Most brokers have
lists of approved insurers. Although brokers are not liable for the failure of insurers, they
must constantly monitor the financial security of the insurers they do business with to avoid
the following:
- problems with disappointed clients should large volumes be placed with an insolent
insurer
- damage to the broker’s reputation from association with an insolvent insurer
- financial loss from unpaid brokerage
- increased costs in placing the same business with other insurers
(xii) Reputation and experience
Within each market certain insurers develop a reputation for certain types of risks in depth of
knowledge and experience e.g. in the chemical industry or motor trade. This may be
beneficial to the insured but the broker has to guard against complacency.
(xiii) Other factors
Personal relationships and “kickbacks” also influence the selection of an insurer. Insurers
must build good personal relationships with brokers to encourage them to support them
hence, the need to appoint a broker consultant. “Kickbacks” although technically illegal are a
reality in the insurance industry. These take the form of a business lunch, an office party
after work, a lakeside ‘nyama choma” party (braai) at Lake Chivero, a weekend boat cruise
in Lake Kariba, etc.
(xiv) Placing the risk
The broker should ensure that he has gathered all the information needed to place the cover
and that the cover matches the requirements of the clients mapped during the analysis
stage. All insurer requirements of proposer’s details e.g. proof of age, security system
certificates, etc, should be obtained at the outset to avoid unnecessary delays at the claims
stage.
(xv) Endorsements and renewals
The broker maintain regular contact with the client to ensure that the insurance cover
arranged is kept up to date with the client’s changing needs. He should arrangement
endorsements where the review of cover reveals some gaps. He should also attend to
annual policy renewals in time to ensure continuity of cover.
(xvi) Negotiation of claims
The broker should retain interest in the policy and should help the client in the claims
negotiation and settlement process. The payment of a claim often creates a need for further
advice, e.g. investment of investment of the proceeds of a maturing policy or of the proceeds
of a policy on death of the life assured. These situations are not only ideal for further
business but also represent part of the broker’s service in making sure that the policy
proceeds are put to use in line with the original plan.
Page 6
1.4 The positioning of the broker
The insurance broker can chose to advise his clients on a limited product range or broad
range of products. If he chooses to specialise, he may advise clients either on short term or
long term products. He may also elect to specialise in classes of business, e.g. fleet motor
insurance, agricultural insurance, geographic region, non-governmental organisations, etc.
The advantages of specialising include:
- Better focus than help in giving clients unparalleled service
- Differentiation from other brokers
- Closer client contact
However, specialisation has its limitations that include:- Possible “poaching” of clients by providers of financial services not offered by you
- Lack of income spread to cover costs
- Incomplete customer service
If the broker chooses to generalise he will offer varied financial services to as many clients
as possible. This helps the broker to give a total service to his clients without developing
mastery in any specific area. To help close the gap caused by lack of specialisation some
brokers form shared business networks that allows individual brokers to focus on their areas
of strength while at the same time ensuring that the client’s needs can be satisfied within the
network.
Chapter 2
The law of agency
2.1 The nature of agency contracts
An agent is a person who acts on behalf on another, known as the principal.
The agent enters into binding contracts with other persons (third parties) on behalf of the
principal. The agent is simply a mechanism through which the principal acts. The legal
principle is expressed as ‘qui facit per alium facit per se’ (he who does something through
another does it himself)
The agent is not personally bound and drops out once the agreement between the principal
and the third party has been reached.
There are three contracts that exist in an agency relationship in insurance broking.
- Agency contract :- this is the contract between the principal (insurer) and agent
(broker)
- Main contract:- this is the contract that comes into being between the principal
(insurer) and third party (insured)
- Ancillary agreement: this is the relationship between the agent and the third party
and depends on whether the principal named, disclosed or undisclosed.
2.2 Contractual capacity and the agent
Page 7
The agent is more than a mere pipeline, but less than a full contracting party as far as the
contract between the principal and the third party is concerned. An agent employs a certain
measure of discretion in the negotiation of the contract and therefore a certain level of
capacity is required of the agent so that he is able to understand the nature of contract in
question. He does not need to have full contractual capacity because it is only the only his
principal who usually becomes liable under the contract.
2.3 Difference of contracts of agency and other contracts
(a) Agents and employees
An employee works for an employer while the main duty of an agent is to bring his principal
into binding legal relationship with third parties. An agent has greater freedom than an
employee.
The employer is usually responsible for acts performed by his employees in the course of
their duties (vicarious liability) but is not normally liable for wrongs committed by his agents.
Agents are independent contractors.
There are only two parties to an employment contract – the employer and employee. An
agency contract exists for the purpose of creating binding legal relationships with third
parties, and another party is always a requirement to the agency agreement.
(b) Agents and trustees
An agent like a trustee must not make a secret profit nor allow his interests to conflict with
his duty to his principal. If he misappropriates the principal’s property he can be treated as a
trustee.
An agent differs from a trustee in that he is not the legal owner of that property although he
may have a right to dispose it. An agent represents his principal whereas a trustee does not
represent beneficiaries under the trust.
(c) Agency and cessions
In a cession, rights are transferred by contract, which the cessionary acquires. In an agency
the agent performs acts for the principal, there is a continuing relationship.
(d) Agents and principals
Although a person may be called an agent, it does not mean that in law he is an agent e.g. a
motor manufacturer may give a dealer a ‘sole agency’ for the sale of his cars. In such case
the car dealer buys cars from the manufacturer and sells them to the public and acts as a
principal and not an agent.
2.4 Intermediaries as agents of insured or insurer
The agent is deemed to be the agent of the insured or proposer when:- Giving advice about insurance needs
- Advising on the most appropriate insurer with whom to place the risk
- Assisting in completing the proposal form
- Giving claims advice
The agent is deemed to be the agent of the insurer:- Issuing a cover note
- Collecting a premium
- Issuing a policy
- Subject to express authority receiving and handling proposal forms
- Handling other forms according to previous dealing with the insurer and assuming an
implied authority to do so.
- Surveying and describing property on the insured insured’s behalf
- Acting without express authority if the insurer ratifies his action
Page 8
-
Acting without authority but with the knowledge that the insurer has ratified such
action in the past
Asking questions and completing proposal forms even when the proposal contains a
declaration of the contrary
2.5 Insurance broking
An insurance broker does not accept liability for insurance risks but acts an intermediary
between the policyholder and the insurer. Provided he holds the necessary agents contracts,
the broker has access to who insurance market unlike an agent who is tied to one or more
specific insurers.
As an insurance specialist, a higher degree of professionalism is expected of an insurance
broker than of an ordinary agent.
A broker is deemed to be an agent of his client for whom he provides a service. He is
remunerated by a commission received from the insurer, and he should reveal the amount of
the commission to his client on request. The broker may charge an additional fee if he feels
the commission is inadequate, but the client must be advised of the amount before the
insurance policy is effected. The additional fee must be shown separately from the premium.
The broker has a duty to obtain not only the best terms for his client but also to ensure that
in the
event of a claim, the client receives an equitable and satisfactory settlement in terms of his
insurance policy.
2.6 Additional services provided by brokers
The modern insurance broker has transformed himself from being an intermediary between
policyholders and insurers to offering a diversified range of services in effort to diversify his
income streams. These include:- Recovery of uninsured losses (e.g. recovery of excess on motor policies from third
parties)
- Loss adjusting services
- Risk surveys
- Design, implementation and maintenance of captives
- Premium finance
- Risks management services
- Reinsurance broking
2.7 The creation of agency
The agency relationship arises by the following means:- Agreement
- Ostensible authority (estoppels)
- Ratification
- Operation of law
- Negotiorum gestio
2.7.1 Agency by agreement
(a) Express agent
The appointment is effective and positive and the agent has authority to act in accordance
with the express terms of the agency agreement. If the ambit of authority is ambiguous the
agent is under duty to seek clarification from the principal. Authority is given in writing or
orally. When an agency is in writing the document created is called a “power of attorney”.
(b) Implied agent
Agency by implication is derived from tacit agreements, e.g.
Page 9
- Reference to past course of dealings
Agency arising from an implied term that such dealings are to be authorized by the principal.
In Murfitt v.Royal Insurance Co (1922) an agent was requested to arrange insurance cover
on fruit trees and crops in an orchard. The agent advised that the property would be covered
while he submitted the proposal to the company. The company, however, rejected the
proposal and in the meantime a fire had taken place. The agent had no express authority to
give verbal cover, but there was overwhelming evidence that he had been doing that in the
district for over two years.
Past course of dealing with an agency was therefore implied and the insurance company
had to meet the claim.
- Reference to specific law and practice
Agency relationships are implied by reference to Acts of Parliament, past precedents, the
established methods of conducting business in a trade or profession or a combination of the
three e.g. under law of partnership each partner is the implied general agent of the firm and
in banking where each bank has an implied authority to be the customer’s agent for the
purpose of collecting cheques for the credit of his account.
- Wife as implied agent
An agency is implied in favour of the wife living with her husband, she is entitled to pledge
her husband’s credit for the purchase of necessaries suitable to their style of leaving. This
implied agency would extend to a woman living with a man in a stable relationship other than
marriage.
However, the implied agency in favour of the wife can be rebutted by proving:
- express warning to supplier to discontinue the supply of goods on credit to the wife;
or
- the wife was already adequately supplied with goods; or
- the wife had an adequate cash allowance to cover necessaries without the need for
credit; or
- the wife had been expressly prohibited the husband’s credit and the supplier had
been notified accordingly.
2.7.2 Agency by estoppel
Estoppel is a rule of evidence whereby a party is precluded or prevented from denying the
existence of some of facts which he has previously asserted. The third party must
demonstrate that he altered his position in reliance to the representation that a person is the
principal’s agent e.g. a man who has prohibited his wife from pledging his credit but not
notified the supplier accordingly may be estopped from denying the wife’s implied agency.
Estoppel operates when the principal has acted in such a way as to create the impression of
an agency agreement and where it would create injustice to third parties for the principal to
be able to escape responsibility.
2.7.3 Agency by ratification
If an agent acts without authority, a principal who would not otherwise be bound by the
agent’s action may adopt the contract by ratification. Ratification gives the contract status of
an act done with actual authority with effect from the date of dealing with the agent.
Ratification thus has retrospective effect.
For ratification to be effective the following must exist:
(i) Contract must not be void
It is essential that the principal must be shown to have been in existence and capable of
contracting at the time of contracting at the time the agent purported to contract for him.
Page 10
In Ashbury Railway Carriages v.Riche (1875) a company was formed to build railway
carriages. The directors entered into a contract to construct a railway in Belgium, a contract
which was ultra vires. The company could not ratify the contract as at the time the contract
was made it lacked the necessary legal capacity.
(ii) Ratification must be within reasonable time
Undue delay in ratifying a contract will render the purported ratification ineffective.
(iii) Act must still be possible
A principal can only ratify an agent’s action if such action is still possible at the time of
ratification e.g. a contract of insurance cannot be ratified after a loss.
In Grover and Grover Ltd v. Mathews (1910) an intermediary without any instructions from
the insured renewed the policy of piano manufacturers which had expired a few days before
a fire at the premises. Ratification was ineffective.
However, the decision in that case was criticized. Canadian and American courts have
subsequently permitted ratification after a loss. The Marine Insurance Act 1906 section 86
allows for the ratification of marine insurance contracts after a loss.
(iv) Awareness of material facts
At the time of ratification, the principal must be aware of all the material facts unless he has
shown himself willing to ratify whatever may be the surrounding facts.
(v) Undisclosed principal
An undisclosed principal cannot ratify. Ratification will only be permitted where it has been
declared openly that the relevant contract has been made on behalf of the person seeking to
ratify. The agent need not name his principal but he must supply sufficient information to
allow him to be identified.
(vi) Methods of ratifying
Ratification can be oral or written. A principal may not both ratify the beneficial aspects of a
transaction and at the same time repudiate those parts which are not beneficial.
(e) Negotiorum gestio
A person who reasonably undertakes to manage the fairs of another on his behalf but
without authority is called a Negotiorum gestor and is entitled to indemnified for necessary
expenses incurred in the course of his management e.g. Chinos sees Tamaz ‘s house
burning down and extinguishes the fire, he is acting as Negotiorum gestor for Chinos. There
is no contract between the parties but the gestor is indemnified for his expenses, on
presentation of statement of account to the principal, although not entitled to remuneration.
2.8
Duties of the agent
At law the agent has the following duties:- To obey instruction and conform to usage
- To exercise care
- To perform his mandate
- To account and pay over
- To deny the title of his principal to goods he holds for him
- To show good faith
(a) Obedience
Page 11
The agent must obey his principal’s instructions and if he fails to execute the agency
contract he will be liable in damages and will be unable to claim any remuneration.
In Turpin v.Bilton (1843), an insurance broker agreed, for a consideration, to arrange for
the insurance of the plaintiff’s ship. He failed to do so, the ship was lost and he was held
liable in damages to the plaintiff.
An agent is also required to exercise discretion in accordance with the duty of obedience.
An agent must perform the duties imposed on him by the agency and is not entitled to
delegate the duties to someone else. He is required to delegate a task which is purely
mechanical which does not require judgment or discretion. Improper delegation makes the
agent liable to the principal for breach of duty.
Exceptions
The agent can delegate his duties in the following circumstances:
- where a principal expressly authorizes the agent to delegate
- where custom or trade usage sanctions delegation
- where delegation is necessary to ensure proper performance
- where the work delegated is purely clerical (e.g., signing letters)
- where unforeseen emergencies arise which impose upon the agent the necessity
of employing a substitute (e.g. serious illness)
(b) To exercise due care and skill
An agent must show skill and diligence in doing his work. If the agent breaches this duty the
principal can sue for damages.
(c) To act in good faith
An agent stands in a fiduciary relationship with his principal and must not use his position for
his own benefit. This duty can be considered as follows:
(i) Conflict of interest
An agent must not let his personal interest to conflict with his business interest. In Swale v
Ipswich Tannery Co (1906), the plaintiff was employed as a fulltime manager. His duties,
among other things, were to advise the defendant on its insurance arrangements.
He accepted an agency from an insurance company without the knowledge of the defendant
and received commission for that. The court held that the misconduct amounted to conflict of
interest and justified instant dismissal.
The agent acts as the tool of the principal and must always act in the principal’s best
interests. He must not act for his own benefit unless he makes a full disclosure to the
principal and receives permission to do so.
An agent appointed to sell property cannot sell to himself or if appointed to buy property
cannot buy from himself without the consent of the principal.
(b) Secret profits
An agent acting on behalf of the principal is not entitled to profit by carrying out those
transactions unless he has made full disclosure of the true position to the principal and has
received permission to do so.
Page 12
Any secret profit made is recoverable by the principal. For example, if an agent receives
money due to a principal a fortnight early and invests it during that time and earns interest,
such interest will amount to a secret profit and will have to be handed over to the principal.
Bribes and double commission amount to secret profits. A bribe is an amount of money paid
to an agent so that he may exercise his agency powers in a particular way.
The principal who discovers that his agent has accepted a bribe can:
- recover the bribe from the agent
- dismiss the agent without notice and without commission
- sue the agent and the third party for conspiracy to defraud
- exercise the right to set aside the contract made with third party
An agent is not permitted to receive commission from both his principal and the third party
unless he has made full disclosure and consent has been granted.
(c) Confidential information
An agent may not use confidential information which he has acquired in his capacity as
agent for his personal benefit or the benefit of a third party. This duty may continue after the
termination of the agency.
(d) Accountability
An agent must account to his principal for all money he receives on his behalf and must
keep a proper record of all transactions. He must keep the agency money separate from his
own.
2.9 Duties owed by principal to agent
An agent has rights against the principal in respect of:
Remuneration
Indemnity
Lien over goods
(i) Remuneration
The agent has a right to the remuneration agreed by his principal or to a reasonable
remuneration as is customary in the particular business or is appropriate to the particular
circumstances. Remuneration usually consists of commission and to earn it he must prove
that he was the effective cause of the transaction.
(ii) Indemnity
The agent must be compensated for all expenses or loss incurred in acting on behalf of the
principal. An agent cannot claim indemnity in respect of unauthorized actions unless they are
subsequently ratified. He has no rights for losses caused by his default or negligence.
2.10 Liability for breach of duty
(a) Breach by principal
The agent can take legal action to recover any money he is owed by the principal. He also
has the right to refuse to continue to act. The agent can in respect of the money he is owed
hold on to any goods he holds on behalf of the principal i.e. exercise a lien over the goods.
(b) Breach by agent
The principal has a right to terminate the agency if an agent is in breach of his obligations.
The principal may also sue the agent for breach of contract. If agency agreement is
terminated on the grounds of fraud, the agent will lose the right to remuneration and there
will be the possibility of prosecution under Prevention of Corruption Act.
Page 13
2.11 Relationship of principal and agent to third parties
(a) Agent contracting for disclosed principal
If the agent acts outside his actual, implied, ostensible or presumed authority, no contract
will be created between the principal and the third party unless the disclosed principal ratifies
the agent’s unauthorized acts.
(b) Agent acting for undisclosed principal
In this case a contract is made with a person who, although really an agent, is not known to
be such at the time of the contract. The principal is treated as undisclosed unless the third
party has actual notice of his existence.
The undisclosed principal and the agent are bound by the contract and can enforce it. The
undisclosed principal will not be able to enforce a contract:
-
where the agent has expressly described himself as principal
where the agent made the contract without authority
where the third party contracted with the agent because of reasons personal to the
agent
- where to admit evidence of the existence of a principal would be in conflict with the
terms of the contract
(c) Personal liability of agent
If an agent fails to disclose that he is acting for an undisclosed principal he can be held
personally liable by the third party.
In Sika Contracts Ltd v. Gill and Others (1978) a chartered civil engineer acting for a
principal made a contract with a building contract and did not disclose this fact until
sometime after the contract had been concluded. He had signed his letters ‘BL Gill BE,
MICE, Chartered Civil Engineer’ although the court agreed that he was acting in a
professional capacity, he was also personally liable to the plaintiffs.
(d) Third party’s right to elect
Where the agent contracts for an undisclosed principal both agent and principal are bound.
However, when the name of the principal is disclosed the third party may elect within
reasonable time the party whom (agent or principal) he is looking to for the discharge of
obligations under the contract.
The contract cannot be enforced against another defendant at a later date. If he elects to
proceed against the agent then the principal is discharged.
(e) Misrepresentation by agent
If the unauthorized acts of an agent are not ratified by the principal the agent becomes liable
to an action by the third party for breach of warranty of implied authority. The agent can be
sued for fraud if he has been fraudulently misrepresenting his authority.
(f) Principal’s liability for the delicts of his agent
A principal is liable for the torts committed by his agent when acting within the scope of his
express, implied or ostensible authority and liabilities extends to torts which he later ratifies.
This is akin to the vicarious liability of an employer for the torts of his employees acting
within the course of their employment.
(g) Payment via agent
The principal remains liable to the third party for payment made through his agent which the
agent fails to pass on by reason of fraud or bankruptcy.
Page 14
(h) Breach of warranty of authority
Anyone claiming to be an agent is deemed to warrant that he has authority to do so. If it is
later discovered that he had no such authority, he can be sued for breach of warranty of
authority.
2.12 Termination of agency
The agency may be terminated in any of the following ways:(i) Mutual consent
The agent and principal may mutually agree to terminate the agency agreement.
(ii) Revocation by principal
The principal can revoke the agency before performance is complete but may be sued for
damages if the revocation is in breach of the agency contract.
(iii) Renunciation by agent
The agent can resign from the agreement before the agency has been completely performed
and may be sued by the principal for damages if the renunciation is in breach of the contract.
(iv) Breach
If either principal or agent breaches the agency contract in a way that would amount to a
breach of conditions the other party may treat the contract as discharged.
(v) Commercial agents
If the contract for a commercial agent is terminated, the agent is entitled to commission for
business he has introduced, repeat orders and renewal commission.
(vi) Personal incapacity
Death or insanity of either principal or agent will terminate the agency agreement.
Bankruptcy of the principal terminates the agency contract.
(vii) Destruction of subject matter
Destruction of the subject matter of the agency will terminate the agency contract e.g. if an
agent is instructed to sell a ship but the ship is destroyed before the sale is effected.
(viii) Supervening illegality
The agency will be terminated where performance of the acts required to give effect to the
agency becomes illegal e.g. a principal becoming an enemy alien on the outbreak of war.
(ix) Effluxion of time
If agency is for a fixed period, the contract terminates at the end of that period.
2.13 Exceptions to rules of termination
Agency coupled with an interest cannot be terminated i.e. the agent has been authority to
act as such in order that he should obtain some benefit for himself)
2.14 Effects of termination
If a principal in breach of contract terminates the agency he may be liable to pay agent
damages for breach. If an agent who declines to perform his obligations under the contract
may be liable in damages to his principal.
(a) Rights of action
Benefits already earned or obtained under the terms of the agreement are not destroyed by
termination. The agent may lose these benefits where he is found to have committed acts of
Page 15
fraud against the principal. Commercial agents are entitled to commission after the
termination of the agency contract if the transaction is mainly attributable to the agent’s
efforts during the contract.
2.15 Binder agreements
Some agents have limited underwriting and claims settling authority delegated to them by
the insurer. There must be a written agreement which in addition to any other terms and
conditions includes a term:-
-
Setting out the kinds of short term policies which may so entered into, premiums or the
basis for the calculation of premiums to be charged in terms of those short term policies,
the wording of those policies and the maximum value of the policy benefits which may be
undertaken to be provided under each such kind of short term policy
If such intermediary is entitled to settle or pay claims under any such short term policies,
setting out the scope of the intermediary’s powers to do so and the circumstances under
which it may be done
If such intermediary is by virtue of such agreement entitled to any remuneration other
than by way of commission only , settling out the basis on which the intermediary is
remunerated for services rendered in terms of such agreement
Requiring that such intermediary shall, prior to entering into a short term policy on behalf
of the short term insurer or Lloyd’s underwriter concerned, disclose to the prospective
policyholder the name of the short term insurer or Lloyd’s underwriter and the fact that
the intermediary is acting in terms of the agreement.
Chapter 3
Risk management and the insurance broker
3.1 The risk management concept
Risk management involves a great deal more than buying insurance. Risk is the uncertainty
of loss and risk management aims at removing some or all of the uncertainty. It takes a
Page 16
broader view to problems posed by risk to that taken by insurance in that in considers both
insurable and uninsurable risks.
3.2 The risk management process
There are three main steps involved in risk management, namely:
- Identification of risk
- Evaluation of risk
- Control of risk
- Monitoring of risk
The process can be represented diagrammatically as follows:
Risk Identification
Risk Evaluation
Severity
Frequency
Risk Control
Financial
Retention
Physical
Transfer
Elimination
Minimisation
Insurance
The diagram shows that risk control can involve the financial transfer of risk and this is
where insurance becomes involved as a subset of the broader risk management framework.
Historically, Insurers have not viewed risk management favourably as its concepts sought to
lure business away from them. It is regrettable that many insurers still hold that view today.
However, some brokers and insurers have realised the benefits and now offer risk
management as a service to clients for a fee.
3.3 The risk manager
The risk manager is a specialist and is not limited to one function. An engineer may be able
to identify engineering risks and a lawyer may be able to identify legal risks. The risk
manager must have a broad overall knowledge of all the activities of the company.
3.4 The role of the broker
The organisation must identify and assess risks incident to the affairs of the organisation and
decide which ones may be retained and minimised economically and those that might
Page 17
transferred to an insurance company. The broker can provide the risk manager with
expertise than is not available within his own organisation. The broker can use his expertise
and wide experience in similar circumstances to report fully but concisely on specific
situations. He can also help in identifying insurers capable of providing the required cover at
the most advantageous terms and rates as he has a detailed understanding of and access to
the entire insurance market.
The broker must produce a report after conducting risk survey and consultations. The report
must detail the specific risks identified and explains how these may be resolved through the
medium of insurance. If the broker is especially appointed to advise on risk management
then his report will be expanded to deal with loss prevention, self insurance and a variety of
other measures which can be used in conjunction with the transfer or retention of risk.
The broker can only comprehensive assistance and guidance if he is only given the detailed
information he requires. He must therefore be allowed to inspect the premises, properties
and processes and to consult with the appropriate departmental managers. Such
consultation must be carried out in conjunction with the risk manager. Access to the required
information will be facilitated by the fact that the risk manager is in close and constant
contact with all areas of the organisation. Satisfactory teamwork and constant consultation
between the risk manager and broker is essential if the broker is to obtain a true appreciation
of the needs of the position to play his part in the basic functions of risk management,
namely, risk identification, risk assessment and risk control.
3.5 Risk Identification
Risk identification can be defined as a combination of techniques brought together to make
all the activities of a firm and their inter-relationships apparent, and to help identify potential
losses.
It can also be defined as the examination of the activities of an organisation in order to
ascertain features which may prove hazardous to the furtherance of its objectives. Such
hazardous features are commonly known as risk exposures and result from a wide variety of
adverse factors. The broker, in his role as assistant to the risk manager, must help identify
such factors so that they be eradicated or minimised.
Companies are exposed to risk in variety of ways which can result in financial loss. The
following steps will help the broker and risk manager or for to everyone within the
organisation in highlighting all areas where a loss or liability could occur.
(a) Physical inspection/Surveys
Before starting it is advisable to first carry out some kind of physical inspection of all
properties and processes of the organisation. This may be carried by the broker or by
specialist surveyors on his staff or insurer’s surveyors. This may involve simply walking
around the plant to add to knowledge already gained from the company publications or
information from interviews with managers. It helps the broker get a feel of the workplace
and may help direct him in the formal identification techniques.
(b) Fire
The survey will disclose potential risk areas which might give rise directly or indirectly to
losses in the future. The fire risk is generally the prime object of the survey, and this will
involve consideration not only of the inherent hazards of the premises or property such as
the storage and use of hazardous materials but also the risk arising from adjoining or
adjacent properties. Consideration will also be given to the external fundamental risk
potentials of storm, flood, subsidence and other natural catastrophes. All the risks
commonly referred to as “special perils” will also receive attention.
Page 18
(c) Security
The security aspects of an organisation must the examined. This may be carried out by the
broker or his specialist adviser depending on the size and nature of business carried out. For
example, a steel stock-yard is less likely to receive the attention of thieves than a jeweller’s
workshop and protection of the latter would normally be referred to a specialist surveyor. The
security aspects will include risks of theft, fraud – including computer crime, robbery,
burglary, terrorism, civil unrest and other forms of politically motivated damage.
(d) Engineering risks
For engineering risks the broker and the risk manager will rely on the reports of the
engineering insurer’s inspectors or reports of an approved inspection authority e.g. NSSA.
These persons make periodic inspections of boilers, lifting appliances and other machinery
to ensure safety conformity with statutory requirements.
Some firms of risk management consultants employ their own specialist engineers to make
recommendations and prepare the necessary reports. The risk considered under the
general heading of engineering will include electrical and mechanical breakdown, and
interruption, with special reference to the availability of vital spares and plant for repair and
replacement.
(e) Health and safety
Special considerations must be given to the health and safety hazards to both employed
personnel and third parties, the latter including not only business contacts such as
customers and suppliers of goods and services but also casual visitors whether invitees or
not, and persons and property in nearby premises and areas. The identification of potential
workmen’s compensation, employers’ liability and public liability risks is an important part
of the work of the risk manager and his broker adviser.
The health and safety of employees’ issues are governed by the Occupational Health and
Safety Act. This Act provides for the general safety of machinery and for the health and
safety of every worker in Zimbabwe, including agricultural employees and domestic
servants but excluding those who fall under the Mines and Works Act and Explosives Act.
Under the Act, an employer with more than 20 workers is required to appoint a safety
representative for each separate workplace. A safety representative must be appointed for
every 50 employees. Where two or more representatives are appointed a safety committee
has to be established. One of the main functions of the safety representatives is to conduct
monthly safety inspections of the workplace. Other provisions of the Act relate to safety
standards for machinery, personal protection equipment and the reporting and
investigations of accidents.
The risk manager and broker must be fully conversant with the requirements of the Act and
ensure its full implementation in which task NSSA is well qualified to offer guidance and
assistance.
(f) On site discussions
In addition to the specific surveys the broker and risk manager will have on site
discussions approved by management, with safety representatives and other selected
personnel at appropriate levels since their views and opinions on the potential risk areas
will be of value in risk identification. A casual comment by a workman may pinpoint a
hazard which might otherwise be overlooked.
(g) Examination of records
It is essential to obtain a comprehensive picture of the organisation and its operations and
for this it is necessary to supplement the facts ascertained during the surveys by an
examination and analysis of certain records which reveal other risk exposures. The extent
Page 19
to which this is possible and likely to be of value depends in part on the size and type of
the organisation concerned and willingness of the management to reveal facts may be
considered confidential, but generally, access would be made available to the following:- Financial statements for the last financial year
- Management budgets and forecasts
- Accident registers and incident reports for the last year
- Published literature giving details of products produced, their range, description and
intended use or application
- Published lists of services provided
- Details of guarantees given to customers
- List of specialist employees and their qualifications
- Standard contracts used by the organisation showing detailed terms of buying and
selling
- Leases in connection with all property which would include contracts for the leasing
of land, buildings, machinery, computers and cars
(h) Interruption
In addition to direct material loss which may result from exposure to risk there always exists
the possibility of a consequential intangible loss. For a non-trading organisation interruption
to operations may result in loss of goodwill from its failure to attain its intended objectives or
provide the intended services. In a manufacturing or trading organisation the result will be a
shortfall in production or a loss of anticipated profit. The potential interruption losses should
be given special consideration in the risk identification process. They may arise not only from
hazards within the insured property or premises but from external circumstances beyond the
control of the organisation, for example:
- Cessation from any cause of suppliers of raw materials from a regular source of
supply
- Failure of regular customers to purchase supplies of finished goods or
- Failure in the regular supply of public utilities such as gas, electricity, water or
sewage disposal facilities.
Attention should always be paid to the possibility of loss resulting from the fire or other
insured peril occurring at the premises of suppliers or customers but this “outside” risk may
arise from many other of which may provide difficult to recognise and identify.
3.5.1Aids to identification
Following the initial inspection, use of the following aids may help in identifying areas of
risk:- Organisational charts
- Flow charts
- Check lists
- Fault trees
- Hazard and operability studies
(i) Organisational Charts
These charts show the basic organisational structure of the company and where the
personnel fit in the company. They can highlight weaknesses in the structure, which
could problems.
For example:
The works manager must report all accidents or near accidents. To do this he has to fill
out 6 pages of documentation, in triplicate, as the three managers above him will need
copies. This is a long involved process and is a positive disincentive to effective reporting
of accidents, especially minor ones.
Page 20
The risk manager could then streamline the system and cut down on the paperwork so
that he gets information much more quickly – perhaps having the form reduced in size
and sent to one person only.
Organisational Chart- ABC Manufacturing Company
Managing Director
Personal Assistant
Purchasing
Finance
Production
Research &
Development
General Manager
Accounting
Contracts Division
Marketing
General Manager
DEF Trading
Company
General Manager
ABC Chemicals
General Manager
ABC Feeds
Purchasing
Works
Research &
Development
Production
Marketing & Sales
(ii) Flow charts
A flow chart is very helpful in companies where the production system involves materials
flowing through a process.
Risk Identification Flow Chart
By road from
subsidiary
100kg A
Page 21
By road from supplier
200kg B
Plant 1
100kg
A
Plant 2
150kg
D
150kg
D
100kg
A
50kg
C
Plant 3
250kg
A+D
150kg E delivered
by road
150kg
ADE
250kg
AD
100kg
F
Plant 4
300kg
ADE
Plant 5a
150kg
X
Sold commercially to company XYZ
MNO
150kg
ADE
Plant 5b
150kg
Y
Sold commercially to company
The figure above illustrates a system where a product X is manufactured:
- Two items of raw materials arrive in quantities of 100kg and 200kg
- Item A arrives by road
- Item B arrives by rail
- The two items are processed in plants 1 & 2 respectively
- As a result process in plant 2, a by-product C is produced and sold to a subisidiary
- Ingredients are added in plant 4 to the remaining product
- Two final products are produced and sold commercially.
Interpretation of the flow chart:The flow chart enables the risk manager to see at a glance where problems could arise. He
will take into consideration the following:-
What effect would a fire at a suppliers premises have on the business
How easy would it be to find another supplier
What effect would there be if plant 2 was destroyed by a fire or other type of peril
How long would it take the business to start some interim operation
What effect would there be on the company’s profits
Will there be a breach of contract, if the company cannot supply by product C to the
client
Could one of the other plants be utilised to replace one which was unable to work
Page 22
(iii) Check lists
3.6 Risk evaluation/assessment
After identifying risk exposures the broker and risk manager must evaluate these in terms of
frequency and severity. In other words they must decide not only how often a loss is likely to
occur but how much is likely to be involved in monetary terms.
The first step requires the collation and analysis of all data obtained during the risk
identification process. This must be added to the actual record of losses over a reasonably
representative period of 3 or 4 years if a statistical analysis of such data is to produce a
reasonably reliable estimate of expected future losses. A particular activity or situation which
has proved unduly hazardous and we therefore be indicative of probable future risk
exposure areas. The broker and risk manager will consider the relative frequency of past
occurrences and from these statistics will be able to infer future probabilities. It is in this
connection that the examination of the accident registers and incident reports is of
importance.
In the assessment of risk it is necessary to build up a detailed risk profile of the organisation
showing specific areas of exposure which will include assets, income, liabilities and
personnel. Each of these areas may then be analysed to show the extent to which it is
affected by the management functions of purchasing, production, transport, distribution,
sales, finance and administration.
The broker and the risk manager must make use of their experience and knowledge of other
organisations in a similar position. They may need to refer to property valuations and will
require not only a knowledge and understanding of the legislation affecting the various
exposures, but, as regards liability risks, a knowledge of the current levels of compensation
awarded by the courts.
3.7 Risk control
Risk can be defined as the uncertainty of loss. If risk exists it may or may not give rise to a
loss. The broker as adviser on risk management must therefore consider not only the control
of risk but the control of losses which may arise. Risk control may be either physical or
financial.
3.7.1
Physical controls
(a) Risk avoidance
This refers to action taken to avoid entirely and possibility of an undesirable event taking
place. To avoid the possibility of having a motor accident a man might sell his car. To avoid
his dog biting the postman he might instruct the post office not to deliver post at his address.
Such risk avoidance is rare in commercial organisations but might involve, e.g. a decision
not to embark on the manufacture and supply of a new drug by a pharmaceutical company
where the possible consequences of its proving harmful would outweigh any financial
advantages from its sale. In such cases the broker merely acts in an advisory role. The
decision must rest entirely with the company and the broker can only indicate the likely
effects.
(b) Risk reduction
This is a process whereby active steps are taken to reduce the degree of hazard presented
by a risk which cannot be eliminated or the frequency with which it may result in a loss.
For example:- The introduction of an improved system of maintaining machinery and equipment
Page 23
-
Limiting the quantity of flammable liquids brought into a factory each day from the main
store
The mandatory use of seat belts to reduce the risk of injury
The replacement of naked flame space heaters by hot water radiators
(c) Loss prevention
This involves the introduction of physical controls to minimise or prevent the possibility of
loss occurring. There is some overlap here with the principles of risk reduction but the
following may be cited as examples of loss prevention:- The elimination of ignition sources in areas where flammable vapours may collect
- The prevention of work above a certain height without special safety precautions
- The substitution of non-flammable solvents for flammable solvents in cleaning
processes
(d) Loss minimisation
This involves physical measures which, while not preventing the loss from taking place will
lessen the extent of the damage as far as possible, e.g.
- The introduction of automatic sprinkler systems
- The employment on site of skilled first aid staff
- The compartmentation of hazardous areas by fire-break walls and break floors.
3.7.2 Financial Controls
(a)
Risk retention
This means that an organisation will itself meet in whole or in part the cost of losses resulting
from a particular risk’
Passive risk retention refers to situations where the organisation is unaware that a risk exists
or alternatively where the existence of a risk is recognised but no active plan has been put in
place to deal with it. In such cases it is the duty of the broker to ensure that his client is
aware of the risk he is retaining, and if appropriate, to make recommendations for it to be
transferred elsewhere.
Active risk retention arises when an organisation takes a conscious decision to bear the cost
of any losses resulting from a recognised risk, and may take the form of:- Electing to carry a voluntary or franchise
- Insuring on a first loss basis with the sum insured being well below the total value at risk or
- Deliberately under-insuring knowing that average will apply
(b) Funded risks
Self-insurance by building up funds is a form of active risk retention. Where risks are funded
an amount is allocated out of operating revenue towards meeting anticipated losses. The
contribution is set at a level which, hopefully, will allow for the build up of a fund to meet
losses over a specified period. The size of these annual contributions should be decided by
reference to the statistical analysis made during the risk assessment process.
The broker and the risk manager must be aware of the applications and limitations of funding
techniques including taxation restraints. There are important tax considerations affecting
funded risks and before a final decision is made to follow this route, the financial director or
auditor or tax consultant should be invited to analyse the after tax position, which may vary
from company to company, according to the nature of the business and the type of assets
employed.
In general terms, ZIMRA will allow the deduction from income of insurance premiums paid
for the protection of assets and revenue, whether the assets are of a capital or current
Page 24
nature. This affects the net cost of insurance. The proceeds of insurance claims for loss of
current assets or revenue, such as a loss of stock or loss of profits, will be regarded as gross
income and is therefore taxable, although the loss will have offset the proceeds of the claim.
Insurance recoveries in respect of fixed assets will, in most instances, be of a capital nature
and thus not taxable.
Where losses are funded in advance in advance in lieu of the payment of insurance
premiums, the amounts set aside are not deductible for tax purposes, and at the end of the
financial year any surplus in the fund must be brought back into the statement of
comprehensive income for tax calculation purposes.
(c) Unfunded risks
These are actively retained risks where the resultant losses are paid for out of current
revenue on each occasion as they arise. Whether or not a risk is best dealt with in this
manner is something which must be assessed by the broker and the risk manager.
(e) Risk transfer to insurers
The broker plays a major role in the transfer of risks to an insurer. Apart from the traditional
markets, the broker may recommend the formation of a captive insurance company to bear
part or whole of the client’s insurable risks. The motivational reasons for making this
recommendation include cost, non-availability of cover locally, taxation advantages and the
possibility of profit-earning should the captive extend its operations beyond the immediate
needs of its parent.
In the formation of a captive company the broker may provide a full handling service
embracing management, documentation, claims handling and administration on a fee basis,
together with the placement of the reinsurance requirements. Alternatively the broker may
advise on offshore funding facilities to achieve similar results.
However, in Zimbabwe there are very few organisations which are large enough and
sufficiently diversified to operate an offshore captive company and the current tax and
exchange control legislation prohibit the formation of offshore captives. However, some
local organisations are adopting the concept and to date IDC, CBZ, ZB Bank and other
have formed captive insurance captives, Allied Insurance, Optimal and Cell respectively.
(f) Risk transfer to non-insurers
This involves transferring risks to third parties who are not insurers. The broker must be
alive to these possibilities and will make recommendations to his client accordingly.
Examination of contract wordings will reveal areas where, through disclaimers or holdharmless agreements, the client is able to transfer responsibility for risks to other parties.
3.7.3 Contingency planning
Contingency planning is an essential part of risk management. The client usually has a predetermined written plan of action to help alleviate and minimise losses. The broker should
play advisory role by conveying his knowledge of the procedural methods available.
3.7.4 Risk monitoring
Risk management is an ongoing process. Once the action outlined above has been
considered and the necessary programme implemented there remain the ongoing task of
monitoring its continued effectiveness and performance.
The objectives will have been established together with guidelines in respect of costs and
benefits, but business conditions change with the passage of time and there is a constant
need to determine whether the objectives are still being attained without undue hindrance
Page 25
from risk or whether changed circumstances demand a revision of the risk control
programme.
The broker’s role in the risk monitoring process demands re-surveys where necessary a
continuous watch on the adequacy or the inadequacy of risk retention limits and sums
insured, and a periodic evaluation and interpretation of loss statistics, all of which will enable
him to give early warning of necessary changes in the programme.
Chapter 4
Long term insurance and financial planning
4.1 Market selection and information gathering
The broker must identify the market he wants to serve. He may choose to focus on the high
income, middle income, low income, self employed markets, etc.
Once a market is identified, individuals that meet the target profile must be qualified to
become good prospects. Before a person is qualified he is called a lead. In order to be
successful in marketing life assurance the broker needs to spend time with his prospects
and getting acquainted to them. This approach changes them strangers to friends. After all
who does not good friends?
Cold calls are not encouraged as they are costly to the broker. Appointments should be
made before a broker goes to make his presentation. The importance of planning cannot be
overemphasised. In life assurance marketing - a failure to plan is planning to fail. The broker
must collect the following information about the possible prospect:Page 26
- Full names and, if applicable, nicknames
- Type of job and the employer’s name and address
- Age
- Marital status
- The names of any children or other dependants
- Home address and telephone numbers
- An estimation of his income level
Other information that may be of assistance but which is not essential will include:- Children’s ages
- Spouse’s job
- Any interests (e.g. sports, hobbies, etc)
- Details of existing life insurance policies and possible retirement fund arrangements
4.2 Needs analysis
People will not buy something unless they believe that they need it. Brokers must not
create wants for the clients. Doing so, will have short term benefits, because the client
will stop paying the premium anytime soon the minute they want money for something
else.
Buying life assurance is like buying a suit of clothing – each person will need a different
size, shape, colour and material. It also important to match the suit with other items the
person already has taking into account shoes and other accessories, the person lifestyle,
the weather, place where person leaves, etc. In insurance marketing – once a prospect
that fits into a target market has been identified, it is important to do a needs analysis.
This will help the broker in working out the best type of policy needed, the amount of
premium and what needs the policy will address.
While people buy life assurance for various reasons; there are certain times in life when
money will be needed for specific items. For example, on death, money will be needed
for:- An income for surviving family members to live off
- Death bed and funeral expenses
- The cost of medical care before death (this could be during a period of illness, or
hospital expenses if involved in an accident)
- The paying of any debts owed by the deceased
On the other hand, disabled persons who can no longer work will need money for medical
expenses and an income for themselves and their families. Even where a person does not
die too soon or become disabled, there is always the chance that they may live too long
(superannuation).
(a) Determining the amount of insurance
For someone taking a life policy to have for a house or a child’s education, working out the
amount of insurance required is very easy as long the possible increase in cost due to
inflation is not ignored.
Working out the amount of insurance required for death, disability or retirement is far more
difficult as it depends on individual circumstances. The role of existing insurances must be
factored in as well, e.g. retirement and funeral schemes.
Banks usually accept life policies as collateral for loans advanced. In fixing the amount of
insurance an individual needs, one can either use a set of general rules or go through each
need with prospect, asking them how much they need. The broker should keep in mind
always that each prospect’s circumstances and ideas could be quite different.
Page 27
For example, one prospect may consider it enough for the family to be able to settle down
after his death whilst another may want permanent replacement of income that he would
have earned if he had lived. The following guidelines can be useful in determining the
minimum amount of required.
(i) Death or disability: subtract current age from 60 then multiply by three months’
salary, plus
(ii) Last medical expenses: any figure between $2000 to $10000 could be applicable,
plus
(iii) Outstanding debts: an actual amount, if possible, if not, provide for one year’s salary.
Example
The prospect’s age is 38 and earns $620 per month. Determine the minimum cover required.
Death and disability: (60-38) x 620 =$13640
Plus
Medical/funeral expenses: $5000
Plus
Outstanding debts: 12x620 = $7440
Minimum required $26080
Establishing and trying to overcome a prospect’s needs is all very well but the broker must
ensure that the prospect can afford to the pay the premiums for the policy. The broker
should avoid overselling. A general rule is that the cost of all insurance premiums should not
be more than 10% of the prospect monthly income or 25% where the person is not a
member of a retirement fund linked to his employment.
Where insurance is being used as savings plan for something special, e.g. university
education or a house, the percentages may be increased if the premiums can be afforded.
The broker must appreciate that younger people may prefer to spend less on life assurance
as they may have other demands on their income, whilst others may prefer to save a higher
percentage of their income as they near retirement age.
4.3 Portfolio construction
Some prospects may not be able to pay for the cover as determined by the needs analysis.
It is therefore advisable to start by setting something for retirement, either completely or
partly until extra resources become available. It is always important to first cater for the
death or disablement of the prospect. The classic approach is to cater for the needs in the
following order:- Life insurance for death of the insured
- Disability insurance for permanent disability of the insured
- Disability insurance for the temporary disability of the insured
- Critical long term savings needs (endowment assurance , with or without life cover)
- Retirement provision (endowment or retirement annuity policies)
Where the prospect already has one or more policies it is important that the benefits of these
plans be deducted from the minimum amount when proposing a further policy. The broker
should use a step by step approach to satisfying the overall needs. The full portfolio should
be built over time. Remember – once a prospect always a prospect!
The premium update facility can also be used to build the client’s portfolio over time. The
flexibility of modern life policies makes it possible to cover all needs using a minimum
number of policies, e.g. universal policies.
Page 28
Chapter 5
The Insurance Act Chapter 24: 07
5.1 Background
Insurance companies in Zimbabwe have to conform to the requirements of the Companies
Act as other companies have to. However, because of the type of business they conduct and
the supervision they receive from the Insurance and Pensions Commission, they are exempt
from some provisions of the Act. The Insurance Act Chapter 24:03 directly applies to all
insurers, reinsurers and brokers.
5.2 Insurance and Pensions Commission (IPEC)
The Minister of Finance appoints a Commissioner of Insurance and Pensions to carry out all
powers assigned to him/her by the Insurance Act.
5.3 Provisions of the Insurance Act applying insurance brokers
An insurance broker must apply for registration in terms of Section 35 of the Insurance Act.
The Commissioner will register the broker if he/she is satisfied that an applicant in terms of
this section:- Is not seeking to register under a name identical with the name of a person
registered in terms of this Act or so nearly resembling the name of such person as to
be mistaken for it
- Has not, under any law of any country been adjudged or declared insolvent or
bankrupt and has not been rehabilitated or discharged
- Has not been convicted by any court wherever situated of any offence involving
dishonesty
- Has not entered into an agreement relating to preferential offer of insurance business
with any insurer so as to impair his impartiality
- Is authorised, if he negotiate insurance business other life insurance business, to act
as a correspondent of brokers who are authorised by insurers in any country to place
business with any such insurers.
Page 29
The commissioner will register the applicant as a broker and him a certificate of
registration. Where the Commissioner is of the opinion that it would not be in the public
interest to approve an application for registration as an insurance broker, he will reject it
and notify the applicant accordingly in writing.
5.4 Investments by insurance brokers
Insurance brokers must hold and maintain unencumbered investment in approved securities
whose values are determined by the Commissioner from time to time in terms of section 36
subsection(1) of the Act.
5.5 Professional indemnity insurance
Insurance brokers must effect and maintain a professional indemnity policy in force with a
limit of liability determined by the Commissioner from time to time in terms of section36
subsection(2) of the Act. The policy must be issued in Zimbabwe.
5.6 Annual returns
Insurance brokers should in terms of 37 subsections(1) and (2), within six months of the end
of each financial year submit to the Commissioner a statement setting out the details of
insurance business placed by the insurance broker and such other additional information as
may be prescribed from time to time. Failure to comply with this provision attracts a penalty.
5.7 Cancellation for registration
The Commissioner may in terms of 37 subsection(1) , (2) and (3) cancel the registration of
an insurance broker if he/she is satisfied that the broker has violated any provisions of the
Insurance Act Chapter 24.03.
Chapter 6
Ethics and the insurance broker
It has long been accepted that users of financial products in Zimbabwe have enjoyed little in
the way of legal protection when it comes to the providers of financial advice. Consumers
are vulnerable because:- Their level of knowledge of financial matters and products is generally very low
- Often products are not regular purchases, so consumers have little chance to evaluate
them
- Some products are of a long term nature and often ‘lock” buyers for a considerable
period of time, with heavy penalties being applied on early termination
Page 30
-
The benefits are intangible and dependant on a number of factors
Products cannot be pre-tested and sometimes a shortfall or oversight is only detected
when it is too late
Many intermediaries involved in the selling of products are themselves ill informed
The legal and economic environment into which these products fall is complex and fast
changing
Many sellers of the products are incentivised to sell by a commission structure which
encourages sales at all costs
Historically, many consumers have been “taken for a rude” by unscrupulous operators.
Despite these glaring challenges very little has been done in Zimbabwe to protect insurance
consumers beyond what is contained in the Insurance Act Chapter 24:0 enacted in 1996. Its
amendment and regulations have primarily focused on solvency issues and the expenses
ethical issues in the transaction of insurance business.
6.1
Introduction
Ethics is a discipline which has been receiving attention of late and which is closely tied the
broader concept of corporate governance. Ethics goes beyond mere compliance with
existing laws to include policies and procedures of business conduct as well as the more
basic moral issues.
It has been shown over time that companies that uphold high ethical standards in their
business tend to do better than those that do not.
6.2
Core concepts of ethics
Ethics embraces the following core concepts:
- Values – such as respect, integrity, honesty and truthfulness
- Obligations – both specific and general responsibilities and our commitment to meet
these
- Rights – to property and treatment of both the service provider and the customer
- Consequences – on both the service provider and the community
- Character – covering issues such as honour and comparison
6.3
Role of ethics in business
Ethics deals with the balance between various stakeholders involved and the process of
business as it impacts on the individuals concerned.
The most common issues are:- Disclosure of relevant information
- Rewards and payments (including gifts, bonuses, etc)
- Social responsibility
- The impact of business on the environment
- The proper use of company assets
- Confidentiality
- Business politics to enhance one’s own position
- Equity in dealing, e.g. not enforcing a deal with a supplier which is totally one-sided.
6.4
Test of ethics
Several checklists are available to help people determine whether a particular decision
complies with good ethical practice. These include asking the following questions about the
decision:- Is it legal?
- Does it comply with professional standards?
Page 31
-
Does it promise the greatest good for the greatest number of people involved?
Does it feel right?
Would you like someone else to act this way towards you?
Would you be able to justify your actions to others, for example for business colleagues,
the media and your family?
What would a reasonable person think?
Can you sleep easily at night given your course of action?
6.5
Creating ethical behaviour in business
The following can help in creating a culture of ethics in business:- Work the aspect of ethics into your corporate vision or mission
- Draw up a code of ethical business conduct
- Talk about ethics regularly in the business
- Do regular audits on your business practice
- Promote openness and disclosure
- Reward ethical behaviour and punish non-compliance
6.6
Corporate governance issues in insurance broking
Corporate governance is a young discipline that has grown out of deep seated concerns
raised by spectacular and well publicized corporate failures. Such corporate failures
worldwide were caused inter alia by insider loans, compensation scandals, fudging financial
statements, inefficient and unethical conduct of external auditors for companies and closed
decision making processes leading to corruption and waste. The collapse of Enron, Arthur
Anderson, World.com and others from the late 2001 to date, generated interest in corporate
governance and a series of regulations and statutory provisions were enacted in 2002
through the famous Sarbanes-Oxley Act.
In South Africa the promotion of good corporate governance has been spearheaded the
King Committee which has since produced guidelines of best practice for South African
companies. To date the King Committee has produced three reports, namely, King I, II & III
which has a gone a long way in improving best practice in the way organisations are
managed and directed.
Zimbabwe has not been spared of corporate scandals and failures. In 2003 scandals
rocked the banking sector involving allegations of insider loans and fudging of company
financial accounts. The problems persist to this very day. In response, the Reserve of
Zimbabwe crafted Guideline No. 1 of 2004 on corporate governance suggesting inter alia the
appointment of independent non-executive directors to serve on the board and committees
of Financial Institutions.
Lately in September 2009, Zimbabwe Leadership Forum and the Institute of Directors
Zimbabwe launched a corporate governance code drafting effort which is gaining
momentum. It is hoped that the effort will yield the best for the corporate governance scene
in Zimbabwe. It will be a unique code dealing with the unique history and interests of the
corporate governance in Zimbabwe. Ex-students of the MSU MBA Graduate School are
involved in the crafting. The code of best practice for Zimbabwe and is expected to be out by
end of 2010.
In a nutshell, good corporate governance covers the following aspects:- Fairness to all stakeholders
- Accountability at all levels being attributed to and accepted by individuals
- Discipline
- Independence, allowing objectiveness in all dealings
Page 32
-
Social responsibility in conducting business of the concern.
6.7 Benefits of being an ethical organisation
A reputation is a character generally ascribed to a company or organizational entity. A good
reputation has the following advantages:- For a listed company, a good reputation is a key asset because it helps to enhance the
shareholder value.
- Companies with high reputation have corresponding high share prices.
- A strong share price makes the raising of extra capital for existing or new investments
easy.
- Damage to the reputation of a company is quickly reflected by a drop in its share price
and loss
of business.
6.8 Industry agreements and self regulation
This is a non-statutory method of supervision exercised by the industry itself through
adherence by its members to the principles contained in codes of practice.
The Life Association of Zimbabwe (LOAZ) and the Insurance Council of Zimbabwe (ICZ)
have a role in facilitating the smooth running of the industry agreements. Their roles, inter
alia, include:- Improved protection of the insurers, as part of the measures to keep premiums down
- Protection of consumers
- Improved public image
- Assistance in limiting the amount of legislative controls
- Improved business efficiency
The following sections contain a summary of relevant LOAZ codes and a few ICZ short term
industry agreements.
6.8.1 Long term insurance
Member offices of LOAZ, have over the years formulated codes of conduct on most aspects
of their business as life assurers. These codes, to which all member offices subscribe, are
constantly updated to meet to meet changing circumstances. These codes are set down as
“entrenched” agreements that no member office will knowingly or deliberately contravene.
Brokers involved in advising clients on life assurance policies should be aware of these
codes and their implications to their work environment.
(a) Code on the life register
The life register is a data base through which insurers can share information about people
who propose for life assurance and have “Notifiable impairments” that are relevant to the risk
being assessed. Notifiable impairments are conditions which result in a final extra mortality
or extra morbidity of 75% or more regardless of the underwriting decision taken.
The LOA life register facilitates full disclosure of material facts in assessment proposals for
life assurance. To this end all life insurers must enter in the life register the details on
applicants whose application for life assurance would have been adversely treated .
(b) Code of good practice on disability insurance
This seeks to avoid over insurance in disability insurance by limiting benefits payable. This
provides an incentive for the claimant to return to work.
Page 33
(c) Code on medical fees, report and related matters
This sets out fees payable on medical examinations for insurance purposes requested by a
member office.
(d) Code on dread disease benefits
The objective of the code is to ensure that all proposals for the dread disease benefits
request information about existing policies and current proposals from similar benefits and to
include benefits within the scope of the LOA claims register.
Dread diseases are known, but not limited to, by the following names:- Critical illness
- Trauma cover
- Living benefits
There are no limits enforced anymore in terms of the code, each insurer must have their own
internal practise regarding limitation of benefits and this should be applied at underwriting
stage. The vast variation in the types of dread diseases cover available makes the limitations
between insurers very difficult.
(e) The HIV testing protocol
This provides guidelines on the application of HIV/AIDS tests and use of HIV/AIDS exclusion
clauses. HIV/AIDS tests are mandatory for policies providing immediate life cover.
The rapid escalation of HIV positive numbers in Zimbabwe necessitated a rethink of the
numerical figures to be used before an HIV test be undergone. All life offices in Zimbabwe
currently require a negative HIV test before they can accept a proposal for a policy providing
for the payment of the full sum assured on death. Where the proposal is unable or unwilling
to go for the HIV test any policy issued is subject to an HIV exclusion clause. The wording of
the clause varies from office to office by the intention is clear that the full benefit will not paid
on death with the first five years of the policy duration.
The clauses available on the market limit the benefit to:- A refund of the premiums less policy fees and commission (without interest)
- Payment of the surrender value or a refund of the premiums whichever is the lesser
- A multiple of the annual premium e.g. twice the annual premium
The above position was taken after it was found that:- An insurance company will be able to refuse payment only where it can be shown that
there was a material non-disclosure in relation to HIV status before the policy was
issued. This is easier said than done as non-disclosure if difficult to prove.
- AIDS is very seldom, if ever, stated on death certificate as the cause of death. This
would thus make it very difficult to enforce an AIDS exclusion clause. The insurer may
elect to rely on the World Health Organisation’s (WHO) list on AIDS related conditions,
but this is one step removed and will make the AIDS exclusion clause difficult to enforce.
Having accepted that AIDS exclusion clauses will no longer be imposed an insurer must
subscribe to a testing protocol that ensures that test results are treated in a confidential
and sensitive manner.
The code also sets the guidelines for HIV testing for life insurance purposes. The proposer
should sign a consent form agreeing to undergo an HIV test, go through pre-test counselling
and post test counselling by his personal doctor. The HIV test should not be disclosed to any
person other than the doctor nominated by the proposer. All positive results and refusals to
undergo a test must be recorded in the LOA’s life registry.
(f) Code on replacement
The objective of the code is the protection of policyholders and the good name of the
industry. The code discourages termination of an existing insurance policy and to effect a
Page 34
new one in its place. The existing policies should be varied to provide changed policyholder
circumstances or requirements instead of replacing them. Cancellation of policies causes
loss to the insured in that he does not get a refund of the premiums paid and the insurer also
loses in that he may not recoup the heavy initial expenses involved in setting up a policy.
Intermediaries have a duty to advise their clients to take more insurance policies and not
cancel existing ones. They have a duty to explain the meaning of replacement, the potential
prejudice from replacement and give them any detailed comprehensive information
regarding the replacement.
-
The code imposes heavy penalties on non-compliance and these include:Issue a warning to offending intermediary
Request that no commission is paid or reversed if payment has already occurred
Grant the client a 30 day cool-off period in accordance with LOA key features document
The intermediary concerned may be considered for action under the Code on “S”
reference
(g) Code on the “S” reference system
The “S’ reference system protects the public in particular and the industry at large from
persons who are not fit and proper to market life assurance products or directly train or
control people who are so engaged. Member offices will not employ, accept business or pay
commission to any intermediary with an “S’ reference.
The imposition of an “S” reference is a very serious matter with grave consequences both for
the industry and the intermediaries concerned. The ”S” reference once imposed for a period
of 5 years. The agent can appeal to the chairperson of the LOA appeal board and right of
appeal may be granted where there is reasonable prospect of the appeal being successful.
After the “S” reference has run its course it is replaced by an “X” reference which indicates
that the intermediary may, once again, to market life insurance, control or train life assurance
intermediaries.
(h) Code on stop orders: collecting commission
This regulates the amount of collecting commission paid to certain employers for collecting
premiums on behalf of life insurers.
(i) Code on reversed commission
This code regulates the recovery of commission paid when the premium it relates to is still
outstanding.
The code provides for the reversal of commission paid in advance in anticipation of the
premium of a premium, but the premium is not later remitted. It code endorses the viewpoint
of the industry that commissions are due only when the premiums they relate to have been
paid.
(j) Code on half yearly statistics
The code regulates the submission of half yearly statistics on all aspects of their business,
including new business written, and statistics on policies surrendered or lapsed.
(k) Code on commission control and the interpretation of the remuneration
regulations
This code restates what is contained in the Insurance Act Chapter 24:03. It is a breach of
regulations of the Insurance Act Chapter 24:03 for an intermediary to be influenced in
selecting an insurer to place business with by an abnormal service or any subsidy or reward
of any kind other commission as laid down in the regulations. The decision on where to
place business must be dependent only upon factors such as the product itself, the standing
Page 35
of the life office and the standard of that type of service which would be of importance to the
policyholder and should not be influenced by factors such as entertainment.
Life offices and their officials must not do anything which could be seen to be an
inducement, consideration or reward for the placing of business which is over and above that
provided for in the regulations.
(l) Code on public relations and on advertising and promotion
The code ensures that making of public statements on behalf of the insurance industry is
only be made by the Life Offices Association.
(m) Code on benefit illustrations
The code is intended to ensure that policyholder expectations created as a result of
illustrative policy benefits are reasonable and do not result in the image of the industry being
damaged.
The code provides for the use of a minimum and maximum interest rate to use in calculating
projected maturity values. The minimum rate is called the lower projection rate and the
maximum rate is called the upper projection rate. These rates are determined by LOA from
time to time.
(n) Code on the Claims Register
The Claims Register is a data base through which insurers can share information about
persons who are lives assured under life policies and who have made “Notifiable claims” that
are relevant to the assessment of future claims, e.g. early claims, claims under special
investigation, fraudulent claims, repudiations, dread disease claims, AIDS/HIV+, etc.
(o) Code on the Intermediary Register
The Intermediary Register affords users the opportunity to access relevant reference data
before appointing an intermediary.
(p) Code on living annuity policies
The code seeks to avoid mis-selling of living annuity policies by ensuring that consumers are
given adequate information to enable them to make informed decisions.
(q) Code on unclaimed benefits
The code ensures that reasonable steps are taken by member offices to inform the
policyholders/beneficiaries on any unclaimed benefit.
6.8.2
Short term insurance
(a) Agreement on the application of pro rata average
This agreement is intended to ensure that assets are insured for their full values and avoid
underinsurance. When assets are not insured for their market values insurers do not get full
premiums and as result are not able to pay for the losses in full. This agreement globally
incorporates the Pro Rata Average in all material damages insurances issued in Zimbabwe.
The classes of insurance to which this agreement applies is reviewed from time to time.
Whenever the policy is subject to average, if property covered by the policy is damaged by
any insured peril has a value less than the value of the loss the insured will be considered as
being his own insurer for the difference and shall bear a rateable share of the loss
accordingly.
(b)
Knock for knock agreement
Page 36
This is a bilateral agreement between motor insurers which allows each insurer to pay for
damages for its own policyholder’s vehicle if such damage is insured irrespective of
responsibility for the accident. This avoids litigation and promotes good relations between
insurers.
Under this agreement, the insurer of the party who was wrong pays the excess of the party
who was in the right. The excess is then sent to the insured as a refund for the excess he
would have paid when the claim was settled.
Chapter 7
Business Insurance
The broker will meet clients who require various business insurance in the course of his
work. The pertinent aspects of some classes of insurances he meets are summarised
below:(i) Key person insurance
Services of a key employee may unexpectedly terminated by untimely death, disability or
resignation. Not only could the vacant position be difficult be difficult to fill, but the knowledge
and expertise that he may impart to a competitor could seriously damages the employer’s
market share.
A key person is someone who would:- Difficult to replace
- Affect the profits of the enterprise
- Result in the reduction of sales
- Result in costly training of a replacement
- Require a possible change in management.
It is often difficult to fix the value of a key person in dollars and cents and the following
questions may help:- Will creditors require immediate settlement as a result of the death of the key
person?
- Will suppliers suddenly require cash on delivery?
- Are certain contracts or projects going to have to be cancelled?
- Is the bank going to cancel any facilities and call up all loans?
Where it is not possible to accurately assess the loss that a key person will mean to an
employer it is normal to use a multiple of his/her basic salary to determine the sum insured,
say, 2 or 5 times his gross salary.
Current legislation treat the premium payable by employers in respect of key person
insurances as tax deductible up to limits that are reviewed from time to time.
(ii) Restraint of trade (preferred compensation)
It is normal for employees to move from one employer to another. Much as any brokerage
may wish to retain the services of a particularly talented employee this would seldom stretch
to normal retirement age as the nature of the enterprise requires a constant flow of new
ideas and thus new talent.
The age of the employee may be such that the period to normal retirement age may be
considered too long and so the plan would not be an incentive for the employee to remain in
the service of the employer.
The answer to either of the above problems is to adapt the employer owned scheme is such
a way that the employee will feel that a real benefit can be reaped for remaining in the
Page 37
service of the employer. At the same time the employer must be able to see a real benefit for
him as well.
The Scheme
The employer and employee agree, in writing, to the following:
- The employer pays the employee a special, non-retirement funding, salary increase
- The employee, after having paid the tax due on the special increment received, will
buy a policy of life insurance
- The employee ceded the policy to the employer as security for the increase
The employer’s position
The employee will claim the increase in salary expenses as a tax deduction. The proceeds
of the policy will also not be paid to the employer and will not be taxed if the complies with
the requirements of the Income Tax Act. Supplementary benefits may be added.
The employee’s position
The employee enjoys ownership of the policy without any extra outlay. The cession must be
a security cession and not an outright cession to ensure that ownership will not be
transferred and the policy remains the property of the employee.
The agreement
The agreement ensures that neither party is unsure of their position with regards to the
policy in the event of a change of their relationship, either by death or resignation. It should
cover issues such as ownership of the policy and what would happen if the employer goes
insolvent.
(iii) Capital asset replacement plan
Unlike land and buildings, plant, machinery, motor vehicles, office equipment, etc, are
wasting assets with a limited time span usage and is standard accounting policy to
depreciate capital assets at a fixed amount each year for their expected life span.
Different write off periods exist for various assets usually between two and 25 years
depending on the nature and lifespan of the asset. The depreciation of these assets reflects
the estimated annual cost of wear and tear and is tax deductible in determining the
company’s taxable income. Although depreciation is a cost, the charging of it does not
involve any cash outlay. To ensure that enough funds are available to replace these assets,
cash amounts equal to the depreciation charges must be invested in a sinking fund, e.g. a
pure endowment policy.
The annual depreciation charge is matched with an annual payment into a pure endowment
policy for a term of at least 5 years. Under current legislation there is no need for a policy to
have a “life insured” if the policy does not provide life cover. Sinking fund policies may also
be used in saving for employee bonuses.
(iv) Buy and sell agreements
Small businesses are affected by the death of a partner or shareholder as their share passes
to their estate on death. The profitability of the business can also be reduced by the
permanent disability of a partner. Retirement and insolvency could also present similar
problems for the business.
Life offices have life assurance plans to mitigate against the inconvenience occasioned to
the business on death, permanent disability and retirement of a partner, shareholder or key
person. It would be ideal for all concerned if the sole proprietor, partner, or shareholders in a
private company arranged for the continuity of their business entity while they are still able to
Page 38
do so. The most effective way of doing this is through a buy-and-sell agreement and fund it
using life assurance policies and the broker must familiarise himself with the following
available options:-
(i) Partnership share protection
When a partner dies his share of the partnership passes to his estate. This may not be
convenient to the surviving partners. It is the interests of all partners that the surviving
partners are able to buy out the interest of the deceased partner and for the family to receive
a cash sum for that. It is recommended that each partnership should have a clause enabling
this. Many life offices offer partnership protection plans containing a draft partnership
agreement and policies under trust for each partner. When a partner dies, the policy on their
life pays out to the surviving partners as beneficiaries of the trust. The funds are then used to
by the deceased partner’s share from his estate.
(ii) Directors’ share protection
Small businesses have problems similar to those faced by partnerships. At death the share
of a director is passed to their estate or someone with no interest in the company. The
surviving directors may want to keep control of the company. The best way is an agreement
between the directors providing for a buy and sell plus a life policy on the life of each
director. On death of a director the policy will pay out and provide funds to surviving directors
to buy shares from the deceased estate.
(v) Contingent liability insurance
A private company like any business entity will sometimes need to borrow to fund its
operations. Directors of the company may be required to sign personal surety where the
bankers feel that the assets of the business provide insufficient security. On death of the
director the loan will be recalled and the business will need to repay the loan. If the company
fails to do so the creditors may claim the outstanding debt from the director’s deceased
estate. To avoid the inconvenience the business may take out insurance on the lives of any
directors that may signed personal sureties on condition that:-
Premiums are paid by the business
The proceeds of the policy are used to settle any amounts outstanding to creditors
who hold personal guarantees that the director may have signed
- Any surplus remaining after the settlement of the secured debts may be retained by
the business
A written agreement is entered into between the business and the director that
compels the business to use the proceeds of the policy to settle the amount owing to
the creditors
- Creditors accept the plan and provide a written undertaking to cancel the personal
surety provided by the director on repayment of the debt.
- It advisable to include permanent disability riders on the basic policy.
Setting up of a contingent liability plan can safeguard not only the estate of a deceased
director but also the enterprise against financial hardship, should the personal guarantor
pass away suddenly.
(vi) Group employee benefits and related schemes
All retirement funds must be registered in terms of the Pension and Provident Fund Act
Chapter 24:07. The aim of this statute is to protect the rights of members and ensure
minimum solvency standards (i.e. to ensure that the fund always has enough assets to meet
its liabilities to members).
Page 39
Retirement fund fall into the following categories:- Pension funds
- Provident funds
- Retirement annuity funds
Of the three types, pension and provident funds have an employer involvement. A retirement
annuity fund is essentially a self financed pension plan where the individual pays all the
contributions, receives all the tax benefits and gets all the concessions that may be available
at retirement. Smaller employers are likely to opt for retirement annuities in order to contain
costs.
The purpose of a retirement fund includes the following:- Primarily to provide a retirement benefit, either as lump sum or a regular monthly
payment or combinations of both options, that will provide an income to a member
who has passed the retirement age agreed between the employer and the employee
representatives until his death; or
- To provide a lump sum payment or monthly income to persons who, for reasons such
as ill health, are no longer able to remain actively in employment; or
- To provide for the dependants of an employee who might die before he reaches
retirement or die after retirement.
In addition most funds now provide for the following features:- Ill health
- Physical disability caused by an accident ; or
- Death – benefits provide for Widows and Orphans Pensions (WOPS) until they can
take care of themselves (e.g. until the attain age 18 or 21 if still in tertiary education).
The benefit payable to surviving to spouse usually continues for life.
The following are arguments for the adequate provision of retirement benefits:- A great deal of goodwill is generated if an employee knows that his dependants are
looked after. The involvement of the employer is seen as part of a social awareness and
uplift ment program for the employees and their dependants
- Employers soon realise that the employees feel more secure and happier in their jobs –
leading to a much more effective work force
- A retirement allows for more orderly staff policy. The employer can plan for succession
and promotion, knowing that those reaching retirement age are adequately provided for.
- It provides a more effective way for an employer to release an employee who, due to
permanent illness or disability, has to stop before normal retirement.
- A direct benefit to the employer is the fact that a good staff retirement fund is an
attraction for a better calibre of applicant when recruiting additional staff.
- The cost of providing retirement benefits is spread over a long period, becoming part of
the employer’s bill and the employee’s monthly deductions.
- Additional benefits e.g. WOPS which show the employer’ s concern are likely to be
reflected by employees loyalty and dedication to the enterprise
- A retirement fund is extremely flexible and can easily accommodate benefit changes for
a whole group of employees.
- It releases employer from his financial obligations to employees once they have left
service.
- Fund assets cannot be attached in the event of the liquidation of either the employer or
employee. This provides a level security to employees that cannot be provided by the
employer or any private scheme.
- Both employer and employees enjoy some tax concessions
Negotiating with staff representatives
Page 40
After the employer has been convinced that a retirement plan is the best interests of the
business and its employees, will need to engage his employees on the structure of the
scheme.
The discussions usually culminate in the appointment of representatives as trustees the
retirement fund. Members are entitled to appoint 50% of trustees with the balance being
appointed by the employer.
There are various types of retirement funds in existence. The most important of these are
self administered funds, funds administered by insurers and funds administered by
professional administrators. The fund benefit structures include defined contribution and
defined benefit schemes. These benefit structures were discussed in the Pensions Scheme
and Design Module IRM 206.
Chapter 8
Operational issues in insurance broking
8.1 Negotiating broking contracts
Before a brokerage can start, operating must be arranged with one or more insurance
companies. As broker should sell a wide range of products and to this end he must approach
a wide range of insurers and negotiate agency contracts. The Insurance Act Chapter 24:03
regulations provide that brokers must be supplied written confirmation of the services which
they van offer from each insurer represented.
(a)
Long term insurance
It is not difficult to obtain a contract with a long term insurer, provided the broker is registered
with IPEC and there is no history of LOA “S” referencing. If annualised commission
payments are being sought, the insurer will usually require full financial statements proving
the stability of key individuals in the brokerage. Annualised contracts will not be granted to
those who have a history of insolvency.
Many long term insurers will review the contract regularly over time. It is current practice to
demand a certain minimum level of production in order to warrant the broker’s consultant’s
time and services. In extreme cases, the contract may be cancelled for non-production.
(b) Short term insurance
It is also not difficult to obtain a contract with a short term insurer, provided the broker is
registered with IPEC and there is no history of LOA “S” referencing. The requirements for
Lloyd’s line are far more extensive.
8.2 Assessing the strengths of insurers
There are three main factors which may endanger the security of the life and general
insurers, namely:Inadequate premiums charged and reserves created, resulting from inadequate
statistics or technical information or changes such as a gradual worsening of claims
experience and the failure to take prompt corrective action
Page 41
-
Chance accumulation in the number or size of claims against which adequate
arrangements, usually by way of reinsurance have not been made
Losses on investments on investments and other assets in particular circumstances
The Ministry of Finance the responsibility of monitoring the situation, largely through the
statutory returns made to IPEC. These controls are not fool proof and all brokers must be
aware of the security of insurers they deal with.
Although in most circumstances brokers are not liable for the failure of an insurer, there are
several reasons why they should monitor constantly of the security of the insurers they deal
with, namely:
-
He could face problems from disappointed clients should large volumes be placed with
an insolent insurer
His reputation will be damaged from association with an insolvent insurer
Financial loss from unpaid brokerage
Increased costs in replacing business with other insurers
(a) Balance sheet tests: short term insurance business
The greatest danger in general insurance relates to the charging of inadequate premium and
creating low reserves.
The charging of premiums over a period of years can go unnoticed by an insurer if proper
provisions for unearned premiums and outstanding claims are not created at the correct
time. The continuing solvency of a short term insurer depends upon its shareholders funds in
relation to the premium income. The shareholder’s funds represent the difference between
the insurer’s total assets and its sources of finance, excluding shareholders funds. It follows
that any overstating of asset values or understating of liabilities will have the effect of
increasing the stated amount of shareholder’s funds.
In analysing an insurance company’s balance sheet, attention should therefore be paid to
any signs of weakness in these balance sheet values:
(i) Balance sheet assets
To obtain a realistic value of the asset side of the balance sheet it is suggested that the
following steps be taken:- Discount entirely goodwill and unsecured debts of an associated dependent company
Goodwill is the premium paid representing the excess over the value of the net assets
when a business is acquired. As such the “asset” does not exist and in extreme cases
(for instance insolvency) will probably have no value.
Unsecured debts are of lower value than secured loans and, technically, the parent can
exert little control over an associate, and there assets of this nature are questionable.
- Discount fixed assets (other than real property by two thirds)
Fixed assets are valued on a going concern basis and in the event of an urgent disposal
may not realise the sums shown in the accounts.
- Discount real property by one third. The lower discount reflects the more tradable nature
of these assets
- Discount shares in associated companies by one third as the valuation of the shares
may be subjective
- Check that the value shown in the balance sheet of quoted investment is not greater
than their market current value – the current market value should be used as it is more
recent.
Page 42
-
-
-
Check that no more than 20% of total assets (after any discounting from the points
mentioned above) is held in agents or companies balances.
(ii) Agent balances
These are amounts owing to the company from its agents, and in most cases these
amounts will be due quite quickly.
Reasons for paying attention to this figure are:A growth in agents balance may indicate weakness in the company’s credit control
systems which could a symptom of other problem
The agent balances may be spread over a wide range of intermediaries and thus failure
of any single intermediary should not cause a great impact
Check that cash, bank balances and money on short term deposit is not less than 6% of
the total assets.
Check that quoted investments at market value plus cash, bank balances and money on
short deposits covers the amount of the insurance funds including outstanding claims as
shown on the liabilities side of the balance sheet. This is an indication that the insurer’s
liquidity i.e. ability to meet current liabilities from current resources
Be aware of the need for the company to follow a sound and broad based investment
policy which will take the strain of both short term and long term cash requirements.
The importance of paying attention to a company’s investment’s mix is demonstrated by
problems and failures of a number of US life companies. Their problems stemmed from
over investment in “junk bonds” (high yielding but risk bonds issued by commercial
companies) and real estate, which both suffered a spectacular slump in the past.
(ii)
Balance sheet liabilities
The largest single item on liabilities for most insurers is the provision for outstanding claims,
followed by unearned premiums. It is essential for an insurer to set aside correct amounts for
unearned premiums and outstanding claims including IBNR claims.
Under-reserving over time can undermine the resources of the company. It is also possible
to test the adequacy of the provisions by analysing the premium income in each separate
class and the outstanding claims at the end of for each class. This information can be
obtained from the company or IPEC statutory returns.
When the company’s assets have examined and, if necessary, recalculated and reduced,
and the total of the company’s liabilities (other than to shareholders) assessed, the latter
total should be taken away from the former to give a margin of solvency. The margin of
solvency should not be less than 25% of general business income net income of outward
reinsurance.
The above comments should be read in conjunction with requirements of the Insurance Act
Chapter 24:03 on calculations of minimum margin of solvency. Although the margin of
solvency is the best measure of an insurer’s solvency, it is based on historic figure and
should therefore be compared with other tests.
(iii)
Other tests
Balance sheet tests suffer from the following weaknesses:- The information is often out of date when it becomes available (although many
companies do publish quarterly statements which may be of some help)
- it may not sufficient to make a complete judgement
it also requires time and a certain degree of expertise to carry out the analysis and this will
be compounded by the number of companies a broker deals with. In addition to the balance
sheet tests, the broker must be aware of the following:-
Page 43
-
long delays in the settlement of claims, although this may be a reflection of
administrative inefficiency rather than a deep seated problem.
- Speed at which return premiums and other credits are repaid by the insurer
- The general quality of insurer statistical information particularly claims experience, so as
to provide indications of inefficiencies within the business which may lead to under –
reserving.
- Willingness to pay above average commissions and other inducements may indicate a
need to generate cash flow in order to keep up with losses.
(iv)
Rules of thumb
The broker can also use the following rules of thumb in assessing the insurer’s security:- Credit ratings
Rating agencies are not without their limitations as the ratings are to some extent
historical
- Paid up capital
Particular attention should be paid to cases where the paid up capital is less than 50% of
issued or authorised capital.
- Trading history
Although not an absolute guarantee, a log trading period of successful trading should be
an indication of future solvency.
- Growth
If the company has grown rapidly in the past this may indicate overtrading, inexperienced
or misguided underwriting or an attempt to obscure problems with expenses or claims.
- Ratio of gross to net premiums
Where insurer is heavily dependent on reinsurance it can be exposed to the insolvency
of one or more reinsurers
- General underwriting style
A company with too relaxed underwriting terms may not be able to meet large claims
- Excessive capacity
A small company which offers capacity comparable to that available from a larger insurer
may be taking excessive risk to its net account or again may be unduly reliant on
reinsurance
8.3 Long term insurance business
The test of solvency for a long term insurer lies in the certificate signed by an actuary and
annexed to the balance sheet stating whether or not the aggregate amount of the liabilities
at the end of the financial year, following valuation, exceeded the aggregate amount of those
liabilities shown in the balance sheet. The balance sheet figure is normally the life insurance
fund plus current liabilities i.e. the fund being the accumulated balance of income over
expenditure in the life revenue account over the years during which the company has
transacted.
The most potential danger to a life office is the loss on investments and other assets. Severe
losses can occur only when sales have to be made at a time of a severe fall in market
prices. However, such sales need not endanger or seriously affect the security of life office
so long as the invested assets are reasonably matched by length of term to the company’s
contractual to its policyholders.
8.4 Embedded value
This is a concept that has been gaining support in the past few years. Embedded value in
the complex world of life insurance is a similar measure to the concept of “economic value’
with other companies.
It is calculated by taking adjusted capital and surplus of the insurer and adding to it the
discounted value of future distributable profits on in-force (effectively the cost of capital
required the in-force business). Any increase in the embedded value over and above
Page 44
what could be expected in the assumed projections would then be seen as ‘value added
during the period’
8.5 Underwriting and Claims
There is a need for efficient administration systems to be maintained to ensure the required
level of customer service and to optimise ongoing sales opportunities.
8.5.1 Short term insurance
(a) New business and underwriting
At the time of making the initial contact with a new client, a client file should be opened with
the client’s details, the paperwork surrounding the survey of needs, the quotation(s) and the
documents required as per industry codes of best practice. The full policy wording is a useful
addition, in case of a claim.
Once the policy is issued the renewal date should be immediately entered on the renewals
register. The files should be stored in alphabetical order for ease of access.
(b) Servicing and renewal
A renewals register must be maintained, preferably listing renewals due during each month
of the year. This will help the broker not to overlook any renewals and this may have serious
consequences for the client.
Where alterations are required to the risk, the details should be added to the client file. All
communication with client should be recorded, including brief transcripts of telephonic
interaction.
(c) Claims
Once a claim has been intimated a separate claims dossier should be opened up within the
client’s file. The handling of the claim should then be tracked through the various stages to
completion with the broker in particular paying attention to:- Ensuring that the insurer is advised timeously of the claim
- Obtaining the necessary documentation
- Ensuring that pressure is put on the insurer (where necessary) to speed up the claim
- Confirming the ongoing insurance cover terms
Details of settled claims should be kept in the records for future reference and use.
8.5.2 Long term insurance
Client files are just as necessary as in short term insurance with similar information being
required. The full needs analysis is essential and must be kept up to date by periodic review
of the client’s needs. Remember: Once a prospect always a prospect – clients needs change
overtime and the broker should maintain contact with his clients to ensure that their life
assurance needs are always covered.
(d) Servicing and renewal
The annual renewal should be “tagged” on the broker’s computer system so that the broker
is reminded of impending renewals in time to enable him make any necessary checks on the
client needs and requirements for the future period.
(e) Claims
The opportunities presented by a claim are huge. Not only is this a good time to demonstrate
tangible results from the insurance but could often lead to further business as the proceeds
may have to be reinvested, for example in an immediate annuity.
Where the claim is as a result of disability, there may be a role for the broker in negotiating
the payment on behalf of the insured.
Page 45
In the event of surrender, the professional broker would probably interact with the client in an
attempt to save the policy, perhaps through a policy loan, and also to assess the extent of
the change to financial position that this may indicate.
Chapter 9
Marketing
9.1 Marketing principles
Marketing is the management process which identifies, anticipates and supplies customer
requirements efficiency and profitably.
Marketing is a management process and requires input from on all four of the traditional
management fields – planning, organising, leading and controlling. Marketing it is about
identification of customer requirements. The need to anticipate is important to take into
account, because often by the time the need actually arises, it is too late to take advantage
of the situation.
Marketing needs to meet the requirements of the customer efficiency. If this is not done it is
highly likely that a competitor will exploit the opportunity. Marketing efforts must be on an
ongoing basis in order to create a good brand awareness status and ongoing customer
loyalty.
9.2
Marketing and selling
Selling focus on the needs of the seller, whereas marketing focuses on the needs buyer. It is
only once the proper process of needs identification has been followed that the selling part
can be put into practice. Marketing is an all embracing philosophy which should permeate
throughout the organisation and not be the sole domain of a person or a department.
9.3
Aspects of marketing
Traditional marketing theory gives four main aspects of marketing, often known as “the 4 Ps”
– product, price, place and promotion – the so called marketing mix.
The product comprises the core products and all aspects of it including the packaging, all
extras, options, guarantees, etc. Place refers to the distribution channel and the method by
which the product or service is brought to the customer including the whole sales process.
Marketing theorists argue that services has 7Ps . These include the 4Ps in addition to the
people factor, the process used to deliver the service and the physical evidence that goes
with it.
9.4
Service marketing
Services are seen to be quite different from commodities in that:-
They are often intangible, i.e. one cannot examine or test the product practically before
buying it
the product cannot be pre-manufactured and warehoused awaiting a buyer but has to be
created “on the spot” as it were
often the delivery of the service places a great emphasis on the person or persons
performing the service, with considerable direct interaction with the customer and
personal customer involvement in the process.
Page 46
-
Most services are consumed in their delivery e.g. the service of the needs analysis or
risk assessment for a client in the insurance field only really has value at the time that it
is performed.
The measurement of quality in service delivery is a complex matter and service marketers
traditionally struggle to produce and maintain the kind of consistency that is required to
ensure an overall quality experience.
9.5
Personal vs business marketing
Marketing theorists also draw a distinction between the marketing focused on individual and
corporate buyers. Business marketing often requires far more hard data than emotional
persuasion, while performance guarantee are often more important. In some situation
marketing to a business may involve several people working as a team rather than an
individual.
9.5.1 The different steps of marketing
Another way of looking at it views marketing as consisting of the following step:- Marketing research
- Product development
- Communication
- Sales
- Analysis and control results
(a) Marketing research
The objective and systematic collection, recovering, analysis, interpretation and reporting of
information about existing or potential markets, markets strategies and tactics, and the
interaction between markets, marketing methods and current and potential products or
services.
Marketing research does not only focus on the customers but also on competitors’
distribution systems and the entire delivery process. Whilst marketing research may often
demand grassroots surveys it could also be done from desk through the public media,
reports or published information and also by gleaning feedback from staff members who
interact with customers. Many marketers also conduct regular feedback sessions with their
as part of marketing research.
There is always a temptation on the part of a relatively small business to ignore marketing
research on the basis that this is only for the bigger companies. However, marketing
research is not necessarily only formal and high cost research studies. In many cases a
smaller company can make excellent use of freely available information as published in
industry media, extracts of surveys done by others and especially, by simply recording day
to day customer comments. The use of a simple customer satisfaction rating survey on a
regular basis is also highly recommended.
(b) Product development
In the sense of the insurance broker this may include the development of specific policy
packages aimed at the target audience but it is more likely to involve the service the service
package offered to customers, including the chosen distribution method, e.g. telesales,
group presentations at the workplace, and so on as well as the methodology of the service,
e.g. using a computerised needs analysis programme.
(c) Communication
Communication covers several aspects, including advertising to the potential market, public
relations activities which help to position the broker uniquely within the chosen community
and personal and personal communication with actual clients.
Page 47
For the small broker advertising may be limited to the signage outside the business
premises, an entry in the yellow pages, perhaps, a regular advertisement in the local, one or
more pamphlets outlining the services offered and an annual calendar or similar handout.
More aggressive approaches could include the daily papers, or even a local radio station.
Often a constant base level of promotion combined with several seasonal bursts just before
key times. This can be done by cold calling on the telephone, a personal drop in post boxes
or via a mailing list.
Direct marketing can be an effective way of reaching a new audience to expand one’s
scratch, for example out of telephone directories, but this takes time and is often not
effective because of changes that may have taken place. It is also not that personal. Lists
may be bought from list brokers or obtained from personal connections. Care should be
taken not to overstep the boundaries of professional conduct in pursuing canvassing too
hard.
The best source of contact referral is from existing clients, especially those who have
enjoyed good service from you already.
Public relations activities could perhaps include a regular talk at the local school on risk
management as a life skill or arranging free insurance coverage for the local old age home
fundraising fair day. A popular marketing approach today is relationship which seeks to build
a continuous, long term relationship between the marketer and the customer.
It is essential that the business should have a clearly defined target audience with which it
wants to communicate as well as a clear message that it needs to convey or confused
message could result.
(d) Sales
This aspect of marketing covers the actual approach to the customer, including the needs
analysis and the presentation of a solution to the needs uncovered, which should lead to the
sale of a policy or the adjustment of an existing one.
(e) Analysis and control
The purpose of this part of the marketing function is to:- Ensure that the plan is working
- Capitalise on areas of particular success
- Adapt the plan where it is not working
- Provide a base for future planning
It effectively operates through comparing the actual performance with that anticipated but
also involves further market research an interaction with the customer base.
9.6 The sales process
It is usual for a salesperson to have a set process to follow in looking for sales. The steps
may include:- Prospecting
- The needs analysis
- The sales visit
- After sales service
- Renewals
(a) Prospecting
Prospecting is general term used to describe the planning phase of an intermediary’s
activities. Instead of approaching just anyone they happen become to come across to see if
Page 48
they are interested in buying insurance intermediaries use prospecting to qualify people into
likely purchasers. While some intermediaries may have a limited success with cold calling on
members of the public the professional intermediary prospects knowing it will help in that.
- Days can be planned to a more efficient use of time. Energy is also used in the
proper way, thus leading to greater personal efficiency
- Unacceptable prospects can be eliminated and the chances of successful sales calls
increased
- People who have a particular need for insurance can be identified
- Closing ratios will improve i.e. making a sale every time a presentation is done. This
leads to greater to greater effectiveness and a positive mental attitude.
Every person has some need for insurance and is a possible prospect. However, the
potential pool of prospects should thus be restricted to an intermediary’s own area in order to
keep costs down and to make ongoing servicing of the client base more feasible. This could
depend on how easily one is able to get around, one’ s status and social standing within the
community and the ability to cultivate centres of influence who can provide qualified leads.
(b) Targeting prospects
A broker will find that he will be more successful if he concentrates on a defined area or
market . As people get to know and accept the broker as part of the community he will be
referred to other members of the community in need of his services. Examples of areas
where an intermediary should thus concentrate his activities are:- The community in which he lives
- The employee of a large employer in the neighbourhood
- A local supporters’ club or church community
- A particular industry
Influential friends and contacts e.g a school principal or estate agent, are known as centres
of influence and are very important to the eventual success of any broker. A centre of
influence is essentially any person who can introduce the broker to a large number of
qualified prospects. The centre of influence will provide the broker with the necessary
information that will leads into prospects. However, the broker must ensure that the
prospects fit the insurer’s target profile.
Some likely target markets would be people:- In a specific age range, say 25 to 55 years old
- Who own their own house
- Who are in a steady job and earn in excess of e.g. $500 per month
- Who have bank accounts
(c) Critical times for insurance sales
There are really good times to approach people about insurance. Brokers should constantly
lookout for these opportunities. For example in long term insurance, the broker could at the
following aspects:- When getting a salary increase
- When getting married
- The birth of a child
- Changing jobs
- Buying or moving house
- Death in the family
Brokers in the short term market should look for_
people on the move either in their career or their physical homes
- purchase of a motor car
the opening of new business premises
- Addition of new plant and equipment
In the short term market the annual renewal time if an important time not only to secure
existing income flow but to look for opportunities to add to the cover.
Page 49
(d) The needs analysis
The sales process will go better if some of analysis of customer’s needs is done first.
The analysis for the long term was discussed in section 4.The amount of short term
insurance cover needed will come from needs analysis, which should comprise of an
inventory of the assets involved, clearly showing what is to be insured, the sum insured and
the type of cover sought.
(e) Building a portfolio
It is known fact that it is far much easier to sell to an existing customer than to a new one.
Brokers must build relationships with their existing customers on an ongoing basis. Brokers
must appreciate the importance of a step by step approach to satisfying the customer needs.
The flexibility of modern policies allows f or the coverage of various needs using a minimum
number of policies, e.g. the universal life policy. This approach is beneficial to both the
insured and the insurer as it saves on costs of acquisition of business.
(f) The sales visit
The visit must be planned for in advance if it is going to yield the required results. The broker
should pay particular attention to the following aspects:
- An appointment should be scheduled at a suitable time in advance, whether at home or
office of the client or the broker’s office.
- The broker’s dress code should suit the professionalism of the industry but should take
into account individual circumstances e.g. when dealing with a farmer it may not be
correct to wear a dark suit and tie.
The sales process consist of following stages :(i) The opening or breaking the ice
This should be tailored to suit the situation. The broker should identify himself, the purpose
of his visit, and may include a certain amount of social chat (depending on cultures) to place
the client at ease.
(ii) The identification of needs and wants
The broker will use the needs analysis he might prepared in advance to work through the
analysis and confirming each component.
(iii) The presentation
The products features and benefits must be articulated to the client. The emphasis should be
on the benefits rather on meaningless features. The link between the benefits of the product
and the needs beings addressed should be stresses. For example, the affordability of the
premium could be highlighted in relation to the client’s financial circumstances.
(iv) Negotiation
This focuses on dealing with any objections which may be raised and the planed must be
smoothened to best suit the client’s circumstances.
(v) The close
This the most important stage of getting the papers signed and formalising whatever needs
to be done in order to bring the policy into force.
Sales training should provide the skills needed to guide the sales process. Hard selling is
unprofessional. The broker should use professional analysis and provide acceptable
solutions to genuine needs thus building trust between him and the clients.
9.7 Customer service and retention
Page 50
The broker has an obligation to submit the proposal to the insurer, submit any additional
information which may required for underwriting and to ensure that the policy is issued. He
must ensure that the first premium is paid that future premiums are received by the insurer.
The broker may also be called to help in some later administrative tasks, e.g. claims.
By assisting the broker ensures that his client is getting the benefits that were explained
during the sales process. The broker must also assist with the policy delivery (if he is not
going to retain it) and also ensure that all other communication is received and understood
by the client.
(a) Ongoing service
For a broker to continue getting business from his centres of influence, he must service
clients properly. If they are not happy, word will quickly spread around cutting off any
chances for future business in that market. The broker must maintain contact with his clients
and provide a good level of service and continuously review their insurance needs as their
finances and circumstances improve.
(b) Ethics, attitude and behaviour
Many policyholders will consistently renew their policies without making any claims or
interfacing with the insurers directly. It is therefore important for a broker to behave in a
proper way.
Brokers are independent contractors who operate with little or no supervision. Personal
responsibility and a sound work ethic are therefore essential for the successful broker.
Brokers must also provide support to the insurers they represent as they are often the only
contact between the policyholders and the insurer. Brokers must not run down the products
of other insurers or brokers as this gives the industry a bad name and breaks down the
insuring public’s trust. The broker must not make promises which cannot be met. It is
advisable to promise to deliver something in five days and then deliver it in four days. He
must under promise but over deliver to delight the customer.
The broker’s duty is to help policyholders but at the same time represent the insurers and
industry. He must therefore keep both their interests in mind at all times.
9.8 Marketing planning and new product development
The broker’s market planning should flow from the overall corporate strategic plan.
This involves setting marketing objectives, evaluating the current and future strengths and
weaknesses, opportunities and threats within the environment, implementation the
programme while putting in place suitable control systems to measure progress and allow for
adaption.
The broker can use, inter alia, the Ansoff model in developing a marketing strategy.
Ansoff Model
Present Markets
New Markets
Present Products
New Products
Market penetration
Product development
Market development
Diversification
The planning should embrace:- The segmentation of possible markets into viable segments
- The selection of appropriate segment(s)
- A positioning statement which clearly places the broker in the market
Page 51
The key measures that will differentiate the provider’s operation from that of the
competitors within the chosen segment.
The broker can also use SWOT analysis to look at his business and try to identify:
S – strengths that exist in comparison to competitors
W – weaknesses that exist in comparison to competitors
O – opportunities that exist in the identified market
T – threats that may arise to jeopardise the operation
The plan drawn up should aim at making the best of the opportunities that exist, given the
strength that are there, while minimising the role of the weaknesses and seeking to counter
or best avoid the threats. The marketing plan should be refined and brought down to
numbers (sales targets and expenses) so that they can be fed into the company financial
model.
-
(a) Segmentation
Market segmentation involves the breaking down of the entire market into separate
components that have similar needs and characteristics, before grouping together those
similar components in terms of the marketing mix.
In segmenting the market, care should be taken to match them to particular strengths of the
brokerage as well as ensuring that the target market suits the objectives of the business.
Segmentation makes it easier to plan one’s activities and the marketing and communication
messages become and the product range become easier to handle.
Consumer markets can be segmented in four different ways, namely:
(i) Geographic
The focuses on the area and scope of the business e.g. Harare low density suburbs or The
Willowvale heavy industrial area
(ii) Demographic
This focuses on the age, race, gender, marital status and income profile of the target market
audience. While many brokers specialise in either the upper income or lower income market
and some focus on the financial needs of women.
(iii) Psychographic
This is related to what is called lifestyle although it can also incorporate attitudes and beliefs.
Segments could include the very conservative or the reckless e.g. drivers of sports cars.
(iv) Behavioural
This focuses on aspects relating to the actual buying decision, e.g. who actually makes the
decision, do they buy only from a broker or their bank or they will buy off the internet or from
a retail store or garage.
Business markets are segmented differently. Typical segments could relate to
- Type of business e.g. mines
- The size of business
- The buying policy of the organisation, e.g. tenders
- Type of company e.g. partnership
Whilst a broad market approach may offer more attractive prospects in short run, the broker
should realise that specialisation on and differentiation in a particular market has a greater
advantage in the long term.
9.9 Consumer behaviour
Marketers have long known that it is important to study consumer behaviour in order to be
successful in meeting their needs. The studies focus on:- The economics of the purchase
- The psychological implications
Page 52
-
The sociological aspects.
(a) Economic theory
This focuses on the disposable income, its flow and stability and the way people evaluate
different products and services in establishing a preferential “hierarchy” for the purchase
decisions. Marketers use the utility theory which seeks to understand the factors which
consumers use to evaluate the use or value of a product or service.
(b) Psychological implications
This concentrates on establishing the underlying motivators that come into play during a
decision about the purchase of a product or services. Maslow’s theory of the Hierarchy of
Needs is often used in understanding this process.
(c) Sociological aspects
Buying decisions are usually affected by the personal makeup and also by the outside
influences e.g. peer groups, role models associations, social class models
Marketers categorise the general buying population in terms of their propensity to accept
new ideas, products and services, on a five stage scale comprising of:- Innovators
- Early adopters
- Early majority
- Late majority
- Laggards
9.10 Bancassurance and its impact on insurance brokers
The financial sector was not spared from the devastating effects of hyperinflation that
besieged the Zimbabwe economy from 1998 to 1998. In order to survive in the turbulent
economic environment. It cannot be business as usual. It has to be business unusual.
Hence, the emergence of strategic alliances between insurance companies and commercial
banks. The strategic alliance is called bancassurance. According to Sigma No.7/2002:3
“…bancassurance represents a strategy by which banks and insurers cooperate in a more or
less integrated way to work the financial markets. This includes, at its core, the distribution of
insurance products by banks”.
The strategy is adopted for various reasons all which revolve around accessing and
exploiting a previously untapped market. Bancassurance is widely gaining acceptance in the
local financial sector. This represents a departure from tradition as insurance in this country
has largely been distributed through insurance brokers with direct sales representing a very
small portion of total sales. At first sight bancassurance represents the best synergistic
scheme for both institutions. However, on further analysis, one is forced to conclude that the
role of the insurance broker cannot and will never be the same in the Zimbabwe insurance
sector.
Brokers have to transform and offer risk management advisory services in order to diversify
their income streams. Alternatively, they can become part of banking groups and offer
broking services to the bancassurance clientele. Detailed treatment of this topic is covered in
the module Bancassurance Practice IRM 207.
This study explores the development of bancassurance in Zimbabwe and its effects on the
insurance brokers.
9.11
E-commerce
Page 53
The wide application of computers in commerce and the advent of the internet has
revolutionalised the way insurance services are distributed. Many services can now be
offered online, for example:- Submission of application forms
- Submission of claims forms and any supporting documents
- Quotations
- General policy administration
- Advertisements
Chapter 10
Support Services in Insurance Broking10.1 Information technology and its application
to insurance broking
All modern day insurance brokerages use information technology to support their operations.
Although manual client records may still be used (in preference to computerised records)
computer generated quotes, e-mail, faxes and even cell phones are indispensible to the
business. However, technology does not come cheap and the system selected must be
adequate for current and any future requirements
(a) System and equipment requirements
The brokerage should appoint a suitably skilled to do an analysis of the system needs of the
operation when the system is first installed. The system should be accommodating
unavoidable refinements which may be required over time.
The broker could purchase an “off the shelf’ IT system that covers the full needs e.g.
(i) Electronic storage of client details
(ii) Communication e.g. fax, e-mail and internet
(iii) Word processing
(iv) Spreadsheets and reports
(v) Electronic marketing
(vi) Research (internet applications)
(vii) Accounting records, including budgets, revenue collection (premiums and commissions),
accounts payable, billing systems, and the necessary financial statements for the
auditors
(viii) Marketing databases
(ix) Statistics/management
(x) Quotation systems
(xi) HR records
(b) System security and disaster recovery plans
A business that relies on a computer system needs to understand the implications of a
possible systems failure. Often this would bring the operations to a halt. While it is possible
to arrange business interruption insurance to cover some eventualities, it is wise to take
some steps towards risk management.
The main sources of systems failure are:(i) Hardware malfunction, e.g. disc crash
(ii) Fire of flooding
(iii) Tampering by staff, either with malice or accidental
Page 54
(iv) Virus attacks
The proper access and system security procedures should be mapped out, including a good
up to date virus protection programme. This can be arranged on a contract basis with a key
provider, so that regular updates are installed.
A properly controlled backup system should be installed. The most practical of these is to do
a daily backup onto a storage device which is kept in a secure place e.g. a safe which offers
protection against tampering and fire, etc.
Weekly backups should be taken for storage at an offsite location. There are service
providers who offer a backup system. Alternatively the disc stored with the bank or at
another business site.
It is advisable to sign a service agreement with a computer company to provide hardware
and software support so as to minimise downtime.
The broker should also be aware that they are specialist providers who can often retrieve
data from crashed discs, and should not lose heart if an unforeseen failure happens to the
system.
10.2 An outline of human resources issues in insurance broking
In larger brokerages the human resources function is handled by a specialist department,
working closely with line management and a number of outside consultants and/or service
providers.
In a small brokerage this role may be played by the owner, unless it is big enough to afford
an operations manager, who is likely to be generalist administration manager than an HR
specialist. The danger is that HR issues may be neglected with serious consequences.
(a)
Recruitment
(i) Planning
Signing on a new staff is not an action that should be taken without careful thought.
Legislation involving employment is such that it is often difficult 9and costly) to reduce the
staff complement and so the employment process must only be followed when it is essential.
Care should be taken to ensure the right people are recruited.
Part of the planning process should include a full investigation of the actual job function,
which should confirm the need for the individual as well as giving rise to a job description,
complete with the skills requirements for the person to fill the position (often referred to as
the job specification)
The initial focus should be on current employees who can be moved into the job either as
promotion or part of the broadening of skills of the individual or even to make better use of
that employee by combining jobs where possible. Another option would be consider if the job
could be done by a temporary worker. The staff complement should be kept at the optimum
without increasing costs.
(ii) The process
Prospective employees can be attracted to the organisation through press advertisements.
An initial screening against set requirements should be done to eliminate those who would
not suit the position. A short list of qualifying applicants should be prepared and interviews
arranged. Where ever possible the interview should be conducted by more than one person.
Practical exercises may be necessary e.g. Pankhurst Test in an effort to assess the fit of the
applicant into long term goal and likely human resources needs of the business.
Page 55
Business references are critical and must be checked in all cases to avoid surprises.
Authenticity of claimed qualifications must be confirmed.
Once a decision has been made to employ someone, an offer letter should be drawn
specifying the terms and conditions of employment (in conformity with labour laws) and
preferably the job description.
(iii) Outsourcing
Much of the hard work involved in recruitment can be outsourced to employment agencies.
However, the brokerage must do the planning and the leave the employment agency to do
the screening and delivering a short list of three of four candidates for final selection, along
with a dossier on each giving the findings of the agency and a motivation for their selection.
(iv) Induction
If a new employee is to perform in his job to the best of his abilities, it is important that they
are properly inducted into the business. This includes settling them physically, introducing
them to other staff, outlining the operation of the company, advising them of the details of the
job requirements and appraising them of the rules and regulations of the organisation.
Regular follow-ups should be made to check on they are settling in and help on any
challenges the employee may be facing.
(c) Business structure and organisation
In a small brokerage business is done in needs in unstructured way with most of the work
being done the proprietor with the help of an assistant. However, as the business grows it
becomes necessary to create formal structures identifying the work allocation to ensure that
people know their areas of accountability.
(i) Issues
Modern management theory does not favour hierarchical organisation structures which
results in people having a “silo mentality” i.e. being boxed in to specific functions thus losing
sight of the overall business goals. Instead it advocates for flat structures. The hierarchical
structure improves communication, highlights areas of responsibility and ensures that
processes are optimised without overlaps or gaps. This means that the breaking up of the
work and allocation thereof to staff with the necessary skills is quite an important item’
An analysis of the work of the work to be done must be made and broken down to quite a
low level. The various tasks must then be combined in some logical way in combinations that
reflect staff competences.
(ii) Job descriptions
A Job description clarifies responsibilities and provides focus for each staff member. It
contains an outline of the main purpose of the job, the reporting lines and a list of duties and
responsibilities for the job. It will also contain the job specifications i.e. skills and person traits
that the incumbent needs for the job. Every employee must have a job description that
should be regularly reviewed as conditions change.
(iii) Delegation
The proprietor or manager cannot carry out everything on his own and will need to allocate
some of his responsibilities to his subordinates. Care should be taken to ensure that the
person to whom the task is given understands what is required and his limits of authority in
executing the tasks. The manager remains responsible for task and must monitor the
progress by requesting periodic feedback.
(d) Human resources management
(i)
Principles
Employees represent a brokerage’s major asset and often consume a large part of the
expense budget. The management of staff is therefore an important function which can
Page 56
make a huge difference to the success of the business. The purpose of human resources
management is to optimise performance of staff and to manage the necessary systems.
(ii)
Administration
All staff records should be kept safe and up to date. This includes all payments, taxation,
training, disciplinary hearing, leave, performance appraisals, etc. Computer software
packages in support of the HR function are available on the market at very affordable prices.
(iii)
Motivation
Staff motivation is important to the success of a brokerage as a motivated workforce will
deliver greater output than a demotivated one. Motivated staff is likely to stay with the firm
for a long time to the benefit of the organisation as this reduces the cost associated with the
replacement of staff.
In addition to pay staff well, the physical work conditions, the nature of the actual work,
recognition, personal respect and involvement and the involvement of staff at levels in the
formulation of business objectives can be very motivating.
(iv) Training
All staff needs to be trained on the job and the modern trend is towards a fair degree of
multi-skilling to cater for unseen events. Training should also include formal development
programmes that are meaningful to the work situation and the employee’s career.
(e) Tax and social issues
All employers have an obligation to register employees for tax purposes and remit the
required amounts monthly. This function is part of the salaries administration, which may be
outsourced or administered easily on a computer package.
Many employers pay other benefits, such as medical aid, retirement fund, group insurance
cover, etc. These may be subsidised by the employer in some way as part of the person’s
remuneration.
(f) Industrial relations
The labour environment has become increasingly legislated in order to protect employees
from being abuse by their employer. The main legislation which applies is the Labour
Relation Act. The main focus of the Act is on trade unions and bargaining, strikes and
disputes as well as disciplinary procedures and requirements for dismissals and
retrenchments.
Chapter 11
The Corporation of Lloyd’s
11.1 The Corporation of Lloyd’s
From small beginnings as an informal meeting house and place to catch up on the shipping
news, Lloyd’s has grown a world famous association of underwriters. The Corporation of
Lloyd’s deals with approximately 50% of the insurance underwritten in the London insurance
market.
11.2 Operations of Lloyd’s
Lloyd’s is not an insurance company. It is an insurance market of members. Members of
Lloyd’s or “capital providers” as they are often known, accept insurance business through
syndicates (i.e. group of members) on a separate basis for their own profit and loss.
Members are not jointly responsible for each other’s losses. Membership of Lloyd’s is made
up of companies, individuals and partnerships. Individual members or names, tend to
support a number of syndicates, whereas some corporate members only underwrite through
a single syndicate.
11.3
The Lloyd’s syndicates and their operations
Page 57
Lloyd’s members conduct their insurance business in syndicates each of which is run by a
managing agent. There are 62 syndicates operating within the market, covering many
speciality areas including:- Marine
- Aviation
- Catastrophe
- Professional indemnity
- Motor
Syndicates tailor solutions to respond to specific risks of the client. They compete for
business, thus offering choice, flexibility and continuing innovation. They cover either the
whole or a portion of the risk and are staffed by underwriters, the insurance professionals on
whose expertise and judgement the market depends. It is the responsibility of the
management agent to employ underwriting staff and manage the syndicate on the member’s
behalf. A managing syndicate must be a company specifically established for the purpose of
managing a syndicate and may not carry out any other function but can be responsible for
more than syndicate.
There are some 164 firms of brokers working at Lloyd’s, many of whom specialise in
particular risk categories. Each Lloyd’s broker is required to demonstrate an understanding
of the Lloyd’s market as part of Lloyd’s assessment of its suitability to be accepted as a
Lloyd’s broker. Business at Lloyd’s can only be placed by Lloyd’s accredited brokers.
Each syndicate has a managing agent or underwriter who is responsible for the negotiations
with the brokers on behalf of the syndicate, having ensured that each member of the
syndicate has the reserves or capital needed for the underwriting transactions.
Syndicates are the insurers, not Lloyd’s. Lloyd’s provides the premises administration
services and assistance needed for the underwriting to take place. Underwriters in the
syndicate do not deal with the individual or company who is seeking to place the insurance
policy but must go through specially appointed Lloyd’s broker. The broker will approach the
under with a “slip” of paper requesting insurance cover. The “slip” will give the type of
insurance needed the time period, geographical location and all other relevant information.
The managing agent will go to his “box” in the Lloyd’s market place, which is known as “The
Room”. Accredited Lloyd’s brokers then move around The Room with the slips of the
insurance they wish to place.
The underwriter will then either accept or reject the insurance cover or may accept a portion
of it, and the broker will then approach other underwriters until all the cover has been sold.
The managing agent who wishes to accept the risk will sign the slip and indicate the amount
of the total risk that his prepared is prepared to take. The action means the names in that
syndicate are committed to specific to a specified share of the risk. The broker will continue
to go around The Room with his slip until all of the insurance is placed and the risk is
covered. The item is then insured at Lloyd’s and not by Lloyd’s.
The Process of Insuring at Lloyd’s
Page 58
CAPITAL
Individual members
Corporate members
Members’ agents
Licensed Lloyd’s advisors
Syndicates
Personal
The Market
Lloyd’s Broker
Clients
Commercial
The corporate members negotiate underwriting deals through the offices of one of the 11
Lloyd’s licensed advisers and will either join or form a syndicate for the deal in the same way
as the individual members do. Most syndicates specialise in a particular type of insurance
risk, such as only underwriting marine or motor insurance.
A syndicate is not a partnership, where there would be shared responsibility for debts. In a
syndicate each member accepts responsibility for his own share of the business and no
more. Each member of a syndicate then receives a previously agreed share of each of the
insurance accepted on behalf that syndicate.
11.4
The structure of Lloyd’s
The Lloyd’s Act changed the structure of Lloyd’s in 1982 and Lloyd’s is now governed by the
Lloyd’s Council, which oversees the activities of Lloyd’s as a whole while the Lloyd’s
Committee carries out the day to day managing and controlling of The Room.
The Lloyd’s is elected by the members and is responsible for supervising the market and
ensuring that members are able to meet their obligations for the Lloyd’s policies in which
they participate. The Committee researches the financial background and reputation of all
those who wish to be elected as Names or underwriting members. Members are required to
deposit a certain sum of money with the Committee which in turn is deposited in a trust
account and held there in order to meet any liabilities that the name has incurred.
One of the reasons for the change in Lloyd’s structure is that Lloyd’s went through a very
difficult time in the early 1980’s. One of the most significant changes is that corporate capital
was allowed into Lloyd’s for the first time in 1984 and now represents 60% of the total
capacity at Lloyd’s.
11.5
The Council of Lloyd’s
The Act of Lloyd’s Act 1982 defines the management structure and rules under which
Lloyd’s operates. Under the Act, the Council of Lloyd’s is responsible for management and
supervision of the market. It is regulated by the Financial Services Authority (FSA) under the
Financial Services and Markets Act 2000.
The Council has six working, six external and six nominated members. The appointment of
nominated members, including that of the Chief Executive Officer, is confirmed by the
governor of the Bank of England. The working and external members are elected by the
Lloyd’s members, the Chairperson and Deputy Chairperson are elected annually by the
Council from among the working members of the Council. All members are approved by the
FSA.
Page 59
The Council can discharge some of its functions by making decisions and issuing
resolutions, requirements, rules and byelaws. Other decisions are delegated to the Lloyd’s
Franchise Board and associated committees.
Governance Structure of Lloyd’s
The Council of Lloyd's
Nominations ,
Appointments &
Compensation
Commitee
Compliance
Committee
Franchise Board
Audit Committee
Capacity Transfer
Panel
Investment Committee
Underwriting Advisory
Committee
Market Supervision &
Review Commitee
11.6
The duties of the Council of Lloyd’s
The duties of the Council of Lloyd’s are similar to those of senior management of any
equivalent organisation. They are responsible for the management and supervision of the
affairs of the Lloyd’s Society and regulation of the business of insurance at Lloyd’s. They
also have the authority to delegate power to the Committee of Lloyd’s and to the
Chairperson and Deputy Chairperson of Lloyd’s. Both the Chairman of Lloyd’s and the Chief
Executive of Lloyd’s serve on the Council.
The Council is always represented at meetings of the Lloyd’s Committee, either by the
Chairperson or by one of his deputies. The Council also appoints committees and subcommittees to look after the activities of various business divisions within the organisation. In
many ways the Chairperson acts as an ambassador for Lloyd’s as it is he who represents
Lloyd’s at meetings with the government of Britain or other countries and other financial
bodies in the City of London.
11.7
Regulation of Lloyd’s
Lloyd’s of London is regulated by the UK Financial Services Authority (FSA) under the
Financial Services and Markets Act 2000.
The FSA oversees Lloyd’s regulation to ensure consistency with general standards in
financial services. The FSA delegates a substantial part of its regulatory activity to the
Council of Lloyd’s and focuses on a supervisory role. The Council of Lloyd’s is the governing
body of the Society under the Lloyd’s Act 1982. Much of the market’s rule structure is
embedded in a series of byelaws passed by the Council. These are supplemented by core
Page 60
principles for underwriting agents and a number of codes of conduct are published to the
market by means of regulatory bulletins.
Day to day supervision of the market is undertaken by the risk management division of the
Corporation of Lloyd’s.
11.8
Lloyd’s franchise board
The Franchise Board sets the franchise strategy, and is responsible for risk management
and profitability targets across the market. It lays down guidelines for all syndicates and
operates a business planning and monitoring process to safeguard high standards of
underwriting and risk management, thereby improving sustainable profitability and
enhancing the financial strength of the market.
The Board is chaired by the Chairperson of the Council of Lloyd’s and has three further
executive members:
- Chief Executive Officer
- Director of Finance and Risk Management
- Franchise Performance Director
Reflecting current best practice in corporate governance, the Board has non-executive
independent directors appointed for their specialised knowledge and expertise.
The Franchise Board carries out its functions through various key sub-committees.
11.9
Lloyd’s in South Africa
Lloyd’s is the largest property and liability insurer and reinsurer in South Africa but is not
allowed to underwrite compulsory third motor liability, compensation for occupational injuries
and diseases and life reinsurances.
All correspondents in South Africa who place business with Lloyd’s underwriters must be
approved by Lloyd’s. In 2008 there were 60 cover holders and 28 open market
correspondence approved to act of underwriters in South Africa. In 1998 trust account
deposits stood at R593 million which is based on 110% of net premium income for this
region. The deposit is available for the payment of South African Rand claims only. Lloyd’s
opened a new office in South Africa in 1998 and the office acts as the main point of contact
of all Lloyd’s business in the region.
11.10 Lloyd’s in Zimbabwe
Lloyd’s is not admitted as in insurer in Zimbabwe, and does not have a local office. Insurers
and brokers seeking to place their business at Lloyd’s have to go through Lloyd’s accredited
correspondents (mostly reinsurers and their retrocessioners).
11.11 Lloyd’s and catastrophe losses in the recent past
The terrorist attacks on World Trade Centre on 9 September 2001 in New York and the
Pentagon Washington brought Lloyd’s into the limelight. The loss from attacks was
enormous. Lloyd’s total net loss was US2.9 billion, its largest payout yet for a single event.
IN2005, Hurricane Katrina hit 50 kilometres of the Mississippi shoreline leaving 80% of New
Orleans under water and covered 235 square kilometres ( about half the size of
France).Lloyd’s initial loss reserve from Hurricane Katrina at US$2.4 and continues to rise.
Page 61
Chapter 12
Industry Associations and Professional Institutes
A number of organisations have been established in Zimbabwe to foster co-operation
between various parties involved in the life insurance industry. These associations provide a
service to all role players by creating a forum in which issues of common interest can be
discussed. Some of these associations act as watchdogs over the industry and co-ordinate
the adoption of voluntary codes of practice amongst their members. This self regulation
initiative avoids the passing of stricter legislation to control the affairs of the industry and
benefits both insurers and their clients.
12.1 The Life Offices Association of Zimbabwe (LOA)
LOA is a voluntary association of life insurers conducting life assurance in Zimbabwe. It is
the spokesperson for the life market, seeking to promote the interests of the industry and
insuring public as a whole. The association members conduct more than 98% of the life
insurance business in Zimbabwe.
The association’s activities are directed by a management committee consisting of all senior
executives of member offices. The management committee is elected every year at the
annual general meeting.The day to day activities of the LOA are conducted by a small
secretariat with an executive director at its head. The management committee and the
secretariat are assisted by a number of committees and sub-committees. Members of these
committees and sub-committees are chosen for their abilities from amongst the member
offices.
12.2 The Zimbabwe Association of Reinsurance Offices (ZARO)
This is an association of companies that only transacts reinsurance. It is the spokesperson
reinsurance market, seeking to promote the interests of the industry and insuring public as a
whole. ZARO specifically considers insurance trends as applicable to the reinsurance
because they tend to carry a greater portion of the larger risks than the direct underwriters.
12.3
The Insurance Council of Zimbabwe (ICZ)
This is a voluntary association of all short term insurers in Zimbabwe. It is the spokesperson
for the short term market, seeking to promote the interests of the industry by negotiating with
government and promotion of cooperation between the industry and the general public.
The ICZ members abide by a Code of Conduct.
Page 62
Core functions of the ICZ are:






The representation of its members' interests to the public in a proactive manner.
The representation of its members' interests to government at all levels.
The provision of a forum for discussion of common interests in the short-term
insurance industry.
The facilitation of information flow among its members.
Interaction with all associations operating within the insurance industry, both locally
and abroad.
The setting of appropriate technical standards for the industry.
12.4
The Zimbabwe Brokers Association (ZIBA)
This is a voluntary association of all insurance brokers in Zimbabwe
Core functions of the ZIBA are:
 To protect members’ interests.
Critical areas are conditional selling, the cancellation of broker contracts, disputes
between insurers and brokers, the S-reference system, equal remuneration and fair and
reasonable broker contracts.
 To act as the mouthpiece for the independent broker.
 To establish training facilities for brokers.
The ZIBA supports the training programs offered by IIZ (Insurance Institute of Zimbabwe)
and any other training provider who could add value for its members.
 To harness members’ collective capacity.
 To solve collective problems on a group basis.
 To develop unique solutions for all stakeholders.
Such products and schemes are group life cover, trauma cover, income protector,
professional indemnity, preferential rates and agreements.
 To provide a home for the independent broker.
The ZIBA provides a place of belonging not only for the small and medium sized
brokerage, but also for the larger independent corporates. Ideas are exchanged and
members support one another. ZIBA meetings are held regularly to keep members
informed and to motivate them.
12.5
The Chartered Insurance Institute (CII)
12.6
The Insurance Institute of Zimbabwe (IIZ)
The IIZ is directly involved in education and training for the industry. It offers both certificate
and diploma courses in short term and long term insurance studies. Recently it acquired a
franchise from IISA and is now offering the advance diploma in Insurance. IIZ also
coordinates and administers the Chartered Insurance Institute examinations in Zimbabwe.
12.7
The insurance Institute of South Africa (IISA)
The IISA is a professional institute that has in the recent past been directly involved in
education and training in the insurance industry. That role has since been outsourced to
UNISA and IISA now concentrates on the role of a professional body of qualified members.
The IISA aims to promote the highest professional and ethical standards in insurance
industry in Southern Africa and elsewhere, IISA has code of conduct which applies to all its
members.
12.8
The Institute of Risk management (IRM)
The Institute provides high quality education, training and professional development in risk
management at a range of levels, from introductory to expert.
The following programmes of study are available:
(a) IRM's International Certificate in Risk Management is a broadly based introductory
qualification taken over 6-9 months.
Page 63
(b) IRM's International Diploma in Risk Management is a post-graduate level distance
learning qualification designed to meet the development needs of a wide range of risk
professionals. Successful completion leads to full membership of the Institute of Risk
Management and the use of letters MIRM after your name
12.9
The Institute of Pensions Consultants and Administrators (IPCA)
This is an association of people have who have at least 5 years directly concerned in giving
advice on schemes or funds or administering such schemes or funds for the provision of
group employee benefit programmes.
Its objectives, inter alia, are:- To promote for the community the existence of a class of consultants and
administrators providing advice on schemes or funds for the provision of employee
benefits who can be relied upon as being trustworthy and duly qualified to perform
their duties responsibly
- To provide a central organisation for its members and generally to do all such things
as from time to time may be considered to enhance their status in the community and
advance and safeguarded their interests and to improve the general standard of
efficiency and proper professional conduct.
12.10 The Association of Insurance and Risk Managers in Industry and Commerce
(AIRMIC)
It will be of interest to know that AIRMIC was formed in UK in December 1963 to cater for
the special interests of insurance managers in both private and public industry, in commerce
and local authorities. It has since widened the scope of its membership and now admits
anyone from industry or commerce or local or national government undertakings who has a
responsibility for insurance or risk management matters. The stated aims of the Association
are:(a) To further the profession of insurance and risk management in industry and
commerce
(b) To ascertain and advise members of changes in insurance law and practice and
other matters relating to insurance and risk control generally
(c) To promote within the members’ sphere of influence a better understanding of risk
management and its techniques, including, but not limited to, insurance
management, and
(d) To represent, where appropriate, a body of informed opinion within fields of interest
to insurance and risk managers and insurance consumers in industry and commerce.
Page 64