Insurance 1a

Question 1 of 3

17 point(s)

Below is the start of a short text outlining the fundamental challenge of insurance brokerage.

Read the text below and fill in the gaps with the missing preposition.

Use these words to complete the gaps in the text.

on , at , into , in(2) , for(3) , out , with(2) , by(3) , through , of , down

Fundamentals of Insurance Brokerage – The Challenge.

common any business an insurance broker exists to maximise the return investments made its shareholders. the most basic level this is achieved earning the highest possible margin whilst incurring the lowest possible costs. Paradoxically therein lies the problem, what is true the broker is also true the client. “Cut the middle man” is the cry resounding the boardrooms companies eager to reach their own hard targets. an increasingly globalised market, the competitive pressure has never been so intense. Unfortunately, a broker definition is a middle man.

A client who places his risk directly an insurance company pays a premium which may be broken the following three elements.

Crudely, a broker the situation is this:

Question 2 of 3

5 point(s)

This is the second part of the text. Read it and answer the questions below.

Even with a very simplistic hypothesis the challenge is very clear. In order to make money, the broker has two options:

• At least equalise the cost to the client
• Sell added value and persuade the client to accept a higher cost for their cover.

If we divide brokers into two groups; small and large entities we can explore various hypothetical options open to brokers and clients.

Large brokers:

Buying Power: As with any commodity large consumers have the opportunity to enjoy discounts. A broker may pass some of this saving on to the client and still be able to earn a reasonable margin whilst offering a cost attractive to the client.

Example A.

In the example A, above the broker is successful in reducing the cost of cover but the total package to the client is still €1000 in excess of the client placing his risk directly with an insurance company.

Note!

If the broker derives this power by placing business from many large clients, this power is substantial, the client receives economies of scale from the total business the broker has. In theory if the number of large clients is small the client may be able to seek discounts based on their large size independent of a broker and save the brokerage fee.

2. Administration Costs: If an insurance company is able to offer a competitive premium which become elevated due to inefficient administration, then there is an opportunity for a broker with a good structure to earn a margin.

3. Access to World Insurance Markets: A large broker has the opportunity to place risk in the most competitive markets, this is not usually an option for many clients…

According to the text which of the following statements are TRUE?

To make a profit the broker must offer the same price to the client as if the client was buying directly from the insurance company.
Some clients may be willing to pay extra for services offered by a broker.
Large brokers can obtain discounted rates
In example A, the broker has managed to offset all their costs through the discount they have obtained from the insurance company.
Individual clients can receive a better price for insurance if their broker has many clients.
Large clients can obtain discounts by dealing directly with the insurance company.
Brokers have lower administration costs than insurance companies.
Large brokers can get better prices because they have more buying options

Question 3 of 3

1 point(s)

For the questions 1-12, read the text below and decide which answer (A,B,C, or D) best fits each gap.

Hover over the orange labels ‘ (1)‘ to see the options then put the corresponding letter or word in the gap. You can use the ‘Tab’ key to go to the next question.

Accounting for premiums

The main revenue item for an insurer is, of course, premiums from policyholders, although for a life insurer, investment income can sometimes represent an even larger (1) of revenue than premiums.

Let us consider a theoretical situation where a policyholder takes (2) a fire insurance policy on his house on July 1 and pays an annual premium of $1,200.

It would be wrong to consider the full amount of the premium as revenue for the insurer at that moment because, according to the revenue recognition (3) revenue should be earned over time as the insurer discharges its obligation to the customer. In this case, if the premium is paid on July 1, no revenue would be recognised at the time of payment because no insurance coverage has yet been provided. A corresponding liability is established for the unexpired contractual obligation.

However, by the end of July, the insurer would have (4) one-twelfth of the coverage agreed to and would therefore be justified in considering one-twelfth of the premium, or $100, to be revenue for the period. Because the premium is recognised over time, we say it is “earned” over the term of the policy. In this example, the insurer will show revenue (that is premium earned) of $100 per month in respect of this individual policy. The total revenue for the insurer for each month is simply the total of all premiums earned over that period from the many individual policies in (5) .

From an accounting (6) , when premiums are received, a cash asset is created, along with a corresponding unearned premium liability; as coverage is provided and premiums are earned, the reduction (7) the unearned premium liability is recognised as income in the financial statements.

In most cases, premiums are earned pro rata (8) time because the insurance service provided, the coverage, is the same over each unit of time. In the homeowner’s insurance policy mentioned above, the (9) risk of loss is not expected to vary significantly from month to month, so the service provided is the same each month, and the premium earned is therefore also unvarying from month to month.

In some cases, however, the risk is not the same over time. Because the revenue recognition concept requires that premiums be earned on the (10) of the service provided, that is the degree of risk being covered by the insurer, the amount of premium earned in each period will not be the same.

English for the insurance sector

Insurance 1a

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