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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.
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:
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:
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.
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?
For the questions 1-12, read the text below and decide which answer (A,B,C, or D) best fits each gap.
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)A: sauce B: source C: well D: root of revenue than premiums.
Let us consider a theoretical situation where a policyholder takes (2)A: out B: on C: over D: up 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)A: plan B: idea C: principal D: principle 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)A: sold B: made C: done D: provided 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)A: force B: contract C: place D: existence .
From an accounting (6)A: idea B: perspective C: view D: rule , 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)A: on B: by C: in D: over the unearned premium liability is recognised as income in the financial statements.
In most cases, premiums are earned pro rata (8)A: in B: on C: by D: over 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)A: underlying B: background C: basic D: real 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)A: idea B: basis C: code D: law 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.