Explore Insurance Products, Processes, and Practices

Learning Objectives

After completing this unit, you’ll be able to:

• Describe how insurance companies make money.
• Describe how insurance brokers make money.
• Identify common sales processes.
• Identify common service processes.
• Explain how market models impact key processes.

How Insurance Companies Make Money

Insurance companies make money because, in any given year, they only need to compensate a small percentage of their customers for losses. Here are the main money making methods.

Although insurance companies strive to keep total premiums above total compensation, they aim to compensate customers fairly and most try to provide the best service they can. This is essential for customer retention and for acquiring new customers by having a good reputation.

How Brokers Make Money

Brokers make money from commissions on the premiums they sell as the broker of record. They also charge for specific services such as compliance audits, Affordable Care Act audits, handbook reviews, consolidated billing, and COBRA administration. Brokers have a view of retention that differs from insurance companies. They won’t hesitate to place a client with a different insurance carrier if it’s in the client’s best interest. Above all, they want to keep clients happy so they get more future business.

Common Sales Processes

Brokers and captive agents have different ways of selling insurance. While brokers work for their customers and use company-independent sales processes, captive agents work for companies and use company-specific sales processes. Managing general agents (MGAs) have underwriting and binding authority from the insurance companies they represent, so they’re somewhat like brokers and somewhat like captive agents. MGAs use both company-independent and company-specific sales processes.

Brokers and managing general agents (MGAs) use these sales processes.

• Assess the needs of the customer: Brokers and MGAs work with multiple insurance companies, but they work for the customer. So their first priority is to find out about the risks a customer faces so they can recommend appropriate coverage.
• Look at the insurance landscape: To offer customers the best choices, brokers and MGAs need to know about all the options available. This includes keeping up with trends in the industry.
• Advise what coverage is needed: Brokers and MGAs match the needs of the customer with what’s available in the insurance industry.
• Compare rates from different insurance companies: If more than one insurance company offers a policy that meets a customer’s needs, the broker or MGA can help the customer choose the policy with the best rate.

Captive agents and MGAs use these sales processes.

• Quote to bind: First, they collect customer data so they can generate a quote. The quote includes the policy coverages and the price. If the customer accepts the offer, the quote becomes a policy in a process called binding.
• Underwriting: An underwriter determines the coverage and premium to offer a customer based on the customer’s risks. For simple cases, underwriting can be automated.
• Payment and billing preferences: A customer can choose monthly, quarterly, or annual premium charges. They can also opt for mail or email billing or to have payments deducted automatically from an account or credit card.

Common Service Processes

Service processes range from simple things a customer can do for themselves, such as changing their phone number, to complex processes requiring the help of a trained professional. 

The most common service processes at insurance companies are:

• Information modifications: Some changes to customer data are separate from the conditions of the policy, such as changing the address, phone number, or beneficiary.
• Policy modifications: Changes that affect the policy include endorsements, renewals, and cancellations. For example, adding a teenage driver who just got their license to an auto insurance policy is an endorsement.
• Claims: Settling a claim involves gathering information about the event and determining who needs to be paid for which services or products. For example, information in an auto accident claim includes the model and year of the car, the damage to the car, the circumstances of the accident, and the shop responsible for repairs.
• Managing the book of business: Some processes require aggregated policy data. For example, an auto insurance company might offer a discount to all customers with no accidents in the last five years.

How Market Models Impact Key Processes

Remember those insurance company business units and what they do? All of them want to optimize their processes to achieve these goals.

Now you know more about how insurance companies acquire and take care of their customers. Let’s move on and take a closer look at how the industry is changing.