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Transparency of remuneration and other agreements or how our relationships with the insurance companies we represent affect our relationship with our customers.

Lundgren & Young Insurance Ltd. has many different kinds of agreements in place with many different insurance companies and their managing general agents. This section has been developed to help you understand how those agreements impact upon what we do for you.

A broker by the definition of the trade acts as an intermediary in the arrangement of contracts between the providers of goods and services and the consumers of those goods and services. In doing this there are times where the broker is representing the needs of the providers and those of the users. If the broker does his job correctly then both parties will receive the best service from those actions.

It may seem complicated but in reality it is quite simple, when representing the interests of the insurer the broker puts the interests of the insurer first and foremost and when representing the interests of the customer, the broker puts the needs of the customer first and foremost. As hard as it may be to believe this is the essence of what an Insurance Broker does and the better they do it, the more money they make.

Insurance is a very complicated product and the insurance broker is required to know the product very well. Before being able to sell insurance in Alberta, an examination of knowledge is needed and a license is only provided if the level of knowledge is sufficient to pass a very difficult examination. Even after passing the examination, a second examination is required within a 3 year period in Alberta to ensure that the broker has improved upon the skill sets acquired to meet the minimum license requirements. In addition to this step, every license holder is required to obtain 15 hours of instruction on insurance in each license year or they cannot renew their license. In addition to these examinations and continuing education requirements the conduct of insurance brokers in Alberta is highly regulated. Under Alberta's insurance act and regulations insurance brokers are required to conduct their business within guidelines that put the interests of their customers first and foremost and to complete their dealings with the highest integrity. Failure to do so may produce substantial penalties including the suspension of their licenses to conduct business in the Province. Anyone at our company who will talk to you about your insurance policy and coverage is subject to these regulations.

So how do you know when an Insurance Broker is working for you and not the insurance company? That's a tough question but the answer is easy, when you ask a question or need an explanation, the Broker is working for you. It isn't any more complicated than that. Our Brokers have obligations to our insurance companies; these obligations are to fully disclose everything they know about you and your insurance circumstances to the insurance company. They also have obligations to you and those obligations are to place your interests above their own, not only by the regulations but by our corporate policies as outlined in the mission statement of our company

How we are paid for the services we provide you?

For the most part the way our company earns its money and the way the people who work here earn theirs are by a commission as a percentage of the money you pay for your insurance. Sometimes we charge a fee for the services we provide instead of receiving a commission and sometimes we charge for things like NSF cheques or providing reports to you or other people about you at your written request. If we charge you a fee for any service it will have been disclosed to you before we collect it and acknowledged by you in writing as that is the law in Alberta. We do hire people on a straight salary basis with no reference to commissions but if those people are licensed to serve insurance customers there is an expectation by our company that the amount of revenue produced by them through the sales and service of insurance products will be enough to cover the amount of salary we pay them and a reasonable profit on their efforts by our company. We are in the business of producing a profit for our shareholders and we make no apologies for that.

What are we paid for what we do?

On private passenger automobiles of an average risk we are usually paid between: 5% and 18% of the premium you pay.

On normal homeowners policies we are usually paid between: 20% and 25% of the premium you pay.

On commercial automobiles on a regular or fleet basis we are usually paid between: 7.5% and 12.5% of the premium you pay.

On commercial property insurance polices we are usually paid between: 10% and 25% of the premium you pay.

On Travel Insurance policies we are usually paid: 30% to 35% of the premium you pay.

To summarize this disclosure document, there are often a number of arrangements in place with the companies we represent for compensation of our efforts and those arrangements are often changing in response to market conditions and the competitive nature of the business we are in. Sometimes we receive quotes net of commissions and we will provide our quote to you on that basis subject to a fee for service. In such cases the fees will be put forth prior to binding coverage and offered for your written acceptance subject to the requirements under the insurance Act in Alberta.

Does the amount of compensation we receive determine our choice of the options we present to our customers?

Regulations governing our business practices already prohibit this kind of market practice but beyond those considerations, it is our corporate policy to determine the best solution to your personal needs without reference to the remuneration for the effort. We look for the best price and the best coverage for your circumstances, the amount of compensation we receive for the effort is irrelevant to the circumstances except where two companies are offering identical premiums and coverage for your circumstances. In that case we will present the one that will give us the best return. This demonstrates how the competitive model works to the advantage of the customer.

Are there other incentives to the broker for doing business with an insurance company?

Most of the companies we represent offer us bonuses and incentives based upon the volume of business we place with them and the quality of the business we place with them. Volume is easy to understand, quality is determined by the loss experience from that book of business. Volume considerations are achieved by having the best product and premium price and they are met accordingly. Actuarially the premiums and incentives for writing business with one company or another are determined by matching the underwriting restrictions of the company with the classes of business placed. The better the job a broker does in matching the kinds of risks he sees with the kinds of risks a company wants, will always produce overall results from that book of business better than brokers who don't make the effort to match those risks. Assuming a broker does this job better than other brokers he will receive incentive bonuses based upon the success in doing that job. This is a fact that transcends companies represented and encourages brokers to do a better job for the companies they represent. Concurrently doing that better job produces a better result for our customers as by applying all the proper discounts and underwriting variables necessary to match the best risks with the best company will always result in the best prices for our customer the consumer. It might be inferred by some that these considerations may present an opportunity for an insurance broker to select against the customer for his/her own benefit but the market place will respond to any such efforts, the best coverage and price is available for those looking for it, that is the capitalist equation we use, the same that works for your groceries or your furniture purchases.

Generally speaking as a customer you should know that the placement of your policy isn't influenced by our placing your policy with any specific insurance company. Any benefits we receive from the results of a book of business are determined by hundreds of individual policyholders and their loss experiences collectively in relation to that book of business. The incentives we receive from the positive results of such books of business may be as much as 3% of the premium you pay for your insurance policy. These incentives are neither guaranteed nor certain and are often influenced by local disasters or market conditions. To consider that these contingencies influence the direction or placement of business is redundant to this discussion.

Are there other incentives provided to the broker by his insurance companies that might influence the decision as to which company new business is place with:

The relationships between insurance brokers and their insurance companies are not dissimilar to the kind of relationships that exist between other kinds of distributors and their suppliers. The uninformed may be surprised to discover that in a franchise situation the supplier will often provide financing to both initiate the business and ensure its transfer to a new owner. The Insurance business is no different. Often an insurance company may provide financing for the purchase of an insurance brokerage and they may well provide such financing by way of a number of restrictions or conditions upon the operations of the broker. They may well stipulate volume conditions as well as preferential positions in the brokerage in providing support for such transactions. There is concern that these conditions might influence an insurance broker to place a clients business with one company in preference to another. The reality of the market place will determine the success of such agreements and the regulation that already provides for fair business practices will over rule any other such agreements. Suffice to say that if any such arrangements are ever put in place between Lundgren & Young Insurance Ltd. and any of it's markets they will be fully disclosed to anyone purchasing an insurance policy from the market such commitments have been made to, while at the same time we will ensure that the interests of the client are first and foremost in the discussions leading up to any such transaction.

Should I be concerned who owns the insurance broker I'm dealing with:

The ownership of any company operating in Alberta or any other jurisdiction is a matter of public record. Some people have inferred that the ownership of an insurance broker company may influence the placement of insurance business. It is our opinion that an insurance broker that isn't being fair with all the companies it represents will soon not represent many of those companies so it is our opinion that ownership isn't a variable from the sales perspective. Besides, a corporate search is easily obtainable at a nominal cost and if a customer considers this an issue they have access to the information needed to make a consumer decision. A customer is not restricted to his/her selection of a broker and so long as a number of options exist for the buying public adverse selection isn't an option for the insurance intermediary. It should be clear to anyone that competitive realities in the insurance market place will respond to the needs of the buying public before a regulation is needed to force such compliance.

In our corporate policy we will disclose to our customers the ownership or involvement of our company with any insurance company we represent. Presently the ownership of Lundgren & Young Insurance Ltd. is totally and completely in the hands of Thom. and Val Young. That is a consolidated position based upon Generally Accepted Accounting Principles. No Insurance companies have any interests in the profitability of our company as an equity participant or otherwise. If there were so we will disclose this to our customers. No companies we write for have any expectations of our marketing efforts beyond those fair and equal to their support of our enterprise.

In summary to this discussion on compensation and remuneration one is prompted to suggest that if anyone dealing with our company believes that the representative they are dealing with is promoting one market unfairly over another that they should bring it to our attention and we will deal with such a situation immediately and fairly to all parties to it.

July 2005, Thom. C.J. Young C.A.I.B. C.E.O