CAIB 3 Chapter 9 Study Questions with
Answers
The prime reason for establishing an insurance brokerage, or any form of enterprise, is to make
a profit. Briefly explain the concept of profit maximization. - ✔✔Most principals and investors
tend to concentrate on short-term profitability. Since profit is the goal, it stands to reason the
more profit the better. This is called profit maximization.
Identify the reason many brokerages give for failing to achieve profit maximization. - ✔✔The
practicalities of operating the brokerage on a day-to-day basis distract attention from a focus
on pure profitability. Nevertheless, a well-run brokerage will be profitable during a "soft"
market when there is aggressive competition among insurers and during a "hard: market when
underwriting is tight. capacity is low an pricing is high.
Identify the common methods to determining the price of a brokerage. - ✔✔1. Multiple of
Commissions
2. Multiple of Earnings
Identify seven additional factors that must be considered when valuing a brokerage. - ✔✔1.
Financial Information
2. Nature of business operation
3. Quality of employees
4. Market Conditions
5. Loss Ratio
6. Errors & Omissions
7. New Business Potential
The financial information about a brokerage will help to determine the stream of income more
accurately and therefore is a major consideration in any valuation method. Identify three of the
areas of financial information to be considered. - ✔✔1. Balance Sheet Items
, 2. Income Statement Items
3. Other Financial Items
Identify the three components of a financial statement - ✔✔1. Assets
2. Liabilities
3. Shareholder Equity
Identify three grouping of assets. - ✔✔1. Cash & Short-Term Investments
2. Accounts Receivable
3. Other Assets
Briefly discuss a problem with settling a value on computer technology. - ✔✔Given the rapid
advances in computer technology, even a fairly new system may have a current value will
below its book value.
The income statement essentially begins with revenues and deducts expenses to determine net
income. Identify and briefly explain the three components of revenue. - ✔✔1. Commissions -
Likely to be the largest income item, but it is not only the size of commissions that is important.
The percentage of commissions to premiums written and the trend of both actual commissions
and commission percentages are important.
2. Investment Income - If a brokerage has a history of successfully and safely investing
premiums from their receipt until payment to insurers, this revenue source can increase its
value.
3. Other Income - Other sources of income could be from fees-for-service, rentals, real estate
commissions, and so on. The value of these items depends on the purchaser.
How might any contingent profit sharing received be valued? - ✔✔Consideration is sometimes
given to contingent profit sharing earned. However, the variability from year to year and their
Answers
The prime reason for establishing an insurance brokerage, or any form of enterprise, is to make
a profit. Briefly explain the concept of profit maximization. - ✔✔Most principals and investors
tend to concentrate on short-term profitability. Since profit is the goal, it stands to reason the
more profit the better. This is called profit maximization.
Identify the reason many brokerages give for failing to achieve profit maximization. - ✔✔The
practicalities of operating the brokerage on a day-to-day basis distract attention from a focus
on pure profitability. Nevertheless, a well-run brokerage will be profitable during a "soft"
market when there is aggressive competition among insurers and during a "hard: market when
underwriting is tight. capacity is low an pricing is high.
Identify the common methods to determining the price of a brokerage. - ✔✔1. Multiple of
Commissions
2. Multiple of Earnings
Identify seven additional factors that must be considered when valuing a brokerage. - ✔✔1.
Financial Information
2. Nature of business operation
3. Quality of employees
4. Market Conditions
5. Loss Ratio
6. Errors & Omissions
7. New Business Potential
The financial information about a brokerage will help to determine the stream of income more
accurately and therefore is a major consideration in any valuation method. Identify three of the
areas of financial information to be considered. - ✔✔1. Balance Sheet Items
, 2. Income Statement Items
3. Other Financial Items
Identify the three components of a financial statement - ✔✔1. Assets
2. Liabilities
3. Shareholder Equity
Identify three grouping of assets. - ✔✔1. Cash & Short-Term Investments
2. Accounts Receivable
3. Other Assets
Briefly discuss a problem with settling a value on computer technology. - ✔✔Given the rapid
advances in computer technology, even a fairly new system may have a current value will
below its book value.
The income statement essentially begins with revenues and deducts expenses to determine net
income. Identify and briefly explain the three components of revenue. - ✔✔1. Commissions -
Likely to be the largest income item, but it is not only the size of commissions that is important.
The percentage of commissions to premiums written and the trend of both actual commissions
and commission percentages are important.
2. Investment Income - If a brokerage has a history of successfully and safely investing
premiums from their receipt until payment to insurers, this revenue source can increase its
value.
3. Other Income - Other sources of income could be from fees-for-service, rentals, real estate
commissions, and so on. The value of these items depends on the purchaser.
How might any contingent profit sharing received be valued? - ✔✔Consideration is sometimes
given to contingent profit sharing earned. However, the variability from year to year and their
