Joint marketing arrangements between unrelated insurers can be an effective sales and financial tool for both companies. For example, Insurer A may have a stronger brand name, or broader jurisdictional authority to write business, than Insurer B. Insurer B may have a distribution force with excess capacity. Both companies can leverage their assets by having Insurer A direct write business, marketed by Insurer B, where both companies share the risk via reinsurance. Sometimes called “private labeling,” these arrangements are really just a type of joint venture, but with unique considerations relating to the insurance industry and its regulations. This advisory provides our insurance company clients with a checklist of terms to consider in structuring such a joint venture.

  1. Marketing: One company will be the direct writer, and one or both companies may offer the products through their agents. Considerations will include:
  • Identifying the policy forms that will be used and in which states.
  • Discussing how the parties will deal with changes that each may want to make to the forms and rates during the term of the program. The direct writer will need to be able to make changes as required by law or by the regulators.
  • Determining the length of time the direct writer will be obligated to (i) issue new policies and (ii) renew policies that are written through the program.
  • Deciding whether the marketer will prepare appointment documentation so the direct writer can appoint the marketer’s agents and brokers, and who will pay the associated fees.
  • Agreeing upon commission schedules and the process for changing commission rates.
  • Negotiating rights for the direct writer to terminate an agent’s or broker’s appointment. If this will be only for “cause,” specify how “cause” is defined.
  • Determining which party will provide training for the agents and brokers.
  • Determining who will prepare marketing materials. Both parties will need rights to approve materials, and someone must be responsible for making certain the materials comply with all applicable laws.
  • Determining license rights for each party to use the other’s name and logo as necessary or appropriate.
  1. Administration: The direct writer will have legal responsibility for administering its policies. However, the parties can agree for the marketer to perform some or all of the tasks. Considerations will include:
  • Determining which party will administer the policies. If the marketer will perform any administration, it becomes an outsourcer for the direct writer, and the parties may need to consider internal control issues (including potentially providing for SAS 70 audits). May 22, 2012 -2-
  • Specifying service levels. It may be sufficient to provide that the administration will be in accordance with industry customs and practices, or there may be certain aspects where the parties want to quantify minimum expectations.
  • Determining whether the marketer will have any input into claims paying decisions and provide a mechanism for keeping both parties informed about denials. The level of the marketer’s concern will likely depend on how much risk it bears. The direct writer cannot relinquish control over its decisions as underwriter, because it will remain legally responsible for the policies. 
  1. Risk Sharing and Payments: In some joint ventures, the parties may each want to retain some of the risk. In others, the marketer may assume 100 percent. Considerations will include:
  • Agreeing upon the percentage of risk the direct writer will retain, and the percentage the marketer will reinsure.
  • Specifying (i) how the reserve liability amount will be calculated, (ii) in accordance with which jurisdiction’s laws and (iii) whether the parties will have a process for disputing the amount.
  • Determining what actions the marketer will be required to take in order for the direct writer to maintain statutory credit for the risk ceded, to the extent the marketer is not licensed in all relevant jurisdictions.
  • Negotiating whether there will be a trust established by the party that has the biggest share of the risk, to provide assurance that funds will be available to pay claims. If yes, the parties will need a separate trust agreement that provides for terms like obligations to top-up the trust assets, rights to withdraw assets, and authorized investments.
  • Negotiating the amount of ceding commission or other fee that will be paid to the direct writer and when.
  • Determining if there will be any third-party reinsurance on the business written through the joint venture. If yes, the documentation needs to provide for how such reinsurance premiums will be paid, how reinsurance recoverables will be shared, and the relative risks of the direct writer and marketer related to the creditworthiness of the third-party reinsurer.
  • Negotiating any fees that will be paid to the administering company for the policy administration costs. This could reflect the administering company’s actual cost (with a sharing based on risk sharing percentage), or it could be cost plus a profit mark-up.
  • Providing for a monthly or quarterly financial settlement, that will include terms regarding:
    • premiums collected by the administering company and shared between the parties according to their risk sharing percentages;
    • ceding commissions;
    • reimbursements to the direct writer for the marketer’s share of premium taxes, commissions, guaranty fund assessments, and uncollectible agents debit balances; and
    • adjustments for deferred acquisition cost (DAC) taxes, if applicable.
  1.  Indemnification: It is especially important for the direct writer to specify indemnification terms, because it remains in contract privity with the policyholders. Considerations include:
  • Determining the scope of the marketer’s indemnity obligation. The marketer will typically indemnify the direct writer for acts of the marketer’s agents and brokers, as well as for any actions the direct writer takes at the marketer’s direction.
  • Determining the scope of the direct writer’s indemnity obligation. Often the direct writer will indemnify if it takes an action to which the marketer has reasonably objected.
  • Determining which party will be responsible for extracontractual payments to policyholders.
  • Providing a mechanism for sharing information about third-party litigation with respect to the business, as well as regulatory complaints and examinations, and specify which party will be involved in supervising and resolving such matters.
  1. Termination: All joint venture partners need to consider exit strategies at the outset. Considerations include:
  • Setting the length of time for the initial term of the joint venture, and provide for any desired renewal options.
  • Specifying under what circumstances the venture may be terminated early.
  • Specifying what happens upon termination: recapture of reinsurance, transition of administration, sharing of records, etc. 
  1. Miscellaneous: Other considerations include:
  • Providing that each party must comply with all laws, including with respect to marketing and licensing.
  • Ensuring that the documentation contains adequate privacy and data security protections.
  • Providing each party with audit rights and access to records, and requiring each party to cooperate with the other party’s regulators.
  • Specifying any necessary or desired periodic reports, including for purposes of filing quarterly and annual statements.
  • Including insolvency provisions relating to the reinsurance.
  • Considering whether each party must maintain appropriate E&O insurance. This may be especially important with respect to the marketer, since its agents will be selling the policies.