Broker Compensation and Financing

The Dominion and Chieftain Insurance* (Chieftain)

Our Relationship with Insurance Brokers and Broker Compensation explained:

The following information is provided in keeping with our ongoing practices of full disclosure and transparency:

The Dominion's and Chieftain's products are available only from insurance brokers. Consumers are generally aware of the difference between buying through an insurance broker, who represents several companies, and purchasing from a single company through a captive agent or directly by phone. We distribute through insurance brokers because insurance consumers value choice and professional advice. We also believe that consumers get the best deal in terms of coverage and price - and the most satisfactory experience over the long term - when an insurance broker is advising them and advocating their interests.

Our broker agreements require that your broker and The Dominion exercise the utmost diligence, honesty and good faith in performing their duties, in properly and promptly servicing policies, and in our communications and dealings with policyholders.

We compensate brokers in two ways: Firstly, we pay your broker a fixed percentage of the premium you pay. This varies by type of business, as shown in the table below. Secondly, we have an annual contingent commission program which recognizes brokers for helping us to write profitable business; allowing us to remain well-capitalized to pay claims and to keep our premiums competitive. We have the technical understanding and statistical evidence to know the premium that should be charged for certain types of business and we set prices to compete for that business. Contingent commission rewards those brokers who understand our market expertise and whose insurance portfolio is made up of the kind of business we seek to write.

Neither The Dominion nor the broker knows which policy will have a claim, so the objective is to have sufficient policies without claims to pay the claims of the rest.

The Dominion's contingent commission is based mainly on the profitability of the broker's total portfolio of business averaged over at least two years. The payments also take into account the amount of business we transact with the broker and The Dominion's annual profitability. In the three years ending 2007, The Dominion paid an average of 2.3% of total gross written premium to brokers in the form of contingent commission. While Chieftain's contingent commission program takes many of the same things into consideration, it is calculated differently to reflect the fact that Chieftain policies earn a lower base commission, are continuous and renew monthly. In 2007 contingent commission paid to Chieftain brokers was 7.4% of gross written premium.

The Dominion's and Chieftain's priorities are to meet obligations to policyholders and shareholders. In addition to ensuring full entitlement to the coverage contracted when there is a claim, our responsibility to policyholders extends to prudent management of future costs so that pricing is stable and reasonable. This is essential for strong corporate governance, effective management, and a reasonable return on the capital invested, enabling us to meet our commitment to shareholders. Insuring cars, homes and businesses that we price accurately is fundamental to meeting these commitments.

In addition to commission, some brokers earn service fees (a fixed percentage of premiums or a transaction fee) for performing services such as underwriting, data input, and administration on our behalf. Where costs are incurred by a broker in moving business to The Dominion, or specific costs are incurred in supporting Dominion business, we may offer compensation to that broker to offset the cost.

Loans are made to support brokers in the development of their brokerage businesses including the acquisition of other brokerages, or for succession - where one broker may buy out the interests of a retiring colleague. Many brokers find bank or private non-insurance company financing difficult to obtain or available only on punitive terms because lending institutions do not always recognize the full value of the broker's principal asset which is the customer list. These other lenders often attempt to encumber the personal assets of brokers as security.

The Dominion's loan agreements stipulate in every case where a premium target is set, that the broker must act in your (their customer's) best interest. This is the overriding priority.

For The Dominion, building the relationship with a broker is a key aspect of any financing arrangement and as such, loan agreements may include premium targets.

The Dominion has a small equity investment of $250,000 in the common shares of one broker representing less than 10% of the outstanding equity of that broker. This arrangement was structured to meet the broker's financing requirements. There are no terms that provide for any control or influence over the broker and its activities and there are no volume or premium conditions associated with this arrangement.

Our support of brokers allows them to continue to be successful in providing you with expert advice, choice and excellent service.

*Chieftain Insurance is an operating division of The Dominion of Canada General Insurance Company