1 - Insurance broking market Flashcards
‘Insurance Broker’ under FCA
organisations that offer independent advice. FCA makes no distinction between ‘broker’ and ‘independent intermediary’
Intermediaries who are authorised to conduct insurance mediation ob behalf of a company (eg an insurer)
Introducer appointed representatives (IARs) or appointed representatives (ARs). Not truly independent, and not insurance brokers. For eg. solicitors, estate agents, travel agents, vets, etc.
Define ‘agent’
Under common law, someone that acts on behalf of another
What is agent’s role?
Authorised by their principal to bring them into a contractual relationship with a third party
Distinguishing feature of an insurance broker as an agent
They are introducing business to the third party, rather than their principal
Insurance Brokers (Registration) Act 1977
Made ‘insurance broker’ a regulated term. Was subsequently repealed so there is no legal recognition of the term.
Evolution of the regulation of the insurance market
Started self-regulated by an independent body - General Insurance Standards Council GISC
Then Financial Services Authority took over 2005 - 2013
Then FCA until today
What is an independent financial adviser IFA
Entity that transacts life insurance, pension and investment advice. Insurance brokers used to do this until regulation was brought in in 2001 to define IFAs
Who does a broker have a legal duty of care to?
Their principal.
The FCA also imposes rules on top of this.
Why have a broker? Convenience
Principals don’t have time to research/prepare documentation. Brokers can do this and can communicate between the principal and insurer.
Why have a broker? Expert knowledge
Broker has responsibility to ensure client understands product. Assocation of British Insurance ABI - 82% of all insurance business bought through brokers in 2012
Why have a broker? Independent quotation
Range of cover. Brokers have influence for more favourable terms
Why have a broker? Complexity of product
Brokers understand complexity and can negotiate combined policies, extensions etc. Some insurers only offer products if a broker is used.
Why have a broker? Assistance with claims
Not all brokers offer claims service.
Brokers do neogitate on clients behalf for a more favourable outcome
Why have a broker? Existing relationship
Clients stay loyal to brokers - especially in family businesses where they like a personal touch
Why have a broker? Other services
Brokers are increasingly offering wider services - makes it harder for client to leave
What contribution is general insurance to UK GDP?
1%
How much general insurance vs commercial insurance is manage by brokers?
What is the total premium for general?
General 70%
Commercial 87%
Total premium for general = GBP 62.4bn
How many people do British Insurance Broking Association BIBA employ?
100,000
What are the three major classes of business?
Personal lines, Commercial and Specialties
What is personal lines insurance?
Purchased by private individuals (defined as ‘consumers’ by the FCA) as acting outside their trade or profession
Brokers owe higher duty of care to consumer than commercial clients under FCA
Types: house, motor, private medical
What share of the commercial lines insurance market do brokers have?
What type of commercial lines insurance is bought through brokers?
ABI - 87%
Small commercial risks - directly
Complex commercial risks - almost exclusively via a broker
SMEs (< 10 ppl) less likely to use a broker for commercial lines
Specialties insurance
eg marine aviation construction
need broker - more complex, bespoke product
Variables that affect using a broker or not
Complexity of risk
Non-standard profile - not enough similar risks to establish a standardized UW approach
Complex - insurers might require a broker to understand the technical side of the cover due to specialist knowledge and explain to cover
Variables that affect using a broker or not
Size of risk
Higher sum insured - higher concentration of risk - insurer might require a broker’s involvement
Variables that affect using a broker or not
Location of risk
Insurers more likely to want a broker in high risk areas (flood plains) or where the client needs to provide risk data
Assets in multiple countries
Variables that affect using a broker or not
Availability of cover
Specialist insurances - eg K&R - need brokers/insurers with specific knowledge
How many broking firms are there in the UK
3500
Global firm
Large organisation growing through acquisition (turnover > 500m). Business global so needs brokers located globally
UK only based firms
Most common in UK
Usually retail (direct client interaction)
Can be generalists or specialists in one niche
Consolidators
Broking firms who grow by acquiring small brokers
Niche sector businesses
Eg. delegated authority with an insurer
Likely to have exclusive access to one client base eg an affinity scheme
Will go to events that client goes to etc
Wholesale broker
Nearest to the insurer
Another broker may be its principal (via a TOBA)
How much of Lloyds business is reinsurance
31%
Largest class transacted in Lloyds
Lloyds is third largest reinsurer in world based on premium
Why buy reinsurance?
Smooth peaks and troughs of claims
Protect the portfolio from certain perils
Improved customer service
Support insurers entering into a new market
Types of reinsurers
Specialist companies who do not transact direct
Lloyds syndicates
insurance companies
Reinsurance flow from client
Client - Insurer - Reinsurer - Retrocessionaire
Online brokers
Mainly on the internet, low-cost, less complex, churn business where service is less important over price
Lloyds brokers
What are the distinguishing diff from other brokers
Registered with Council of Lloyds who places additional regulation to that of the FCA
Diffs:
Market they operate in
Methods of transacting (f2f)
Types of risks (irregular)
Legilsative Reform Lloyds Order 2008
Gives greater access to the market by other brokers who are not registered by Lloyds
Managing agent - employed by? regulated by?
Established to manage UW of syndicate(s)
Appoints UWs
Regulated by PRA and FCA
Lloyds code of conduct
Relies on FCAs - says it has to be minimum standards have to apply to all Lloyds brokers
Contract certainty
Sending proof of cover
30 days from inception for most
5 days for some personal insurances
Retail broker
closest to client. also a producing broker or a sub-broker
Lloyds system for claims services
XCS Xchanging Claims Services
Lloyds central claims database, moves claim money
Lloyds: % of risks that come from UK market
18%
Broker networks
independent smaller brokers coming together to increase their buying power / better T&Cs for clients.
Why segment business?
Better client service, cost effective
Types of segmentation
By class of insurance
By trade (client’s sector)
By client size (SMEs vs middle market vs large/global)
Premium size
Main broker services
Traditional broking
Risk Management - additional services to help reach risk management objectives (identify, evaluate, control and transfer). This can help bring down premiums if demonstrated to an insurer
Added value services - non-traditional solutions to manage risk
Services to insurers
2017 FCA new regulatory rules on transparency for retail general insurances
need to treat customers fairly so.. at renewal you must
disclose last year’s premium
encourage them to check cover/shop around
if renewed 4 times, extra encouragement to check cover
price increases weren’t previously transparent so customers defaulted to products which were $ and not well suited
Define risk management
Identification
Analysis
Economic control
of risks threatening assets/earning of an enterprise
Ways to manage risks
Identify
Evaluate
Control and/or eliminate (via insurance)
Added value services offered by brokers
Specialist consultancy services such as property surveys, business continuity planning, business interruption reviews, health and safety consultation, liability surveys, motor fleet risk management, environmental risk surveys, post-loss control surveys, disaster recovery surveys
Services brokers offer insurers
Cost-effective distribution, technical expertise, checking and issuing documentation, collecting premium, administrative issues, dealing with client, claims management, client risk management, regulatory responsibility for sanctions checking and handling client money!
What does the law of agency say about commission
Empowers consumers to request details. Brokers must disclose if a commercial customer
Why might a broker earn more commission. When can conflicts of interests occur
on a delegated authority - for doing more work or if it is profitable, might cause conflict of interest
if they have a volume overrider / contingent commission arrangement paid on a whole account basis when profitable - sometimes not understood by clients, conflict of interest
General IPT
Exceptions
General 12%
Sometimes 20% for travel
Fees (paid by an insurer to broker)
For services to insurers - such as client behaviour data eg why didnt client accept their quote
Work transfer fees - for broker doing parts of admin
Client service role
Activity for all brokers and their engagement with the client
New business role
Focus on acquiring new clients
Usually segregated
People paid on basis of their performance
Broking role
Usually client service staff also do this. Sometimes though you have placing brokers who only place the business.
Claims role
Different depending on firms
Loss assessor fee insurance
Services of a loss assessor then provided fee to an insured
Management role
Ensure objectives are achieved
Brokers adopt different structuresC
Compliance role
Making sure broking procedures are established correctly and monitored to adhere to regulatory requirementsP
Product development role
Identifying gaps in product - sometimes client driven or driven by broker
Back office role
finance IT HR Marketing
Benefits of a broker to an insurer
Convenient - they do the admin, deal with complaints, present the risk information, ensure client understands product
Technical expertise - for complex products the client needs explaining of the product
Peace of mind - explaining consequences of not disclosing material facts
Cost benefits - delegate admin tasks
British Insurance Brokers Assocation
Open to all independent intermediaries
Non-statutory trade association with more than 2000 members
Seeks to maintain high standards of business behaviour to protect and enhance interests of members and customers
London Market Regional Committee
BIBA’s regional committee.
Maintains a lobbying role for the insurance broking sector to government / regulators.
London and the International Insurance Brokers Association LIIBA
Independent trade body for insurance and reinsurance brokers
Overlap between LIIBA and LMRC
Ensuring London remains core hub of insurance by focusing on transformative processes and enforcing high standards
Represents brokers to government and regulators
Modernise processess / legislative technical changes / encouraging collaboration between Lloyds LMA and IUA
