2 - Role of the broker in meeting client needs

Question 1

What are some of the ‘core broking functions’?

Answer 1

• provision of products and services
• negotiation and placement
• selection of insurers
• claims negotiation, collection and payment
• the design and operation of insurance programmes

Question 2

What is consideration from the insured and insurer?

Answer 2

Consideration from the insured is the payment of premium.

Consideration from the insurer is the promise to pay a valid claim.

Question 3

What is ‘identifying and clarifying a client’s requirements’ also known as?

Answer 3

Their ‘demands and needs’.

The broker can use their expertise to assist their client in distinguishing between their demands and needs.

Question 4

Explain the relationship/difference between a clients ‘demands and needs’?

Answer 4

A client may demand an insurance policy for their car, as they know the law requires them to have one.

But, each motor policy has different features which are suited to different clients depending on their requirements. These requirements are the client’s needs.

Clients may be unaware of their needs so it’s the broker’s job to help establish them.

Question 5

How does a broker establish a client’s demands & needs?

Answer 5

By asking questions.

This usually requires the completion of a ‘proposal form’.

Question 6

What is the ‘demands and needs statement’? When must a client’s ‘demands & needs’ be established?

Answer 6

This is the document outlining the client’s demands and needs, which must be established prior to the conclusion of a contract.

The regulator requires a copy of this document, and it is also distributed to the client and must be agreed by all parties.

Question 7

When should the broker really commence their search for the most suitable insurance policy?

Answer 7

Ideally once the client’s demands & needs have been agreed.

Question 8

Describe the process of providing an insurance product?

Answer 8

1. First contact with the client - The client identifies their wants:
   - e.g. motor, travel, or household policy.
2. Data capture appropriate to the class of business:
   - The broker asks relevant questions to gather sufficient information about the risk & what the client wants, to establish what the client actually needs in terms of coverage.
   - Traditionally, brokers asked client’s to complete a proposal form.
3. Confirm the client’s demands & needs and provide them with a copy of the proposal form.
   - A demands & needs statement is shown to the client to obtain their agreement.
4. Source the appropriate product, having considered the full range of the client’s demands and needs.
   - The statement forms the basis of the search for the most appropriate insurance policy.
   - Broker must explain if any warranties or conditions apply.
5. Recommend the product to the client ensuring they have all the product information and include a statement of how the product meets the client’s demands and needs – ‘the suitability statement’.
6. Formally arrange cover and bring the insurer and the client to contract.

Question 9

What does a ‘suitability statement’ record? What is the purpose?

Answer 9

The ‘suitability statement’ must record:
1. the customers demands & needs.
2. how the recommendation addresses these demands & needs.
3. reasons for the recommendation.

The purpose is to ensure that customers have the necessary
information to make an informed choice about whether or not to buy a specific insurance contract and whether a contract meets their needs.

Question 10

Name 2 electronic placing platforms?

Answer 10

1. Placing Platform Limited
2. Whitespace

Question 11

What does ‘broking’ the insurance contract involve?

Answer 11

When armed with the appropriate ‘material facts’, a broker can negotiate the best possible policy terms for their client.

Question 12

What principle underpins insurance contracts?

Answer 12

The principle of ‘Utmost good faith’.

Question 13

What case summarises the principle of ‘utmost good faith’?

Answer 13

Rozanes V. Bowen (1928).

The broker (assured) has a duty to make a full disclosure to the underwriter, without being asked of all the material circumstances.

Question 14

What act defines a ‘material fact/circumstance’? How is it defined?

Answer 14

The Marine Insurance Act (1906).

Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk.

Essentially, a material fact is something that influences the risk insured.

Question 15

What did the ‘Consumer Insurance (disclosure and Representations) Act (2012) do? What policies does it apply to?

Answer 15

The act applies to consumer policies.

Under the Consumer Insurance (Disclosure and Representations) Act 2012, consumers are only required to take reasonable care not to make a misrepresentation when providing information before a contract is entered into.

The act modifies the consumer’s duty of utmost good faith by removing the obligation to disclose all material facts. They need only to respond honestly and with reasonable care to questions asked.

A key principle within the Act is to disclose information with clarity and urgency, even when there is doubt that the information is material.

Question 16

What is one of the KEY material facts that should be disclosed to underwriters?

Answer 16

The client’s loss experience.

i.e.
- insurance claims.
- any uninsured losses that have occurred.

Question 17

What did the ‘Insurance Act (2015)’ do? What policies does it apply to?

Answer 17

The act applies to commercial (non-consumer) policies.

The duty to make a ‘fair presentation’ is retained (unlike for consumer contracts). The commercial insured must:

• disclose to insurers every ‘material circumstance’ which the insured knows or ought to know.
• provide the insurer with ‘sufficient information’ on material circumstances.

Question 18

What are the remedies for a breach of the ‘duty of fair presentation’?

Answer 18

1. If the breach was ‘deliberate or reckless’ and the insurer would NOT have entered into the contract had it known the full information, the insurer may avoid the policy and retain the premium.
2. If the breach was neither ‘deliberate or reckless’ and the insurer would NOT have written the contract with the full information - they may avoid the contract but return all the premium.
3. If the breach was neither ‘deliberate or reckless’ and the insurer WOULD have written the contract, but with different terms & conditions - the policy is now deemed re-written from inception, including those new terms.
4. If the breach was neither ‘deliberate or reckless’ and the insurer would have applied the same terms & conditions but charged a higher premium - additional premium is not charged, but claims are reduced by the same % as the premium was underpaid.

Question 19

Can parties contract out of the ‘Insurance Act 2015’?

Answer 19

Yes, parties to an insurance contract can agree that the provisions of the Insurance Act 2015 will not apply, and that the previous law on disclosures will apply.

Question 20

How does the ‘Insurance act 2015’ impact ‘Warranties’?

Answer 20

Breach of warranty no longer automatically terminates the contract. Instead, an insurer’s liability will be suspended from the time of the breach until the breach is remedied.

Question 21

What are some of the ways that a broker can gather information of the client’s risk that may be useful to the underwriter?

Answer 21

• proposal forms
• PPL and Whitespace (electronic placing platforms)
• insurer’s questionnaires
• broker’s questionnaires
• survey reports
• statement of fact

Information is gathered over the phone, face-to-face, or electronically, and that information is combined into a statement of fact.

Question 22

What is a ‘Proposal form’? Advantages / Disadvantages of ‘proposal forms’?

Answer 22

A proposal form allows the insurer to ask general questions for the insured to answer, which are usually asked in a standardised format. The client has to sign the proposal form and warrant the truth of the information.

Advantages:
- Allow the client to adhere to their ‘duty of disclosure’.
- Allows relevant data to be collected.

Disadvantages:
- The form tends to be standardised so some of the questions may not be relevant.

Question 23

What is an ‘insurer’s questionnaire’?

Answer 23

This is a questionnaire made by the insurer, tailored to the needs of the particular client & risk.

Advantages:
- Questions that are not relevant can be avoided and all the correct information can be gathered.

Disadvantages:
- Because they are tailor-made to fit the risk they can take time to structure.

Question 24

What is a ‘broker’s questionnaire’?

Answer 24

Broker’s can have their own questionnaires to gather information. used so the broker can capture all the relevant information.

Advantages:
- Forms can be sent in advance of a face-to-face meeting so the client can gather/prepare the appropriate risk information.
- Complementing this form with a face-to-face visit can save time.

Disadvantages:
- They should not be used as a substitute for a face-to-face meeting - the broker should not lose touch with the client.
- Can be time consuming and expensive for the broker.
- They may not capture all of the information required.

Question 25

What is a ‘survey report’?

Answer 25

For complex risks, brokers may need to conduct a formal underwriting survey to fully understand the client’s risk. This survey may even be a requirement of the insurer. A detailed survey report is completed after a site visit.

Advantages:
- Generally captures physical risk information.

Disadvantages:
- Cost: Survey’s are expensive as they need to be conducted by an expert.

Question 26

On what are risks presented to London Market underwriters?

Answer 26

A Market reform Contract (MRC), aka a ‘slip’.

Question 27

What are the sections of an MRC?

Answer 27

Risk details.
Information.
Security details.
Subscription agreement.
Fiscal & regulatory.
Broker remuneration & deductions.

Question 28

When should contract documentation be issued?

Answer 28

Consumers: Within 7 days.

Commercial consumers: Within 30 days.

Question 29

What does ‘Contract Certainty’ mean?

Answer 29

That all the terms & conditions of the insurance policy have been agreed before the insured and insurer commit to the contract.

Question 30

Name some factors that affect the broker’s selection of an insurer?

Answer 30

Regulation:
- In the UK, regulated insurance brokers can only deal with regulated insurers.

Financial security:
- An overriding factor when choosing an insurer.
- Rating agencies (Standard & Poor’s or AM Best) assess an insurers financial security.

Class of business:
- The broker must find an insurer who specialises in the class of business that best matches the broker’s client base.

Administration:
- Even the larger insurance brokers do not deal with every single insurer.

Broker selection:
- Many insurers have a reputation and brokers may select insurers on a relationship basis.

Question 31

What positive factors would make a broker select a particular insurer?

Answer 31

Credit facilities:
- Some insurers offer credit facilities to a broker’s clients.
- Some insurers also give brokers a longer window to pay client premiums.

Additional income:
- Insurance premiums are normally paid at the outset so insurers can invest these to create additional premium.

Ease of payment:
- Insurers can offer facilities for the premium to be paid in a monthly direct debit, but as they are losing some of the investment opportunity they will normally charge for this service.
- Some insurers however may offer to do this at no extra cost to offer a competitive advantage.

Question 32

For ‘fair analysis’ of the market to take place, what must the broker do?

Answer 32

The broker must be able to consider an adequate number of insurers so they demonstrate their knowledge of the insurers operating in the relevant market sector.

Brokers must also be able to evidence this analysis by adhering to and documenting a set process.

Question 33

Explain the process of ‘fair analysis’?

Answer 33

1. Data capture & establish the client’s demands and needs.
2. Identify the potential insurers for that class of business.
3. Refine the list of potential insurers based on the client’s demands & needs and produce a shortlist of potential insurers.
4. Refine the shortlist using specialist broking knowledge/expertise. Ensure this is documented with reasoning, leaving a minimum of 5 potential insurers.
5. Provide a broking submission & negotiate terms.
6. Select a recommended insurer & present the quotation to the client - making it clear why the recommendation best suits their demands & needs, and that the quote was obtained through fair analysis.

Question 34

What must the broker show in writing at the shortlist stage?

Answer 34

Why, in writing, the insurers at the shortlist stage did or did not get on the list of final insurers to approach.

Question 35

What are some of the main criteria brokers assess when selecting insurers for their client’s specific risk?

Answer 35

Quality of service:
- Insurers should provide a; fast quotation, efficient & accurate production of documents, fast payment of claims etc.

Breadth of cover:
- The broker must source the most appropriate cover for the client’s demands and needs.

Flexibility:
- The willingness of an insurer to adapt the terms and conditions of its quotes to the client’s specific needs.

Innovation:
- The insurer’s ability to step outside the conventional in order to accommodate complex risks or meet individual client needs.

Capacity:
- Insurers must reserve enough capital to pay future claims.
- Capacity affects the cover offered.

Geographical spread:
- Benefits multi-national risks.

Technical advice & specialist expertise:
- The accessibility of an insurer’s technical experts to brokers & clients.

Claims service:
- Rapid decision making and quality of communication.
- The administrative interaction between client & insurer when there is a claim.

Price:
- Sourcing a competitive price between insurers is a key task of the broker.

Survey and risk control:
- Insurers may provide risk surveys which can be an advantage.
- Risk control advice can also be helpful but can be onerous or expensive for he client to implement.

Continuity:
- Loss histories are already known if a client stays with their existing insurer.

Reputation & experience:
- Certain insurers may have developed great experience in underwriting a particular type of risk.

Question 36

What is a ‘suitability statement’? What does the ‘suitability statement’ need to record?

Answer 36

A ‘suitability statement’ provides an explanation of the brokers recommended insurer, and how it will deliver the client’s demands and needs. The purpose of this statement is to ensure that clients have the necessary information to make an informed choice about whether or not to buy a specific insurance contract.

Records:
1. The customers demands & needs.

2. How the recommendation addresses these demands and needs.
3. The reasons for the recommendation.

Question 37

When the broker is presenting and explaining the terms to the client, the objectives are to…?

Answer 37

• convey the terms accurately & concisely.
• ensure the client understands the cover and the terms & conditions that apply.
• ensure the client understands where the cover may not met their requirements.
• provide full details of the insurers.

Also an opportunity for the broker to explain the importance of:
- disclosing material facts.
- warranties and policy conditions.

Question 38

If the quotation is for a renewal, what would a good
presentation of terms to the client include?

Answer 38

• last year’s terms with last year’s values.
• last year’s terms on this year’s values.
• this year’s terms on this year’s values.
• competing or alternative terms on this year’s values.
• percentage differences by line and in total.
• any key differences between this year and last year’s terms, such as cover or excess changes.

Question 39

When should contract documentation be provided to the ‘Contract certainty Code of Practice’?

Answer 39

All contract documentation must be provided ‘promptly’ according to the Contract Certainty Code of Practice.

Question 40

What does an insurers ‘risk appetite’ refer to?

Answer 40

The amount of risk that an organisation or individual is willing to take on in pursuit of their strategic objectives.

Question 41

What happens to the design of an insurance programme during the broking process?

Answer 41

The insurance programme will evolve during the broking process as initial assumptions about the client’s needs are replaced by facts.

Question 42

What are some of the key issues brokers face when designing insurance programmes for their clients?

Answer 42

Risk Retention:
- The level of the risk the client wishes to retain.

Packages and combining policies:
- This is where a number of risks are combined into a single policy with a single insurer.
- Can savings be achieved by this?
- Can high-risk business be covered with other lower risk elements?

Programme term:
- Insurers may offer to maintain the same rates for a longer term period of say 2 to 3 years.

Limits:
- Does the client have accurate sums insured?

Specialist cover:
- i.e. terrorism.
- an the programme be adapted to include specialist cover?

Insurers:
- Which markets are writing the risk and how will they respond to the proposed programme structure?

Question 43

Name some advantages for companies in using global programmes (multinational companies)?

Answer 43

• Consistency in cover
• Central control
• Potential savings through economies of scale

Question 44

Name some disadvantages for companies in using global programmes (multinational companies)?

Answer 44

• A reduced number of insurers to choose from
• The risk of upsetting local relationships
• Contentious allocation of the premium between different sites

Question 45

Describe the ‘insurance cycle’?

Answer 45

• Capital markets invest in insurance
• New insurers and underwriting vehicles emerge
• Insurers’ capacity increases
• Insurers write more business/accept more risk
• Competition lowers rates
• Claims exceed premiums (more business written = more claims)
• Capital markets withdraw from insurance
• Insurers’ capacity reduces
• Competition for reduced capacity increases rates
• Premiums exceed claims
• Attracts capital markets to invest in insurance again

Question 46

What is a ‘Soft Market’?

Answer 46

When capital markets invest in insurance, there is a high capacity, so insurers relax their underwriting terms and take on more risk.

More risks accepted results in more claims.

More claims and more claims costs, coupled with lower premiums, drives capital out of the market.

= A “soft market”.

Question 47

What is a ‘Hard Market’?

Answer 47

When capital markets invest less, there is less capacity and insurers write less business.

This increases competition between brokers to find an insurer willing to quote.

Insurers increase their premiums and restrict cover as they are more selective in the business they write.

= A “hard market”.

Higher premiums increase profitability, so this then attracts new investment where the cycle starts again.

Question 48

Do all classes of business follow the same market cycle?

Answer 48

No, different classes of business may be relatively more profitable than other classes of business, so they can have their own market cycles.

Question 49

If insurers begin to announce losses, what happens in terms of the insurance market cycle?

Answer 49

If insurers begin to announce losses, it is likely that premiums will rise, the market will ‘harden’, and brokers will advise their clients to retain more risk.

Question 50

What happens to the insurance market cycle if insurers begin to announce profits?

Answer 50

If insurers begin to announce profits, it is likely that premiums will be maintained, the market will ‘soften’, and brokers may consider encouraging clients to retain less risk.

Question 51

Name the 4 ways a broker can deal with a client’s claim?

Answer 51

1. No service.
2. Claims advocacy role.
3. Full claims service.
4. Delegated authority

Question 52

How does a broker deal with a claim by ‘No Service’? Why?

Answer 52

The broker has NO authority to deal with a claim. The broker must notify the insurer promptly and inform the client they cannot deal with the claim.

• Brokers feel its more efficient for the insured to liaise directly with the insurer.
• Some insurers prefer total control of the process.

Question 53

How does a broker deal with a claim by a ‘Claims Advocacy Role’? Why?

Answer 53

The insured deals directly with the insurer. The broker assists & advises the client if there are any problems with the claim or policy holder.

The insurer engages with the broker if there are any issues.

Question 54

How does a broker deal with a claim by a ‘Full Claims Service’? Why?

Answer 54

These brokers deal entirely with the insurer on the client’s behalf, appointing loss adjusters, collecting claims payments from the insurer and paying the client directly.

This service is often only offered for larger clients on more specialist/complex risks because it can be time-consuming & expensive.

Question 55

How does a broker deal with a claim by a ‘Delegated Authority Claims Handling’? Why?

Answer 55

The broker takes full responsibility for claims up to an agreed financial limit with insurers.

Care must be taken to avoid a conflict of interest as the broker may have dual principles (i.e. arranging the policy & settling the claim).

Question 56

When the broker provides a claims service for their client, what are some basic principles of the broker when dealing with claims?

Answer 56

• Advising the client as to whether the claim is insured or not.
• Giving immediate notification of losses to insurers.
• Advising the client of their rights/obligations under the policy.
• Arranging for the completion of claims forms.
• Appoint adjusters where necessary.
• Help the client prepare the necessary information/documents to best present the claim to the insurer.
• Collect claims payments from insurers.
• Attend site meetings with the adjuster.

Question 57

How much do fraudulent claims add to the premiums of honest policyholders a year?

Answer 57

5% to the premiums of honest policyholders.

Question 58

Does the law of agency override a broker’s duty to comply with the law?

Answer 58

No - a broker who pursues a claim on their client’s behalf when they know it is fraudulent is committing an offence.

Question 59

Name the 2 main types of insurance fraud?

Answer 59

1. Opportunistic fraud.
2. Organised fraud.

Question 60

What is ‘Opportunistic fraud’?

Answer 60

The individual or firm exaggerates or inflates a genuine claim to increase the value of a payout.

Question 61

What is ‘Organised fraud’?

Answer 61

Where a criminal gang takes out insurance policies with the specific intention of committing fraud.