3 - Other Roles of Insurance Brokers

Question 1

Other than the broker helping clients transfer risk to insurers - what else do brokers help with?

Answer 1

Risk management.

Question 2

Name some key benefits of ‘Risk Management’?

Answer 2

• Reducing the potential for loss by identifying & managing hazards.
• Greater shareholder confidence in a company’s ability to manage its risks.
• A disciplined approach to quantifying risks.
• Potential reduction in insurance premiums where an insurer can see that a company is positively engaged in managing its risks.

Question 3

What 3 steps are part of the risk management process?

Answer 3

1. Risk identification.
2. Risk analysis.
3. Risk control.

Question 4

What is involved in the first step: ‘risk identification’?

Answer 4

The first step is to identify all the existing threats to the company as well as the potential future threats.

(Essentially identifying the risks).

Question 5

What is involved in the second step: ‘risk analysis’?

Answer 5

The identified risks are evaluated or analysed to predict likely losses in the future.

Risk managers do this by examining past loss patterns.

Question 6

What is involved in the third step: ‘risk control’? Name and explain the 5 techniques of risk control?

Answer 6

If the risk is considered to have the potential to adversely affect the business, action should be taken to control, reduce or even eliminate it, depending on the severity and costs to the business for doing so.

Techniques of risk control:
1. Avoidance.
2. Reduction.
3. Prevention.
4. Minimisation.
5. Transfer.

Question 7

Explain what each technique of ‘risk control’ involves?

Answer 7

Avoidance:
= Action is taken to avoid entirely any possibility that an undesirable event will happen.

Reduction:
= Active steps are taken to reduce the degree of hazard presented by a risk that cannot be eliminated or to reduce the frequency of occurrence.

Prevention:
= Involves the introduction of physical controls to minimise or prevent the possibility of a loss occurring.

Minimisation:
- Requires physical measures that, while not preventing the loss from taking place, will lessen the extent of the damage as far as possible.

Transfer:
- Transferring the risk to others outside of the business, not just insurers.

Question 8

What is the most effective technique of risk control?

Answer 8

Risk avoidance is the most effective course of action but the measures that may need to be taken to do this may be extremely expensive.

Question 9

Name 2 aspects (ways) of controlling risks?

Answer 9

Physical controls:
- such as installing sprinklers or alarm systems.

Financial controls:
- such as making sure that contracts are carefully worded.

Question 10

Out of the 3 parts of risk management - What does the process of ‘data capture’ fall under?

Answer 10

The process of data capture is a form of risk identification.

Question 11

For each part of ‘risk management’ - How can brokers help?

Answer 11

‘Risk identification’:
- A broker may be able to identify risks the client was not aware of during the data capture of risks.

‘Risk analysis’:
- Brokers can assist clients by examining their previous claims history and they may suggest how the risk can be managed more effectively.

‘Risk control’:
- Brokers & insurers may impose requirements or make recommendations to improve a risk; e.g. fitting an alarm.

Question 12

Name some additional (optional) specialist risk management services a broker may offer?

Answer 12

Brokers may have in-house specialists or have arrangements with specialist companies:

• property surveys.
• business continuity planning.
• business interruption reviews.
• health & safety consultation.
• liability surveys.
• environmental risk surveys.
• post-loss control surveys.
• disaster recovery services.

Question 13

What type of company do broker’s traditionally help clients transfer their risks to?

Answer 13

Proprietary insurance companies.

Question 14

What is a ‘proprietary insurance company’?

Answer 14

Proprietary companies are limited liability companies.

They are owned by shareholders who, in buying shares, contribute to the share capital of the firm.
The shareholder’s liability for the company’s debts is limited to the value of the shares they own.

Question 15

What is the collective name for other ways in which risks can be transferred? Give a brief definition?

Answer 15

Alternative Risk Transfer (ART).

A phrase describing various non-traditional forms of (re) insurance and techniques where risk is transferred to the capital markets.

Question 16

What other type of company (ART - Alternative Risk Transfer) can a broker help a client transfer their risk to?

Answer 16

A Captive insurance company.

They are insurance companies owned by their parent company. They usually only insure/accept their parent company’s risks.

The captive may be based offshore which can provide tax benefits.

Question 17

Name some benefits of a ‘captive insurance company’ for firms?

Answer 17

• self-insure in a structured way.
• deals with claims in a more efficient & timely way.
• cover risks that the traditional market may not write.
• retain premium in-house that would otherwise go to an insurer.

Question 18

Name some other additional services offered by insurance brokers?

Answer 18

• broker networks.
• statistical analysis of insured trends such as loss analysis.
• security services.
• premium finance.
• general risk consultancy.

Question 19

What is a ‘delegated authority agreement’?

Answer 19

Where an insurer delegates underwriting authority to a third party (such as a broker or a managing general agent - MGA).

Question 20

How much of ‘Lloyd’s’ business is derived from the operation of delegated authorities to various coverholder’s around the world?

Answer 20

As much as 40% of revenue at Lloyd’s is derived from the operation of delegated authorities to various coverholder’s around the world.

Question 21

What is a ‘Coverholder’?

Answer 21

The entity that holds the delegated authority from the insurer.

e.g. the broker.

Question 22

What is a ‘Binding Authority’?

Answer 22

The contract under which delegated authority is given to a third party.

Question 23

What is a ‘Bordereau’?

Answer 23

The report provided by the Coverholder of the risks written & claims reported, normally provided monthly.

The insurer is responsible for reviewing and assessing the report (bordereau).

Question 24

What is a ‘Managing General Agent (MGA)’?

Answer 24

An organisation that underwrites insurance risks on the behalf of an insurance company or providers of insurance capacity.

They are not insurance brokers.

Question 25

Describe how a delegated authority operates?

Answer 25

1. Insurer or Coverholder sees a business opportunity and presents their case to the other party.
2. Coverholder and insurer draw up an agreement and procedures.
3. Coverholder operates the delegated authority in accordance with the terms.
4. Coverholder interacts with the insurer as agreed, ensuring they do NOT exceed their authority & the correct information is provided on the bordereau.
5. Insurer conducts regular audit checks in line with the agreement to ensure Coverholder is acting correctly.

Question 26

Name some reasons WHY an insurer would choose to delegate their authority to third parties?

Answer 26

• Access business that would otherwise not come directly to an insurer.
• Access the knowledge & experience of the insurance broker (Coverholder).
• Access a number of risks for which it is financially viable to underwrite themselves individually.

Question 27

What should the third party and insurer establish before entering into a delegated authority agreement?

Answer 27

1. The insurer: A full business plan should with projected income & expenditure should be developed before an agreement.
2. The third party: A clear business case before it agrees to take on the extra responsibilities of acting as a Coverholder.

Question 28

What can be a consequence of an insurer or Coverholder not fulfilling their obligations?

Answer 28

The insurer and the Coverholder both risk reputational damage if either party do not fulfill their obligations.

Question 29

For an insurance broker, what is there a potential for when acting as a Coverholder?

Answer 29

There is a potential for a conflict of interest to arise (where the broker is acting as both the agent of the insurer well as the agent of the client).

Question 30

What activities can be delegated by an insurer?

Answer 30

Underwriting:
- Most commonly delegated activity.

Credit control:
- Premium is paid by the insured to the Coverholder. It’s the responsibility of the coverholder to collect premium & make sure they keep detailed records for the insurer.

Document issuance & management:
- Coverholder is normally responsible for issuing documentation once a risk is bound.

Claims:
- Claims settlement authority can be delegated but usually within limits. A claims fund can be provided to the coverholder to speed up settlements.

Recoveries:
- a claim can be settled & a recovery can be made from another party.

Question 31

What are some benefits of a delegated authority agreement for the (insurer)?

Answer 31

1. Ability to access business held by brokers who would not usually want to reveal this to insurers in normal circumstances.
2. Cost-efficient underwriting that allows the insurer to place small risks in bulk that would not be economical to underwrite individually.
3. Lower operating costs per risk.
4. Ability to access/use the knowledge, experience & reputation of the coverholder.
5. Cost-effective way of trying out a new area of business rather than employing a new set of underwriters.
6. Localised quick claims handling provides good customer service.

Question 32

What are some disadvantages of a delegated authority agreement for the (insurer)?

Answer 32

1. Loss of control
2. Coverholder’s may not report their activity adequately.
3. If any delegated service is poor it impacts on the insurer’s brand.
4. Risk of the coverholder sub-delegating without permission.
5. Risks of funds being mis-managed & disorganised with other insurers funds.

Question 33

What are some benefits of a delegated authority agreement for the (broker)?

Answer 33

1. Access to a unique product on a bespoke policy for their clients.
2. Brokers are autonomous subject to their degree of authority.
3. Speed of underwriting, claims and documentation means improved service for their clients.
4. Efficient mechanism for obtaining cover for low value, high volume business, but still with high-grade security.
5. Potential for increased commission levels.
6. Full autonomy subject to their degree of authority.

Question 34

What are some disadvantages of a delegated authority agreement for the (broker)?

Answer 34

1. Potential dependency on a single market.
2. Increased workload with potentially new staff required and training burden.
3. Potential reputational damage if insurer fails.
4. Potential conflict of interest between insurer & client.
5. Increased reporting & audit requirements.

Question 35

Some benefits of a delegated authority agreement for the (customer)?

Answer 35

1. Faster service.
2. Local service; high quality security.

Question 36

Some disadvantages of a delegated authority agreement for the (customer)?

Answer 36

1. May not know who their actual insurer is.

Question 37

What is the most common activity that an insurer can delegate to a coverholder?

Answer 37

Underwriting.

Question 38

What is a Managing General Agent (MGAs)?

Answer 38

Is an individual or business entity that underwrites business on the behalf of an insurer, who provides capacity for the MGA and acts as their principal.

The MGA underwrites on the behalf of the insurer, but does not carry the risk itself.

Question 39

What is the name of the trade association for Managing General Agents (MGAs) in the UK?

Answer 39

Managing General Agent’s Association (MGAA).

A non-profit organisation designed to shape the future of delegated underwriting in the UK.

Question 40

What are the 2 different extents to which underwriting can be delegated?

Explain both?

Answer 40

1. ‘Full authority’.
   = Risks are accepted and rates are set by the coverholder.
2. ‘Prior submit’.
   = The coverholder refers every risk to the insurer.