Chapter 1: Market reforms and commercial (re)insurance contract wordings Flashcards
What risk does the lack of contract certainty bring to the underwriters?
Underwriters will not know exactly where their exposure is under the contract ; reserving will not be accurate ; will not be able to allocate capital correctly
How did the FSA intervene in question of contract certainty?
Gave the market until the end of 2006 to find a solution. Made it clear failure would result in regulatory intervention
What was the main reason for uncertainty regarding contract certainty?
London Market relied heavily on slips. In absence of full wordings this was used. Disputes due discrepancies between wording and terms on the slip
In which case was the slip deemed ‘inadmissible’?
Youell V Bland Welch 1992
What were the issues with the Slip?
- Lack of contract certainty
- Subjectivities did no clearly define when they had been met
- Conditions noted on the slip, did this apply to one or all insurers?
- Changes that could be agreed by the leading insurer on behalf of the others
How were the inconsistencies in the slip solved?
Introduction of the Market Reform Contract (MRC)
What is the London Market Principles (LMP)
Voluntary blueprint for reforms which were to follow.
MRC, Leading Underwriting Agreements, Principle of Contract Certainty
What were the reasons for the London Market Reform?
Regulation
Loss of reputation
Legal Costs
Other Costs
Define Contract Certainty
Achieved by the complete and final agreement of all terms between the insured and insurer by the time they enter the contact.
What does the code of certainty seek to eradicate?
Uncertainties associated with parties contracting on the basis of price with leaving the detail for later.
What are the seven principles for contract certainty?
- Insurer and broker must ensure all terms are clear and unambiguous by the time the offer is made
- Contract documentation must be provided promptly
- Insurer and Broker must demonstrate the above
- Contract changes need to be certain and documented promptly
- Contract must include the agreed basis on which insurer’s final participation will be determined
- Final participation must be provided by each insurer promptly
- Broker and insurer have a responsibility to resolve exceptions to nay of above principles without delay
Why is is common to add subjectivity to an MRC at the time of quiatation?
Insurer requires further information from the insured before it can write the business
What is recommended for subscription contracts?
Signing provisions to ensure carrier’s participation can be clearly determined
What are the two things that written lines are?
To stand or un-annotated
What is meant by un-annotated?
Necessary be subject to change in the event of over-placement of the contract by the broker.
In order for a contract of insurance to be legally binding, it needs to be written in clear and unambiguous terms to achieve…
Contract Clarity
Up to what size of non-complex claim does the Single Claims Agreement Party cover?
£250,000 [or currency equivalent]
Which organisation has the key aim of transforming market processes and maintaining the highest professional standards of insurance and reinsurance brokers operating in the London and international markets?
London and International Insurance Brokers’ Association.
When a broker receives a Settlement Due Date, this is…
the date by which the [re]insurer wishes to receive the premium from the broker, which is not necessarily the premium payment date as set out as a policy conditions.
In the UK, the non-subscription market is generally considered to include the members of the…
Association of British Insurers and the British Insurance Brokers’ Association.
What is the Lloyd’s Wording Repository?
An electronic database of contract clauses, warranties and conditions and model contracts.
What does dual-regulation mean for Lloyd’s and its participants?
- PRA is responsible for ensuring the financial soundness of Lloyds.
- FCA monitors the conduct of the Corporation of Lloyd’s and its Managing Agents.
A soft market normally arises as a result of a period of:
little major loss activity and competitive market forces.
A syndicate at Lloyd’s agreed a several liability clause when it was set up. If one of the members was subsequently declared bankrupt, how does this affect the other remaining individuals?
Liability is several but not joint, so the remaining members are not responsible for making up any shortfall.
Why might an insurer review its contract wording as a result of a recent Financial Ombudsman Service [FOS] decision?
FOS has provided a ruling on previously disputed commercial contract wordings.
What are the benefits of an MRC?
Easier for insurers to assess risks offered by adding clarity to the broker/underwriter discussions
What are the types of Market Reform Contracts?
Open Market
Binding Authority
Lineslip
When should an Open Market MRC be used?
- Open market insurance and reinsurance business placed by LM brokers
- Marine open cargo covers and declarations
- declarations where MRC lineslips is not appropriate
- declarations off limited binding authority agreements
What is the general guidance as to the use of the Open Market MRC?
- Currency using ISO code
- Do not use non-specific acronyms
- Contract terms clearly stated
- Contract make reference to need to attach any notice by local laws after it has been agreed by the insurer but before provided to insured
- Any outstanding subjectivities ti be stated
- Contract provisions must be relevant to risk or administration of that risk
What are the 6 sections of the MRC?
Risk Details Information Security Details Subscription agreement Fiscal and regulatory Broker remuneration and deductions
What is highlighted in the risk details?
UMR, Type, Period, Interest, Limit of liability, Situation, Conditions, Choice of law and jurisdiction, Premium, Premium payment terms, Taxes payable, insurer contract documentation
What is an UMR?
Unique Market Reference
What is included in the information section
Free form additional information
What is the Security details in an MCR?
More than one subscriber of the risk, or insurer is a Lloyd’s Syndicate - several liability.
What section is the Several Liability and Attestation Clause in the MRC?
Security Details
Should a Several Liability and Attestation Clause be full or referenced?
Full
What is in the final part of the Security details clause?
- Unacceptable Line conditions
- Unnecessary Line Conditions
- Acceptable Line conditions
The section that documents all the inter and intra-market arrangements that will operate between the subscribers of risk is called?
Subscription agreement
What are contract changes usually subject to?
General Underwriters Agreement (GUA)
Is the adoption of SCAP optional or compulsory?
Optional
What is SCAP?
Single Claims Agreement Party - established to streamline and simplify the London Market claims agreement for the benefit of customers and reinforce the attractiveness of LM
How is SCAP achieved?
Incorporation of LMA in the MRC
What does SCAP provide?
Delegation of sole claims handling responsibility
Brokers are x to disclose whether or not a fee is payable by their client
‘strongly encouraged’
It is a x to state if there are any other deductions from the premium
Requirement
What sections must be retained in full for provided contract documentation to a client
Risk details, Information and Security Details
How does an MRC for binding authorities differ than for an Open Market MRC?
Risk details is replaced with Schedule and Non-Schedule agreements
There is no requirement of several liability language
GUA are not used
What is in the Schedule section?
Details of the binding authority contract
Details of any additional contractual information to be declared to a coverholder in an MRC for Binding authorities is in the…
Non-Schedule
What is a lineslip?
Broker to access a particular group of insurers who have delegated authority to receive business on another insurers behalf.
Are actual risks on the MRC for lineslips?
No
What is interest in an MRC?
Refer to subject matter or nature of liability
Market Wide body made up of company market insurers, Lloyd’s Managing Agents, Brokers and Corporation of Lloyd’s is the ?
London Market Group (LMG)
What dos LMG do?
- Setting/Maintain and promoting common vision of London
- Sponsoring agreed projects
- Determining priority of projects
What is the corporation of Lloyd’s
Overseas and supports the market, ensuring efficient operation and reputation retention
What is the LMA
Lloyd’s Market Association
What does the LMA do
Provides professional and technical support for Lloyd’s underwriting and claims community
What is the IUA?
International Underwriting Association of London
What is LIIBA?
London and International Insurance Brokers’ Association
What is the PRA’s approach to supervision?
Judgement Based
Forward Looking
Focus on greatest risks to consumers
What is the PRA
Prudential Regulation Authority
What are the objectives of the PRA?
Promote safety and soundness
Protection to those who may become policyholders
Secondary: Effective competition
What is the FCA
Financial Conduct Authority
What are the objectives of the FCA?
Consumer protection
Integrity
Competition
Who regulates (re)insurance brokers?
FCA
What is Xchanging?
Business processing, technology and procurement firm providing services domestically and internationally
Who regulates (re)insurance companies?
PRA and FCA
Insurers must take reasonable steps to communicate information in a way that is clear, fair and not misleading is featured in….
ICOBS 2 (General Matters)
Insurers are responsible for producing and insurance intermediaries for providing information for consumers to make educated decisions is featured in…
ICOBS 6 (Product Information)
In non-subscription markets insurers often failed to…
maintain appropriate version control over their wordings
What caused inconsistencies with the slip?
Format was non-standard. Each broker/insurer would develop its own version according to internal procedures
What is dealt in the fiscal and regulatory section of the MRC?
Fiscal and regulatory issues specific to parties
What is contained in the broker remuneration and deductions section?
Information relating to brokerage, fees and other deductions from the premium.
Why was the MRC for lineslips introduced?
Bring the standard into line with changes affected in the Open Market MRC
What does the MRC for endorsements address?
Layout and content for paper-based contract amendments to the MRC
X is able to regulate the activities of businesses within its market place as well as provide the infrastructure in which they operate
Corporation of Lloyds’
What does membership to the LMA bring?
Access to the Lloyd’s Wordings Repository (LWR) which includes wording developed by LMA
What is considered the the world’s largest representative organisation for international and wholesale insurance
IUA (International Underwriting Association)
What does the LUA exist to do?
Promote and enhance business environment of its member companies
Does the IUA have its own database of Insurance and Reinsurance clauses?
Yes
What is the London and International Insurance Brokers Association (LIIBA)
Trade association representing interests of insurance and reinsurance brokers operating in the London and International markets
X is a worldwide association providing support for those responsible for risk management and insurance in their own member companies
Airmic
What does the Association of British Insurers (ABI) represent?
UK General Insurance, investment and long term savings industry
The London Marine reinsurance market commonly contracts using….
the Joint Excess Loss Committee (JELC) Excess Loss Clauses
What is ISO?
Insurance Services Office
Provider of statistical, actuarial, underwriting and claims information and analytics etc.
The Aviation Insurance Clauses Group (AICG)
Establishes non-binding standard wordings, clauses and variants for us in aviation policies
What is the FPC?
Financial Policy Committee - sub committee within BoE. Day-to-day responsibility for macro-prudential supervision of regulated firms
What is the PRA?
Subsidiary of BoE. Responsible for micro-prudential regulator of (re) insurers
The Lloyd’s Act 1982 established…
The council of Lloyd’s as the governing body f the markets. Power to regulate and direct business in Lloyd’s
What does PRIN set out?
Principles for Business set out fundamental obligations of firms under regulatory system
Can (re)insurance contracts be affected by market cycles
Yes
Are improvements to coverage likely to be reversed when the market is hard?
No
What may happen creating a requirement to review and broaden existing coverages?
Insurers appetite to attracting new customers
Consideration needs to be given to the consequences of broadening existing wordings as…
Changes have a negative effect of increasing frequency/severity of claims
New, emerging or increased complexities in existing insurance products can…
Lead to developments of new ones
In the event of a claim, an appropriate Reservation of Rights letter enables an insurer to…
investigate a claim to determine whether or not coverage applies without waiving its rights.
Under the AIRMIC Reservation of Rights clause, the stated period allowed before the insurer can
issue a notice to reserve its rights is…
90 days.
Which body is primarily responsible for overseeing and driving process change in the London
Market to maintain and enhance its position internationally?
London Market Group.
Which section of a Market Reform Contract states the type of insurance coverage?
Risk details.
An insured has advised his broker that a burglar alarm system has been installed in one of its major
offices. Under which section of a Market Reform Contract should this be noted?
Information
The standard clauses applicable to a risk bound under a binding authority Market Reform Contract
(MRC) must be…
cross-referenced in the MRC and readily available to all participating underwriters.
Who regulates (re)insurance firms?
PRA & FCA
Who regulates Lloyd’s?
PRA
FCA for managing agents and the corporation of Lloyd’s
Who regulates (re)insurance brokers?
FCA
What is an MOU?
Memorandum of Understanding between the FCA and PRA
What are high level standards?
Firms must take reasonable care to establish and maintain such systems and controls to its business. E.G. SYSC.
When providing a copy of an open market Market Reform Contract to a client as an insurance
contract, which section must always be included?
Security details.
Which body has a secondary objective of facilitating effective competition within the insurance
industry?
Prudential Regulation Authority.
What role does Xchanging provide to the insurance and reinsurance market?
It issues guidelines on the content of Market Reform Contracts.
Which part of the Financial Conduct Authority’s Handbook contains the Principles for Businesses?
High Level Standards.
