Chapter 1 - Market reforms and commercial (re)insurance contract wordings

Question 1

Referring to the slip as an aid of construction of the wording should run counter to one of the objects of replacing the slip with the policy: namely that the wording is designed specifically to reflect the agreement between the parties more clearly. This has been tested by which case law:

Answer 1

Youell v. Bland Welch (1992) - The slip was held to be inadmissable

Question 2

Which case law held that a ‘slip policy’ was intended to be the contract of insurance and that a clause included in the slip policy, but not in the subsequent wording, formed a part of the contract?

Answer 2

HIH Casualty and General Insurance Ltd v. New Hampshire Insurance Co. (2001)

Question 3

Which three issues with slips led to the introduction of the MRC?

Answer 3

1. Subjectivities imposed by an insurer which did not clearly define when they had to be met
2. Conditions noted on a slip against an insurer’s written line and whether these were to apply to the insurer’s participation or to all the other insurers on the slip; and
3. Changes that could be agreed by the leading insurer on behalf of other insurers

Question 4

In the UK, the non-subscription market is considered to comprise membership of…

Answer 4

1. Association of British Insurers (ABI); and

2. British Insurance Brokers’ Association (BIBA)

Question 5

What problem did the UK non-subscription market have?

Answer 5

Insurers often failed to maintain appropriate ‘version control’ over their wordings

Question 6

What 4 other markets in the insurance industry have helped developed how insurance is bought and sold?

Answer 6

1. Direct Insurance
2. Bancassurers
3. Supermarkets and high street retailers
4. Online comparison sites (aggregators)

Question 7

When continental and overseas markets use MRCs it is likely….

Answer 7

…they are subscribing to a risk that is led by a London Market insurer and are signing the MRC for their participating in the risk

Question 8

A binder used by overseas and continental markets is…

Answer 8

…effectively a one or two page quotation setting out details of the risk, sum insured and any specific conditions and limitations to be noted

Question 9

If the terms and conditions of a binder quotation are acceptable to the client …

Answer 9

…the broker will instruct the insurer to issue a final binding agreement

Question 10

In 1999, which three parties agreed to work together to propose reforms to the traditional London Market business processes?

Answer 10

1. International Underwriting Association of London (IUA)
2. London Market Brokers’ Committee (LMBC - now LIBA)
3. Lloyd’s

Question 11

In 2000, the London Market Principles (LMP) programme included which three things?

Answer 11

1. The reform of placing of insurance and reinsurance business through the introduction of a new slip format
2. A new Leading Underwriters Agreement
3. The principle of contract certainty

Question 12

From 1st April 2013, the FSA became….

Answer 12

The Financial Conduct Authority and the Prudential Regulatory Authority

Question 13

3 key drivers for change in the UK (re)insurance market include:

Answer 13

1. Loss of reputation - poor record in policy issuance
2. Legal costs - formal disputes over policy wordings were expensive for both sides
3. Other costs:
   - Tangible - wasted management time associated with managing legal disputes and costs of correcting errors
   - Intangible - Destruction of relationships from higher acquisition costs

Question 14

The London Market Group (LMG) issued what in a response to the FSA’s challenge in 2005….

Answer 14

…The Code of Practice (October 2005)

This was updated to the Contract Certainty Code of Practice - Principles & Guidance (October 2012)

Question 15

Contract Certainty Code of Practice - Principles & Guidance (October 2012) is…

Answer 15

…a common approach for the whole UK insurance industry.

It is stated to apply to general insurance contracts either entered into by a UK regulated insurer, or arranged through a UK regulated broker (slip and non-slip business).

Its status remains as industry guidance and it is not intended to be binding on any party.

Question 16

Contract certainty is….

Answer 16

…achieved by the complete and final agreement of all terms between the insured and the insurer by the time that they enter into the contract, with contract documentation provided promptly thereafter.

Question 17

Contract Certainty Principle A - When entering into the contract is….

Answer 17

….The insurer and broker (where applicable) must ensure that all terms are clear and unambiguous by the time the offer is made to enter the contract or the offer is accepted. All terms must be clearly expressed, including any conditions or subjectivities.

Question 18

Contract Certainty Principle B - After entering into the contract is….

Answer 18

Contract documentation must be provided to the Insured promptly

Question 19

Contract Certainty Principle C - After entering into the contract is

Answer 19

The insurers and brokers (where applicable) must be able to demonstrate their achievement of principles A and B

Question 20

Contract Certainty Principle D - In respect of contract changes is

Answer 20

Contract changes need to be certain and documented promptly.

Question 21

Where there Is more than one participating insurer:

Contract Certainty Principle E - When entering Into the contract is

Answer 21

The contract must include an agreed basis on which each insurer’s final participation will be determined. The practice of post-Inception over-placing compromises Contract Certainty and must be avoided.

Question 22

Where there Is more than one participating insurer:

Contract Certainty Principle F - After entering Into the contract is

Answer 22

After entering Into the contract:

The final participation must be provided to each Insurer promptly.

Question 23

Where there Is more than one participating insurer:

Contract Certainty Principle G - Where the contract has not met the principles is

Answer 23

The Insurer and broker (where applicable) have a responsibility to resolve exceptions to any of the above principles as soon as practicable and without undue delay.

Question 24

The three Appendices to the Contract Certainty principles contain guidance regarding…

Answer 24

…subjectivities and signing provisions, and a checklist

Question 25

What 4 things should a subjectivity set out?

Answer 25

1. the condition/action that needs to occur, by whom and to what standard;
2. the applicable timescale, if any, within which the condition is to be met;
3. the terms which are to apply until the condition Is met; and
4. any consequences which follow if the condition is not met.

Question 26

What does Appendix 2 of the Code provide?

Answer 26

A sample checklist designed to help assess contracts against Principle A: All terms and conditions are clearly and unambiguously expressed.

Question 27

Appendix 2 of the Code encourages organisations to..

Answer 27

…develop their own versions tailored to their particular businesses.

The list may also serve as a reminder as to the content of particular contracts. For example, has a law and jurisdiction clause or a several liability clause been included? Is the contract compliant with any regulatory requirements?

Question 28

What does a several liability clause provide?

Answer 28

That a subscribing insurer’s obligations under the contract are several, not joint, and are limited solely to the extent of their individual subscription.

In other words, they do not extend to a co-subscriber’s subscription if, for any reason, that co-subscriber does not satisfy all or part of their obligation.

Question 29

Appendix 3 of the Code sets out…

Answer 29

Signing Provisions

Question 30

A carrier’s participation should be clearly determined as required by which principle…

Answer 30

Principle E (For subscription contracts, signing provisions are recommended.

Question 31

Written lines are typically,,

Answer 31

to stand or un-annoated

Question 32

Written lines that may be subject to change in the event of over-placement of the contract by the broker are…

Answer 32

…un-annoted

Question 33

What type of model provision is this:

In the event that the written lines hereon exceed 100% of the order. any lines written ‘lo stand’ will be allocated In full and all other lines will be signed down In equal proportions so that the aggregate signed lines are equal to 100% of the order without further agreement of any of the Insurers.

However:

a. In the event that the placement of the order Is not completed by the commencement date of tho period of Insurance then all lines written by that date will be signed in full;
b. the Insured may elect for the disproportionate signing of Insurers’ lines, without further specific agreement of Insurers, providing that any such variation Is made prior to the commencement date of the period of Insurance, and that lines written ‘to stand’ may not be varied without the documented agreement of those Insurers.
c. The signed lines resulting from the application of the above provisions can be varied, before or after the commencement date of the period of Insurance, by the documented agreement of the Insured and all Insurers whose lines are to be varied. The variation of the contracts will take effect only when all such Insurers have agreed, with the resulting variation In signed lines commencing from the date set out In that agreement.

Answer 33

With Disproportionate signing

Question 34

What type of model provision is this:

In the event that the written lines hereon exceed 100% of the order. any lines written ‘lo stand’ will be allocated In full and all other lines will be signed down In equal proportions so that the aggregate signed lines are equal to 100% of the order without further agreement of any of the Insurers.

However:

a. In the event that the placement of the order Is not completed by the commencement date of tho period of Insurance then all lines written by that date will be signed in full;
b. The signed lines resulting from the application of the above provisions can be varied, before or after the commencement date of the period of Insurance, by the documented agreement of the Insured and all Insurers whose lines are to be varied. The variation of the contracts will take effect only when all such Insurers have agreed, with the resulting variation In signed lines commencing from the date set out In that agreement.

Answer 34

Without Disproportionate signing

Question 35

In the model provision that allows disproportionate signing, signed lines for each contract are set out at what point?

Answer 35

at the conclusion of the placement or, if later, the commencement date of the period of (re)insurance. Any subsequent variation must be agreed between the (re)insured and all of those (re)insurers whose lines are to be varied.

Question 36

If lines totalling 120% are written with 40% of those lines ‘to stand’ on a contract which Includes a Disproportionate Signing provision, how should the lnsured’s broker must sign down the lines?

Answer 36

The lines totalling 80% not written to ‘to stand’, to 60%.

It remains free to choose whether to sign all of those lines down by a quarter (that is, proportionately), or to do so disproportionately according to whatever criteria suits.

Question 37

Are contract certainty and contract clarity the same?

Answer 37

No

Question 38

Whilst the objective of (the code of practice of) contract certainty is to provide clarity for both customer and (re)insurer 011 the terms and conditions prior to inception, it is often taken to mean…

Answer 38

…contract evidence. In other words, the customer and (re)lnsurer have agreed a full written contract at inception, and no more.

Question 39

t is not necessarily the case that, at inception, each party’s intention mirrors that of the other, and that that agreed intention has been reduced to writing in clear and unambiguous terms to achieve…

Answer 39

…contract clarity

Question 40

There will be evidence of the contract in the form of…

Answer 40

…an agreed wording.

Question 41

To deal with inconsistencies with non-standard slips, what was introduced in 2002?

Answer 41

a standardized LMP slip

Question 42

The LMP slip was mandated by….. or business incepting from……and recommended by ……. to …….

Answer 42

he LMP slip was mandated by the Franchise Board at Lloyd’s for business incepting from the 2 January 2004, and recommended by the IUA and the LMBC to its members.

Question 43

One of the key provisions of the LMP slip was that…

Answer 43

the fully claused wording must be attached to the slip or all clauses fully referenced.

Question 44

What replaced the LMP April 2005 slip and what subsequently replaced that?

Answer 44

In June 2006, the Market Reform Slip (MRS) and was in turn replaced by the MRC.

Question 45

When did the MRC standard become mandatory for open market business f

Answer 45

1 November 2007

Question 46

What are three main forms of Market Reform Contract:

Answer 46

• open market;
• binding authority; and
• lineslips.

Question 47

In support of each form of Market Reform Contract is

Answer 47

n MRC standard for documenting and agreeing contract changes (that Is, the Market Reform Contract Endorsement or MRCE). Additionally, their content Is compatible with ACORD standards.

Question 48

What does ACORD stand for:

Answer 48

ACORD (Association for Cooperative Operations Research and Development) is the global standards-setting body for the insurance and related financial services industries

Question 49

What 4 things should an Open Market MRC be used for:

Answer 49

• all firm quote and firm order open market insurance and reinsurance business placed by London Market brokers;
• all marine open cargo covers and the declarations attaching to them (marine open cargo covers are defined as those risks where the insured has, or is expected to acquire, an insurable interest in each declaration bound);
• declarations or off-slips attaching to line-slips where the use of MRC (Lineslip Declarations) is not appropriate; and
• declarations off limited binding authority agreements, where appropriate.

Question 50

General guidance as to the use of the Open Market MRC includes:
Currency
Acronyms
Contract terms
Reference to
Subjectivities
Contract Provisions

Answer 50

• The currency of any monetary amounts should be identified by the relevant three-letter ISO currency code - for example, GBP for British pounds sterling and USO for United States dollars - rather than symbols such as£ or$.
• Acronyms - for example, TBA (to be agreed/advised?) - or any other terms which are ambiguous or non-specific should not be used.
• All contract terms should be clearly stated and any standard registered wordings or clauses should be referenced or attached. All bespoke and non-standard wordings and clauses must be attached in full.
• The contract should make reference to the need to attach any notice required by local laws to a contract after it has been agreed by the insurer and before It is provided to the insured (for example, US surplus lines brokers must attach notices in state-prescribed forms to surplus lines contracts).
• Any outstanding subjectivities stated in the contract must be expressed as unambiguous conditions and, as we discussed in section A4C, must specify the responsibilities and timescales for resolution and the consequences of failure to do so.
• Standard contract provisions must be relevant to the risk or the administration of that risk.

Question 51

Open Market MRC is in how many sections?

Answer 51

6:
Risk details
Information
Security details
Subscription agreement 
Fiscal and Regulatory 
Broker remuneration and deductions

Question 52

What section of the OM MRC sets out the details of the risk/contract involved, such as insured, type, coverage,
conditions etc.

Answer 52

Risk Details

Question 53

What 12 headings are mandatory on an OM MRC:

Answer 53

UMR
Type
Period
Interest
Limit of Liability
Situation
Conditions
Choice of Law and Jurisdiction
Premium
Premium payment terms
Taxes payable by the insured and administered by the insurer
Insurer contract documentation

Question 54

OM MRC: Situation includes…

Answer 54

Situation, territorial limits or scope, trading warranties or location

Question 55

OM MRC: Conditions includes…

Answer 55

The full wording (Including all clauses and any amendments, qualifications, variation or similar) should be entered or referenced here. Further, the contract document must
reference or attach in full all wordings and clauses. If referenced, they must be readily available to the broker and all carriers.

Question 56

OM MRC: Taxes payable by the insured and administered by the insurer
includes…

Answer 56

Here, ‘payable by’ refers to the party bearing the economic cost of the tax, and
‘administered by’ to the party responsible for settling the tax with the relevant authority. Examples Include: insurance premium taxes and stamp duties

Question 57

OM MRC: Insurer contract documentation includes…

Answer 57

Either a copy of the contract document or an Insurance policy for open market risks

Question 58

What section of the OM MRC would Include descriptions of the business activities, turnover details of a particular insured, and claims history.

Answer 58

Information

Question 59

What is required to establish the individual (several), not joint, liability of each insurer or syndicate member if there is more than one subscriber to the risk, or the insurer is a Lloyd’s syndicate?

Answer 59

a several liability clause

Question 60

What has been agreed for use on open market risks and, according to the standard, should be reproduced in full, not referenced where there is more than one subscriber to the risk?

Answer 60

Several Liability and Attestation clause (LMA 3333)

Question 61

Where would a several liability clause be found in an Open Market MRC?

Answer 61

security details

Question 62

What clause is this:

The liability of a (re)lnsurer under this contract Is several and not Joint with other (re)lnsurers party to this contract. A (re)lnsurer Is liable only for the proportion of llablllty it has underwritten. A (re)lnsurer Is not jointly liable for the proportion of liablllty underwritten by any other (re)insurer. Nor Is a (re)insurer otherwise responsible for any liability of any other (re)lnsurer that may underwrite this contract.
The proportion of liablllty under this contract underwritten by a (re)lnsurer (or. In the case of a Lloyd’s syndicate, the total of the proportions underwritten by all the members of the syndicate taken together) Is shown next to Its stamp. This Is subject always to the provision concerning “signing” below.
In the case of a Lloyd’s syndicate, each member of the syndicate (rather than the syndicate itself) Is a (re)insurer. Each member has underwrillen a proportion of the total shown for the syndicate (that total itself being the total of the proportions underwritten by all the members of the syndicate taken together). The liability of each member of the syndicate Is several and not joint with other members. A member Is liable only for that member’s proportion. A member Is not Jointly liable for any other member’s proportion. Nor Is any member otherwise responsible for any liability of any other (re)lnsurer that may underwrite this contract. The business address of each member Is Lloyd’s, One Lime Street, London EC3M 7HA. The Identity of each member of a Lloyd’s syndicate and their respective proportion may be obtained by writing to Market Services, Lloyd’s, at the above address.
Proportion of liability
Unless there Is “signing” (see below), the proportion of liability under this contract underwrillen by each (re)lnsurer (or, In the case of a Lloyd’s syndicate, the total of the proportions underwritten by all the members of the syndicate taken together) Is shown next to Its stamp and Is referred to as Its “written line•.
Where this contract permits, written lines, or certain written lines, may be adjusted (“signed”). In t11at case a schedule Is to be appended to this contract to show the definitive proportion of liability under this contract underwritten by each (re)lnsurer (or, In the case of a Lloyd’s syndicate, the total of the proportions underwritten by all the members of the syndicate taken together). A definitive proportion (or, In the case ol a Lloyd’s syndicate, the total of the proportions underwritten by all the members of a Lloyd’s syndicate taken together) Is referred to as a
“signed line”. The signed lines shown In the schedule will prevail over the written lines unless a proven error In calculation has occurred.
Although reference Is made at various points in this clause to “this contract• In the singular, where the circumstances so require this should be read as a reference to contracts In the plural.

Answer 62

(Re)insurers liability clause (LMA 3333)

(Re)insurer’s liability several not joint

Question 63

What section of the Open Market MRC details the order (if known prior to placement), the basis of the written and the signed lines, and the signing provisions

Answer 63

Security Details

Question 64

It is recommended that, if the order is not known, written lines are expressed as…

Answer 64

percentages of the monetary limit (for example, 25°/o of US$1 million) whether they are to be expressed as a percentage of the whole or of order.

Question 65

Typically, written lines are expressed as

Answer 65

percentages of whole, order, or of part (that Is, where the orders are rnonetaiy amounts).

Question 66

There Is no need to reference the basis of the signed lines unless It differs from that of the written lines. This is most likely to be relevant for….

Answer 66

…quota share or excess of loss treaty reinsurance.

Question 67

At the end of the Security Details section, under the heading ‘Written Lines’, each (re)insurer places its stamp to Identify:

Answer 67

• the particular company or entity (re)insuring, and to which an underwriting reference is usually annotated; and
• Its written line to identify the proportion of the risk it Is prepared to underwrite.

Question 68

Who should clearly identify all underlying insurers and their respective proportions under Security Details:

Answer 68

Consortia and Agencies

Question 69

Where is this text found and what does it do:

In a co-insurance placement, following (re)insurers may, but are not obliged to, follow the premium charged by the slip leader.
(Re)insurers may not seek to guarantee for themselves terms as favourable as those which others subsequently achieve during the placement.

Answer 69

Security details under the heading ‘Written Lines’

It enables a single MRC to handle placements with multiple insurers on different terms.

Question 70

The final part of Security details section has three tables which detail….

Answer 70

• Unacceptable line conditions, for example, ‘wording to be agreed’ for the obvious reason that wordings should be agreed before an insurer commits to the contract;
• Unnecessary line. conditions, as provision is made for them elsewhere In the contract. For example, ‘SDD 14/11/05’ intended to indicate the expected premium payment date because It should appear under the Settlement Due Date heading in the Subscription Agreement Section, and ‘Excluding Hull War’ because such a condition should be articulated in the Risk Details section.

Acceptable lines conditions - ‘line to stand’ and ‘excluding Letters of Credit and Outstanding Claims Advances (and/or for incurred but not reported losses’. The latter condition is peculiar to reinsurance business.

Question 71

How do you Imagine the guidance under Security details would classily a line condition stating:
‘Warranted premium payable within 60 days of inception’?

Answer 71

Unnecessary line. condition - This is a premium payment term that should be under the premium payment terms heading section in the risk details section

Question 72

What section in the Open Market MRC documents all of the inter and intra-market arrangements that will operate between the subscribers to the risk?

Answer 72

Subscription Agreement.

These are in relation to the agreement of contract changes, claims, the collection of expert fees, the payment of premiums and the use of third party service providers.

Question 73

Here, any applicable market agreements for the agreement of contract changes and claims, must be referenced, and the relevant agreement parties identified. Equally, those (re)insurers agreeing for their proportion only should also be stated.

Answer 73

Subscription Agreement

Question 74

Contract changes are typically the subject of

Answer 74

a General Underwriters Agreement (GUA).

Question 75

Claims will be the subject of a….. if there are any subscribing Lloyd’s syndicates, or the ….., if there are any subscribing bureau company underwriters.

Answer 75

Lloyd’s Claims Scheme and IUA claims agreement practices

Question 76

Is the SDD a policy condition such as a premium payment warranty or condition?

Answer 76

No it is a term of trade, an accommodation to the broker

Question 77

Under subscription agreements periods of credit for subsequent premium instalments and adjustments must also be stated and are usually

Answer 77

120 days

Question 78

Two mandatory fields under subscription agreement are …

Answer 78

dealing with the payment of premiums (bureaux arrangements) and claims
(claims administration).

Question 79

What section in the Open Market MRC deals with fiscal and regulatory Issues specific to the parties.

Answer 79

Fiscal and regulatory

Question 80

The fiscal and regulatory section in the open Market MRC identifies:

Answer 80

any taxes or charges which are payable by the insurer (for example, income taxes, parafiscal levies, withholding taxes and other taxes such as fire brigade taxes).

the country in which the policyholder is resident, if a private individual, or has its main operating address, if a corporate body.

Question 81

Any taxes payable by the insured should be included in what section in the open Market MRC

Answer 81

the risk details section

Question 82

Two Mandatory headings under Fiscal and Regulatory are:

Answer 82

Overseas Broker and Regulatory Client Classification.

There are also various disclosures to be made if the business originates from, or involves, the USA.

Question 83

The Fiscal and Regulatory section should state what in relation to Lloyd’s placements…

Answer 83

the risk code and the split of premium for each for signing purposes.

Question 84

The 5 options under Regulatory Client Classification in Fiscal and Regulatory are:

Answer 84

Consumer
Commercial Customer
Large Risk
Group Risks
Reinsurance

Question 85

Consumers include:

Answer 85

Either

(1) private individuals,
(2) small businesses, commonly referred to as micro­enterprises,
(3) other small non-business organisations, or
(4) any other entity that would be considered a consumer by the relevant regulatory authority In the local territory.

Question 86

Commercial customers include:

Answer 86

A customer who Is not a consumer. This classification must not be used If the contract Insures a ‘large risk’.

Question 87

Large Risks include:

Answer 87

A contract insuring:
• Railway rolling stock, aircraft, ships, goods In transit, aircraft liability or liability of ships
• Certain credit or suretyship risk; and
• Land vehicles (other than railway rolling stock), fire and natural forces, other than damage to property, motor vehicle liability, general liability and miscellaneous financial loss, insofar as the policyholder exceeds at least two of the following criteria:
- balance sheet total euros 6.2 million;
- net turnover euros 12.8 million; and
- average number of employees during the financial year of 250.

Question 88

Group risks include:

Answer 88

A group policy sold to a customer (consumer, commercial or large risk) for the benefit of policyholders in relation to their common employment, occupation or activity.

Question 89

What section of the open market MRC contains information relating to brokerage, fees and other deduc1ions from the premium.

Answer 89

Broker remuneration and deductions

Question 90

Brokers are ‘strongly encouraged’ to disclose what in the Broker remuneration and deductions section?

Answer 90

whether or not a fee Is payable by its client.

Question 91

II is a requirement to state what in the Broker remuneration and deductions section?

Answer 91

if there are any other deductions from the premium (for example, administration fees, sundry payments etc.).

Question 92

One of the key drivers for the Introduction of the MRC was

Answer 92

that it enabled the ‘slip’ to be used as the final contract documentation for the client in many cases (and, in theory, avoided the need for a cover note).

Question 93

When providing contract documentation to a client, it should be noted that the standard requires that the following sections must always be retained in full:

Answer 93

• Risk details;
• Information; and
• Security details.

A schedule of signed lines may be added but, if there are any changes to those sections, the document becomes a Broker Insurance Document (BID). A BID may be used to confirm cover to the insurer but should not be referred to in the MRC or represented as authorised by insurers.

Question 94

A binding authority is….

Answer 94

… a means by which an insurer (or group of insurers) enables a third party, typically known as a coverholder, to underwrite, issue contract wording documentation and/or settle claims on Its behalf.

Question 95

The current MRC standard for binding authority contracts became mandatory for all such contracts incepting

Answer 95

on or after t March 2012

Question 96

How many sections are in the MRC for binding authorities

Answer 96

Seven

Question 97

The Risk Details section of the Open Market MRC is replaced by the equivalent information in the MRC for binding authorities under the headings:

Answer 97

• Schedule; and

* Non-schedule agreements.

Question 98

In the Schedule section of the MRC for binding authorities, the details (or variables) of the binding authority contract are provided in the form of …

Answer 98

….a schedule using headings which match the specific wording being used.

Question 99

In the Non-Schedule section of the MRC for binding authorities, it details…

Answer 99

… any additional contractual information to be declared to the coverholder.

Question 100

Two differences in the sections of the Open Market MRC to the MRC for binding authorities include:

Answer 100

• there is no requirement of several liability language as it should already be included in the binding authority wording; and
• GUA are not used on binding authorities.

Question 101

A lineslip allows

Answer 101

a broker to access a particular group of insurers. These insurers have delegated authority to another insurer to accept on their behalf business that has been Introduced by that broker.

Question 102

A standard for the MRC for lineslips use was first mandated by…… with effect from….

Answer 102

Lloyd’s Franchise Board and 1 October 2005

Question 103

A Market Reform Lineslip was introduced in…. and was replaced by…. in…..

Answer 103

A Market Reform Lineslip was introduced in October 2006, which was aligned with the Contract Certainty Code of Practice guidance that existed at that time.

This has been replaced with effect from 1 July 2008 with the MRC standard for lineslips, bringing the standard into line with the changes affected in the Open Market MRC.

Question 104

The MRC for lineslips has how many sections?

Answer 104

Six:

Contract Details
Security Details
Subscription Agreement
Information
Fiscal and Regulatory
Broker Remuneration and deductions

Question 105

Actual risks on a lineslip are placed on…

Answer 105

off-slips, which are subject to the Open Market MRC provisions.

Question 106

The main section defining the characteristics of the business which may or may not be accepted under the lineslip is found in…

Answer 106

the contract details section

Question 107

As with binding authorities, there is no requirement for …. language, and there is a prohibition on …..on lineslips or on declarations off a lineslip.

Answer 107

several liability language and the use of GUAs

Question 108

How has the Market Reform Contract made It easier for Insurers (and relnsurers} to assess the contracts offered to them, and subsequent processes more efficient?

Answer 108

By standardizing the layout, and by prescribing the context of each section, in each of its forms

Question 109

The MRC for endorsements standard uses the following 5 headings:

Answer 109

• Risk and endorsement identification details;
• Contract changes;
• Information (where required);
• Agreement; and
• Contract administration and advisory (where required

Question 110

In the MRC for endorsements it is mandatory for what in these sections:

• Risk and endorsement identification details;
• Contract changes;
• Agreement;

Answer 110

• Risk and endorsement identification details - to include the risk’s UMR and the unique endorsement reference
• Contract changes - the effective date of each change should also be stated.
• Agreement - the parties required to agree the changes are defined and their formal agreement recorded.

Question 111

The London Market Group is made up of senior representatives of each of the four market constituencies:

Answer 111

• company market insurers;
• Lloyd’s managing agents;
• brokers; and
• the Corporation of Lloyd’s.

Question 112

The London Market Group remit includes which 6 things:

Answer 112

• setting, maintaining and promoting the common vision of London as the market of choice for global insurance;
• identifying and/or initiating and/ or approving and sponsoring commonly agreed projects that will build towards this vision;
• determining the relative priority of projects within the overall modernisation programme;
• commissioning commonly agreed market bodies to take primary responsibility for delivering those projects and to ensure they are appropriately resourced and financed;
• tracking and reporting on progress of those projects;
• leading the communication of the modernisation agenda.

Question 113

A key role of the LMG is to act as a focal point for

Answer 113

setting the direction of modernisation projects

Question 114

A programme of modernisation has been underway since 1999 and its achievements which 5 things:

Answer 114

• the adoption of contract certainty and the standard slip;
• the delivery of the Insurers’ Market Repository (IMR);
• the adoption of the electronic claim file (ECF);
• the removal of paper from the accounting and settlement process; and
• the introduction of electronic support for placing and endorsements.

Question 115

Who reports into the LMG?

Answer 115

LMA Board
LIIBA Board
IUA Board
Franchise Board/Council

Question 116

Volume 1 of the LMG set out

Answer 116

the main drivers and justifications for modernisation

Question 117

In October 2013, the LMG published

Answer 117

Volume 2 of its Future Process Review Report, setting out a detailed statement of what it is currently looking to achieve.

Question 118

the LMG Future Process Review Report proposed the following 5 key principles for this modernisation programme:

Answer 118

• to deliver better service to the insured;
• to reduce the cost of doing business;
• brokers lo deal with London in the same way as other markets;
• data to service a risk to be delivered to the insurer by the time a risk is bound;
• markets need infrastructure and a world class process.

Question 119

In 2015, the LMG’s main focus was…

Answer 119

on designing the future operating model for the London Market, and beginning that journey with the publication of the detailed business requirements for the Target Operating Model, the creation of a governance structure to manage the programme, and the validation of its costs and benefits.

Other key and related work streams have included building a new software platform for the Insurers’ Market Repository (IMR), and developing an electronic placing platform.

Question 120

The LMG Secretariat (LMGS) is…

Answer 120

the key body involved in the co-ordination and reporting of progress.

Question 121

The role of the LMG Secretariat (LMGS) is to support the LMG. by..

Answer 121

• keeping track of all reform activity;
• monitoring progress against the direction that the market has set; and
• making information available to firms.

Question 122

The LMGS is supported by….

Answer 122

….Lloyd’s, the IUA, LIIBA and the LMA.

Question 123

Lloyd’s may be said to have two distinct parts:

Answer 123

• the market made up of independent underwriting businesses; and
• the Corporation of Lloyd’s which, broadly speaking, oversees and supports that market, ensuring that it operates efficiently and retains its reputation as the global market of choice for specialist insurance and reinsurance risk.

Question 124

The Corporation of Lloyd’s is able to…

Answer 124

regulate, to a large extent, the activities of businesses within its marketplace, as well as providing the infrastructure in which they operate.

It took lead responsibility for co-ordinating the implementation of the electronic claims file and the accounting and settlement document repository.

Together these make up the Insurers’ Market Repository (IMR) enabling syndicates to view all the information and documentation submitted by brokers in a secure database.

Question 125

Lloyd’s Market Association (LMA)….

Answer 125

provides professional and technical support for the Lloyd’s underwriting and claims community and represents their interests. It was formed in 2001 by the merger of the five associations that had separately served the interests of the various market sectors.

Question 126

The Lloyd’s Market Association’s (LMA) purpose is to …

Answer 126

identify and resolve issues which are of particular interest to this community. In addition, working in partnership with Lloyd’s and other trade associations, its purpose is to influence the course of future market initiatives.

Question 127

Who are actively involved in the Association’s work by providing members to serve on the board, committees or panels.

Answer 127

All Lloyd’s Managing Agents and Members’ Agents

Question 128

Certain members of the LMA continue, for example, to …

Answer 128

develop and revise policy wordings or clauses for adoption by the LMA and publication on the Lloyd’s Wordings Repository.

Question 129

The Lloyd’s Wording Repository is…

Answer 129

an electronic database of wordings developed by the LMA with ISO, a leading source of information about risk and a provider of wordings in the USA. The Repository is arguably the most comprehensive, single source of vetted wordings and clauses available in the London Market. It provides access to established model wordings and clauses in current use in all lines of business, against which MRCs can be referenced.

Question 130

Membership of what brings with it access to the Lloyd’s Wordings Repository (LWR)

Answer 130

The LMA

Question 131

the Lloyd’s Wordings Repository (LWR) took the place of

Answer 131

the old Market Wordings Database (MWD)

Question 132

the Lloyd’s Wordings Repository (LWR) is actively managed by

Answer 132

the LMA - which retains responsibility for the vetting of wordings and the loading and review of wordings in the
‘core’ section of the Repository.

Question 133

the Lloyd’s Wordings Repository (LWR) includes wordings developed by:

Answer 133

• the LMA
• other industry organizations,
• individual managing agents (within their own sponsored sections),
• other insurers and brokers

Additional information, such as associated technical and news bulletins, is stored with the wordings, making them more user-friendly. Members may also subscribe to receive instant email alerts when new content is added.

Question 134

the Lloyd’s Wordings Repository (LWR) provides access to…

Answer 134

ISO wordings and a link to the Brokers and Reinsurance Markets Association (BRMA) website. Based in the USA, ISO is a market leader in the development of standard policy forms and programmes. The BRMA is a networking forum for property and casualty treaty reinsurance professionals.

Question 135

The LMA Academy aims to…

Answer 135

aise the profile of education in the Lloyd’s Market through a series of technical training programmes that support LMA members’ learning and career development. It focuses on key areas of insurance from foundation to advanced levels.

Question 136

The LMA legal and compliance team does what 5 things:

Answer 136

• monitors legal and regulatory developments in the UK and overseas relating to the Lloyd’s Market;
• looks at issues faced by those responsible for compliance in LMA member firms;
• reviews specific matters of concern to Lloyd’s managing and members’ agents;
• supports other LMA teams and committees in the legal and compliance aspects of their work, in particular the LMA Regulatory Committee and Lawyers’ Forum; and
• co-ordinates responses of LMA members to proposals by governments and regulators, where appropriate, and generally enhances communications between LMA members, Lloyd’s Corporation and other supervisory and market bodies.

Question 137

Three recent key issues for the LMA legal and compliance team include:

Answer 137

• Brexit;
• UK law reform and the effects of the Insurance Act 2015 and Enterprise Act 2016; and
• sanctions.

Question 138

The LMA publishes a series of documents aimed at providing guidance on specific topical issues affecting contract wordings such as:

Answer 138

• Insurance Act 2015 guidance and model clauses;
• consumer wordings guidance; and
• LMA consumer cancellation guidance.

Question 139

The IUA was formed at the end of 1998 from the merger of…

Answer 139

the London International Insurance Reinsurance Market Association (LIRMA) and the Institute of London Underwriters (ILU), bringing together the representative bodies for the marine and non-marine sectors of the London company
(re)insurance market.

Question 140

What is considered to be the world’s largest representative organisation for international and wholesale insurance and reinsurance companies.

Answer 140

International Underwriting Association of London {IUA)

Question 141

International Underwriting Association of London {IUA) exists to…

Answer 141

promote and enhance the business environment for its member companies which operate in or through London.

In recent years, the IUA has provided support for the market and clients with Informative publications on topical issues such as financial loss insurance and environmental insurance.

Question 142

3 Key priorities of the IUA are:

Answer 142

• improve process efficiency and business attraction to London by promoting the design and implementation of all aspects of market modernisation;
• promote expertise and innovation in underwriting and claims by maintaining a full secretariat to support the work of the numerous underwriting and claims committees; and
• influence public policy and compliance by monitoring and responding as necessary to regulatory developments, recognising that insurance and reinsurance regulation is being strengthened locally and converging globally.

Question 143

Unlike Lloyd’s, the IUA cannot …

Answer 143

mandate to its members.

Question 144

The IUA has its own dedicated database of London Market insurance and reinsurance clauses that can be used by brokers and insurers when preparing contract wordings and is grouped into three main business classes:

Answer 144

aviation, marine and property/casualty. It also includes updates of relevant legal developments. Access is not limited to members.

Question 145

Who meets regularly to discuss issues raised by the underwriting committees.

Answer 145

IUA Clauses Sub-Committee

It also considers modifications to existing clauses and the development of new ones.

Question 146

The London and International Insurance Brokers’ Association (LIIBA) is …

Answer 146

a trade association representing the interests of insurance and reinsurance brokers operating in the London and international markets. It took on the role performed by the London Market Insurance Brokers’ Committee (LMBC) and before that by the Lloyd’s Insurance Brokers’ Association (LIBA), founded in 1910.

Question 147

Who’s mission is to ensure that London remains the market in which the world wants to do business

Answer 147

The London and International Insurance Brokers’ Association (LIIBA) - by continuing the transformation of market processes and maintaining the highest professional standards

Question 148

The London and International Insurance Brokers’ Association (LIIBA) 3 key priorities are:

Answer 148

• to represent members’ interests to government, the FC, the EU and international bodies to establish a proportionate regulatory framework;
• to modernise the London Market’s business processes to be competitive and efficient, delivering improved client service; and
• to support members with regard to legislative and technical changes.

Question 149

Instead of maintaining a permanent wordings committee, LIIBA…

Answer 149

lends its expertise and contributes to the development of market wordings and clauses on an ad hoc basis.

Question 150

Xchanging is…

Answer 150

a business processing, technology and procurement firm, providing a variety of services to insurance and reinsurance markets worldwide.

Question 151

Xchanging services include:

Answer 151

• claims handling,
• claims and premium processing,
• policy administration.
• the Model Wordings Library (MWL).

Question 152

The Model Wordings Library is

Answer 152

an electronic database of approved wordings, clauses and associated documentation, which can be used in the preparation of contract wordings. Subscribers gain access to an extensive library of over 16,000 items in English and a number of other European languages. In addition they receive a monthly newsletter, providing information on new (public) content. The library also holds a substantial quantity of privately registered wordings.
Additionally, the MWL administers the London Special Wordings (LSW) scheme. This involves referencing the wording, adding it to the library and then disseminating it to the various market associations.

Question 153

What is the goal of the London market group?

Answer 153

To oversee and drive process change in the London Market

Question 154

Association of Insurance and Risk Managers (Airmic) is

Answer 154

a worldwide association providing support for those responsible for risk management and
insurance within their own member companies.

Question 155

Airmic’s technical agenda includes:

Answer 155

providing detailed research, training, networking, lobbying and market information for the benefit of its members.

It also generates wordings and useful related guidance on topical insurance issues. In 2009, for example, it issued a contract certainty guide for members and, since then, separate guides on conditions precedent and warranties in insurance policies, as well as an endorsement designed to enable its members to take advantage of some of the benefits of the Insurance Act 2015 in advance of it coming into force.

Its database includes a variety of publications and training materials.

Question 156

Formed in 1985, the … represents the UK general insurance, investment and long-term savings industry.

Answer 156

Association of British Insurers (ABI)

Question 157

Association of British Insurers (ABI)’s role is to

Answer 157

• Be the voice of the UK insurance industry, leading debate and speaking up for insurers.
• Represent the UK insurance industry to government, regulators and policy makers in the UK, EU and internationally with the intention of driving effective public policy and regulation.
• Advocate high standards of customer service within the industry and provide useful information to the public about insurance.
• Promote the benefits of insurance to the Government, regulators, policy makers and the public.

Question 158

In addition to its extensive high-level, macro policy (principles not contracts) and research work, the ABI also

Answer 158

publishes guidance from time to time to assist insurers and policyholders on issues as they arise. It did this in 2005, lending its support to the Contract Certainty Code of Practice.

Question 159

The ABI has published guidance and information on products and topical issues such as

Answer 159

climate change,
cyber insurance,
mesothelioma and
asbestos.

Question 160

The London marine reinsurance market commonly contracts using

Answer 160

Joint Excess Loss Committee (JELC) Excess Loss Clauses.

Question 161

The Joint Excess Loss Committee (JELC) is run by

Answer 161

Lloyd’s and the International Underwriting Association (IUA),

It promotes standardised wordings and clauses for excess of loss reinsurance contracts.

Question 162

The Insurance Services Office, Inc. (ISO) is a provider of

Answer 162

statistical, actuarial, underwriting, and claims information and analytics; compliance and fraud identification tools; policy language; information about specific locations; and technical services.

Question 163

ISO serves who?

Answer 163

insurers, 
reinsurers, 
agents and brokers, 
insurance regulators, 
risk managers, and other participants in the property/ casualty insurance marketplace.

Question 164

ISO operates …

Answer 164

an online repository of policy wordings on behalf of Lloyd’s that can be used in the London Market by subscribing brokers and underwriters in the preparation of commercial (re)insurance contract wordings, specifically regarding risks that are domiciled in the USA.

Question 165

The Aviation Insurance Clauses Group (AICG) was established in June 2005 by

Answer 165

the Lloyd’s Market Association and the International Underwriting Association of London.

The AICG establishes non-binding standard wordings, clauses and variants for use in aviation insurance policies. Users are consulted on suggested clauses and can propose variant clauses themselves.

Since its formation, the AICG has published over 30 aviation wordings and clauses.

Question 166

After 1 April 2013, the Government transformed the regulation of financial services in the United Kingdom through which Act?

Answer 166

the Financial Services Act 2012

Question 167

Under the Financial Services Act 2012, who has responsibility for protecting the stability of the UK financial system as a whole and macro-prudential regulation?

Answer 167

the Bank of England

Question 168

The Financial Policy Committee (FPC), a sub-committee within the Bank of England, has day-to-day responsibility for

Answer 168

macro-prudential supervision of regulated firms.

It may give directions and make recommendations to other regulators (i.e. the PRA and FCA - see sections D1B and D1C) for this purpose.

Question 169

micro-prudential regulation is aimed at safeguarding

Answer 169

individual institutions

Question 170

macro-prudential regulation is aimed at safeguarding

Answer 170

the system as a whole.

Question 171

The FPC (Financial Policy Committee) is primarily concerned with

Answer 171

identifying, monitoring, and taking action to remove or reduce risks to the stability of the system in whole or in significant part (that is, ‘systemic’ risks).

Such risks are stated in the act to include those that may be attributable to structural features of financial markets. This would include things such as connections between financial institutions, or to the distribution of risk within the financial sector, or which arise from unsustainable levels of leverage or debt.

In the light of prior failures, the FPC is required to prepare and publish a financial stability report bi­annually. The report must include its views of the stability of the UK financial system and assessments of, amongst other things, the strengths and weaknesses of that system and risks to its stability.

Question 172

The Prudential Regulation Authority (PRA) is

Answer 172

a subsidiary of the Bank of England, and is the (micro-)prudential regulator for (re)insurers.

Question 173

The PRA’s core or general objective is to:

Answer 173

promote the safety and soundness of the firms it regulates

Question 174

The PRA’s specific insurance objective is to:

Answer 174

contribute to the securing of an appropriate degree of protection for those who are or may become policyholders

Question 175

The PRA has how many complementary statutory objectives, in its supervision of (re)insurers?

Answer 175

2

Question 176

What gave the PRA a secondary objective?

Answer 176

The Financial Services (Banking Reform) Act 2013

Question 177

What is the PRA’s secondary objective?

Answer 177

to facilitate effective competition.

This objective only applies when the PRA is advancing its primary objectives and means that the PRA must be mindful of the likely competition effects of its actions.

Question 178

In setting out its approach, the PRA has said that it…

Answer 178

sees a stable financial system that is resilient in providing the critical financial services the economy needs, as a necessary condition for a healthy and successful economy.

Whilst not operating a zero-failure regime, it seeks, as far as possible, to ensure that any firms that do fail do so in a way that avoids significant disruption to the supply of financial services. This will depend largely on the efficacy of the statutory resolution regime in place, including arrangements involving the Financial Services Compensation Scheme (FSCS).

Question 179

The PRA’s approach to supervision may be characterised as follows.

Answer 179

• It is based on judgment following evidence and analysis, rather than being narrowly rules based.
• It is forward looking.
• It is focused on those issues and firms which pose the greatest risk to stability and to policyholders. This will determine the frequency and intensity of supervision and this will increase in line with the risk posed to PRA’s objectives.

Question 180

What will have a significant impact on how the PRA delivers its objectives once implemented?

Answer 180

Solvency II - that is, the European-wide system for insurance regulation

(All insurers need to meet its requirements as to, for example, the assessment of capital adequacy, risk management and reporting for (re)insurers. )

Question 181

What is the conduct of business regulator for the insurance industry.

Answer 181

the Financial Conduct Authority (FCA)

Question 182

The FCA has responsibility for

Answer 182

supervising authorised persons and is funded entirely from fees levied on the firms it regulates.

Question 183

The FCA has a single strategic objective of ensuring that the insurance and reinsurance markets function well. It has three operational objectives as follows:

Answer 183

• securing an appropriate degree of protection for consumers (the consumer protection objective);
• protecting and enhancing the integrity of the UK financial system (the integrity objective); and
• promoting effective competition in the interests of consumers in the markets (the competition objective).

Question 184

Which two entities work alongside each other to create a ‘twin peaks’ regulatory structure.

Answer 184

The FCA and the PRA

Question 185

The FCA and the PRA have agreed what?

Answer 185

a Memorandum of Understanding (MOU).

The MOU recognises that, whilst the PRA and the FCA have separate and independent mandates, it is essential that they co-ordinate in some areas and co-operate in others. Indeed, they have a statutory duty to do so and the MOU sets out the necessary high level framework.

Question 186

The FCA/PRA MOU contains provisions about:

Answer 186

• information sharing;
• consultation in advance of policy and rule making;
• supervision of dual-regulated entities; and
• enforcement- the PRA has a veto over enforcement action if it is believed such action will threaten financial stability or result in the failure of a firm that would adversely impact the system.

Question 187

The Lloyd’s Act 1982 established

Answer 187

the Council of Lloyd’s as the governing body of the insurance and reinsurance market, with authority to manage the affairs of Lloyd’s and the power to regulate and direct the business of (re)insurance at Lloyd’s.

Question 188

Lloyd’s appointments to the Council are now subject to whose approval?

Answer 188

the FCA

Question 189

Lloyd’s specifically has what powers

Answer 189

rule-making and enforcement powers, oversees risk in the market and has a role in ensuring capital adequacy.

The MOU provides that the FCA and the PRA will maintain co-ordination arrangements with Lloyd’s in the support of their activities; these arrangements were agreed in June 2013.

Question 190

(Re)insurance companies are subject to what regulatory bodies?

Answer 190

prudential regulation from the PRA and conduct regulation from the FCA.

Question 191

Authorisation of dual-regulated firms is the responsibility of…

Answer 191

the prudential regulator;

it requires the FCA’s consent before granting permission and the FCA will be fully involved in the process.

Question 192

Who is the prudential regulator for Lloyd’s and has responsibility for promoting the safety and soundness of Lloyd’s and its members taken together, including the central fund.

Answer 192

the PRA

Question 193

the PRA is the prudential regulator of:

Answer 193

Lloyd’s and Lloyd’s managing agents

Question 194

What does the FCA regulate on a conduct basis?

Answer 194

the Corporation and the Managing Agents.

Question 195

Who does the FCA regulate on a prudential and a conduct basis?

Answer 195

the Members’ Agents and advisers and Lloyd’s brokers.

In this context, conduct issues for the FCA include, for example, how the Corporation handles the auctioning of syndicate capacity and complaints.

Question 196

(Re)insurance brokers are regulated by?

Answer 196

the FCA

Question 197

The FCA Handbook is divided into 4 blocks:

Answer 197

High Level Standards
Prudential Standards
Business Standards
Regulatory Processes

Question 198

High Level Standards

Answer 198

These standards apply to all firms and approved persons. For example, the Principles for Businesses (PAIN), which address the fundamental obligations of all firms under the regulatory system

Question 199

Prudential Standards

Answer 199

This block sets out the prudential (or financial resource) requirements for firms

Question 200

Business Standards

Answer 200

The detailed requirements relating to firms’ day-to-day business which, In the context of the FCA and Insurance, can be found In the Insurance: Conduct of Business Sourcebook (!COBS)

Question 201

Regulatory Processes

Answer 201

These manuals describe the operation of the FCA’s and PRA’s authorisation, supervisory and disciplinary functions

Question 202

In issuing rules and guidance, the regulators are required to have regard to a number of regulatory principles. These include:

Answer 202

• the need to use resources In the most efficient and economic way;
• the responsibilities of the regulated firms’ own senior management;
• the principle that the burdens and restrictions imposed by regulation should be proportionate to the benefits;
• the desirability of sustainable growth In the UK economy in the medium or long term;
• the desirability of each regulator exercising its functions in a way that recognises differences in the nature of, and objectives of, regulated businesses;
• the desirability, in appropriate cases, of publishing information relating to regulated businesses as a means of contributing to the advancement by each regulator of its objectives; and
• the principle that the regulators should exercise their functions as transparently as possible.

Question 203

The first High Level Standard - Principles for Businesses (PRIN) - sets out the fundamental obligations of firms under the regulatory system in the form of a list of those principles. These are as follows. (11)

Answer 203

1. Integrity - A firm must conduct Its business with integrity.
2. Skill, care and diligence - a firm must conduct Its business with due skill, care and diligence.
3. Management and control - A firm must take reasonable care to organise and control Its affairs responsibly and effectively, with adequate risk management systems.
4. Financial prudence - A firm must maintain adequate financial resources.
5. Market conduct - A firm must observe proper standards of market conduct.
6. Customers’ interests - A firm must pay due regard to the Interests of its customers and treat them fairly.
7. Communications with clients - A firm must pay due regard to the information needs of Its clients, and communicate Information to them in a way which Is clear, fair and not misleading.
8. Conflicts of interest - A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
9. Customers: relationships of trust - A firm must take reasonable care to ensure the suitability of Its advice and discretionary decisions for any customer who Is entitled to rely upon Its judgment.
10. Clients’ assets - A firm must arrange adequate protection for clients’ assets when it is responsible for them.
11. Relationship with regulators - A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.

Question 204

the PRA is currently transitioning away from its Handbook Into

Answer 204

a new Rulebook.

Question 205

The PRA rulebook is divided into three main sectors:

Answer 205

Banking and Investment Rules,
Insurance Rules, and
Other Rules for Non-authorised Persons.

The first two categories are further divided Into (Solvency II) directive and non-directive firms.

Question 206

It is a rule that a firm must take reasonable care to establish and maintain such systems and controls as are appropriate to its business. One such high-level standard is the

Answer 206

Senior Management Arrangements, Systems and Controls (SYSC).

Question 207

SYSC addresses…

Answer 207

operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

The standards provide guidance with regard to the establishing of systems and controls for the management of operational risk and, in particular, the use of insurance as a means of reducing the monetary impact orthis risk.

Question 208

When using insurance, the SYSC guidance provides that the prospective insured should consider:

Answer 208

• the time taken for the insurer to pay claims;
• the financial strength of the insurer; and
• the.affect of any limiting conditions and exclusion clauses that may restrict cover to a small number of specific operational losses and may exclude larger or hard to quantify indirect losses (such as lost business or reputation al costs).

Question 209

Insurance risk can be defined as…

Answer 209

fluctuations in the timing, frequency and severity of insured events, relative to the expectations of the firm at the time of underwriting, or in the timing and amount of claim settlements.

Question 210

The (risk control) SYSC guidance provides that ‘a firm should pay close attention to the wording of its policy documentation to ensure that these wordings do not expose it to more, or higher, claims than it is expecting. In so doing, the firm should consider:

Answer 210

1. whether It has adequate in-house legal resources;
2. the need for periodic Independent legal review of policy documentation;
3. the use of standardised documentation and referral procedures for variation of terms;
4. reviewing the documentation used by other insurance companies;
5. revising documentation for new policies in the light of past experience; and
6. the operation of law in the Jurisdiction of the policyholder.

Question 211

Before entering into any form of insurance risk transfer agreement, (re)insurers should, amongst other things, ensure:

Answer 211

• that there are adequate legal checking procedures in respect of the draft agreement;
• that they understand the nature and limits of the agreement, giving particular attention to the wording to ensure that all of the required risks are covered;
• that the level of available cover is appropriate; and
• that all the terms, conditions and warranties are unambiguous and understood.

Question 212

Within the FCA handbook is what sourcebook?

Answer 212

the Insurance: Conduct of Business Sourcebook (IC0BS).

It applies to (re)insurers and insurance Intermediaries and to contracts with retail customers (‘consumers’) as well as commercial customers.

Question 213

Under IC0BS 2 (General Matters), insurers…

Answer 213

must take reasonable steps to communicate information in a way that is clear, fair and not misleading.

Question 214

Under IC0BS 6 (Product Information), insurers…

Answer 214

are responsible for producing, and insurance intermediaries for providing, such information as to enable a customer to make an informed decision about the Insurance arrangements proposed.

If no insurance intermediary is involved, the Insurer is also responsible for providing the required information.

The insurer or intermediary must take reasonable steps to ensure that a customer is given appropriate information about a policy in good time and in a comprehensible form to enable them to make an informed decision. The extent of the information required will vary according to, for instance, the knowledge, experience and ability of a typical customer, whether the same information has been provided before, and the actual terms, conditions and exclusions of the wording.

This ‘appropriate information’ rule applies pre-conclusion and post-conclusion of the policy, and has an impact on, for example, mid-term changes and renewals. In the case of renewals, the intermediary should, therefore, notify a customer in good time before the expiry of the policy if it no longer deals with that insurer or is aware, for example, that the insurer is unwilling to invite renewal. Similarly, if renewal is to be invited, the intermediary should provide renewal terms to the customer, again in good time before the expiry of the policy.

Evidence of cover must be provided promptly after inception of the policy.

Question 215

(Re)insurance can go through underwriting cycles that extend over several years. These are often termed … and reflect the law of….

Answer 215

‘hard’ and ‘soft’ markets

supply and demand

Question 216

premiums fall in a

Answer 216

soft market

Question 217

premiums increase in a

Answer 217

hard market

Question 218

What is particularly susceptible to market cycles?

Answer 218

Reinsurance - since terms for both proportional treaties and excess of loss contracts are agreed in advance of the actual treaty or contract period.

Whatever losses affect a reinsurance agreement during its currency, the agreed terms at inception are rarely amended for that particular period. Increases in rates in the reinsurance market will have a knock on effect in the insurance market, and this effect can be seen In the negotiation and issuance of commercial (re)insurance contract wordings.

Question 219

Hard markets have historically followed

Answer 219

an unusually large loss, particularly a large natural peril event loss, such as an earthquake, a severe windstorm and sometimes an extensive flood, where losses are measured in billions of dollars.

Where, for example, large natural peril event losses occur simultaneously in different parts of the world, over a relatively short period of time, there is a pressure on insurers’ own insurance and, in some cases, they can find it difficult to purchase insurance due to reductions in capacity. Insurers will have to negotiate the best terms for their renewals, including coverage and conditions.

Question 220

In a hard market for commercial buyers:

Answer 220

• there will be a noticeable change in insurers’ attitude to insurance contract wordings, in particular the scope of coverage.
• Insurer discipline will become very focused and customers’ contract wording, - terms and conditions are likely to be scrutinised more carefully than in a soft market.

Question 221

in a hard market an underwriter may be under instruction by its own reinsurer to focus its attention on

Answer 221

specific clauses and terms within the contract wording.

Examples could include clauses relating to the definition of natural perils (windstorm, earthquake or flood), clauses relating to terrorism, and extensions of cover in liability Insurances that pertain to defence costs for criminal acts relating to health and safety at work and corporate manslaughter.

In certain situations, new clauses or limitations that have been specifically drafted or issued under instruction or recommendation by re insurers could be added to existing wordings to limit or clarify the scope of existing coverage. In extreme situations, a (re)insurer may offer up its own contract wording as an alternative to the existing wording, which presents a challenge for both the insured and their brokers.

For the broker responsible for preparing the contract wording and acting on behalf of an insured, there will be a challenge to balance potential premium stability with maintaining the scope of existing coverage through negotiation with the (re)insurer.

Question 222

A soft market normally arises after

Answer 222

a period of little major loss activity and competitive market forces, or rather the fear of such competitive forces.

This causes reinsurers to reassess their rating structures, the extent of coverage and how restrictive such coverage should be.

Question 223

A soft market can also be a result of…

Answer 223

new insurance players in the market, offering competitive premiums and broad contract wordings.

(Re)insurance brokers will, therefore, use a soft market to challenge a (re)insurer on its attitude to risk, price and scope of coverage by encouraging clients to seek alternative quotations from different
(re)insurance markets.

This can lead to a breakdown In underwriter discipline, whereby the (re)insurer can be forced to accept significant reductions in rates and increases in the scope of coverage of (re)insurance contract wordings. While some (re)insurers have the ability to maintain underwriter discipline and a consistent approach throughout a soft market, others accept broader terms and conditions on existing or new pieces of business to ensure they do not lose the opportunity to participate in such business.

While (re)insurance may eventually rise, (re)insurers do not always recognise that by accepting a significant broadening of insurance coverage with a (re)insurance contract wording during a soft market, they may have lost ground and find it difficult to reinstate restrictions or tighten conditions lost during the soft market cycle.

Question 224

Influences in the creation of contract wordings - Internal influences include:

Answer 224

• Insurers and brokers are under continuous pressure to maintain or increase volumes of business and to increase their competitiveness in the marketplace.
• Insurer appetite for attracting new business may mean there is a requirement to review and broaden existing coverages or to soften exclusionary and conditional language within commercial (re)insurance contract wordings.
• Insurer and/or broker marketing departments may decide that new insurance products need to be considered, whereby a new wording for these products will have to be prepared, reviewed and agreed.
• The sale and marketing of such insurance products needs to be factored in and unique selling points identified.
• Identifying gaps In existing market products will help the sellers of insurance to gain an advantage when promoting their product to potential buyers.
• Insurers will need to analyse past, and predict future, claims experience. Consideration needs to be given to the significance of broadening existing wordings and whether such changes will have the negative effect of increasing the frequency or severity of claims.
• Not all Insurers or brokers have a dedicated wordings drafting resource, so thought needs to be given to whether the existing or new wording will be drafted internally or by external lawyers and consultants.
• The way in which revised, existing products or new commercial (re)insurance products will be marketed and sold will have to be considered. For example, will the insurer market the product itself or use a broker or a coverholder by means of a delegated authority or binding facility.
• Will the new product have the ability to meet the demands of electronic trading platforms.

Question 225

Influences in the creation of contract wordings - External influences include:

Answer 225

• New, emerging complexities in traditional insurance products can lead to the development of new products and concepts requiring new forms of contract wordings. Recent examples include emerging risks such as cyber insurance, cyber terrorism insurance, and supply chain insurance. Future risks might include insurance relating to the increased use of drones, driverless cars and artificial intelligence.
• Financial Ombudsman or court decisions on previously disputed commercial contract wordings may result in the requirement that existing wordings products have to be reviewed and adapted. A consequence of a major decision is that it could have identified a potential gap in coverage in standard commercial contract wordings, which would need to rectified in existing wordings or factored into the production of a new commercial product.
. • Changes in legislation governing particular aspects of risk can lead to the review and amendment of existing wordings. For example, International legislation governing the pollution and contamination of natural habitats has become a key factor in the design of new environmental liability products.
• There may be pressure from insurance bodies, which represent policyholders such as AIRMIC, for insurers and brokers to amend or revise certain areas of commercial contract wordings that have been seen or construed to be restrictive or unfair by policyholders. The Insurance Act 2015 was considered an opportunity for insurers and brokers to address specific areas of insurance contract wordings which were considered unfair. AIRMIC was a leading proponent of such changes.
• Competition from other insurers and markets introducing their own commercial Insurance products will often force insurers to revise wordings for their own products or to start the process of developing new wordings to provide similar or broader coverage than their competitors.
• Government pressure on the insurance industry to provide innovative and affordable products to consumers.
• FCA considerations such as the fair treatment of customers will be the guiding principle when insurers and brokers are selling products and services. From a contract wording perspective, this means that products should perform as firms have led consumers to expect.

Answer 226

use of plain English;

• use of consistent terms within a wording;
• use of items in bold such as defined terms;
• clarity on what is covered and not covered by a contract wording;
• clarity of general conditions which are well-signposted;
• clarity on the policyholder’s duties and responsibilities regarding disclosure, and the remedies available to an insurer in the event of a breach of a particular condition within the contract wording; and
• clear instructions on how a policy can be cancelled by either party, including the notice period and how return premiums may be calculated.