Chapter 1 - The Insurance Broking Market (12 Qs)

Question 1

What is an insurance broker?

Answer 1

= An independent intermediary - offering independent and unbiased advice while conducting insurance mediation. Refer to IF1 notes.

Question 2

What are two names given for insurance brokers who conduct insurance mediation on behalf of an Insurer who they are contractually tied?

Answer 2

Introducer Appointed Representative (IAR)s & Appointed Representatives (ARs)

Question 3

What is an agent?

Answer 3

Everyone who acts on behalf of another person.

The agent is authorised by the ‘principle’ to bring them into a contractual relationship with another (third party) - The insurance broker is the agent bringing the principle into a contractual agreement with the TP.

Can adjust this as I know it.

Question 4

What is the main distinguishing feature between an insurance broker and other intermediaries?

Answer 4

When placing business, the clients are the principle, and not the Insurer.

Question 5

When did the term ‘insurance broker’ become regulated?

Answer 5

Its not - almost did under the Insurance Brokers Registration Act 1977 but the Act was repealed. So no legal recognition of the term

Question 6

What are the benefits of using an insurance broker for clients?

Answer 6

1. Convenience - clients do not have time or inclination to research insurance market and compare cover/prices
2. Expert Knowledge - for more complex products, reduces the chance of unfavourable terms
3. Independent Quotation - Often can obtain more favourable terms than if the client searched directly.
4. Complexity of Product - Brokers can understand complexities of multiple covers/extentions to ensure needs are correctly met. Some covers only offered to clients with a broker, as they can trust the broker to fully explain the cover.
5. Assistance with Claims - Often obtain more favourable outcomes
6. Existing relationship or connected business - Broker has in-depth knowledge of clients business, especially if has been together for a long time.
7. Other services -

Question 7

What are the benefits of an insurance broker to insurers?

Answer 7

1. Convenience - clients can be demanding in terms of level of interaction/admin they require. So can focus on core business better (UW/Claims). Don’t have to deal with potential complaints. Communication is then made from a position of knowledge by both parties.
2. Technical Expertise - Insurer can trust the broker to explain more technical aspects of cover to clients.
3. Peace of Mind - Can insure the broker has disclosed the required risk information for the insurer to correctly underwrite the policy. e.g. non-disclosure
4. Cost benefits - saves money as not administering each policy directly with the client.

Question 8

Who is BIBA?

Answer 8

British Insurance Brokers’ Association - Major non-statutory trade association for insurance intermediaries. Specific attention to professional conduct and utmost good faith and represent interest of customers.

Question 9

Who are the LMRC?

Answer 9

London Market Regional Committee - created by BIBA for specifically the London Market. Intention is to lobby and represent the sector to the FCA.

Question 10

Who is LIIBA?

Answer 10

London and International Insurance Brokers’ Association - Independent body representing interest of insurance and reinsurance brokers in London and international markets. There is overlap between the LMRC and LIIBA. Mission is to ensure London market is place world wants to conduct insurance business. e.g. representation, innovation, modernization and relationships.

Question 11

What are the 3 major classes of business handled by insurance brokers?

Answer 11

1. Personal Lines - for private individuals e.g. household & private motor. Usage by brokers is reducing
2. Commercial - businesses. For more complex, larger risks. Higher likelihood of using a broker if bigger business, than one with less than 10 employees
3. Speciality = specialist risks, some of which are only available through brokers. Brokers need as special risks, so less likely to be an off the shelf product so insurance is designed on an exclusive basis.

Question 12

What are the 4 reasons why some classes of business are more suited to insurance brokers?

Answer 12

1. Complexity - need to broker to distribute the cover due to complexities and insured can trust the brokers has specialist knowledge and are appropriately covered.
2. Size of the risk - higher value (size), more likely need for a broker
3. Location of risk - Insurer/Insured needs to broker to fully explain/understand the cover and exemptions & provide correct risk data to the Insurer
4. Availability of cover - where risks are very specialist, sometimes brokers are the only ones with specific market knowledge and experience in the niche area (can identify the Insurers with the correct appetite)

Question 13

How many people do the majority of insurance brokers employ?

Answer 13

Less than 5 people

Question 14

What are the 8 different types of insurance broker?

Answer 14

1. Global firms
2. UK-only-based firms
3. Consolidators
4. Niche sector businesses
5. Wholesale brokers
6. Reinsurance brokers
7. Online brokers
   8 Lloyd’s brokers

Question 15

Why are there global insurance broking firms?

Answer 15

Response to the needs to large companies (often with turnovers over £500m) and operating in more than one territory need insurance brokers with the capability to arrange and manage extensive and diverse insurance programmes

Question 16

What is the definition of a retail broker (producing broker)

Answer 16

A broker who arranges contracts of insurance directly or on behalf of the insured or policyholder.

Question 17

What is a wholesale broker?

Answer 17

A broker whose clients are other brokers. They are used by retail/producing brokers to access preferential markets and policy coverage. Work between the Insurer and retail/producing broker (with the retail broker as the principle in the agreement, and the wholesale broker as the agent)

Question 18

Define a catastrophic loss?

Answer 18

A very large loss on an individual risk, or a loss resulting from an accumulation of losses from a single catastrophic event.

Question 19

What is the purpose of reinsurance?

Answer 19

• Smooth peaks and troughs in the claims experience
• Protect the portfolio of risks being insured
• Provide improved customer service
• Provide support for insurers entering new areas of business

= cushions to protect Insurers against large losses

Question 20

Who do Lloyd’s brokers need to be registered by?

Answer 20

Council of Lloyd’s - must satisfy the Council of high level of expertise, financial standing and integrity

Question 21

What is the structure of Lloyd’s as a market place? Who is it made up of and who provides the capacity?

Answer 21

Made up of syndicates of private individuals (names) and corporate members who back how much business an Insurer can underwrite in a year. The managing agent manage the Underwriting of one or more syndicates

Question 22

What are the 3 ways business is transacted at Lloyd’s?

Answer 22

1. Face-to-face between Broker and UW
2. Through delegated authority
3. Through businesses set up outside of Lloyd’s by syndicates

Question 23

What is the process of ‘signing down’ in Lloyd’s

Answer 23

If more than 100% of a risk is underwritten, then each underwriter’s line is reduced proportionally

Question 24

What is PPL in reference to Lloyd’s?

Answer 24

= Placing Platform Ltd -> electronic platform for risk capture, placing, signing and closing in Lloyd’s. Designed to improve speed of UW response, broker turnaround and document production. Also, ACCURACY, as documents around produced automatically.

Question 25

Why have broker networks developed?

Answer 25

So smaller, individual brokers can obtain better terms, conditions for clients, improved service from Insurers and develop own-branded products enabling smaller firms to compete with larger firms.

Question 26

Why do some brokers segment their business?

Answer 26

To allow them to provide best service to client while remaining cost-effective for the broker. e.g. becoming specialists in that particular area

Question 27

What are typical method of segmentation for an insurance broker?

Answer 27

1. Class of insurance
2. Trade
3. Client size
4. Premium Size

Question 28

Who does the reinsurance market consist of?

Answer 28

Specialist reinsurance companies, Lloyd’s syndicates and Insurance companies who act as reinsurers

Question 29

What are the 4 main services offered by insurance brokers?

Answer 29

1. Traditional broking services
2. Risk management
3. Value added services
4. Services to Insurers

Question 30

What are the different elements included in ‘traditional broking services’?

Answer 30

• Reviewing clients insurance needs (demands and needs)
• Deciding on appropriate market for the risk (level of cover, cost, terms, security of insurer & claims service)
• Negotiate terms and conditions with the Insurer
• Provide advice to client on the insurance
• Negotiate renewals
• Advise in the event of a claim
• Design and operation of insurance programmes

Question 31

In April 2017 what rules did the FCA introduce for renewal transparency?

Answer 31

1. Must disclose last year’s premium
2. Include text to encourage consumers to check their cover and shop around
3. if been with same insurer for over 4 years, include an additional message to encourage shopping around

Question 32

What is the role of a broker when providing risk management services?

Answer 32

Support clients in achieving risk management objectives, therefore by identifying, evaluating, controlling or transferring. If company can demonstrate good risk management, may be offered better terms.

Question 33

What are ‘added value services’ also referred to as?

Answer 33

Specialist risk consultancy services

Question 34

What are some examples of added value services from an insurance broker?

Answer 34

• Property survey
• Motor Fleet risk management
• BI reviews
• Health & Safety consultation
• Environmental risk surveys

Question 35

What are the services brokers provide to an Insurer?

Answer 35

• Cost effective distribution
• Technical, accurate data capture and risk presentation
• Assistance with prep and issuing of documents
• Premium collection,
• Technical explanation of cover to clients
• Claims management
• Risk management

Question 36

What are the two ways brokers and remunerated?

Answer 36

Commission (brokerage) by the Insurer and is an agreed percentage of premium or by the client through a ‘fee’. But cannot have both commission and a fee for the same service.

Question 37

Is commission paid before of after the calculation of IPT?

Answer 37

Commission is paid net of IPT, meaning after IPT is calculated and deducted.

Question 38

What is a volume overrider of contingent commission?

Answer 38

= Commission paid by Insurer on a whole account basis dependent on profitability or growth of an account. Same with DA schemes

Question 39

Briefly explain how brokers are remunerated by fees?

Answer 39

= Paid by Insured to broker for service provided. Agreed prior to contract and basis of calculation should be explained to client clearly.

Question 40

What are the two fees provided by the Insurer to brokers?

Answer 40

1. Fee whereby insurer receives information on clients e.g. why they didn’t renew
2. Work transfer - fee paid by insurer if broker carries on extra work e.g. invoicing, DA etc.

Question 41

What are the traditional roles in an insurance broking organisation?

Answer 41

• Client service (day to day handling e.g. me)
• New business
• Broking
• Claims
• Management
• Compliance