Chapter 1 - The insurance broking market

Question 1

What is an insurance broker?

Answer 1

An insurance broker is an independent advisor in the insurance market, helping clients find suitable insurance products.

Question 2

What are some categories of intermediaries in the insurance market?

Answer 2

introducer appointed representatives (IARs) and appointed representatives (ARs), who are authorized to conduct insurance mediation on behalf of a company they are tied to, like an insurer.

Brokers ect.

Question 3

What distinguishes insurance brokers from other intermediaries?

Answer 3

Insurance brokers are independent intermediaries, unlike IARs and ARs. They are not tied to any company and offer unbiased advice.

Question 4

How does the Financial Conduct Authority (FCA) view the term ‘insurance broker’?

Answer 4

The Financial Conduct Authority (FCA), the UK regulator of insurance brokers, makes no distinction between the terms ‘broker’ and ‘independent intermediary,’ considering them to mean the same.

Question 5

What is the law of agency?

Answer 5

The law of agency states that anyone who acts on behalf of another person is called an ‘agent’.

Question 6

Who is an agent in legal terms?

Answer 6

An agent is someone who is authorized by the ‘principal’ (the person they represent) to create a contractual relationship with a ‘third party’.

Question 7

How does the law of agency apply to insurance brokers?

Answer 7

In the insurance market, an insurance broker acts as an agent, helping their client (the principal) enter into a contract with the insurer (the third party).

Question 8

Why do insurance brokers exist?

Answer 8

Insurance brokers exist to help clients navigate the insurance market by offering independent, impartial advice and helping them enter into a contract with an insurer.

Question 9

What is the role of an insurance broker?

Answer 9

An insurance broker acts as an intermediary between the insurer and the client, helping the client understand their options, offering advice, and ensuring a transparent contractual relationship between both parties.

Question 10

How do insurance brokers get paid?

Answer 10

Insurance brokers may charge their clients a direct fee for their services, but more commonly, they take a commission from the premium paid to the insurer. This commission is known as brokerage.

Question 11

Why do some clients choose to buy insurance through a broker instead of directly from an insurer?

Answer 11

Clients may choose to buy insurance through a broker for convenience, expert knowledge, independent quotations, assistance with claims, and the benefits of existing relationships or other services offered by the broker.

Question 12

How do insurance brokers offer convenience to their clients?

Answer 12

Brokers save clients time by handling the research, documentation, and communication with insurers. They offer various service methods, including face-to-face meetings, phone, email, and web-based options.

Question 13

Why is expert knowledge a benefit of using an insurance broker?

Answer 13

Brokers have specialized knowledge, especially for complex products like commercial insurance. They help clients understand their policies, reducing the risk of unfavorable outcomes.

Question 14

How can insurance brokers assist with claims?

Answer 14

Brokers often help clients with claims, negotiating on their behalf to achieve better outcomes with insurers.

Question 15

What convenience do insurance brokers offer to insurers?

Answer 15

Insurance brokers handle client interactions, administration, and complaints, allowing insurers to focus on underwriting and paying claims. Brokers also present risk information in a standardized format, streamlining negotiations and communication.

Question 16

Why do insurers have peace of mind when working with brokers?

Answer 16

Insurers trust that brokers have disclosed all necessary risk information and have informed clients about the consequences of not disclosing material facts, making it easier for insurers to underwrite policies.

Question 17

What are the cost benefits for insurers when working with brokers?

Answer 17

Insurers save time and money by delegating tasks like policy issuance and premium collection to brokers. However, brokers may charge fees for performing these tasks on behalf of insurers.

Question 18

What is the London Market Regional Committee (LMRC)?

Answer 18

The LMRC was established in June 2009 to replace the LMBC. It operates within BIBA’s regional committee structure and represents the interests of London Market brokers to the FCA, UK Government, and other organizations. Its role is to avoid duplication of work and address members’ concerns.

Question 19

What is the British Insurance Brokers’ Association (BIBA)?

Answer 19

The British Insurance Brokers’ Association (BIBA) was formed in 1977 from the merger of four broking bodies. It is the main trade association for insurance intermediaries and includes over 2,000 regulated firms. BIBA promotes high standards of conduct and represents the interests of its members.

Question 20

What are personal lines insurance products?

Answer 20

Personal lines insurance products are bought by private individuals. Examples include household buildings and contents, private motor, travel, and private medical insurance.

Question 21

How does the FCA classify personal lines customers?

Answer 21

The FCA classifies personal lines customers as consumers. This means they are acting for purposes outside their trade or profession.

Question 22

Why do insurance brokers owe a higher duty of care to personal lines customers?

Answer 22

Insurance brokers owe a higher duty of care to personal lines customers because they are considered consumers, acting outside of their trade or profession, which requires additional protection.

Question 23

How is insurance for small versus large commercial risks typically handled?

Answer 23

Insurance for small commercial risks is often available directly from insurers, while larger, more complex commercial risks are almost exclusively sold through brokers.

Question 24

Why are some classes of insurance more likely to be purchased directly rather than through a broker?

Answer 24

Some classes of insurance are purchased directly due to their simpler nature and standardized risk profiles. However, more complex or specialized risks often require the expertise of a broker.

Question 25

How does the complexity of a risk influence the decision to use a broker?

Answer 25

The more complex the risk, the more likely it is to be handled by a broker. Brokers have the specialist knowledge needed to understand and manage non-standard or complex risks, such as high-value jewellery, fine art, performance cars, marine, aviation, construction, manufacturing, and food.

Question 26

How does the size of a risk affect the involvement of insurance brokers?

Answer 26

Higher-value risks or those with large sums insured are more likely to involve brokers. This is because large risks consume more of an insurer’s financial capacity and may lead insurers to prefer handling them through brokers who can manage and understand the higher concentrations of risk.

Question 27

Why might the location of a risk impact the decision to use a broker?

Answer 27

Risks located in high-risk areas, such as flood plains or regions prone to storms, often require a broker. Brokers can provide insurers with detailed risk data and analysis, making it more feasible for insurers to offer coverage in these challenging locations.