Chapter 1 - The insurance broking market Flashcards
What are the 3 types of broker?
Independent intermediary
Introducer appointed representatives (IARs)
Appointed representatives (ARs)
What is an insurance intermediary/broker?
Mediation on behalf of a contractually tied company e.g., insurer
What type of broker is an insurance broker?
Independent intermediary
In common law, what are you known as if you act on behalf of another person?
Agent
What is an agent?
Authorised by the ‘principal’ to bring them into a contractual relationship with another (third party)
What is the difference between an insurance broker and other intermediaries?
When placing business, clients are their principal, not insurer or third party that they are introducing business to
What was the Insurance Brokers (Registration) Act 1977 designed for?
‘Insurance broker’ became recognised from a regulatory perspective
Prevent broker acting as representative of one or more insurance companies
Was the 1977 Act repealed?
Yes - No legal recognition of the term ‘Insurance broker’
Who are insurance broking firms regulated by?
Financial Conduct Authority (FCA)
Who provides life insurance, pensions and investment advice?
Independent financial advisers (IFAs)
What are the benefits of an insurance broker to a client?
Convenience - do not have time or inclination to quote/compare themselves
Expert knowledge / complex products - ensure client and insurer needs are met
Independent quotation - size and influence of brokers to obtain better terms
Claims assistance - negotiate favourable outcome
Existing relationship - loyalty of broker or company
What are the benefits of an insurance broker to a insurer?
Convenience - reduce client interaction, admin, complaints, risk info in agreed format
Technical expertise - explain complex policies
Peace of mind - explain non-disclosure of material facts
Cost benefits - fee for issuing policy and collecting premium
What is British Insurance Brokers’ Association (BIBA)?
Major non-statutory trade association for insurance intermediaries - open to all independent intermediaries
> 2000 regulated firms
Rules = conduct business with good faith and to represent the interests of their customers
What is the London Market Regional Committee (LMRC)?
Integrated into BIBA’s existing regional committee structure
Members advise the areas they want to develop its strategy and objectives
What is London and the International Insurance Brokers’ Association (LIIBA)?
Independent trade body
Representing the interests of insurance and reinsurance brokers who operate in London and international markets
What are LIIBA’s key priorities?
Regulatory framework
Modernise business processes
Legislative and technical changes
Strengthening relationships with Lloyd’s, the London Market Association (LMA) and the International Underwriting Association (IUA) on a range of market issues
What are the 3 major classes of business?
Personal lines
Commercial
Specialties
Who are personal lines insurance products purchased by? Examples?
Private individuals - consumers (FCA)
e.g., Household buildings and contents, private motor, travel, private medical
Are all commercial insurances purchased via a broker?
No
Small commercial - direct to insurer
Large complex commercial - via a broker
Do insurance brokers owe a higher duty of care to consumers than to commercial customers? Why?
Yes
Consumer is defined as acting for purposes which are outside their trade or profession
What classes are examples of specialist risks? Are all via a broker?
Marine, Aviation, Construction
Yes
Why are some classes of business more suited to insurance brokers?
Complexity of risk e.g., high value jewellery/fine art, performance cars, marine, aviation, construction
Size of risk - value of the asset or sum insured
Location of risk - high risk areas or e.g., flood plains, storms
Availability of cover - e.g., K&R, motor track
How many different types of insurance broker are there?
8
Global firms
UK-only-based firms
Consolidators
Niche sector businesses
Wholesale brokers
Reinsurance brokers
Online brokers
Lloyd’s brokers
What makes an insurance brokers a global firm?
Large organisations employing thousands of people in different countries (>100 territories)
Do UK-only based firms usually conduct business on a retail basis?
Yes - single, regional or national brokers
What is a consolidator insurance brokers?
Mergers and acquisitions - acquire smaller firms
What are niche sector businesses?
Small businesses in specialist areas e.g., delegated authority for their client base
Affinity scheme - an agreement with an organisation whose members have a common purpose or risk profile such as a workplace federation, or club
What is a sub-broker?
Producing broker
What is the purpose of reinsurance?
Smooth peaks and troughs in claims experience
Protect the portfolio of risks being insured
Provide improved customer service
Provide support for insurers entering new areas of business
What is a catastrophic loss?
Very large loss on an individual risk
Loss resulting from an accumulation of losses
arising from a single catastrophic event
What are the three types of reinsurer?
Specialist reinsurance companies e.g., Swiss Re
Lloyd’s syndicates
Insurance companies that also act as reinsurers
How is a risk transferred from client to retrocessionaire?
Client > Insurer/cedant > Reinsurer > Retrocessionaire
Who do online brokers compete with?
Insurers via call centres and full cycle electronic processing
Is service more important than price for online brokers?
Yes - high ‘churn’ ’ (turnover of clients from one insurer to another at renewal)
Who should Lloyd’s brokers be registered with to act as Lloyd’s brokers?
Council of Lloyd’s
Satisfy the council with expertise, financial standing, integrity
What are the factors distinguishing Lloyd’s brokers from other insurance brokers?
The market in which they operate
Methods of transacting business
The type of risks they place
Is the Lloyd’s market dual-regulated? What does it mean?
Yes
Approved by the Prudential Regulation Authority (PRA) to carry on PRA-regulated activities
Business conduct activities are regulated by the Financial Conduct Authority (FCA)
What are the methods of transacting business at Lloyd’s?
Face-to-face
Delegated authority
Businesses set up outside Lloyd’s by syndicates
What does PPL stand for? What is the aim?
Placing Platform Ltd (PPL)
Support more flexible negotiation, faster placement, accurate document production
What are broker networks?
Collective buying power of independent brokers
Obtain better terms and conditions for their clients, improve service standards from insurers, achieve higher levels of brokerage
and develop own-branded products
What is a common term for the segmented group in an organisation?
Division
What are typical methods of segmentation in an organisation?
Class of insurance
Trade - retail or property owners
Client size
Premium size
How do brokers tend to offer terms for larger commercial accounts?
Net of commission and charge a fee for service
What are the main services offered by insurance brokers?
Traditional broking services
Risk management
Added value services
Services to insurers
What are traditional broking services?
Responsibility is to the client so:
Review client demands and needs
Decide on the market for the risk - level of cover, cost of contract, terms, financial security of insurers, claims service
Negotiate terms and conditions with insurer
Provide advice to client - measure of a brokers expertise
Negotiate renewals - premium deduction, better coverage, claims outside of terms
Advise and assist clients when they have a claim
Design and operation of insurance programmes - multiple assets in >1 country
What are the FCA rules on renewal transparency for insurers and intermediaries for retail general insurances? When was the change? What was the aim?
Disclose last years premium (incl MTBC)
Encourage consumers to shop around
Additional message to 4 year clients to shop around
When: April 2017
Aim: Encourage competition and levels of consumer engagement
What are 2 reasons that brokers offer additional services to their clients?
Risk management
Added value services
What is the definition of risk management?
The identification, analysis and economic control of those risks which threaten the assets or earning capacity of an enterprise
What are the 3 areas of risk management?
Identifying risk
Evaluating the risk
Controlling or eliminating risk (includes risk transfer to an insurer)
Can larger companies have their own risk management departments run by a dedicated risk manager?
Yes
Do most companies rely on external specialists to offer advice and support on risk management?
Yes including insurance brokers, insurers, specialist risk management firms or independent consultants
If a company can demonstrate that it is managing its risks well, can the insurer offer more favourable terms (regarding price and cover)?
Yes
What are added value services also known as?
Specialist risk consultancy services
What are examples of added value services a broker might offer their clients?
Property surveys
Business continuity planning
Business interruption reviews
Health and safety consultation
Liability surveys
Motor fleet risk management
Environmental risk surveys
Post-loss control surveys
Disaster recovery services
Do insurers offer added value services? Why?
Yes e.g., property services
For their own benefit - improve data capture, exact sum insureds
What are the key services brokers offer insurers?
A cost-effective distribution network
Technical expertise in data capture and risk presentation
Assistance with preparation and issuing of documentation
Checking the accuracy of an insurer’s documentation, including pricing
Premium collection
First contact for all the insured administrative issues
Technical expertise to explain cover issues to clients
Support with claims management
Support with client’s risk management
Holding regulatory responsibility in terms of sanctions checking and handling client money
What are the 2 ways that brokers can be remunerated?
By insurer (commission/brokerage)
By client (fees)
Can a broker be paid fees and commission/brokerage?
No
What does the law of agency say about disclosing a brokers earnings?
Must tell principal and/or consumer
Many brokers volunteer their earnings
Where would a commission be stated?
TOBA
Slip - per case basis at quote stage
Elsewhere - Seperate doc or website
When is commission earnt?
New policy is issued
Additional cover arranged
At renewal
Do brokers refund commission?
Might do when return premium is paid
Depends on TOBA
Why does a level of commission vary?
Depends on insurer
Or class of business
Are higher commissions paid by insurers where a broker operates a delegated authority?
Yes - doing activities an insurer would be doing
e.g., underwriting, producing docs
Is commission paid net of Insurance Premium Tax (IPT)? What does this mean?
Always
IPT is first calculated and deducted before applying the commission rate to establish the commission
payment due
What are volume overriders or contingent commissions?
Paid by the insurer on a whole account basis
Vary depending on profitability and/or growth of the account
What is the risk of enhanced brokerage?
Conflicts of interest
When should a fee be agreed?
Prior to the contract
How the fee is calculated should be explained to the client
Are fees generally reimbursed to clients following mid-term adjustments?
No
Results in lower premium
Not payable for increased covers
What is an example of a broker charging a fee for services to insurers?
Client behaviour data
Fee is paid by the insurer to the broker for the provision of information on their clients
What are work transfer fees?
Paid by insurers for certain work the broker carries out on their behalf,
e.g., invoicing premiums for individual tenants on block property polices, administration of delegated authorities, issuing policies and conducting underwriting surveys
Can brokers earn fees or commissions from premium finance companies?
Yes
What are the main roles within an insurance broking organisation?
Client service e.g., account manager per class of business - renewals - producing broker
New business or business development
Broking - placing brokers only. Agency management with insurers
Claims - Service teams or specialists
Management - flat or hierarchical/pyramidal structures. Team leader, managing director, CEO
Compliance - broking procedures/regulations are in place, adhered to
Product development - gaps in products and services to clients. Work with client service
Back office functions - Finance, IT, HR, Marketing
