Chapter 3 - Other roles of insurance brokers

Question 1

Roughly describe some of the benefits of risk management

Answer 1

• Reduce losses by identifying and managing hazards
• Give shareholders more confidence to take risks
• Potential reduction in premium if insurer can see company is engaged

Question 2

What are the three steps in the risk management process?

Answer 2

1. Identification - find what the risks facing the business are
2. Analysis - evaluate or analyse to predict likely losses in the future
3. Control - course of action to control, reduce or eliminate the risk

Question 3

What are the main techniques for risk control?

Answer 3

• Avoidance - avoid any possibility of undesirable event occurring
• Reduction - reduce degree of hazard
• Prevention - Physical controls to prevent chance of loss
• Minimisation - physical measures to reduce loss which occurs
• Transfer

Question 4

What are the main aspects to control risk?

Answer 4

1. Physical controls
2. Financial controls

Question 5

How do brokers assist clients in:
1. risk identification
2. risk analysis
3. risk control

Answer 5

1. Identify the risks using surveys or visits & data capture
2. Examine claims history and suggest ways to manage more effectively
3. Make recommendations to improve a risk

Question 6

What is the key difference between risk management services provided by an insurer and a broker?

Answer 6

Broker risk management is for the benefit of the client, whereas insurers often do it for own benefit, to reduce their risk of loss and impose risk improvements.

Question 7

Try to list the 9 main potential risk management services a broker could provide

Answer 7

1. Property Survey
2. Businesses continuity planning
3. BI review
4. Health & Safety consultation
5. Liability surveys
6. Motor Fleet risk management
7. Environmental risk survey
8. Post-loss control survey
9. Disaster recovery services

Question 8

What is a proprietary insurance company?

Answer 8

A company owned by shareholders and is limited liability, meaning liability is limited to the amount of shares the own

Question 9

What is a captive insurance company?

Answer 9

Wholly-owned subsidiary of a main business. Its capital is provided by the owning company and accepts the companies’ risks. Often based offshore for tax benefits

Question 10

What are the benefits of a captive insurance company?

Answer 10

• Self-insure in a structured way
• Act as a focus for risk management activity
• Deal with claims in an efficient and timely manner
• Provide cover for risks the traditional market will not accommodate
• Retain premium in house

Question 11

What is the definition of ART

Answer 11

Alternative Risk Transfer - general phrase to denote various non-traditional forms of re(insurance) techniques where risk is transferred to capital markets.

Question 12

What are some additional services offered by insurance brokers?

Answer 12

• Broker networks = collective buying power and services e.g. training, marketing
• Stat analysis of insured trend e.g. loss data = give to clients & insurer - is very valuable as data can be used for so much e.g. prediction, competition etc.
• Premium finance
• General risk consultancy

Question 13

What is a delegated authority agreement?

Answer 13

A scheme where an insurer delegates underwriting authority to a third party (e.g. a broker or MGA), who is known as a cover holder who may conduct business in accordance with the terms of the agreement

Question 14

Define a coverholder

Answer 14

An entity to which the Insurer gives DA

Question 15

The following is a definition of what term?
The contract under which delegated authority is given to a third party

Answer 15

Binding authority

Question 16

What is a bordereau?

Answer 16

Report provided by coverholder of risks written and claims reported

Question 17

Define an MGA

Answer 17

A organisation that underwrites insurance risks and owes its primary duties to one or more insurance companies or providers of insurance capacity
-> Can be owned and operated by insurance broking firms

Question 18

Roughly describe how DA schemes operate

Answer 18

1. See business opportunity & presents case to other party - benefits e.g. access to specialist market and knowledge of the broker, not financially viable to write all individually
2. Coverholder and insurer draw and agreement and procedures
3. Coverholder operates DA in accordance to terms (operation of agreement)
4. Coverholder interacts with insurer as agreed, ensuring authority is not exceeded (ongoing interaction)
5. Insurer conducts audit checks to ensure coverholder acting correctly (audit and monitor)

Question 19

What are the 5 activities which can be delegated?

Answer 19

• Underwriting
• Credit control
• Document issuance and management
• Claims
• Recoveries

Question 20

What are some of the benefits of DA agreements for an Insurer, coverholder (broker) & Customer

Answer 20

Insurer:
ability to access NB
cost efficient
lower operating costs
ability to access, knowledge and experience of coverholder

broker:
Efficient for obtaining cover of low value, high volume business
Increased commission levels
Faster speed of UW

Client: faster service

Question 21

What are some of the challenges of DA agreements for an Insurer, coverholder (broker) & Customer

Answer 21

Insurer:
Loss of control
Coverholder may not report enough information
Regulatory issues
If coverholder service is poor, reflects badly on insurer

Coverholder:
Dependency on single market
Increased workload
Reputational damage if insurer service is poor
Conflict of interests

Customer:
May not know who there actual insurer is

Question 22

Who do MGAs underwrite business for?

Answer 22

The insurer, who provides the capacity. As not underwriting for themselves, technically considered an intermediary by the FCA

Question 23

What is the association for MGAs?

Answer 23

MGAA Manging General Agents Association