Chapter 3 - Other roles of insurance brokers Flashcards
What are the benefits of risk management?
Reduce potential losses
Shareholder confidence
Disciplined approach to quantifying risks
Reduction in insurance premiums
What are the 3 steps of risk management?
Risk identification - existing and future threats
Risk analysis - predict future losses
Risk control - control, reduce or eliminate risk
Should risk management be a continuous and developing process embedded in a firm’s strategy?
Yes
What are the 5 techniques of risk control?
Avoidance - action taken to avoid possibility of risk
Reduction - active steps to reduce frequency of the risk that cannot be eliminated
Prevention - physical controls to minimise or prevent the possibility of a loss occurring
Minimisation - physical measures that will lessen the extent of the damage
Transfer - transferring the risk outside the business, not just insurers
What is the most effective technique of risk control?
Avoidance - usually expensive
What are the two distinct aspects to controlling risk?
Physical controls - e.g., sprinklers, alarms
Financial controls - e.g., contracts are worded well, responsibility for cash
What must risk elimination and/or risk reduction be subject to?
Cost
Test of whether the cost of doing so is reasonable vs the cost of the ev
Can insurance brokers provide specialist risk management services to their clients?
Yes
Large companies = own departments
Smaller/mid companies = use services of other insurance brokers
How is it made clear who will ultimately benefit from the risk management service?
Broker for client = additional/optional service where client pays a fee
What are examples of specialist risk management services?
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
What are proprietary insurance companies?
Limited liability - owned by shareholders
What are captive insurance companies?
A wholly-owned subsidiary of the client business or a ‘rent-a-captive’ (a vehicle designed to fund risk, which is not owned or controlled by the client)
Normally only accepts company’s risks
What are the benefits of a captive?
Self-insure in a structured way;
Act as a focus for risk management activity;
Deal with claims in a more efficient and timely way;
Provide cover for risks that the traditional market may not write; and
Retain premium in-house that would otherwise go to an insurer
What is another way other than captives where a risk can be transferred?
Alternative risk transfer (ART)
What are additional services offered by insurance brokers?
Broker networks - for smaller firms enabling them to compete and obtain buying power via access to markets. Access to services such as compliance, marketing and training.
Statistical analysis of insured trends e.g., loss analysis - valuable to client and insurer. Brokers may only be able to charge insurers for this service as clients expect to be included in fee
Security services - associated with people travelling to hazardous areas
Premium finance - offering clients a line of credit to pay their premiums
General risk consultancy - e.g., political risk and contract risk management
What is a coverholder?
An entity to which an insurer can give delegated authority.
Can be broker, an independent organisation or a company in the same group as the insurer
What is a binding authority?
The contract under which delegated authority is given to a third party
What is a bordereau?
The report provided by the coverholder of the risks written and claims reported,
normally provided monthly.
What is an MGA?
An organisation that underwrites insurance risks and which owes its primary
duties to one or more insurance companies or providers of insurance capacity.
MGAs may be owned and operated by insurance broking firms but they are not
insurance brokers or wholesalers of insurance products
What is the process of operating a delegated authority scheme?
- Insurer or coverholder sees a business opportunity and presents their case to the other party
- Coverholder and insurer draw up an agreement and procedures - agree authority with limits
- Coverholder operates the delegated authority in accordance with the terms
- Coverholder interacts with the insurer as agreed, ensuring they do not exceed their authority and the correct information is provided on the bordereau - risk and claims details
- Insurer conducts regular audit checks in line with the agreement to ensure coverholder is acting correctly
Why might an insurer delegate authority? and challenges?
Access business that would not otherwise come directly to an insurer;
Access the knowledge and experience of the insurance broker (coverholder); and
Access a number of risks for which it would not be financially viable to underwrite themselves individually
Challenges: loss of control, coverholder not report activity properly, regulatory issues with local tax not complied with, impacts brand if services are poor
What type of activities can be delegated?
Underwriting
Credit control
Document issuance and management
Claims
Recoveries - Where a claim has been settled and a recovery can be made from another party
What are the benefits and challenges of delegated authority agreements for broker (coverholder)?
Pros: efficient high volume, low value business. Access unique products. Speed
Cons: Dependency on single market, new staff and training burden on DA, damage if insurer fails
What are the benefits and challenges of delegated authority agreements for customer?
Pros: Faster, local, high quality service
Cons: May not know who insurer is
Are MGAs considered an intermediary by the FCA?
Yes - do not carry any of the risk
Do MGAs have their own trade association?
Yes - Managing General Agents Association (MGAA)
