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LM2 - Cert CII > Chapter 6 - Insurance Intermediation > Flashcards

Chapter 6 - Insurance Intermediation Flashcards

1
Q

What law do brokers operate under?

A

The Law of Agency.

Brokers are formally known as ‘insurance intermediaries’.

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2
Q

What is the ‘Law of Agency’?

A

The insured is the ‘principal’, the broker is the ‘agent’, and the insurer is the ‘third party’.

The agent acts on the behalf of the principal, and bring the principal into a contractual relationship with the third party.

Contract is between the principal and third party only.

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3
Q

How is an agency agreement ideally agreed?

A

Ideally expressly and in writing.

But it can be agreed by behavior.

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4
Q

What situation gives rise to a ‘conflict of interest’ for the broker?

A
  • It’s possible for a broker to have two different principals relating to just one risk.
  • This can give rise to a ‘conflict of interest’, where one person or organisation has two principals that have views/positions which are not necessarily aligned.
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5
Q

What are the 3 ways an ‘agency agreement’ can be created in law?

A
  1. by agreement.
  2. by ratification.
  3. by necessity.
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6
Q

How is an agency agreement created ‘by agreement’?

A

Express agreement between the agent and principal.

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7
Q

How is an agency agreement created ‘by ratification’?

A

An agent acts without authority, but the principal accepts the act as something done by the agent on their behalf. The principal’s agreement with the actions of the agent after the event is their ratification.

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8
Q

How is an agency agreement created ‘by necessity’?

A

Usually in an emergency situation where someone has to decide, as no-one with actual authority to do so is present.

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9
Q

What are some duties agents have towards their principals?

A
  • following their instructions.
  • act in good faith towards their principal.
  • not to sub-delegate without permission.
  • account for funds.
  • act with due care & skill.
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10
Q

What is a ‘wholesale broker’?

A
  • The broker who has direct contact with the insurer.
  • Where there are several brokers, the ‘wholesale broker’ is the one closest to the insurer.
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11
Q

What is a ‘retail broker’?

A
  • The broker who has the contact with the ultimate client.
  • Retail broker is the intermediary between the client desiring coverage & the insurance marketplace.
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12
Q

What is a ‘producing broker’?

A

This broker has contact with the client and produces the work for the client.

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13
Q

What is a ‘single-tied agent’?

A

They represent the insurer, and can only sell products from a single insurer.

This broker cannot advise products from another insurer.

These agents do NOT work in the London Market.

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14
Q

What is a ‘multi-tied agent’?

A

They represent the insurer, and sell a number of different insurance products - but only one product per insurer.

Cannot advise their client on other insurance products in the wider market.

These agents do NOT work in the London Market.

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15
Q

What is an ‘independent intermediary’?

A

(this is the traditional London Market broker).

They are NOT tied to any insurer, and work for their ultimate client who is the insured or reinsured.

This agent CAN advise their client on the best insurance products in the wider market.

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16
Q

What is a ‘surplus lines broker’?

A

This broker is the intermediary for business emanating from the USA.

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17
Q

What is an Open Market Correspondent (OMC)?

A

A non-Lloyd’s broker, who introduces business either to Lloyd’s directly or to a Lloyd’s broker for placement in the Lloyds market, on an open market basis.

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18
Q

What is a ‘Lloyd’s broker’?

A

A Lloyd’s broker has gained accreditation from Lloyd’s, on top of their own regulator.

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19
Q

What is a ‘Non-Lloyd’s broker’?

A

A broker regulated by either the UK regulator or their own home state regulator, but has NOT obtained a Lloyd’s accreditation.

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20
Q

What is a ‘Market Reform Contract’?

A
  • Also known as the ‘slip’.
  • MRC is the main document used to submit information to insurers in the market.
  • Underwriters ink their stamps & proportions of a risk on the MRC.
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21
Q

What does it mean if there are ‘signing down issues’ on the MRC?

A

This means there are lines written that total to more than 100%.

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22
Q

What is a ‘written line’?

A

This is the share of the risk that an underwriter writes on the MRC.

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23
Q

What is a ‘signed line’?

A

This is the share of the risk that is entered onto the database - this may be less than the written line as the total cannot be more than 100%.

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24
Q

What is the process of putting up ‘Chinese Walls’ or ‘Ethical rules’?

A

Occurs when a broker has 2 different principals relating to just 1 risk (a conflict of interest).

The broker engages in sensible business practice to avoid either of their principals being disadvantaged.

25
Q

What is the main ‘duty’ a broker has towards their client?

A

They have a duty of care.

26
Q

How is business placed in the London Market?

A
  1. Physically using a paper MRC (and physically obtaining an insurers agreement to their line)
  2. Electronic placing platforms
27
Q

Name the 2 electronic placing platforms used instead of a physical MRC?

A
  1. Platform Placing Limited (PPL)
  2. Whitespace
28
Q

Can a broker reduce an underwriters written line without asking?

A

Yes.

Unless the underwriter has indicated that no reduction is acceptable by stating ‘line to stand’ next to their stamp.

29
Q

What is the ‘signing number & date of a risk’?

A

It’s the unique reference relating to that risk which allows easy identification of it within market systems.

30
Q

How is the premium paid electronically?

A

Xchanging facilitates the movement of premium from the brokers bank account to the insurer.

31
Q

Who is notified of a loss (claim) first?

A

The broker is notified of a loss by the insured first.

32
Q

What is ‘subrogation’?

A

The right of the insurer, having indemnified the insured, to pursue the at fault third-party for repayment of losses.

33
Q

Terms of Business Agreements (TOBAs)?

A

This captures the terms and conditions under which a broker does business with different parties.

34
Q

Who does a broker have ‘TOBAs’ with?

A
  1. Insurers.
  2. Clients.
  3. (possibly) producing brokers.
35
Q

A ‘risk transfer TOBA’ between the broker and insurer?

A

Allows a broker to hold premium funds on behalf of the insurer.

Once premium is paid to the broker by the insured, it is deemed paid to the insurer even if it is not yet in the insurers bank account.

36
Q

A ‘non-risk transfer TOBA’ between the broker and insurer?

A

Does not allow the broker to hold premium funds on the behalf of the insurer.

Best appropriate for brokers/insurers in the early stages of their relationship.

(This info is included in the insurer’s TOBA with a broker).

37
Q

What are the 2 payment methods by which a broker can be remunerated?

A
  1. Flat fee.
  2. Commission or brokerage.
38
Q

What is payment by ‘flat fee’?

A

A fee payed to the broker by the client.

39
Q

What is payment by ‘commission’?

A

Commission/brokerage is paid by the insurer.

The insurer agrees that the broker can retain, or hold back,
part of the premium charged to the client.

40
Q

What is ‘gross premium’?

A

The premium charged to the client.

41
Q

What is ‘net premium’?

A

The amount of premium received by the insurer (which is the gross premium less the brokerage retained by the broker).

42
Q

What does IDD stand for? Who does it apply to?

A

Insurance Distribution Directive.

Applies to ‘insurance distributors’ (as opposed to ‘insurance intermediary’).

43
Q

What does the Insurance Distribution Directive (IDD) entail?

A
  • Requires distributors to act honestly, fairly, & professionally in accordance with the best interests of customers.
  • Information provided by distributors must be fair, clear, not misleading.
  • Distributors must disclose: 1. the nature of the remuneration & 2. the basis for remuneration.
44
Q

What are the basic requirements for a broker under the Insurance Distribution Directive (IDD)?

A

Distributors must disclose: (nature & basis)

  1. the nature of the remuneration.
  2. the basis for remuneration.
45
Q

Who are Brokers regulated by?

A

The FCA.

46
Q

What are ‘Client Assets Rules’?

A

Specific rules in the FCA handbook concerning client money.

47
Q

What does the FCA’s ‘Client Asset Rules’ (CASS) require the broker to do?

A

Provide adequate protection for client assets.

The broker should do this by segregating the client’s money (i.e. premium/claims) from the broking firms own money.

The two types of segregated account a clients money can be held in are:

  1. A Statutory Trust Account.
  2. A Non-Statutory Trust Account.
48
Q

What is a ‘Statutory Trust Account’?

A

An account that is used to hold client money only.

The broker cannot fund any payments out of this type of account.

49
Q

What is a ‘Non-Statutory Trust Account’?

A

The broker can fund payments out of this account in which they hold the client money.

50
Q

According to ‘Client Asset Rules’ (CASS), how soon should client money be paid out to client’s?

A

CASS rules advise 1 business day after receipt by the broker, to be paid to the client.

51
Q

What does The Data Protection Act 2018 and the General Data
Protection Regulation (GDPR) do?

A

It ensures the careful processing of personal data by businesses and organisations.

Also aimed to modernise data protection laws.

52
Q

What is the fine for the most serious data breach?

A

Fine of up to £17.5m or 4% of annual global turnover.

53
Q

Who does the UK GDPR apply to?

A

Controllers & processors outside the UK if their processing activities relate to individuals in the UK.

54
Q

Who does the GDPR apply to?

A

Controllers & processors in the EU.

55
Q

What does a data ‘controller’ do?

A

Says how & why personal data is processed.

56
Q

What does a data ‘processor’ do?

A

Acts on the controllers behalf.

57
Q

What information does the GDPR apply to?

A

Personal data.

58
Q

What are some examples of ‘sensitive personal data’?

A
  • race
  • ethnic origin
  • politics
  • religion
  • genetics
  • trade union membership
  • biometrics
  • health
  • sex life
  • sexual orientation
59
Q

What is an SAR?

A

Subject Access Request.

An individual has the right to submit an SAR to an organisation to find out if it is using or storing their personal data.

An organisation generally has 1 month to respond to an SAR.

LM2 - Cert CII (9 decks)

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