Chapter 6: Insurance Intermediation Flashcards
How Agency agreements are created in law
- By Agreement
- By Ratification (Where some behaviour is accepted or condoned)
- By Necessity (Usually in an emergency situation)
Agent duties to principal
- Follow their instructions
- Act in good fath
- No sub-delegation without permission
- Account for funds
- Act with due care and skill
Principal options if agent acts outside their authority
- Ratify their actions and continue as if nothing happened
- Ratify actions and make claim against agent (likely for damages)
- refuse to ratify their actions and expose the agent to third party claims
Law of tort
- if broker breaches duty of care they have an obligation to the person who is harmed by the breach
Duty of Care breach examples
Failure to:
- Ensure insurance was placed with suitable insurers
- Ensure insurance was placed on suitable terms
- Ensure broker understood instructions
- Explain terms and effects to clients
List of intermediaries
Wholesale broker
Retail Broker
Producing broker
Single tied agent
Multi-tied agent
Independent intermediary
Surplus lines broker
Open market correspondent
Lloyd’s Broker
Non-lloyd’s broker
Wholesale broker
- Direct contact with insurer
- can have contact client as well if they are the only broker
- where there are multiple brokers, they are the closest one to the insurer
Retail broker
- Other end of the chain to wholesale (closest to client)
- Retail and wholesale brokers could be 2 completely different brokers or 2 offices of the same broker
Producing broker
Broker which has the contract with the client and creates/produces the work for the client
Single Tied agent
- representative of the insurer
- most common in high street agency selling multiple products of one single insurer
- agent cannot advise the client on others insurers products
- dont work in London Market
Multi-tied agent
- representative of the insurer again
- selling number of different insurers products but only one per insurer
- cannot offer independent advice about other products in the wider market
- not in the london market
Independent intermediary
- Traditional london market broker
- not tied to any insurer
- works for their ultimate client (insured)
- Agent takes unbiased view of the entire market and advises client of the best options for their needs
Surplus lines broker
If london market is used in surplus lines, SLB must be used in the intermediary chain
- details of the broker are part of the data captured on MRC
Open Market correspondent (OMC)
- not lloyds approved coverholder
- Introduce business to lloyds either directly or via lloyds broker on OM basis
- Certain territories where brokers want to introduce business may need additional approval levels
Open Market
- Risk is individually placed rather than being attached to pre-existing delegated underwriting agreement.
Lloyds broker
- Broker already approved by their own regulator can apply to lloyds to get a separate accreditation.
Non-Lloyds broker
Broker regulated by UK/Home regulator but doesnt have lloyds accreditation
Placing process for brokers
- review clients needs
- put together MRC to obtain quotes
- reviewing quotes with the client
- finalising the placement
- Compiling documentation for submission to Xchanging
- Requesting premium from their client
- Submitting documentation to Xchanging
- Making changes to the risk
Written Line
Share/proportion that the underwriter writes on the MRC
Signed Line
When the risk is finally entered on the market databases
might be less than written line
Claims process
- First advice
- Expert instructions
- Further updates
- Negotiation
- Settlement
- Recoveries/Subrogation
Subrogation
The right of an insurer following payment of a claim, to take over insured’s right to recover payment from a third party for the loss
Terms of Business Agreements (TOBAs)
Market agreements used to capture the T&Cs under which a broker does business
No standard template but need to make sure agreement covers the fundamentals
LMA, IUA and LIIBA have model TOBAs to assist
Who does a broker have TOBAs with
- Insurers
- Clients
- Potentially producing brokers
For lloyds, there would be an individual TOBA entered by the broker with each managing agent they do business with
Contents of an Insurer/Broker TOBA
Regulatory Status
Brokers Authority
Remuneration
Holding Money/Taxes
Compliance
Ownership and access to data and records
Law and jurisdiction
Conflict management
Confidentiality
TOBA: Regulatory status
Both warrant to each other they are authorised to conduct broking activities
TOBA: Broker’s authority
- brokers authority to hold premium for insurer
- can be granted risk transfer (if insurer is comfortable with them)
- Non-risk transfer TOBA is more appropriate where an insurer is not comfortable with broker
- FCA have rules relating to client money which a broker must comply with
TOBA: Remuneration
Sets out how much brokerage/commission will be set out in individual insurance contracts
TOBA: Holding money/taxes
- Broker will account to the insurer for any taxes paid on their behalf
TOBA: Compliance
- Each party will comply with their respective obligations including contract certainty and financial crime
TOBA: Ownership and access to data and records
- Both parties agree to comply with GDPR and DPA 2018
- Less chance of dispute in future if matter of ownership is
- Comes up after allegations were made that some documents were not shown to insurers
TOBA: Law and jurisdiction
- agree where disputes between insured and insurer will be heard
TOBA: Conflict management
- parties agree to adopt procedures to ensure conflicts are identified and managed
TOBA: confidentiality
- Agree to maintain confidentiality of information received and only disclose as required
Contents of Broker/Client TOBAs
Identity of Client
Claims notification
Disclosure
How the brokers are paid
How monies are held
Data protection
Complaints
Dispute resolution
Broker/Client TOBA: Identity of client
- Clarifies that the broker is working for the insured’s client
Broker/Client TOBA: Claims notification
- Allows broker to advise client as to requirements in the event of a claim
Broker/Client TOBA: Disclosure
- Puts client on notice as to their duty to disclosure during placing process
Broker/Client TOBA: How brokers are paid
Sets our various options for how brokers are paid
includes fee
- Broker may also retain a commission (brokerage)
Broker/Client TOBA: How monies are held
- makes clear broker holds money on trust for mainly the client but also occasionally the insurer (when they have risk transfer)
- Will make clear who may retain interest made on funds
Broker/Client TOBA: Data protection
- broker confirms they will comply with GDPR /DPA 2018
Broker/Client TOBA: Complaints
Sets out brokers complaints process
Lets clients know their complaints can be referred to Financial Ombudsman Service
Broker/Client TOBA: Dispute resolution
Dispute resolution in place from the outset as with insurer TOBA
Types of broker remuneration
- Flat fee
- Commission or brokerage
- Other fees/commissions
Broker remuneration: Flat fee
- Payable by the client
- Broker must provide a client with details of any fees that will be payable before any fees (as per ICOBS)
- If actual fee cant be stated, the basis for calculation must be provided
- If future fees might be incurred, also need to be declared
Broker remuneration: Commission/Brokerage
- Paid by insurer rather than client
- Insurer agrees the broker can retain or hold back a part of the premium charged to the client when transferring to the insurer
- If asked by commerical client, broker must tell them what they are receiving from the insurer. Information doesnt have to be volunteered
Broker remuneration: Other fees
- Additional commissions (e.g. ‘collecting commission’ on claims) - insurer would pay 101% value of the claim but insured gets 100%
- In DUA where broker is acting as coverholder, can be paid coverholder commission and profit commission
- Technical advise on engineering matters can be charged as a fee
Insurance Distribution Directive (IDD)
1st October 2018 (replacing Insurance Meditation Directive)
- Distributors must always act honestly, fairly and professionally in accordance with customers best interests
- All information provided by distributors must be fair, clear and not misleading
- Distributors must disclose nature and basis of remuneration
- all brokers must be registered in home state
- UK Brokers have to consider setting up EU entities following brexit as regulatory rules are different uway
What does IDD apply to
- All sellers of insurance products
- Any person whos activities consist of assisting/administering insurance
- Ancillary insurance intermediaries
