Chapter 8 - Business Process Flashcards
What is a Quotation?
A proposal from the insurer of the terms & conditions (incl. premium) regarding the risk put forward by the broker.
Why does the broker obtain a number of different quotes?
So the client can compare the various options available.
Are Quotations always valid?
Quotations do NOT remain indefinitely. The insurer indicates on the quotation the period of validity (i.e. the time the broker must confirm whether they want to proceed).
If the client tries to accept the quote after the expiry date, the insurer can agree if it wishes but it’s not obliged to do so - the insurer can re-consider the risk & re-quote without being bound by the previous quotation).
What concept applies if the quotation time period for which it is open for acceptance is not specified?
The concept of ‘reasonable time’.
i.e. if not specified, the quotation remains valid for acceptance for a ‘reasonable time’.
Can the insurer back out of the agreement if the client accepts the quotation on the terms provided in the time period?
No.
If the client seeks to change the terms, the offer & acceptance process starts again.
What concepts apply to a contract?
Disclosure of material facts.
The duty of utmost good faith.
What is the ‘Consideration’ of a contract?
Consideration is the promise from the insurer to pay any valid claims, and the promise from the insured to pay the premium.
When is an individual contract created between the insurer and insured?
When the insurer gives their written line either physically on the MRC or electronically.
What is used on a ‘slip’ to indicate each underwriter’s agreement on the MRC?
A ‘stamp’.
Each underwriter also indicates the share of the risk they are each taking.
What term describes an underwriter’s signature on the slip/MRC?
‘Scratches’.
The underwriter signs the slip & adds the date.
What is the underwriters ‘written line’?
The share of the risk the underwriter writes on the MRC/slip when they accept the risk.
What is meant by the broker’s ‘order’?
This is the share of the risk the broker has been asked to place.
The broker’s share is called the ‘order’.
e.g. the broker may have a ‘50% order to place’.
When is the contract between the insured and individual company or syndicate commenced?
At the point the underwriter puts their line down on the broker’s slip (MRC).
At what point are the insurers ‘on risk’?
At the start of the policy period.
If the risk is ‘oversubscribed’ what does this mean?
The total of the written lines by the underwriters exceeds 100%.
What is the process called where shares of a risk are reduced to 100%?
‘Signing down’.
When the risk is entered onto the central market database Xchanging, each insurer’s written line is reduced proportionately so the total written lines add to 100%.
What does ‘line to stand’ mean?
The underwriter puts this down next to their stamp. This indicates the insurer does NOT want their written line to be signed down by the broker.
Can a broker increase an underwriters written line?
NO, the broker can NOT increase an underwriters lines without their express permission.
What are the 2 different ways a contract can terminate?
- Natural termination.
- Unexpected termination.
What are some examples of ‘natural termination’?
- Cancellation by the insured.
- If the whole premium was paid up front the insurer returns it all.
- Short rate premium provision: Shows the % of premium the insurer is entitled to keep based on how many days the policy was in force before the cancellation.
- Downgrade clause: Provides the insured the right to remove an insurer from their policy if certain circumstances occur (i.e. insurers security rating reduces. insurer goes into run-off etc.) - Cancellation by the insurer.
- e.g. In marine hull insurance a policy will terminate should the vessel be sold. - Fulfilment.
- e.g. A single vehicle is insured, it suffers a total loss & the policy pays out in full. - Expiry of the policy period.
- Most commercial insurance policies are for a period of 12 months.
- Long-tail & Short-tail risks.
What does it mean if a ‘short rate premium provision’ is included in a policy?
If the contract is naturally terminated by the insured, this shows the % of premium the insurer’s entitled to keep based on how many days the policy was in force before the cancellation.
What does it mean if there is a ‘downgrade clause’ included in a policy?
Provides the insured the right to remove an insurer from their policy if certain circumstances occur (i.e. insurers security rating reduces. insurer goes into run-off, being bought by another insurer, a certain underwriter leaves.)
What are some examples of ‘unexpected termination’?
- Breach of the duty of fair presentation.
- Insured has a duty to present insurers with all material facts about the risk they know or ought to know.
- If the breach falls into the category of ‘deliberate or reckless’ - the insurer may avoid the contract & retain the premium.
- If the breach was neither ‘deliberate or reckless’ - the insurer may only avoid the contract if they would NOT have written the contract had the full information been given - but they must return the premium.
- If the insurer would have applied different T&C’s then the policy will be deemed rewritten from inception. - Breach of warranty
- The contract will be suspended just for the period of the breach.
- If the insurer wants to rely on the breach to refuse a claim, they won’t be able to if the insured can show the breach did not increase the risk of the loss. - Fraud.
- If an insurer can prove fraud, it can be discharged from liability but it may also keep the premium.
If the insured’s breach was ‘deliberate or reckless’, what may the insurer do with the contract/premium?
The insurer may avoid the contract altogether, and retain all the premium.
If the insured’s breach was neither ‘deliberate nor reckless’, what are the three remedies for the insurer?
- If the insurer would NOT have written the contract with the full information - they may avoid the contract but return all the premium.
- If the insurer WOULD have written the contract but with different terms & conditions - the policy is now deemed re-written from inception, including those new terms.
- If the insurer would have applied the same terms & conditions but charged a higher premium - additional premium is not charged, but claims are reduced by the same % as the premium was underpaid.
i.e.
Premium paid: £80
Premium should have been paid: £100
Claim presented: £1000
Claim paid: £800
How long is an individual policy period?
12 months.
Does the broker have to approach the same insurers when renewing a risk?
No.
Brokers responsibility to obtain the best options for their client - new insurers may have become involved in certain classes of business.
2 reasons why an existing insurer may NOT want to quote for the renewal of a risk?
- The contract has been loss-making.
- They are exiting that class of business.
2 reasons why an existing insurer would wish to keep/renew existing business?
- It costs less to renew business than write it from scratch (risk is already known to the insurer so less analysis).
- The more stable the portfolio of clients, the more reliable the statistical data.
What do the new regulatory rules introduced by the FCA in 2017 introduce, which affect retail general insurances?
- disclose last years premium on renewal notices.
- include text encouraging consumers to shop around for the best cover.
- identify consumers who have renewed with the same insurers 4 consecutive times, and encourages these consumers to shop around.
What is meant by ‘Days of Grace’?
The extended period of cover given by insurance companies should the insured be late in renewing their insurance.
What can happen if an insurer writes a risk after the risk has incepted?
The insurer can be liable for losses that occurred before they wrote the risk.
(some claims take time to come in).
e.g.
If an insurer writes a risk in March which incepted in February, they are liable for any valid claims coming out of February.
What is a ‘proposal form’ used for? Who creates the ‘proposal from’? Who fills it out? Who uses it?
Used to present the risk to the insurer for quotation & formal agreement to accept the risk. Is used on top of the MRC as a questionnaire.
The insurer creates the proposal form which allows them to include questions on what they consider to be material.
The proposal form is completed by the insured or jointly by the insured & the broker and is used in conjunction with the MRC to present the risk to the insurer.
Proposal forms are only used in certain classes of business such as yacht & professional indemnity.
Why use a ‘proposal form’?
As the proposal from is created by the insurer, it allows them to include questions on what they consider to be material.
It serves to reduce the risk of matters not being disclosed during the placing process.
What information is included on a ‘proposal form’?
General questions.
i.e.
- name, address, nature of business
- information on past insurance history (incl. losses/claims)
- size of the exposure
- geographical spread of the risk
- amount of insurance being requested
What classes of business are ‘proposal forms’ used for?
Yacht & professional indemnity.
What is included at the end of the ‘proposal form’?
At the end of the proposal form there is a declaration that the proposer (prospective insured) must sign to declare that their answers given on the proposal form are true.
