Chapter 8A Flashcards
What is a quotation
A quotation is a proposal or indication from the insurer as to the terms and conditions
(including premium) that it is suggesting for the risk put forward by the broker.
Why does a broker collect multiple quotations
It allows the client to compare the
various options available to them and weigh up the various merits of balancing cover and
premium cost
Who has the duty of disclosure to the broker and insurer
The client
What are the legal implications of an insurer providing a quotation
- they are not valid indefinitely ( the insurer can indicate the period of validity)
- If the client tries to accept the quotation after the expiry date, the insurer can agree if it
wishes, but it is not obliged to do so. - If the insurer does not specify on the quotation the time period for which it remains open
for acceptance, then the concept of ‘reasonable time’ applies. This is the standard rule in
contract law - The insurer is not on risk if a client has received its quotation only and not yet accepted it.
- If the client accepts the quotation on the terms provided in the time period, the insurer
cannot back out of the agreement. However, should the client seek to change the terms,
the offer and acceptance process starts again.
What happens if further info material to the contract is produced after the quote
The insurer can vary its terms or withdraw
What happens after all quotes are issued
The client chooses which one with the help of the broker
What does the broker do after quotes are agreed?
The broker meets with each insurer separately (electronically or otherwise) and obtains their
underwriters’ agreement to take a share of the risk, which could be 100%, but as London is a
subscription market it is likely to be less.
How does an underwriter indicate agreement?
using a rubber
stamp which shows its company or syndicate, together with the name, if agreeing on a
paper document.
The underwriter then ‘scratches’ the slip (which means that they sign either their initials
or the initials of the insurer) and adds the date. Finally, they indicate the share of the risk
that they are taking. Each insurer will also state the specific underwriting reference that
it is applying to this risk. This reference is specific to the insurer and might contain data
that’s internal to the insurer, such as a class of business code or an indicator as to whether
reinsurance is being purchased.
How does an underwriter indicate agreement electronically
If the risk is being placed electronically then the underwriters will agree their lines
electronically as well. Instead of putting down a rubber stamp with the insurer name and
reference, and then scratching the slip, the system records a timestamp and identification
code for the insurer/individual underwriter based on their logins to the system
Firm Order
The process of the client giving their broker formal instructions to proceed with the
placement is also known as the client giving a ‘firm order’. Therefore you will often see
the insurers, particularly those who issued a quote in the first place acknowledge the
existence of the firm order by stating ‘Firm Order Noted’ or ‘FON’. By doing this they are
committing to the contract (although will not yet be on risk if this is done prior to inception)
Written Line
The line that the insurer has agreed to here is known as their ‘written line’.
It might be that the risk is very popular and hence the total of all the written lines adds up to
more than 100%.
Does a broker place the whole risk
The broker might not have been asked to place the whole risk. They may only have a share
of the risk to place.
Maybe another share is in a different market or perhaps the client has asked another broker
in London to place part of the risk – perhaps to encourage competition between the brokers
to get the best deal.
The share is called the ‘order’ – so a broker will say they have, for example, a ‘50% order
to place’.
- They have to be clear to underwriters about the share
At what point are insurers on the risk?
The contract between the insured and the individual company or syndicate is concluded at
the point at which the underwriter puts their line down on the broker’s slip (Market Reform
Contract). This can be done either physically or by agreeing his written line via an electronic
system, which will in fact not only date but time stamp the response. However, the extent of
their liability under the contract is not necessarily clear at that point, but they are committed
to the contract
- The point at which the underwriters are actually on risk depends on the inception date of the policy. However, their precise share of the risk may even at that point, not be entirely clear.
Signing Down
The process in which shares of a risk are reduced to 100% is known as ‘signing down’,
which means that later in the process (when the risk is entered into the market central
databases at Xchanging, for example) each insurer’s written line is reduced proportionately
so that the total lines add up to 100%. This reduced line size is known as the ‘signed line’.
How to sign down
For example, if all of the written lines add up to 150%, then the easiest way to reduce
them to the right size to add up to 100% is to divide each line by 150 and then multiply
by 100.
Line to Stand
If an insurer does not want to reduce their share of the risk
Work out what percentage is to stand. Divide the remaining lines and * by the desired
What should a broker do about signing down
Tell the underwriters in advance if there will be signing down at the time of placing due to time lag on XChanging
Natural cancellation by the insured
buyers of commercial insurance do not generally
have the same rights as consumers to cancel during the first 14 days or so (what is
known as the cooling-off period) most contracts allow some concept of cancellation. In
these circumstances, the insurers usually require some payment of premium to represent
the time that they were on risk unless the cancellation is effective from the start of
the contract.
What happens to premiums when a contract is cancelled by the insured (natural)
If the whole premium was paid up front, then the insurer will return all (or at least a
substantial part) of it on cancellation by the insured – subject to any specific wording
in the policy on this issue. What might be included in the policy is something called a
short rate premium provision including a table showing the percentage of premium that
the insurers will be entitled to keep depending on how many days the policy was in force
before the cancellation took effect.
The insured could also invoke a term within their policy which is known typically as a
downgrade clause. This clause provides the insured with the right to remove an insurer
from their policy if one of a stated set of circumstances occurs, the most typical of which
is that the insurers security rating (A+ A.M Best etc.) reduces below a certain level. Other
stated reasons might include the insurer going into run-off, being bought by another
insurer or even a certain underwriter leaving (although that is quite an unusual criterion to
see included).
Cancellation by the Insurer (natural)
Some insurance policies have clear provisions which state
that the policies will terminate should certain things happen. An example of this is in
marine hull insurance where a policy will terminate should the vessel be sold. The reason
for this is that insurers consider the ownership and management of a vessel as a key
factor in its risk evaluation. When an insurer cancels a policy they should normally send
notice of cancellation in a form where evidence can be obtained of its receipt by the
insured, such as a recorded delivery letter. Where brokers are involved, the notice of
cancellation would typically be sent to them as the agent of the insured.
Policy Cancellation - fulfilment
. If a single vehicle is insured, it suffers a total loss and the policy pays
out in full, then the subject-matter of the insurance does not exist and the policy is
effectively terminated.
Policy Cancellation - Expiry of the policy period
. Most, although not all, commercial insurance policies are for
a period of twelve months (some can be shorter and some longer). The contract is for the
period of the policy and will terminate at the end of that period.
Breach of Fair duty of presentation
In terms of what the insured ‘ought to know’ the Act talks about information that should have
been revealed by a ‘reasonable search’ of information available to the insured.
There is no longer just one remedy provided for the offended party. If the breach falls
into the category of deliberate or reckless, the insurer may avoid the contract and retain
the premium. If the breach was neither deliberate or reckless, the insurer may only avoid
the contract if they can show that they would not have written the contract had the full
information been given. However, they must return the premium.
If the insurer would have applied different terms and conditions then the remedy for the
breach is that the policy is now deemed to be rewritten from inception, including those new
terms. These terms might be an increase in the excess, or another exclusion, for example. If
claims have already been handled before the issue was discovered, then the insurer needs
to revisit those claims again and reconsider them under the revised policy terms. This might
result in a different outcome for those claims so will require careful consideration.
If the insurer would have applied the same terms and conditions but would have charged a
higher premium then the remedy is not that an additional premium should be charged but
that any claims are reduced by the same percentage as the premium was underpaid
Breach of Warranty
Rather than the insurer being automatically discharged from liability under the contract, the
contract is now suspended just for the period of the breach. If the insurer wants to rely on
the breach to refuse a claim, they will not be able to do so if the insured can show that the
breach did not increase the risk of the loss that actually occurred in the circumstances in
which it occurred.
Fraud
It is very difficult for an insurer to prove fraud and, within the claims context, is made more
complicated by an insured using what are known as ‘fraudulent devices’. This means that a
legitimate claim might be exaggerated by fraudulent means. If an insurer can prove fraud in
relation to a breach of the duty of fair presentation, it can not only be discharged from liability
but it may also keep the premium.
Why might a broker go to different insurers at renewal
While speaking to them and requesting a renewal quote is a matter of market courtesy, the
broker must try to obtain the best options for their client. For example, it is possible that the
market has changed over the last twelve months, with some new insurers becoming involved
in this class of business
Why might an existing insurer not want to quote for renewal?
The contract has been loss-making.
* They are exiting that class of business
Why might an insurer want to sign the same risk at renewal?
It costs less to renew business than to write it from scratch. This is because the risk
is already known to the insurer. Therefore, its analysis of the risk is likely to be less
time-consuming (and hence less costly) than if it had never seen the risk before.
* The more stable the portfolio of clients, the more reliable the statistical data.
FCA rules on renewal transparency for retail general insurances (2017)
Affects personal insurances: disclose last year’s premium on renewal notices (accounting for mid-term adjustments
where relevant);
* include text to encourage consumers to check their cover and shop around for the best
deal at each renewal; and
* identify consumers who have renewed with them four consecutive times, and give
these consumers an additional prescribed message encouraging them to shop around.
This was to increase competition
Days of Grace
‘Days of grace’ can best be described as a perceived ‘elastic’ end to the previous policy
which allows the insured some scope should they be late in renewing their insurance. Unless
the policies specifically make provision, then they do not exist. They are in fact an ‘urban
myth’ which can cause problems if a client is led to believe that they have them and they
think they can delay renewing a policy
When could a risk be written after inception
This might be because the placement process has been very drawn-out, or it could be that
the renewal process has not been quite as efficient as it might have been – perhaps because
the client has been slow in giving instructions.
Whatever the reason, the underwriter must be very careful in these cases, as of course they
do not want to pick up losses which might have already occurred by the time they confirm
their participation in the risk.
The broker has to show any claims which have happened in this time
