Definitions Flashcards
Compensatory in nature
The value placed on the loss is not determined in advance. Exceptions are personal accident and sickness policies.
Benefit policies
Policies for which there is no way of valuing the value of a loss so the principle of indemnity does not apply e.g. of sight or of life, so pre-agreed amounts are paid in the event of accident or sickness
Pure risk
Those where there is the possibility of a loss but not of gain, e.g. risk of fire, machine breakdown
Speculative risk
Risks are speculated with a view to making some kind of gain, e.g. investing in the stock market or starting a new business
Fundamental risk
Occur on such a vast scale that they are uninsurable. They arise from social, economic, political or natural causes and are widespread in their effect. It is often a lack of willingness or capacity on the part of insurers that causes such risks to be uninsurable.
Particular risk
Localised or even personal in their cause and effect, e.g. a factory fire, car collision, theft of personal possession
Fortuitous
The event insured must be accidental or unexpected and not inevitable, so far as the insured is concerned. Must not be deliberate on the part of the insured.
Insurable interest
The legally recognised financial relationship between the insured and the object or liability that is being insured
Objective risks
A sufficient number of exposures to similar risks, historical patterns and trends will enable an insurer to forecast the expected extent of future losses
The Law of Large Numbers
The greater the number of similar risks to insure, the closer the actual outcome will be to what was expected in terms of losses - allows the insurer to predict fairly confidently the final cost of claims in any one year
Peril
That which gives rise to a loss, e.g. fire, lightning
Hazard
That which influences the operation or effect of the peril
Physical hazard
Relates to the physical characteristics of the risk and includes any measurable dimension of the risk
Moral hazard
Arises from the attitude and behaviour of people - harder for the insurer to quantify, address and correct, so pose a bigger problem than physical hazards
Pooling
The losses of the few who suffer misfortune are met by the contributions of the many who are exposed to similar potential loss - insurers gather together relatively small premiums from people who want to be protected financially from similar kinds of perils
Discrimination factors
When deciding on an equitable premium, insurers take into account the different elements of risk brought into the pool by each of the insured, e.g. previous medical history and previous driving experience
Fire waste
The overall cost to the community of all damage by fire in a year
Premium reserve
There is a time delay between the receipt of premiums and the occurrence of claims, creating a premium reserve
Claims reserve
Once claims have occurred there is a further period (that can be very extensive for third-party claims involving personal injury or illness) before the claims are actually paid
Co-insurance
1) Risk sharing between insurers - agreeing the rating and terms to be applied and issuing a collective policy
2) Used in relation to the amount of a risk that the insured may retain where an insured is responsible for a large proportion of each loss - a small fixed sum called an excess, a large fixed sum called a deductible
Leading office
The first named insurer on the policy and carries the largest share of the risk, issues the documentation (and signing slips for other insurers to indicate confirmation to changes)
Dual insurance
Two or more policies in force which cover the same risk
Self-insurance
1) An individual or firm has decided not to use insurance as the risk transfer mechanism, but to carry the risk themselves by means of funding
2) Also used when referring to the part of a loss that the insured retains - called the retention
Pecuniary
Relating to money
Credit insurance
Covers businesses against the risk of non-payment by buyers
Guaranteed asset protection
Originally sold to cover the gap between the amount paid out by a motor insurance policy and the amount still to be repaid on the finance that was taken out to buy the vehicle
Aggregators
Comparison websites
Solvency margin
Difference between a company’s assets and liabilities
Proprietary company
Owned by shareholders who contribute to share capital of firm - profits therefore belong to shareholders
Limited liability companies - shareholders’ liability for the company debts is limited to the nominal value of the shares they own
Registered under the Companies Act 1985
Mutual company
Owned by the policyholders, who share in the profits of the company by way of lower premiums - theoretically they are liable for any losses made by the company but in reality they are limited by guarantee, with a policyholder’s maximum liability usually limited to their premium
Demutualisation
Where a mutual company becomes a proprietary company
Mutual indemnity associations
Self-managed pools of insurers owned by their policyholders - primarily active in marine insurance (P&I clubs)
Captive
Insurance company established by its parent company or group that provides insurance coverage primarily, if not solely, to that parent company - tax efficient method of transferring risk
Protected cell company (PCC)
Ring-fenced the assets of the participating cells and allowed them to operate as distinct insurance entities - operates in 2 parts with a core and unlimited number of cells
Societas Europea (SE)
A public EU company that can register in any Member State of the EU, and transfer to other member states without the necessity to liquidate the company, although they are subject to taxes and charges in states where their administrative centres are situated
Composite insurer
Accept several types of business (classes) and represent the major part of the company market
Specialist insurer
Tend to issue policies for only one class of business
Takaful
Means ‘guaranteeing each other’ - type of insurance with roots in Islamic financial services industry - works on principle that any transaction risk and profit (and loss bearing) should be shared between the participants
Gharar
Uncertainty - Islamic law forbids sales where there is an unreasonable risk to the buyer, insurance do not remove enough uncertainty
Maisir
Gambling - because some policyholders receive payouts whilst others do not
Riba
Interest - Islamic law forbids making money from money, e.g. through interest
Syndicate
Groups of private individuals or corporate members who actually carry the risks - each syndicate employs a managing agent, whose responsibility it is to appoint an underwriter who may accept risks on behalf of the syndicate
Managing agents
Companies specifically established to manage one or more syndicate on behalf of the members that will provide the capital
Dual regulation
Approved by the PRA to carry out PRA-regulated activities and any business conduct activities regulated by the FCA
Syndicate capacity
Members govern the amount of business that each syndicate can write each year by allocating capital support
Members agent
Advises their clients (corporate and individual members) on the advantages/disadvantages of investing in the Lloyds’ market, syndicate selection and performance, reserve requirements and compliance issues
Market Reform Contract (MRC)
Known as a slip - the means through which risks are placed in Lloyd’s
Xchanging
The organisation that carries out the preparing, checking and signing of the fully placed slip for Lloyd’s
Brokerage
Premium collected by the broker less the agreed commission
Name
Provide financial backing for Lloyd’s syndicates, historically they guaranteed their shares of losses up to the full extent of their own person fortune
Umbrella arrangement
A Lloyd’s broker would take responsibility for the business placed by the non-Lloyd’s broker
Contract certainty
(Previously known as London Market Principles) Achieved by the complete and final agreement of all terms (including signed down lines) between the insured and the insurer before inception
The market has decided that appropriate evidence of cover be issued within 30 days of inception for commercial risks and 7 days for non-commercial risks
Signed down lines
Refers to the practice of a broker placing more than 100% of a slip and then proportionately reducing Lloyd’s syndicate or insurer’s shares
Agent
In legal terms - one who is authorised by one party, termed the principal, to bring that principal into a contractual relationship with another, termed the third party
Exempt from FCA authorisation
Means the intermediary must adopt the status of an appointed representative (AR) or introducer appointed representative (IAR), or be a member of a professional body that has equivalent rules to those of the FCA, termed a designated professional body
Ancillary insurance intermediary (AII)
A person that distributes insurance on an ancillary purpose, and whose principal professional activity is not insurance distribution - this could include travel operators that sell travel insurance as part of their services, but not as a main part of their business
Authorised person
An individual or firm authorised by the FCA to engage in regulated activities
Authorised representative
May be an individual or company that is appointed by an authorised person (the principal) under the terms of a contract - may be acting for an insurer or an intermediary that is itself directly authorised by the PRA or FCA
Introducer appointed representative (IAR)
One whose scope of appointment by the authorised person/firm is limited to effecting introductions and distributing ‘non-real time financial promotions’ i.e. supplying such things as brochures and prop forms
Lloyd’s broker
Brokers must satisfy the Council of Lloyd’s as to their expertise, integrity and financial standing
Wholesale broker
The Lloyd’s broker that provides services for an intermediary that is not itself a Lloyd’s broker
Sub-broker/producing broker
An intermediary that is not itself a Lloyd’s broker but accesses the market by using the services of a Lloyd’s broker
Consolidators
Companies that are growing by the formal acquisition of others within the marketplace
Marketing mix
Making decisions on product, price, promotion and place
Direct marketing
Employees of the insurer sell the insurance products or direct mailing techniques and websites are used to promote sales
Indirect marketing
Intermediaries paid by the insurer to promote products on the insurer’s behalf, they act like insurers in binding cover, underwriting and pricing, appointing agents and handling claims
Managing general agent
Specialist type of intermediary who also has delegated authority to act for one or more insurers
Bancassurance
Describes the arrangement between a bank and an insurance company whereby insurance products are sold to the bank’s customers - generally through its bank branches
Aggregation
The term used for information retrieval for goods and services on the internet (comparison websites)
Facultative reinsurance
Arranging reinsurance on a single known risk
Treaty
Insurers arrange facilities to enable them to place a range of risks that fall within agreed criteria
Retroceeding/retrocession
Where a reinsurer transfers some of their risks to other reinsurers
Reinsured/cedant/ceding office
The insurer who buys the reinsurance cover
Reserving
Determining the realistic cost of a claim prior to payment
Loss adjuster
An expert in processing claims from start to finish and acts for the insurer - independent, professionally qualified people
Loss assessor
Expert in dealing with insurance claims and acts for the policyholder
Compliance officer
Ensure that their firm abides by the rules and regulations set down by the regulator
Internal auditor
Work within firms to monitor and evaluate how well risks are being managed, the business is being governed and internal processes are working
Untraced Drivers’ Agreement
Applies to the provision of compensation for personal injury or death, plus property damage (only in circumstances where the vehicle is identified but the driver cannot be traced)
Uninsured Drivers’ Agreement
Concerned with third-party personal injury or third-party property damage, when there is no motor insurance policy in force
Judicial precedent
Once a principle has been established, it is followed in other court cases where similar circumstances apply
Insurance contract
An agreement, enforceable by law, between the insurer and the insured
Conditional acceptance (+ give court case)
If new terms are introduced, the so-called acceptance becomes a new offer (a counter-offer), which is to be accepted or rejected by the person who made the original offer
Hyde vs. Wrench
Postal acceptance (+ give court case)
Where post is used, acceptance is complete at the point when the letter of acceptance is posted… this rule even applied if the letter is destroyed, is lost or delayed in the post and never reaches the offeror
Household Fire Insurance Co. vs Grant
Consideration
Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other
Money is the common form of consideration for one of the parties
Fulfilment
Total loss of subject matter, e.g. written-off car
Warranty
According to the Marine Insurance Act it is a term which must be exactly and literally complied with by the insured whether material to the risk or not
Agency by consent
Either by means of express or implied appointment: insurers will issue a TOBA to each agent stating the terms and conditions of the appointment
Agency by necessity
Where a person is entrusted with someone else’s goods and it becomes necessary to act in a certain way in order to preserve the property in an emergency
Agency by ratification
An agent acts without authority, but the principal accepts the act as having been done by the agent on their behalf; the principals agreement after the event is their ratification and they are bound by the contract to the third party
Undisclosed principle
In most situations it is clear that an agent is acting not on their own behalf, but on behalf of a principle. However, English law permits an agent to act for an undisclosed principle while seeming to act on their own behalf.
Actual authority
Actual authority may be express or implied
Express authority
Arises from the terms of an agency agreement, which may be oral or in writing, however it is unusual for this to be oral in an insurance context; all terms would be expressed in a TOBA
Implied authority
May be of 2 kinds; if the agent has to undertake a certain action in order to carry out express instructions, they will have implied authority to do so
Apparent (ostensible authority)
Since a third party is in no position to make any judgment about the extent of an agent’s authority, the situation is catered for in law by what is termed ‘apparent authority’; a binding contract will be created if the principal’s conduct indicates that the agent is acting on their behalf. However, if an agent has been validly appointed but has not been permitted to carry out certain tasks, the way the contract is determined as valid is whether the action carried out by the agent us if a kind that is usual in that trade or profession
Force majeure
Major things out of a party’s control
Assignment
The transfer of rights under the terms of a contract
Insurable interest
The legal right to insure arising out of a financial relationship recognised at law, between the insured and the subject-matter of insurance. It includes not only loss and damage but also potential liability.
Subject-matter of insurance
The item or event insured - any type of property or any event which may result in a loss of legal right or the creation of a legal liability, e.g. cars, houses, valuables
Subject-matter of the contract
The financial interest a person has in the subject-matter of the insurance, as defined in the case of Castellain vs. Preston
Insurers’ insurable interest
An insurers’ insurable interest is the financial interest in the original insurance that they hold, when they place reinsurance with another insurer/reinsurer
Anticipated insurable interest (+ court case)
The expectation of acquiring insurable interest at some point in the future (however certain) may not be enough to create insurable interest in general non-marine insurances
Lucena vs. Craufurd
Codifying act
Bringing together and updating all previous legislation on the subject
Creation of insurable interest by common law
We all owe duties to each other and have certain rights under common law; these give rise to insurable interest, i.e. ownership
Creation of insurable interest by contract
Situations in which we accept greater liabilities than those imposed by common law, and occur when we enter into a contract that gives us greater responsibilities, e.g. a landlord is normally liable for the maintenance of the property they own but may make the tenant liable under the terms of the lease
Creation of insurable interest by statute
There are a few statutes which impose a particular duty on, or grant some benefit to, certain groups of people, thus creating or modifying insurable interest. There are also statutes which restrict liability and therefore restrict insurable interest.
Statute
Act of Parliament
Contracts of utmost good faith
The insurer and the insured have a duty to deal honestly and openly during their contractual relationship, and must volunteer material information in all negotiations before the contract comes into effect
Utmost good faith (+ court case)
A positive duty to voluntarily disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not
Rozanes vs. Bowen
Duty of disclosure
Implicit in all insurance negotiations there is a duty to disclose material facts - particularly important at the proposal stage, before the contract comes into existence. At common law, once the policy is in force, the duty of disclosure is revived at each renewal date
Material fact
Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take this risk (Marine Insurance Act 1906)
The courts test whether a fact is material by looking at it from a prudent insurer’s point of view; they do not consider the insured’s point of view or that of the particular insurer involved
Material facts relate to either physical or moral hazard
Insured’s duty of disclosure (+ court case)
It is important that the insured makes full and complete disclosure of all the material facts relating to the contract if they wish to ensure that, in the event of a loss covered by the terms of the policy, their claim is paid
Carter vs. Boehm
The measure of what an insured ought to know
What should have been revealed by a reasonable search of information available to the insured
Estoppel
The legal term used for a bar or impediment that precludes a person from asserting a fact or a right; the insurer has to be very careful not to lead the insured into a false sense of security concerning the policy validity
Material representation deemed as ‘substantially correct’
If the prudent insurer would not consider the difference between what is represented and what is actually correct to be material
Concealment
Where a non-disclosure is fraudulent
Insurance: Conduct of Business Sourcebook (ICOBS)
The over-arching requirement is that insurers must not unreasonably reject a claim
Misrepresentation
A reinforcement of the fact that a proposer need only answer to the best of their knowledge or belief. However, where a proposer deliberately or recklessly answers wrongly, the insurer will be entitled to avoid the policy ab initio. The misrepresentation must concern a fact not an opinion, and must otherwise meet the conditions outlined relating to non-disclosure.
Qualifying misrepresentation
Either deliberate, careless or reckless
Qualifying breach
A breach that triggers a remedy
Reducing a claim proportionately
Premium actually charged/higher premium x 100
Proximate cause
Means the active, efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started and working actively from a new and independent source (Pawsey vs. Scottish Union and National)
The proximate cause of an occurrence is always the dominant cause and there is a direct link between it and the resulting loss; a single event is not always the direct cause of a loss: a loss sometimes occurs following a train of events
Leyland Shipping vs. Norwich Union Fire Insurance Society: ‘causation is not a chain but a net’
Insured perils
Those named in the policy as covered
Excepted or excluded perils
Those named in the policy as specifically not covered
Uninsured or unnamed perils
Those perils not mentioned at all in the policy
Indemnity (+ court case)
Financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred
Castellain vs. Preston
Reinstatement
The insurer agrees to restore a building (or piece of machinery) that has been damaged by an insured peril
Modifies the principle of indemnity
Valued policy
Insurable value agreed between the insurer and insured, common in marine insurances
Betterment
Making an allowance in an indemnity settlement for basic buildings cover for any improvements that may result from the repair or reconstruction, e.g. new plumbing or redecoration
Agreed value policies
Value of subject-matter is agreed at the start of the contract and the sum insured fixed accordingly – this value is reviewed at each renewal, therefore in the event of a claim the value need not be proven at the time of loss
First loss policies
The insured believes the full value of the insured property is not at risk of total loss, so requests that the sum insured is set less than full value
New for old cover
Usually applies to household contents policies, and commercial property risks insured on a reinstatement basis can be placed in same category. Represents an attempt to replace at current costs.
Inner limits or item limits
There are many policies which contain limits within the overall sum insured, the most common being a household contents policy. There is usually a single item limit (for gold, silver etc) of 5% of the sum insured, or an overall limit for such items of say, 1/3 of the total contents value.
Average condition
The insured is considered to be their own insurer for the amount they have chosen not to insured, if there is underinsurance at the time of any loss. It means even partial losses will be shared in proportion to the amount of underinsurance. Common in commercial fire and theft policies and in virtually all household policies. It cannot apply to liability insurance. The total sum insured is only payable when the insured suffers a total loss.
Sum insured/actual value of goods at risk x loss
Special condition of average
Applies to agricultural produce and livestock because their value may fluctuate significantly (e.g. agricultural produce around harvest time). The clause states that if the value at the time of loss represents at least 75% of the actual value, average will not be applied.
Two conditions of average
Designed to apply to contents or stock, the insurance of which is arranged on a floating basis (in more than one location), where specific insurance also applies. The effect of the wording is to first of all state that ‘average’ applies, but also states that if there is a more specific insurance for the items insured at any of the locations, only the excess value will be used to check whether average applies.
Deductible
Lack of consistency regarding the use of term, historically meant a large excess – remains one of its definitions. It is often linked to a risk management process and is a means of retaining risks up to a certain size within an organisation. When a deductible does represent a very large sum, for which the insured accepts responsibility under a material damage or business interruption policy, there tends to be a 72-hour time limit for the defining of ‘any one event’, which is important when considering weather-related claims that may occur over a period of time. Therefore the deductible only applies once in such circumstances.
Contribution
The right of an insurer to recover part of a claim payment where two or more policies cover the same interest, the same risk and are in force when the loss occurs. if there is no specific policy condition the insured is entitled to claim the whole amount from any of the insurers liable to pay - they will then leave that insurer to recover appropriate shares from the other insurers.
Rateable proportion or rateable share
The contribution condition of a policy restricts each insurer’s liability to their rateable proportion of a claim if an insured has two or more policies which cover the same interest
Contribution condition
Compels the insured to make a claim under each valid policy for the sum for which each insurer is liable, if they wish to receive a full settlement. The condition restricts each insurer’s liability to its rateable proportion.
Sum insured method of contribution
Apportions the rateable proportion in line with the sums insured under each policy
Policy sum insured/Total sum insured (all policies) x Loss
Independent liability method of contribution
Calculates the amount payable under each policy as if no other policy existed, and the loss is then shared in proportion to the independent liabilities of the 2 policies
Policy sum insured/Total value at risk x Loss
Non-contribution clause
Means the policy would not contribute if another insurance policy was in force. If both (or all) policies covering the same subject-matter have a non-contribution clause, they effectively cancel each other out and each insurer has to contribute its rateable proportion.
Subrogation (+ court case)
A common law right - the right of an insurer, following payment of a claim, to take over the insured’s rights to recover payment from a third party responsible for the loss. It is limited to the amount paid out under the policy. Insurers invariably include a policy condition which gives them the power to pursue subrogation rights before the claim is paid, the only limitation being that the insurer cannot recover from a third party before it has actually settled it own insured’s claim.
Rayner vs. Preston
Tort
Under common law, everyone has a duty to act in a reasonable way towards others – a breach of this duty is called tort. The person who has suffered damage or injury is entitled to compensation.
Subrogation rights under a contract
Under certain contracts a breach entitles the aggrieved party to compensation, regardless of fault. Insurers can assume the benefits of these rights. Many building projects are entered into under particular forms of contract that specify the legal, and insuring, responsibilities of the parties; principal, contractor and subcontractor.
Salvage
Market practice tends towards repairs of a subject-matter of insurance exceeding 60% of market value as being uneconomic for repair. When this happens there may be some residual value in the thing insured.
Market agreements for subrogation
Exist to reduce the correspondence and administrative costs involved in pursuing frequent subrogation procedures, e.g. the ABI Memorandum of Understanding for surrogated motor claims
Immobile property agreement
In the past some motor and property insurers operated the immobile property agreement which covered impact damage by motor vehicles. Whenever a vehicle collided with a building this agreement meant that insurer would contribute towards the loss in the proportions already agreed.
Litigious society
Tending or too ready to take legal action to settle disputes - the UK is following in the footsteps of the USA
Privity of contract
A person can only enforce a contract if they are a party to it, therefore even if a contract is made with the purpose of benefitting someone not a party to it, that third party has no right to sue for breach of contract
The PRA’s power of veto
Ensures that the regulatory regime can at certain times of stress prioritise financial stability over consumer protection, and can direct the FCA to refrain from particular action
Whistleblowing
The public allegation of a firm’s concealed misconduct, usually from within the same organisation
Protected disclosures
The PIDA lists a wide range of possible illegal or criminal activities that somebody could ‘whistleblow’ a company for
Enhanced capital requirement (+ how it is calculated)
Designed to minimise the risk of an insurance company having insufficient funds to meet present and future claims, consists of an asset-related and insurance-related requirement
1) An asset-related requirement: prescribed percentage determined by each type of admissible asset an insurer has (loans, shares)
2) Insurance-related requirement: prescribed percentage determined by each class of business and calculated separately for net written premiums (total debited premiums less reinsurance costs) and technical reserves (include elements such as current outstanding claims and unearned premium reserves)
Threshold Condition
Minimum requirements that firms must meet in order to be permitted to carry on regulated activities and to promote safety and soundness
3 aspects of the PRAs Risk Assessment Framework
- Potential impact on policyholders and the financial system of a firm failing
- How the macroeconomic and business risk context in which a firm operates might affect the viability of its business model
- Mitigating factors, including risk management, governance and financial position (e.g. solvency and resolvability)
PRA’s Proactive Intervention Framework
PRA’s judgement about a firms’ proximity to failure - every firm will sit in a particular stage at each point in time. PIF stages: External context, Business risk, Management and governance, Risk management and controls, Capital and liquidity
3 operational objectives of FCA
- Consumer protection
- Integrity
- (Effective) competition
FCA’s firm categorisation - fixed portfolio
Large insurers and insurance brokers subject to a programme of firm or group-specific supervision (pillar 1)
FCA’s firm categorisation - flexible portfolio
Smaller firms subject to event-driven reactive supervision and thematic issue or product supervision only (pillars 2/3)
3 elements of FCA’s risk framework
- Firm Systematic Framework (FSF) - designed to assess a firm’s conduct risk
- Event-driven work - supervisory activity in response to issues that are emerging or recent
- Issues and products - regularly conducts thematic reviews and provides detailed feedback on the outcome of such reviews
FCA’s product intervention powers
Only allowed to use its product intervention powers in relation to retail customers
3 new roles covered by the SMCR
1) Head of key business area
2) Group entity senior manager
3) Significant responsibility function
Controlled functions
1) Involve a significant influence on the conduct of an authorised person’s affairs
2) Involve dealing with customers in connection with regulated activities
3) Involve dealing with the property of customers in connection with regulated activities
Fit and proper test
Ensuring approved persons are honesty, competent and financially sound. Checks such as CCJs, credit enquiries and bankruptcy. Tests performed before a person is appointed to a controlled function role and on a regular ongoing basis.
Discipline and enforcement available to FCA
- Public censure - can be used instead of a financial penalty or in addition to
- Financial penalties
- Prosecution for criminal offences, e.g. carrying on a regulated activity without authorisation, providing false information to an auditor etc. Can issue a formal caution rather than prosecute but is not published.
- Civil and less formal remedies, e.g. withdrawal of approval
3 pillars of Solvency II
- Capital adequacy
- Systems of governance
- Supervisory reporting
Solvency capital requirement (SCR)
The level of capital required to give 99.5% confidence that assets will cover liabilities over following 12 months. Firms that fall below SCR will trigger ‘ladder of intervention’ – aims to recover a firms’ solvency position within a set period of time.
Minimum capital requirement (MCR)
The level of capital required to give the national supervisor 85% confidence that assets will cover liabilities over following 12 months. Firms that fall below MCR will have a shorter period of time to recover their position – ultimate supervisory action is closure.
3 methods of calculating a firm’s capital requirements
- Standard formula – categorises risks into risk modules for capital purposes, being market risk, credit risk, underwriting risk (life and non-life) and operational risk
- Undertaking specific parameters – a firm can change the parameters to ones appropriate to their business, but needs ultimate approval from the regulator
- Internal models – for complex firms a full or partial model allows a more bespoke assessment of a particular business and its risk profile, must obtain prior approval of their model from the PRA
Pillar 2 of solvency II (systems of governance)
The Own Risk and Solvency Assessment (ORSA) is a set of processes and procedures that are used to identify, assess, monitor, manage and report the short- and long-term risks a (re)insurance company faces. Also enables companies to determine the level of funds necessary to ensure that their solvency needs are met. Aims to assess continuously the overall solvency needs related to the specific risk profile of the insurance company capturing non-quantifiable risk where capital is not necessarily the best measure.
Pillar 3 of solvency II (supervisory reporting)
Gives information to the regulator and the market in the form of public and private reports (both qualitative and quantitative):
a) Solvency and Financial Condition Report (SFCR) – public
b) Regulator Supervisory Report (RSR) – private report between firm and national supervisor
Solvency and Financial Condition Report (SFCR)
A public report which gives information to the regulator
Regulator Supervisory Report (RSR)
A private report between firm and national supervisor, contains an additional level of detail and granularity over and above that required for the SFCR
4 aspects of Authorisation and Regulation of Insurers by the PRA
- Capital adequacy
- Monitoring
- Intervention
- Winding up
Retail Mediation Activities Return (RMAR)
For INTERMEDIARIES. Submitted via an online system called GABRIEL. Provides a framework for the collection of information required by the FCA and as a basis for its supervision activities. Firms are required to complete and submit a complaints return via an online form within 30 days of their accounting reference date and half year accounting reference date.
Sections: Accounting information (P&L, income of ARs and complaints), Regulatory capital, PI insurance (at least £1m), Threshold conditions, Training and competence, Conduct of business data (no. and monitoring of ARs), Product sales data (types and volumes of policies), Calculation of fees
Insurance: Conduct of Business Sourcebook (ICOBS)
A rulebook that applies specifically to the sales and administration process for general insurance. More stringent rules apply to PPI, GAP and certain pure protection (life) policies. Applies to intermediaries, those effecting/carrying out insurance contracts, managing agents of Lloyd’s, those communicating or approving financial promotions (however if an insurer is dealing directly with the customer the rules also apply to them). 8 chapters:
Initial Disclosure Document
Firm can use an Initial Disclosure Document to inform customer who regulates them, what service they can expect, fees, complaints, FSCS etc. The customer is entitled to know which insurers the intermediary has approached and must be given this info if they ask for it.
3 aims of IDD
1) Make it easier for firms to trade across borders
2) Strengthen policyholder protection
3) Provide a level playing field
Key provisions of IDD
1) Professionalism - staff must complete at least 15hrs of training per year
2) Commission disclosure - type of remuneration required to be disclosed; for contracts involving large risks or for professional customers this would be waived
3) Harmonisation - allows Member States to set stricter requirements (‘gold plate’) if they deem necessary
4) New product governance requirements
5) Ancillary insurance intermediaries – new category
3 general principles of IDD
1) Distributors must act honestly, fairly professionally
2) Distributors must communicate clearly
3) Remuneration of a distributor must not conflict with the duty to act in a customer’s best interests
3 stages of money laundering
- Placement – process of putting cash into the financial system and converting it into other financial assets (e.g. cheques, property)
- Layering – to conceal the origins of the money they will create a series of complex transactions (e.g. transferring funds overseas or trading in stocks)
- Integration – where the criminal gets access to the money and gives the impression that it is something legitimate (e.g. buying property and leasing it)
3 principle offences under the Criminal Justice Act 1993
- Assistance to a criminal where you know, suspect or ought to have suspected that money laundering was taking place (14 years)
- Failing to report either knowledge or suspicion of the money laundering (5 years)
- Tipping off (5 years)
MLRO
A money laundering reporting officer (MLRO) is an individual appointed by a firm in accordance with the Systems and Controls Sourcebook (SYSC) in FCA Handbook to have responsibility for oversight of the firm’s compliance with the FCA’s rules on systems and controls against money laundering.
Requirements of an MLRO
1) Takes responsibility and acts as the focal point for all the firm’s anti-money laundering activities
2) They are expected to be based in the UK
3) Required to have a certain level of authority and independence within the firm
4) Required to have sufficient resources to enable them to fulfil responsibilities
5) The MLRO reports suspicious transactions to the NCA
Money laundering rules applicable to general insurers
General insurers and intermediaries are subject to the high-level rules, and in particular SYSC which contains specific requirements regarding anti-money laundering measures. Their employees are also subject individually to the terms of CJA and POCA. Therefore, although general insurers and intermediaries are not directly impacted by the Money Laundering Regulations, there are specific money laundering rules that apply to them. Firms must follow guidance issued by the JMLSG (Joint Money Laundering Steering Group) in relation to client identification and verification, and appropriate systems and controlled.
Information Commissioner
Regulates and enforces data protection laws
‘Transparent’ term in Consumer Rights Act 2015
Expressed in plain and intelligible language and (in the case of a written term) is legible
‘Prominent’ term in Consumer Rights Act 2015
If it it brought to the consumer’s attention in such a way that an average consumer would be aware of the term - define as a consumer who is reasonably well-informed, observant and circumspect
Grey list
The Consumer Rights Act 2015 clarifies the role of, and extends the list of, terms that may be regarded as unfair
Ethical standards
Concerned with the way in which a moral outcome can be achieved in given circumstances, concerned with behaviour and conduct
Code of conduct
All professional bodies will produce a code of conduct to which their members must adhere; it does not have the force of law and, although there may be penalties for failure to comply, a breach does not provide any automatic grounds for criminal prosecution
Professional competence
Where examination success and membership of a professional body (behaviour and values) meet
Competence
Having the skills, knowledge and expertise needed to discharge the responsibilities of the employee’s role
FCA’s 3 key areas of training and competence
- Assessing competence
- Maintaining competence
- Record-keeping
List of eligible complainants
- Consumer
- Micro-enterprise with fewer than 10 employees and a turnover or balance sheet total of no more than €2m
- Charity with an annual income of less than £6.5m
- Trustee of a trust with a net asset value of less than £5m
- Consumer buy-to-let (CBTL) consumer
- Small business with an annual turnover of less than £6.5m and fewer than 50 employees or a balance sheet total of less than £5m
- Guarantor
The amount of compensation a policyholder can receive under the FSCS
- Protection is 100% for: Compulsory insurance, Professional indemnity, Long-term insurance (pensions and life), Certain claims for injury, sickness or infirmity of the policyholder
- Protection is 90% of the claim with no upper limit for other types of policy, including general insurance advice and arranging
Net written premiums
Total debited premiums less reinsurance costs
Technical reserves
Includes elements such as current outstanding claims and unearned premium reserves
Limited liability companies
Shareholders’ liability for the company debts is limited to the nominal value of the shares they own
Legislative reform order
Permit changes to primary legislation where the legislation itself did not anticipate future changes by means, e.g. statutory instruments
London Market main providers
Insurance and reinsurance companies (many members of the IUA), Lloyd’s syndicates, Lloyd’s service companies and P&I clubs (marine liability)
Designated professional body
A professional body that has equivalent rules to those of the FCA
Independent intermediary
Main distinguishing feature is that they act on behalf of the client when placing business not on behalf of the insurer introducing the business
Delegated authority
Often called binders, the most common way is the issuing of a motor cover note book
Personal Effects Contribution Agreement (PECA)
Where there is an overlap between travel, all risks, household and the personal effects section of a motor policy, the agreement states that insurers will not insist that the insured claims a proportion from each insurer where the sum insured is modest, regardless of what the policy conditions actually say
Home sales agent
Tend to sell industrial life insurance - direct form of marketing
FCA’s PROD4 rules
Cover the development, distribution and life cycle of new products as a result of the Insurance Distribution Directive
