Module 8: Intermediation

Question 1

What is a broker?

Answer 1

An Intermediary who stands between the supplier of a service

(in this case, the Lloyd’s syndicate or the insurance company)

and the individual or business that wishes to acquire the service

(the client or proposer, who will become the insured or reinsured).

Question 2

What are the three basic functions of a broker?

Answer 2

1. Acting as an intermediary between prospective (re)insureds and (re)insurers.
2. Being a professional adviser on insurance matters.
3. Representing prospective (re)insureds’ interests.

Question 3

What is a single tied agent?

Answer 3

An intermediary who can only offer the products of one insurer.

Question 4

What is a multi-tied agent?

Answer 4

An intermediary who can offer products from a number of insurers, but only one product from each.

For example, car insurance from one, home contents from another.

Question 5

What is an insurance broker?

Answer 5

A totally independent intermediary who can advise his client on the full range of products in the market.

Question 6

What is market security?

Answer 6

A collective term encompassing consideration of an insurer’s financial strength and claims paying ability.

Question 7

How does a broker assess market security?

Answer 7

Many broking firms have their own internal security panels which use their intelligence sources to evaluate an insurer’s financial position, including knowledge of market conditions.

In addition to this, market research sources such as A.M. Best, Standard and Poor’s are used.

Question 8

What is the BIPAR?

Answer 8

The European Federation of insurance Intermediaries.

It is a non-profit European organisation grouping professional associations of insurance intermediaries and independent financial advisors in Europe.

Question 9

What is BIPAR Principle 1?

Answer 9

“The intermediary shall, based on information provided specify the demands and needs of the client as well as the underlying reasons for any advice.”

So the broker should always reflect back to the client to ensure that they have understood the client’s requirements accurately.

Question 10

What is BIPAR Principle 2?

Answer 10

“Before placing a risk, an intermediary will review and advise a client on market structures available to meet its needs

• and, in particular, the relative merits of a single insurer or a multiple insurer placement.”

So the broker will always advise the client whether placing the risk with one insurer or on a subscription basis is better.

Question 11

What is BIPAR Principle 3?

Answer 11

”- If the client, on advice of the intermediary, instructs the latter to place the risk with multiple insurers,

• the intermediary will review, explain the relative merits and advise the client on a range of options for multiple insurer placement.
• Intermediaries will expect insurers to give careful, independent consideration to the option request.”

There are two main options here - lead and followers having the same terms and conditions (including premium); or lead and followers having completely independent premiums but usually similar terms.

Question 12

What is BIPAR Principle 4?

Answer 12

”- In the case of a placement of a risk with a lead insurer and following insurers on the same terms and conditions,

• the previously agreed premiums of the lead insurer and any following insurers will not be aligned upwards,
• should an additional follower require a higher premium to complete the risk placement.
• The intermediary should not accept any condition whereby an insurer seeks to reserve to itself the right to increase the premium charged in such circumstances.”

Question 13

What is BIPAR Principle 5?

Answer 13

“During the placement of the risk, the intermediary will keep the client informed of progress.”

Question 14

Outline the business flow for brokers.

Answer 14

1. Disclosure
2. Fact-finding
3. Marketing the risk
4. Issuing the quotes
5. Firm order
6. Cover confirmed
7. Issue of documentation
8. Premium handling
9. Claims handling
10. Endorsements to the risk

Question 15

What does signing down mean?

Answer 15

If the total lines ir share that each insurer has agreed to total more than 100% then each line or share will be reduced on a pro-rata basis to make the total add up to 100%.

For example: a broker places a slip where the insurers original written lines add up to 125%. If an insurer originally indicated he would write a share of 5%, after signing down his share will be:
5 x 100/125 = 4%.

Question 16

What is TORT law?

Answer 16

The branch of the law which deals with matter that are referred to the civil courts rather than the criminal courts.

Question 17

In what situations might the broker fail their relationship with the client due to failing in their duty of care?

Answer 17

1. Failure to obtain any, or proper, insurance.
2. Failure to arrange insurance with properly authorised/regulated insurers.
3. Failure to clarify/confirm ambiguous/incomplete client instructions.
4. Failure to disclose material facts to underwriters.
5. Failure to keep the insured advised of relevant developments relating to the insurance including confirming that cover has been effected, explaining any subjectivities or warranties.
6. Failure to act with reasonable speed.

Question 18

What are Terms of Business Agreement’s (TOBA)?

Answer 18

A business to business agreement which sets out the way in which the broker operates, what services it provides and how it is remunerated.

Question 19

What are the two types of TOBA?

Answer 19

1. Risk transfer TOBA - this allows full risk transfer and co-mingling of funds in accordance with the FSA Client Assets Sourcebook (CASS) rules.
2. A non-risk transfer TOBA - this type of TOBA is where insurers may not be entirely comfortable with the credentials of their intermediaries but still wish to trade with them. In this case there will be no risk transfer or co-mingling of funds permitted.

Question 20

What did the Lloyd’s Act 1982 state?

Answer 20

That business can only be underwritten at Lloyd’s when it is placed by a broker.

Question 21

What basic standards must brokers meet in order to agree TOBA’s with managing agents?

Answer 21

1. Being approved by an appropriate regulatory body - (FSA, in the UK. Foreign brokers need to be approved by the regulator in its own country.)
2. Meeting Lloyd’s specific E&O insurance requirements - These relate directly to the net retained brokerage - i.e. how much the broker gets paid. For the largest firm, E&O cover of at least £30 million is required.
3. Having arrangements for protecting insurance/client monies, as per the FSA requirements or other equivalent requirements in other countries.
4. Being able to handle and process the business placed in accordance with relevant London Market standards and practices.

This means that for subscription market business, the broker must be able to demonstrate that it can properly operate the necessary accounting and settlement and claims advice and settlement processes to transact business at Lloyd’s.

Question 22

What are appointed representatives (ARs)?

Answer 22

These are intermediaries that act as agents for insurers and also brokers. They are not independent agents and, therefore operate, in effect, as controlled agents of their principals. These principals are responsible at law for the advice given by an appointed representative.

Question 23

What are introducer appointed representatives (IARs)?

Answer 23

Introducers of business that are (a) operating in the UK and (b) deal with UK clients only. Their role is simply to act as initial contact point between the client and the IAR’s principal. IARs may not provide any advice, but may be remunerated for the act of introdudction.

Question 24

What is an intermediary?

Answer 24

Any natural or legal person who, for remuneration, takes up or pursues insurance (or reinsurance) mediation.

Question 25

What is insurance mediation?

Answer 25

• Introducing, proposing, or carrying out other work preparatory to the conclusion of contracts of insurance,
• or of concluding such contracts,
• or of assisting in the administration and performance of such contract, in particular in the event of a claim.

Question 26

What is the aim of the Insurance Mediation Directive (IMD)?

Answer 26

“to guarantee that all persons (natural or legal) taking up and pursuing the activity of insurance or reinsurance mediation have been registered on the basis of a minimum set of professional requirements.”

Question 27

What two authorities will the FSA be replaced by in the near future?

Answer 27

1. The Financial Conduct Authority on the one hand, will be the regulator for the brokers,
2. The Prudential Regulator Authority on the other hand, will be the regulator for insurers (including Lloyd’s).

Question 28

When did the insurance mediation directive come into force?

Answer 28

January 2005.

Question 29

What is the essential element of the Insurance Mediation Directive?

Answer 29

That all national governments within the EU are required to implement a national system of authorisation and registration for all intermediaries which meets the core expectation of the Directive, and is backed up by a system of sanctions for those who transgress the rules.

Question 30

What are the four preconditions set out by the IMD in the field of professional requirements, which any broker must meet before it can be authorised?

Answer 30

1. Possession of appropriated professional knowledge and ability.
2. No criminal record or previous bankruptcy.
3. Adequate professional indemnity insurance (or a similar financial guarantee).
4. Adequate “financial capacity”.

Question 31

Why is an intermediary required under the Financial Services Authority’s (FSA) rules to maintain trust accounts for client monies?

Answer 31

Client monies need to be protected in the event of the insolvency of the intermediary.

Question 32

What are the two types of trust account?

Answer 32

1. Non-statutory trusts - these allow the intermediary to hold any relevant client money (commercial and consumer) provided that they have the necessary systems and controls to manage it

Intermediaries wishing to segregate consumer client money in this type of trust will also need to hold a minimum of £50,000 regulatory capital.

2. Statutory trusts - these are default trusts for intermediaries who are unable to meet the requirements of a non-statutory trust.

Question 33

In what situations may the requirement for client money to be placed in a trust account be waived?

Answer 33

Where a scenario known as risk transfer operates.

This means that an insurer treats premiums received by an intermediary, who sells their insurance, as having been received by themselves (i.e. the insurer), with a contract to support this arrangement.

Firms must retain copies of any agreements for at least six years from the date the agreement is terminated.

Question 34

What is consumer insurance?

Answer 34

A product bought by a customer for purposes outside his trade, business or profession.

Typically, it includes personal motor, household, travel and life insurance products.

Question 35

What is a commercial insurance customer?

Answer 35

The FSA defines and rules, a buyer of direct insurance who is not a consumer is a commercial customer.

Question 36

In a consumer insurance policy, what is a “cooling off” period?

Answer 36

The right to return the policy within a short timeframe, such as 30 days, if a product has been purchased in error or on the basis of a misunderstanding.

Question 37

What are the three main objectives of the Financial Conduct Authority?

Answer 37

1. Securing an appropriated degree of protection for consumers.
2. Protecting and enhancing the integrity of the UK financial system.
3. Promoting efficiency and choice in the market.

The new Financial Conduct authority will have sole responsibility for regulating the brokers.