Module 8: Intermediation Flashcards
What is a broker?
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).
What are the three basic functions of a broker?
- Acting as an intermediary between prospective (re)insureds and (re)insurers.
- Being a professional adviser on insurance matters.
- Representing prospective (re)insureds’ interests.
What is a single tied agent?
An intermediary who can only offer the products of one insurer.
What is a multi-tied agent?
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.
What is an insurance broker?
A totally independent intermediary who can advise his client on the full range of products in the market.
What is market security?
A collective term encompassing consideration of an insurer’s financial strength and claims paying ability.
How does a broker assess market security?
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.
What is the BIPAR?
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.
What is BIPAR Principle 1?
“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.
What is BIPAR Principle 2?
“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.
What is BIPAR Principle 3?
”- 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.
What is BIPAR Principle 4?
”- 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.”
What is BIPAR Principle 5?
“During the placement of the risk, the intermediary will keep the client informed of progress.”
Outline the business flow for brokers.
- Disclosure
- Fact-finding
- Marketing the risk
- Issuing the quotes
- Firm order
- Cover confirmed
- Issue of documentation
- Premium handling
- Claims handling
- Endorsements to the risk
What does signing down mean?
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%.
What is TORT law?
The branch of the law which deals with matter that are referred to the civil courts rather than the criminal courts.
In what situations might the broker fail their relationship with the client due to failing in their duty of care?
- Failure to obtain any, or proper, insurance.
- Failure to arrange insurance with properly authorised/regulated insurers.
- Failure to clarify/confirm ambiguous/incomplete client instructions.
- Failure to disclose material facts to underwriters.
- 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.
- Failure to act with reasonable speed.
What are Terms of Business Agreement’s (TOBA)?
A business to business agreement which sets out the way in which the broker operates, what services it provides and how it is remunerated.
What are the two types of TOBA?
- Risk transfer TOBA - this allows full risk transfer and co-mingling of funds in accordance with the FSA Client Assets Sourcebook (CASS) rules.
- 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.
What did the Lloyd’s Act 1982 state?
That business can only be underwritten at Lloyd’s when it is placed by a broker.
What basic standards must brokers meet in order to agree TOBA’s with managing agents?
- Being approved by an appropriate regulatory body - (FSA, in the UK. Foreign brokers need to be approved by the regulator in its own country.)
- 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.
- Having arrangements for protecting insurance/client monies, as per the FSA requirements or other equivalent requirements in other countries.
- 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.
What are appointed representatives (ARs)?
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.
What are introducer appointed representatives (IARs)?
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.
What is an intermediary?
Any natural or legal person who, for remuneration, takes up or pursues insurance (or reinsurance) mediation.
