C1 - Overview

Question 1

What is a binding authority

Answer 1

The contract under which delegated authority is given to a third party

Question 2

What is a Bordereau

Answer 2

Report provided by the coverholder-MGA or TPA of the risks written and claims reported, normally provided monthly in a one line per risk or claim format

Question 3

What is bulking/non-bulking

Answer 3

The way that the individual risks accepted under a line slip are advised to the insurers and the premium paid.

Bulking = risks are aggregated together
Non-Bulking = presented individually

Question 4

What is a consortium

Answer 4

A delegated authority where the authority is given to one of the insurers involved and which is set up by the insurers, NOT using a broker

Question 5

What is a Coverholder-MGA

Answer 5

Terms are used interchangeably.

This can be an independent organisation, such as a broker, or another company within the same group as the insurer, however, this party will never be to the contracts of insurance.

All MGAs are coverholders, but not all coverholders operate as MGAs.

Question 6

What is a DCA

Answer 6

A delegated claims administrator

An entity involved in claims handling for insurers/CHs/MGAs. This term includes traditional TPAs and other claims related services (medical assistance companies etc.)

Question 7

What is a lineslip

Answer 7

A group of insurers brought together by a broker as a pre-determined source of capacity. A traditional lineslip would delegate underwriting to the lead UW. Today, it’s likely that insurers agree their own share of any risk being declared to a lineslip.

Question 8

What is a managing agent

Answer 8

Organisation that manages a Lloyd’s syndicate. Completely different to a Managing General Agent (MGA).

Question 9

What is a managing general agent

Answer 9

An organisation that underwrites risks for its principals (the insurers). MGAs are not brokers but they can operate on a retail basis, offering products directly to consumers, or on a wholesale basis, distributing products through brokers.

These entities will never be a party to the contracts of insurance.

Question 10

What is a service company

Answer 10

A coverholder-MGA which is part of the same group of companies as the insurer delegating the authority.

Question 11

What is a TPA

Answer 11

A third party administrator.

An entity involved in claims handling for insurers and CHs/MGAs.

Question 12

what is a binder

Answer 12

A term used interchangeably with delegated authority.

Question 13

What types of business can a binding authority be used in and when is it most appropriate

Answer 13

Any type, including reinsurance.

More often it is used to access business which is higher volume/lower value in nature. As it is not economically viable to write on an individual open market basis.

Question 14

What is one of the key benefits of using a binding authority.

Answer 14

The reputation and business contacts of an MGA in a retail marketplace to attract business.

Question 15

What is the benefit to a broker of a lineslip agreement

Answer 15

1. Pre-agreed capacity - they are able to tell their clients that they have interested insurers able to support their business.
2. Flexibility - can place the business 100% to a lineslip (if the lineslip offers the appropriate security for the risk) or combine various lineslips to complete the placement.
3. Lineslip leader - only has to visit one or 2 UWs and all the remaining insurers would be advised of the risks bound on their behalf.

Question 16

Can lineslips also be non-delegated

Answer 16

Yes, participants can choose to agree their own participation to any one risk. However, although more time consuming for broker, they still benefit from pre-determined group of capacity.

Question 17

How can authority be limited under a lineslip.

Answer 17

1. Factual terms - certain risk characteristics can be limited.
2. Financial terms - size of risk or limit deployed can also be limited.

Question 18

What is the term used for a risk that is accepted onto a lineslip.

Answer 18

A ‘declaration’ onto the lineslip

Question 19

What are the 2 types of lineslip used in the LM

Answer 19

1. Bulking - premium is aggregated for presentation and settlement to underwriters
2. Non-bulking - each individual declaration has to be presented separately

Question 20

What are the benefits of using lineslips to:
1. The broker
2. The insurers
3. The leader

Answer 20

1. The broker has a more efficient way of accessing a large amount of market without having to go and see each insurer.
2. Some insurers are not involved in agreeing risks and obtain shares without having to visit a broker.
3. The leader has the opportunity to sometimes build in commissions (typically a profit commission), if the lineslip makes money.

Question 21

How to lineslips vary from binding authorities

Answer 21

Lineslips are more commonly used for larger commercial type risks such as professional indemnity, as well as, smaller risks such as cargo and personal effects.

Question 22

What is a Consortium/Consortia

Answer 22

Very similar to a lineslip but where a broker is not involved in setting it up. Most often are set up to take advantage of specialist knowledge present in one insurer who becomes the consortium leader.

Question 23

Benefits of a consortia to all parties

Answer 23

1. Leader can put down a far larger line on behalf of the consortium.
2. If business is profitable, then agreements typically have a profit commission payable to the leader as well as general leader fees
3. Broker has to see fewer insurers
4. Consortium followers obtain the benefit of the leaders knowledge
5. All consortium members benefit from accessing business they would not otherwise see, particularly due to the larger lines they are able to deploy.

Question 24

What is a Group/Affinity programme

Answer 24

An entity offers add-ons to their core products to try and maximise their value to the customer.

There is additional oversight/regulatory requirements to ensure that customers are receiving benefits that they are actually able to claim on.

Question 25

What are some typical benefits available with a bank account

Answer 25

1. Worldwide travel insurance (for eligible customers aged U70) 2. 24-hour roadside breakdown assistance 3. Mobile phone insurance (up to £300) 4. Commission free currency and traveller’s cheques for telephone orders.

Question 26

What are the 4 new outcomes relating to the FCA’s new Consumer Duty

Answer 26

1. Products and Services 2. Price and Value 3. Consumer understanding 4. Consumer support

Question 27

What are master policies

Answer 27

Similar to group/affinity programmes, however these individuals are not parties to the contract of insurance and merely benefit from the insurance. E.g. employers buying a group or master health programme. As opposed to an insurer offering add-one to a customer already buying a primary insurance product.

Question 28

Are master policies delegated underwriting

Answer 28

No - there’s no decision making authority delegated. More so a benefit of the identified group as there’s no assessment of any individual risk.

Question 29

What activities can be delegated

Answer 29

1. Underwriting - although binding authorities/lineslips can be on a prior submit basis as well as a pre-agreed rates basis. 2. Document issuance and management - Policy documentation should be issued to the client to evidence their insurance. Typically it is the CH/MGAs responsibility to issue documents with any wordings. 3. Claims - CHs/MGAs, Loss adjusters or TPAs can be given authority to settle claims. Typically a limited authority based on financial and factual limits. For larger claims the insurers are notified promptly, for regular presentation of claims this is attached to the monthly bordereaux. Loss funds are often used to settle claims in a timely manner. 4. Subrogation/recoveries - this responsibility should be considered by the same party who has claims control. Insurers should make it clear which party is to manage this element of the claim.

Question 30

Regardless of their authority, what is central to any CH/MGAs role

Answer 30

Comprehensive reporting - insurers must be provided with details of all risks bound and their premiums on a regular basis as well as paying premiums to the insurer within strict timeframes.

Question 31

How is premium typically paid under a lineslip/consortium

Answer 31

The broker will normally pay each insurer separately rather than paying the leader and relying on them to pass funds

Question 32

What are the two types of contract involved in delegated underwriting

Answer 32

1. Contract of delegation - between insurer and whoever has been given authority 2. Contract of insurance - issued to the insured between them and the insurer (CH/MGAs are NOT a party to this contract)

Question 33

Why might delegated underwriting contracts involve a broker or chain of brokers

Answer 33

1. It’s market practice to use a broker 2. The MGA may not be familiar with the security options available to it and uses a broker to present its potential business opportunities to a number of different insurers as if it were placing a risk.

Question 34

Are brokers present after the binders have been placed

Answer 34

Sometimes, the CH/MGAs may continue to use a broker as the conduit for bdx reporting. Alternatively, it is open for the parties to decide if the broker is no longer necessary and deal directly with the insurers.

Question 35

Are TPAs parties to the delegated underwriting contract

Answer 35

No, there will be a separate agreement. If it is a CH who holds claims handling authority then there should be internal operational procedures to ensure that conflicts of interest are managed and recognised. Although they can never be removed completely.

Question 36

What are the benefits to insurers of a delegated underwriting contract of any type

Answer 36

1. Accessing business held by regional brokers. 2. More cost effective underwriting process. 3. Lower operating costs per risk (excluding the commission paid to the CH-MGA) 4. Accessing knowledge, experience and reputation of others. 5. A more cost effective way of trying out new areas of business before employing a new set of UWs 6. Localised speedy claims handling for improved customer service.

Question 37

What are the risks to an insurer of a delegated underwriting contract of any type

Answer 37

1. Mismanagement of funds (both premium and claims) due to intermingling of funds belonging to different insurers. 2. Being more costly due to operational oversight required. 3. Premiums not being accounted for and paid regularly and accurately. 4. Regulatory issues because of local taxes or other requirements. 5. Impact of poor claims service from a brand and regulatory standpoint. 6. Anti-selection where the CH/MGAs has a number of binders onto which to place risks. 7. Failure to report adequately. 8. Unauthorised sub-delegation of authority. 9. Risks being written outside of an insurers appetite, particularly in relation to ESG.

Question 38

What are the benefits to a CH/MGAs of delegated underwriting contracts of any type

Answer 38

1. Access to high-quality markets 2. Reputation benefit through association with those markets 3. Full autonomy to run the book of business (subject to the extent of authority given)

Question 39

What are the risks to a CH/MGAs of delegated underwriting contracts of any type

Answer 39

1. Dependency on the insurer which exposes the CH/MGAs should that insurer put the business into run-off. 2. Losing business because it goes straight to the insurer as open market business or authority is given to another party, such as a broker. 3. Need to be aware of regulatory requirements if they have the obligation to identify and pay local taxes and charges.

Question 40

What are the risks to a Lineslip/consortium leader of delegated underwriting contracts of any type

Answer 40

1. Obligation to ensure information is available to other insurers involved. 2. Need to be aware of regulatory requirements if they pay local taxes/charges. 3. Dependency on other insurers in the same way an MGA does.

Question 41

What are the benefits to a CH/MGAs of delegated underwriting contracts of any type

Answer 41

1. Ability to place larger lines 2. Potential to earn commissions 3. Full autonomy to run the book of business, subject to authority given.

Question 42

What are the risks to a policyholder of delegated underwriting contracts of any type

Answer 42

1. Potentially not knowing their actual insurer if MGA goes out of business.

Question 43

What are the benefits to a policyholder of delegated underwriting contracts of any type

Answer 43

1. Blend of local, focused service and high-quality security.

Question 44

What are the risks to a broker of delegated underwriting contracts of any type

Answer 44

1. Dependency on a CH for business. 2. If broker holds authority, Lloyd’s has to approve senior manager to operate delegated authorities. 3. If broker holds authority, local taxes and other charges have to be accounted for. 4. Holding delegated authority is not more cost effective for certain business than placing direct into an insurer. 5. Service standards need to be maintained with more authority which requires hiring more people. 6. Overall employee costs due to increased activities such as underwriting, reporting and document issuance. 7. Losing the relationship as a broker with insurers not involved in the delegated authority arrangement. 8. Increase chance of E&O exposure and therefore insurance cost as running delegated arrangements are risky.

Question 45

The Oxford Dictionary defines branding and brand as:

Answer 45

“The promotion of a particular product or company by means of advertising and distinctive design” “A particular identity or image regarded as an asset”

Question 46

What challenge does delegated authority present w.r.t brand image

Answer 46

As brand and identity are not immediately visible to the client, the potential insured does not know from whom they are buying insurance from, meaning one of the basic elements of a contract - the meeting of minds - is not in place. Therefore insurers need to ensure their identity is obvious to potential customers.

Question 47

What do insurers do to mitigate bad claims experiences under a delegated contract

Answer 47

They limit the TPAs ability to make ‘contentious claims’ decisions, such as denials which can often lead to complaints.

Question 48

What is an early warning sign to an insurer that a third party may negatively impact their reputation

Answer 48

The receipt of and analysis of appropriate and accurate management information. This is because there is typically a 60 day delay between reporting and contract formation. This means that problems are only spotted after some time.

Question 49

When does a conflict of interest arise

Answer 49

Where a party has obligations to more than one principal, whose interests may not always be aligned with each other

Question 50

What is the most obvious potential for conflict of interest in delegated authority

Answer 50

Where a broker is delegated both claims and underwriting authority.

Question 51

What are the 4 potential areas of conflict for a broker

Answer 51

1. Are they able to make financial gain or avoid a loss at the expense of their client. 2. Do they have financial incentive to favour one group of clients over another. 3. Do they have more than one client with claims arising out of the same incident. 4. Do they have an interest of outcome due to the service they provide such as commissions.

Question 52

What are the brokers/CHs responsibilities when they hold a binder

Answer 52

They must treat each insurer fairly and act in the insureds best interest. They should ensure that prices are competitive and they are placing business in the right binder and not cramming as much business inside one, just to make a profit. The brokers responsibilities are the same under each binder so favouring one over another is a disservice to certain insurers.