Chapter 1 - Market reforms and commercial (re)insurance contract wordings Flashcards
(226 cards)
1
Q
Referring to the slip as an aid of construction of the wording should run counter to one of the objects of replacing the slip with the policy: namely that the wording is designed specifically to reflect the agreement between the parties more clearly. This has been tested by which case law:
A
Youell v. Bland Welch (1992) - The slip was held to be inadmissable
2
Q
Which case law held that a ‘slip policy’ was intended to be the contract of insurance and that a clause included in the slip policy, but not in the subsequent wording, formed a part of the contract?
A
HIH Casualty and General Insurance Ltd v. New Hampshire Insurance Co. (2001)
3
Q
Which three issues with slips led to the introduction of the MRC?
A
- Subjectivities imposed by an insurer which did not clearly define when they had to be met
- Conditions noted on a slip against an insurer’s written line and whether these were to apply to the insurer’s participation or to all the other insurers on the slip; and
- Changes that could be agreed by the leading insurer on behalf of other insurers
4
Q
In the UK, the non-subscription market is considered to comprise membership of…
A
- Association of British Insurers (ABI); and
2. British Insurance Brokers’ Association (BIBA)
5
Q
What problem did the UK non-subscription market have?
A
Insurers often failed to maintain appropriate ‘version control’ over their wordings
6
Q
What 4 other markets in the insurance industry have helped developed how insurance is bought and sold?
A
- Direct Insurance
- Bancassurers
- Supermarkets and high street retailers
- Online comparison sites (aggregators)
7
Q
When continental and overseas markets use MRCs it is likely….
A
…they are subscribing to a risk that is led by a London Market insurer and are signing the MRC for their participating in the risk
8
Q
A binder used by overseas and continental markets is…
A
…effectively a one or two page quotation setting out details of the risk, sum insured and any specific conditions and limitations to be noted
9
Q
If the terms and conditions of a binder quotation are acceptable to the client …
A
…the broker will instruct the insurer to issue a final binding agreement
10
Q
In 1999, which three parties agreed to work together to propose reforms to the traditional London Market business processes?
A
- International Underwriting Association of London (IUA)
- London Market Brokers’ Committee (LMBC - now LIBA)
- Lloyd’s
11
Q
In 2000, the London Market Principles (LMP) programme included which three things?
A
- The reform of placing of insurance and reinsurance business through the introduction of a new slip format
- A new Leading Underwriters Agreement
- The principle of contract certainty
12
Q
From 1st April 2013, the FSA became….
A
The Financial Conduct Authority and the Prudential Regulatory Authority
13
Q
3 key drivers for change in the UK (re)insurance market include:
A
- Loss of reputation - poor record in policy issuance
- Legal costs - formal disputes over policy wordings were expensive for both sides
- Other costs:
- Tangible - wasted management time associated with managing legal disputes and costs of correcting errors
- Intangible - Destruction of relationships from higher acquisition costs
14
Q
The London Market Group (LMG) issued what in a response to the FSA’s challenge in 2005….
A
…The Code of Practice (October 2005)
This was updated to the Contract Certainty Code of Practice - Principles & Guidance (October 2012)
15
Q
Contract Certainty Code of Practice - Principles & Guidance (October 2012) is…
A
…a common approach for the whole UK insurance industry.
It is stated to apply to general insurance contracts either entered into by a UK regulated insurer, or arranged through a UK regulated broker (slip and non-slip business).
Its status remains as industry guidance and it is not intended to be binding on any party.
16
Q
Contract certainty is….
A
…achieved by the complete and final agreement of all terms between the insured and the insurer by the time that they enter into the contract, with contract documentation provided promptly thereafter.
17
Q
Contract Certainty Principle A - When entering into the contract is….
A
….The insurer and broker (where applicable) must ensure that all terms are clear and unambiguous by the time the offer is made to enter the contract or the offer is accepted. All terms must be clearly expressed, including any conditions or subjectivities.
18
Q
Contract Certainty Principle B - After entering into the contract is….
A
Contract documentation must be provided to the Insured promptly
19
Q
Contract Certainty Principle C - After entering into the contract is
A
The insurers and brokers (where applicable) must be able to demonstrate their achievement of principles A and B
20
Q
Contract Certainty Principle D - In respect of contract changes is
A
Contract changes need to be certain and documented promptly.
21
Q
Where there Is more than one participating insurer:
Contract Certainty Principle E - When entering Into the contract is
A
The contract must include an agreed basis on which each insurer’s final participation will be determined. The practice of post-Inception over-placing compromises Contract Certainty and must be avoided.
22
Q
Where there Is more than one participating insurer:
Contract Certainty Principle F - After entering Into the contract is
A
After entering Into the contract:
The final participation must be provided to each Insurer promptly.
23
Q
Where there Is more than one participating insurer:
Contract Certainty Principle G - Where the contract has not met the principles is
A
The Insurer and broker (where applicable) have a responsibility to resolve exceptions to any of the above principles as soon as practicable and without undue delay.
24
Q
The three Appendices to the Contract Certainty principles contain guidance regarding…
A
…subjectivities and signing provisions, and a checklist
25
What 4 things should a subjectivity set out?
1. the condition/action that needs to occur, by whom and to what standard;
2. the applicable timescale, if any, within which the condition is to be met;
3. the terms which are to apply until the condition Is met; and
4. any consequences which follow if the condition is not met.
26
What does Appendix 2 of the Code provide?
A sample checklist designed to help assess contracts against Principle A: All terms and conditions are clearly and unambiguously expressed.
27
Appendix 2 of the Code encourages organisations to..
...develop their own versions tailored to their particular businesses.
The list may also serve as a reminder as to the content of particular contracts. For example, has a law and jurisdiction clause or a several liability clause been included? Is the contract compliant with any regulatory requirements?
28
What does a several liability clause provide?
That a subscribing insurer's obligations under the contract are several, not joint, and are limited solely to the extent of their individual subscription.
In other words, they do not extend to a co-subscriber's subscription if, for any reason, that co-subscriber does not satisfy all or part of their obligation.
29
Appendix 3 of the Code sets out...
Signing Provisions
30
A carrier's participation should be clearly determined as required by which principle...
Principle E (For subscription contracts, signing provisions are recommended.
31
Written lines are typically,,
to stand or un-annoated
32
Written lines that may be subject to change in the event of over-placement of the contract by the broker are...
...un-annoted
33
What type of model provision is this:
In the event that the written lines hereon exceed 100% of the order. any lines written 'lo stand' will be allocated In full and all other lines will be signed down In equal proportions so that the aggregate signed lines are equal to 100% of the order without further agreement of any of the Insurers.
However:
a. In the event that the placement of the order Is not completed by the commencement date of tho period of Insurance then all lines written by that date will be signed in full;
b. the Insured may elect for the disproportionate signing of Insurers' lines, without further specific agreement of Insurers, providing that any such variation Is made prior to the commencement date of the period of Insurance, and that lines written 'to stand' may not be varied without the documented agreement of those Insurers.
c. The signed lines resulting from the application of the above provisions can be varied, before or after the commencement date of the period of Insurance, by the documented agreement of the Insured and all Insurers whose lines are to be varied. The variation of the contracts will take effect only when all such Insurers have agreed, with the resulting variation In signed lines commencing from the date set out In that agreement.
With Disproportionate signing
34
What type of model provision is this:
In the event that the written lines hereon exceed 100% of the order. any lines written 'lo stand' will be allocated In full and all other lines will be signed down In equal proportions so that the aggregate signed lines are equal to 100% of the order without further agreement of any of the Insurers.
However:
a. In the event that the placement of the order Is not completed by the commencement date of tho period of Insurance then all lines written by that date will be signed in full;
b. The signed lines resulting from the application of the above provisions can be varied, before or after the commencement date of the period of Insurance, by the documented agreement of the Insured and all Insurers whose lines are to be varied. The variation of the contracts will take effect only when all such Insurers have agreed, with the resulting variation In signed lines commencing from the date set out In that agreement.
Without Disproportionate signing
35
In the model provision that allows disproportionate signing, signed lines for each contract are set out at what point?
at the conclusion of the placement or, if later, the commencement date of the period of (re)insurance. Any subsequent variation must be agreed between the (re)insured and all of those (re)insurers whose lines are to be varied.
36
If lines totalling 120% are written with 40% of those lines 'to stand' on a contract which Includes a Disproportionate Signing provision, how should the lnsured's broker must sign down the lines?
The lines totalling 80% not written to 'to stand', to 60%.
It remains free to choose whether to sign all of those lines down by a quarter (that is, proportionately), or to do so disproportionately according to whatever criteria suits.
37
Are contract certainty and contract clarity the same?
No
38
Whilst the objective of (the code of practice of) contract certainty is to provide clarity for both customer and (re)insurer 011 the terms and conditions prior to inception, it is often taken to mean...
...contract evidence. In other words, the customer and (re)lnsurer have agreed a full written contract at inception, and no more.
39
t is not necessarily the case that, at inception, each party's intention mirrors that of the other, and that that agreed intention has been reduced to writing in clear and unambiguous terms to achieve...
...contract clarity
40
There will be evidence of the contract in the form of...
...an agreed wording.
41
To deal with inconsistencies with non-standard slips, what was introduced in 2002?
a standardized LMP slip
42
The LMP slip was mandated by..... or business incepting from......and recommended by ....... to .......
he LMP slip was mandated by the Franchise Board at Lloyd's for business incepting from the 2 January 2004, and recommended by the IUA and the LMBC to its members.
43
One of the key provisions of the LMP slip was that...
the fully claused wording must be attached to the slip or all clauses fully referenced.
44
What replaced the LMP April 2005 slip and what subsequently replaced that?
In June 2006, the Market Reform Slip (MRS) and was in turn replaced by the MRC.
45
When did the MRC standard become mandatory for open market business f
1 November 2007
46
What are three main forms of Market Reform Contract:
* open market;
* binding authority; and
* lineslips.
47
In support of each form of Market Reform Contract is
n MRC standard for documenting and agreeing contract changes (that Is, the Market Reform Contract Endorsement or MRCE). Additionally, their content Is compatible with ACORD standards.
48
What does ACORD stand for:
ACORD (Association for Cooperative Operations Research and Development) is the global standards-setting body for the insurance and related financial services industries
49
What 4 things should an Open Market MRC be used for:
* all firm quote and firm order open market insurance and reinsurance business placed by London Market brokers;
* all marine open cargo covers and the declarations attaching to them (marine open cargo covers are defined as those risks where the insured has, or is expected to acquire, an insurable interest in each declaration bound);
* declarations or off-slips attaching to line-slips where the use of MRC (Lineslip Declarations) is not appropriate; and
* declarations off limited binding authority agreements, where appropriate.
50
```
General guidance as to the use of the Open Market MRC includes:
Currency
Acronyms
Contract terms
Reference to
Subjectivities
Contract Provisions
```
* The currency of any monetary amounts should be identified by the relevant three-letter ISO currency code - for example, GBP for British pounds sterling and USO for United States dollars - rather than symbols such as£ or$.
* Acronyms - for example, TBA (to be agreed/advised?) - or any other terms which are ambiguous or non-specific should not be used.
* All contract terms should be clearly stated and any standard registered wordings or clauses should be referenced or attached. All bespoke and non-standard wordings and clauses must be attached in full.
* The contract should make reference to the need to attach any notice required by local laws to a contract after it has been agreed by the insurer and before It is provided to the insured (for example, US surplus lines brokers must attach notices in state-prescribed forms to surplus lines contracts).
* Any outstanding subjectivities stated in the contract must be expressed as unambiguous conditions and, as we discussed in section A4C, must specify the responsibilities and timescales for resolution and the consequences of failure to do so.
* Standard contract provisions must be relevant to the risk or the administration of that risk.
51
Open Market MRC is in how many sections?
```
6:
Risk details
Information
Security details
Subscription agreement
Fiscal and Regulatory
Broker remuneration and deductions
```
52
What section of the OM MRC sets out the details of the risk/contract involved, such as insured, type, coverage,
conditions etc.
Risk Details
53
What 12 headings are mandatory on an OM MRC:
```
UMR
Type
Period
Interest
Limit of Liability
Situation
Conditions
Choice of Law and Jurisdiction
Premium
Premium payment terms
Taxes payable by the insured and administered by the insurer
Insurer contract documentation
```
54
OM MRC: Situation includes...
Situation, territorial limits or scope, trading warranties or location
55
OM MRC: Conditions includes...
The full wording (Including all clauses and any amendments, qualifications, variation or similar) should be entered or referenced here. Further, the contract document must
reference or attach in full all wordings and clauses. If referenced, they must be readily available to the broker and all carriers.
56
OM MRC: Taxes payable by the insured and administered by the insurer
includes...
Here, 'payable by' refers to the party bearing the economic cost of the tax, and
'administered by' to the party responsible for settling the tax with the relevant authority. Examples Include: insurance premium taxes and stamp duties
57
OM MRC: Insurer contract documentation includes...
Either a copy of the contract document or an Insurance policy for open market risks
58
What section of the OM MRC would Include descriptions of the business activities, turnover details of a particular insured, and claims history.
Information
59
What is required to establish the individual (several), not joint, liability of each insurer or syndicate member if there is more than one subscriber to the risk, or the insurer is a Lloyd's syndicate?
a several liability clause
60
What has been agreed for use on open market risks and, according to the standard, should be reproduced in full, not referenced where there is more than one subscriber to the risk?
Several Liability and Attestation clause (LMA 3333)
61
Where would a several liability clause be found in an Open Market MRC?
security details
62
What clause is this:
The liability of a (re)lnsurer under this contract Is several and not Joint with other (re)lnsurers party to this contract. A (re)lnsurer Is liable only for the proportion of llablllty it has underwritten. A (re)lnsurer Is not jointly liable for the proportion of liablllty underwritten by any other (re)insurer. Nor Is a (re)insurer otherwise responsible for any liability of any other (re)lnsurer that may underwrite this contract.
The proportion of liablllty under this contract underwritten by a (re)lnsurer (or. In the case of a Lloyd's syndicate, the total of the proportions underwritten by all the members of the syndicate taken together) Is shown next to Its stamp. This Is subject always to the provision concerning "signing" below.
In the case of a Lloyd's syndicate, each member of the syndicate (rather than the syndicate itself) Is a (re)insurer. Each member has underwrillen a proportion of the total shown for the syndicate (that total itself being the total of the proportions underwritten by all the members of the syndicate taken together). The liability of each member of the syndicate Is several and not joint with other members. A member Is liable only for that member's proportion. A member Is not Jointly liable for any other member's proportion. Nor Is any member otherwise responsible for any liability of any other (re)lnsurer that may underwrite this contract. The business address of each member Is Lloyd's, One Lime Street, London EC3M 7HA. The Identity of each member of a Lloyd's syndicate and their respective proportion may be obtained by writing to Market Services, Lloyd's, at the above address.
Proportion of liability
Unless there Is "signing" (see below), the proportion of liability under this contract underwrillen by each (re)lnsurer (or, In the case of a Lloyd's syndicate, the total of the proportions underwritten by all the members of the syndicate taken together) Is shown next to Its stamp and Is referred to as Its "written line•.
Where this contract permits, written lines, or certain written lines, may be adjusted ("signed"). In t11at case a schedule Is to be appended to this contract to show the definitive proportion of liability under this contract underwritten by each (re)lnsurer (or, In the case of a Lloyd's syndicate, the total of the proportions underwritten by all the members of the syndicate taken together). A definitive proportion (or, In the case ol a Lloyd's syndicate, the total of the proportions underwritten by all the members of a Lloyd's syndicate taken together) Is referred to as a
"signed line". The signed lines shown In the schedule will prevail over the written lines unless a proven error In calculation has occurred.
Although reference Is made at various points in this clause to "this contract• In the singular, where the circumstances so require this should be read as a reference to contracts In the plural.
(Re)insurers liability clause (LMA 3333)
| (Re)insurer's liability several not joint
63
What section of the Open Market MRC details the order (if known prior to placement), the basis of the written and the signed lines, and the signing provisions
Security Details
64
It is recommended that, if the order is not known, written lines are expressed as...
percentages of the monetary limit (for example, 25°/o of US$1 million) whether they are to be expressed as a percentage of the whole or of order.
65
Typically, written lines are expressed as
percentages of whole, order, or of part (that Is, where the orders are rnonetaiy amounts).
66
There Is no need to reference the basis of the signed lines unless It differs from that of the written lines. This is most likely to be relevant for....
...quota share or excess of loss treaty reinsurance.
67
At the end of the Security Details section, under the heading 'Written Lines', each (re)insurer places its stamp to Identify:
* the particular company or entity (re)insuring, and to which an underwriting reference is usually annotated; and
* Its written line to identify the proportion of the risk it Is prepared to underwrite.
68
Who should clearly identify all underlying insurers and their respective proportions under Security Details:
Consortia and Agencies
69
Where is this text found and what does it do:
In a co-insurance placement, following (re)insurers may, but are not obliged to, follow the premium charged by the slip leader.
(Re)insurers may not seek to guarantee for themselves terms as favourable as those which others subsequently achieve during the placement.
Security details under the heading 'Written Lines'
It enables a single MRC to handle placements with multiple insurers on different terms.
70
The final part of Security details section has three tables which detail....
* Unacceptable line conditions, for example, 'wording to be agreed' for the obvious reason that wordings should be agreed before an insurer commits to the contract;
* Unnecessary line. conditions, as provision is made for them elsewhere In the contract. For example, 'SDD 14/11/05' intended to indicate the expected premium payment date because It should appear under the Settlement Due Date heading in the Subscription Agreement Section, and 'Excluding Hull War' because such a condition should be articulated in the Risk Details section.
Acceptable lines conditions - 'line to stand' and 'excluding Letters of Credit and Outstanding Claims Advances (and/or for incurred but not reported losses'. The latter condition is peculiar to reinsurance business.
71
How do you Imagine the guidance under Security details would classily a line condition stating:
'Warranted premium payable within 60 days of inception'?
Unnecessary line. condition - This is a premium payment term that should be under the premium payment terms heading section in the risk details section
72
What section in the Open Market MRC documents all of the inter and intra-market arrangements that will operate between the subscribers to the risk?
Subscription Agreement.
These are in relation to the agreement of contract changes, claims, the collection of expert fees, the payment of premiums and the use of third party service providers.
73
Here, any applicable market agreements for the agreement of contract changes and claims, must be referenced, and the relevant agreement parties identified. Equally, those (re)insurers agreeing for their proportion only should also be stated.
Subscription Agreement
74
Contract changes are typically the subject of
a General Underwriters Agreement (GUA).
75
Claims will be the subject of a..... if there are any subscribing Lloyd's syndicates, or the ....., if there are any subscribing bureau company underwriters.
Lloyd's Claims Scheme and IUA claims agreement practices
76
Is the SDD a policy condition such as a premium payment warranty or condition?
No it is a term of trade, an accommodation to the broker
77
Under subscription agreements periods of credit for subsequent premium instalments and adjustments must also be stated and are usually
120 days
78
Two mandatory fields under subscription agreement are ...
dealing with the payment of premiums (bureaux arrangements) and claims
(claims administration).
79
What section in the Open Market MRC deals with fiscal and regulatory Issues specific to the parties.
Fiscal and regulatory
80
The fiscal and regulatory section in the open Market MRC identifies:
any taxes or charges which are payable by the insurer (for example, income taxes, parafiscal levies, withholding taxes and other taxes such as fire brigade taxes).
the country in which the policyholder is resident, if a private individual, or has its main operating address, if a corporate body.
81
Any taxes payable by the insured should be included in what section in the open Market MRC
the risk details section
82
Two Mandatory headings under Fiscal and Regulatory are:
Overseas Broker and Regulatory Client Classification.
There are also various disclosures to be made if the business originates from, or involves, the USA.
83
The Fiscal and Regulatory section should state what in relation to Lloyd's placements...
the risk code and the split of premium for each for signing purposes.
84
The 5 options under Regulatory Client Classification in Fiscal and Regulatory are:
```
Consumer
Commercial Customer
Large Risk
Group Risks
Reinsurance
```
85
Consumers include:
Either
(1) private individuals,
(2) small businesses, commonly referred to as microenterprises,
(3) other small non-business organisations, or
(4) any other entity that would be considered a consumer by the relevant regulatory authority In the local territory.
86
Commercial customers include:
A customer who Is not a consumer. This classification must not be used If the contract Insures a 'large risk'.
87
Large Risks include:
A contract insuring:
• Railway rolling stock, aircraft, ships, goods In transit, aircraft liability or liability of ships
• Certain credit or suretyship risk; and
• Land vehicles (other than railway rolling stock), fire and natural forces, other than damage to property, motor vehicle liability, general liability and miscellaneous financial loss, insofar as the policyholder exceeds at least two of the following criteria:
- balance sheet total euros 6.2 million;
- net turnover euros 12.8 million; and
- average number of employees during the financial year of 250.
88
Group risks include:
A group policy sold to a customer (consumer, commercial or large risk) for the benefit of policyholders in relation to their common employment, occupation or activity.
89
What section of the open market MRC contains information relating to brokerage, fees and other deduc1ions from the premium.
Broker remuneration and deductions
90
Brokers are 'strongly encouraged' to disclose what in the Broker remuneration and deductions section?
whether or not a fee Is payable by its client.
91
II is a requirement to state what in the Broker remuneration and deductions section?
if there are any other deductions from the premium (for example, administration fees, sundry payments etc.).
92
One of the key drivers for the Introduction of the MRC was
that it enabled the 'slip' to be used as the final contract documentation for the client in many cases (and, in theory, avoided the need for a cover note).
93
When providing contract documentation to a client, it should be noted that the standard requires that the following sections must always be retained in full:
* Risk details;
* Information; and
* Security details.
A schedule of signed lines may be added but, if there are any changes to those sections, the document becomes a Broker Insurance Document (BID). A BID may be used to confirm cover to the insurer but should not be referred to in the MRC or represented as authorised by insurers.
94
A binding authority is....
... a means by which an insurer (or group of insurers) enables a third party, typically known as a coverholder, to underwrite, issue contract wording documentation and/or settle claims on Its behalf.
95
The current MRC standard for binding authority contracts became mandatory for all such contracts incepting
on or after t March 2012
96
How many sections are in the MRC for binding authorities
Seven
97
The Risk Details section of the Open Market MRC is replaced by the equivalent information in the MRC for binding authorities under the headings:
* Schedule; and
| * Non-schedule agreements.
98
In the Schedule section of the MRC for binding authorities, the details (or variables) of the binding authority contract are provided in the form of ...
....a schedule using headings which match the specific wording being used.
99
In the Non-Schedule section of the MRC for binding authorities, it details...
... any additional contractual information to be declared to the coverholder.
100
Two differences in the sections of the Open Market MRC to the MRC for binding authorities include:
* there is no requirement of several liability language as it should already be included in the binding authority wording; and
* GUA are not used on binding authorities.
101
A lineslip allows
a broker to access a particular group of insurers. These insurers have delegated authority to another insurer to accept on their behalf business that has been Introduced by that broker.
102
A standard for the MRC for lineslips use was first mandated by...... with effect from....
Lloyd's Franchise Board and 1 October 2005
103
A Market Reform Lineslip was introduced in.... and was replaced by.... in.....
A Market Reform Lineslip was introduced in October 2006, which was aligned with the Contract Certainty Code of Practice guidance that existed at that time.
This has been replaced with effect from 1 July 2008 with the MRC standard for lineslips, bringing the standard into line with the changes affected in the Open Market MRC.
104
The MRC for lineslips has how many sections?
Six:
```
Contract Details
Security Details
Subscription Agreement
Information
Fiscal and Regulatory
Broker Remuneration and deductions
```
105
Actual risks on a lineslip are placed on...
off-slips, which are subject to the Open Market MRC provisions.
106
The main section defining the characteristics of the business which may or may not be accepted under the lineslip is found in...
the contract details section
107
As with binding authorities, there is no requirement for .... language, and there is a prohibition on .....on lineslips or on declarations off a lineslip.
several liability language and the use of GUAs
108
How has the Market Reform Contract made It easier for Insurers (and relnsurers} to assess the contracts offered to them, and subsequent processes more efficient?
By standardizing the layout, and by prescribing the context of each section, in each of its forms
109
The MRC for endorsements standard uses the following 5 headings:
* Risk and endorsement identification details;
* Contract changes;
* Information (where required);
* Agreement; and
* Contract administration and advisory (where required
110
In the MRC for endorsements it is mandatory for what in these sections:
* Risk and endorsement identification details;
* Contract changes;
* Agreement;
* Risk and endorsement identification details - to include the risk's UMR and the unique endorsement reference
* Contract changes - the effective date of each change should also be stated.
* Agreement - the parties required to agree the changes are defined and their formal agreement recorded.
111
The London Market Group is made up of senior representatives of each of the four market constituencies:
* company market insurers;
* Lloyd's managing agents;
* brokers; and
* the Corporation of Lloyd's.
112
The London Market Group remit includes which 6 things:
* setting, maintaining and promoting the common vision of London as the market of choice for global insurance;
* identifying and/or initiating and/ or approving and sponsoring commonly agreed projects that will build towards this vision;
* determining the relative priority of projects within the overall modernisation programme;
* commissioning commonly agreed market bodies to take primary responsibility for delivering those projects and to ensure they are appropriately resourced and financed;
* tracking and reporting on progress of those projects;
* leading the communication of the modernisation agenda.
113
A key role of the LMG is to act as a focal point for
setting the direction of modernisation projects
114
A programme of modernisation has been underway since 1999 and its achievements which 5 things:
* the adoption of contract certainty and the standard slip;
* the delivery of the Insurers' Market Repository (IMR);
* the adoption of the electronic claim file (ECF);
* the removal of paper from the accounting and settlement process; and
* the introduction of electronic support for placing and endorsements.
115
Who reports into the LMG?
LMA Board
LIIBA Board
IUA Board
Franchise Board/Council
116
Volume 1 of the LMG set out
the main drivers and justifications for modernisation
117
In October 2013, the LMG published
Volume 2 of its Future Process Review Report, setting out a detailed statement of what it is currently looking to achieve.
118
the LMG Future Process Review Report proposed the following 5 key principles for this modernisation programme:
* to deliver better service to the insured;
* to reduce the cost of doing business;
* brokers lo deal with London in the same way as other markets;
* data to service a risk to be delivered to the insurer by the time a risk is bound;
* markets need infrastructure and a world class process.
119
In 2015, the LMG's main focus was...
on designing the future operating model for the London Market, and beginning that journey with the publication of the detailed business requirements for the Target Operating Model, the creation of a governance structure to manage the programme, and the validation of its costs and benefits.
Other key and related work streams have included building a new software platform for the Insurers' Market Repository (IMR), and developing an electronic placing platform.
120
The LMG Secretariat (LMGS) is...
the key body involved in the co-ordination and reporting of progress.
121
The role of the LMG Secretariat (LMGS) is to support the LMG. by..
* keeping track of all reform activity;
* monitoring progress against the direction that the market has set; and
* making information available to firms.
122
The LMGS is supported by....
....Lloyd's, the IUA, LIIBA and the LMA.
123
Lloyd's may be said to have two distinct parts:
* the market made up of independent underwriting businesses; and
* the Corporation of Lloyd's which, broadly speaking, oversees and supports that market, ensuring that it operates efficiently and retains its reputation as the global market of choice for specialist insurance and reinsurance risk.
124
The Corporation of Lloyd's is able to...
regulate, to a large extent, the activities of businesses within its marketplace, as well as providing the infrastructure in which they operate.
It took lead responsibility for co-ordinating the implementation of the electronic claims file and the accounting and settlement document repository.
Together these make up the Insurers' Market Repository (IMR) enabling syndicates to view all the information and documentation submitted by brokers in a secure database.
125
Lloyd's Market Association (LMA)....
provides professional and technical support for the Lloyd's underwriting and claims community and represents their interests. It was formed in 2001 by the merger of the five associations that had separately served the interests of the various market sectors.
126
The Lloyd's Market Association's (LMA) purpose is to ...
identify and resolve issues which are of particular interest to this community. In addition, working in partnership with Lloyd's and other trade associations, its purpose is to influence the course of future market initiatives.
127
Who are actively involved in the Association's work by providing members to serve on the board, committees or panels.
All Lloyd's Managing Agents and Members' Agents
128
Certain members of the LMA continue, for example, to ...
develop and revise policy wordings or clauses for adoption by the LMA and publication on the Lloyd's Wordings Repository.
129
The Lloyd's Wording Repository is...
an electronic database of wordings developed by the LMA with ISO, a leading source of information about risk and a provider of wordings in the USA. The Repository is arguably the most comprehensive, single source of vetted wordings and clauses available in the London Market. It provides access to established model wordings and clauses in current use in all lines of business, against which MRCs can be referenced.
130
Membership of what brings with it access to the Lloyd's Wordings Repository (LWR)
The LMA
131
the Lloyd's Wordings Repository (LWR) took the place of
the old Market Wordings Database (MWD)
132
the Lloyd's Wordings Repository (LWR) is actively managed by
the LMA - which retains responsibility for the vetting of wordings and the loading and review of wordings in the
'core' section of the Repository.
133
the Lloyd's Wordings Repository (LWR) includes wordings developed by:
- the LMA
- other industry organizations,
- individual managing agents (within their own sponsored sections),
- other insurers and brokers
Additional information, such as associated technical and news bulletins, is stored with the wordings, making them more user-friendly. Members may also subscribe to receive instant email alerts when new content is added.
134
the Lloyd's Wordings Repository (LWR) provides access to...
ISO wordings and a link to the Brokers and Reinsurance Markets Association (BRMA) website. Based in the USA, ISO is a market leader in the development of standard policy forms and programmes. The BRMA is a networking forum for property and casualty treaty reinsurance professionals.
135
The LMA Academy aims to...
aise the profile of education in the Lloyd's Market through a series of technical training programmes that support LMA members' learning and career development. It focuses on key areas of insurance from foundation to advanced levels.
136
The LMA legal and compliance team does what 5 things:
* monitors legal and regulatory developments in the UK and overseas relating to the Lloyd's Market;
* looks at issues faced by those responsible for compliance in LMA member firms;
* reviews specific matters of concern to Lloyd's managing and members' agents;
* supports other LMA teams and committees in the legal and compliance aspects of their work, in particular the LMA Regulatory Committee and Lawyers' Forum; and
* co-ordinates responses of LMA members to proposals by governments and regulators, where appropriate, and generally enhances communications between LMA members, Lloyd's Corporation and other supervisory and market bodies.
137
Three recent key issues for the LMA legal and compliance team include:
* Brexit;
* UK law reform and the effects of the Insurance Act 2015 and Enterprise Act 2016; and
* sanctions.
138
The LMA publishes a series of documents aimed at providing guidance on specific topical issues affecting contract wordings such as:
* Insurance Act 2015 guidance and model clauses;
* consumer wordings guidance; and
* LMA consumer cancellation guidance.
139
The IUA was formed at the end of 1998 from the merger of...
the London International Insurance Reinsurance Market Association (LIRMA) and the Institute of London Underwriters (ILU), bringing together the representative bodies for the marine and non-marine sectors of the London company
(re)insurance market.
140
What is considered to be the world's largest representative organisation for international and wholesale insurance and reinsurance companies.
International Underwriting Association of London {IUA)
141
International Underwriting Association of London {IUA) exists to...
promote and enhance the business environment for its member companies which operate in or through London.
In recent years, the IUA has provided support for the market and clients with Informative publications on topical issues such as financial loss insurance and environmental insurance.
142
3 Key priorities of the IUA are:
* improve process efficiency and business attraction to London by promoting the design and implementation of all aspects of market modernisation;
* promote expertise and innovation in underwriting and claims by maintaining a full secretariat to support the work of the numerous underwriting and claims committees; and
* influence public policy and compliance by monitoring and responding as necessary to regulatory developments, recognising that insurance and reinsurance regulation is being strengthened locally and converging globally.
143
Unlike Lloyd's, the IUA cannot ...
mandate to its members.
144
The IUA has its own dedicated database of London Market insurance and reinsurance clauses that can be used by brokers and insurers when preparing contract wordings and is grouped into three main business classes:
aviation, marine and property/casualty. It also includes updates of relevant legal developments. Access is not limited to members.
145
Who meets regularly to discuss issues raised by the underwriting committees.
IUA Clauses Sub-Committee
It also considers modifications to existing clauses and the development of new ones.
146
The London and International Insurance Brokers' Association (LIIBA) is ...
a trade association representing the interests of insurance and reinsurance brokers operating in the London and international markets. It took on the role performed by the London Market Insurance Brokers' Committee (LMBC) and before that by the Lloyd's Insurance Brokers' Association (LIBA), founded in 1910.
147
Who's mission is to ensure that London remains the market in which the world wants to do business
The London and International Insurance Brokers' Association (LIIBA) - by continuing the transformation of market processes and maintaining the highest professional standards
148
The London and International Insurance Brokers' Association (LIIBA) 3 key priorities are:
* to represent members' interests to government, the FC, the EU and international bodies to establish a proportionate regulatory framework;
* to modernise the London Market's business processes to be competitive and efficient, delivering improved client service; and
* to support members with regard to legislative and technical changes.
149
Instead of maintaining a permanent wordings committee, LIIBA...
lends its expertise and contributes to the development of market wordings and clauses on an ad hoc basis.
150
Xchanging is...
a business processing, technology and procurement firm, providing a variety of services to insurance and reinsurance markets worldwide.
151
Xchanging services include:
- claims handling,
- claims and premium processing,
- policy administration.
- the Model Wordings Library (MWL).
152
The Model Wordings Library is
an electronic database of approved wordings, clauses and associated documentation, which can be used in the preparation of contract wordings. Subscribers gain access to an extensive library of over 16,000 items in English and a number of other European languages. In addition they receive a monthly newsletter, providing information on new (public) content. The library also holds a substantial quantity of privately registered wordings.
Additionally, the MWL administers the London Special Wordings (LSW) scheme. This involves referencing the wording, adding it to the library and then disseminating it to the various market associations.
153
What is the goal of the London market group?
To oversee and drive process change in the London Market
154
Association of Insurance and Risk Managers (Airmic) is
a worldwide association providing support for those responsible for risk management and
insurance within their own member companies.
155
Airmic's technical agenda includes:
providing detailed research, training, networking, lobbying and market information for the benefit of its members.
It also generates wordings and useful related guidance on topical insurance issues. In 2009, for example, it issued a contract certainty guide for members and, since then, separate guides on conditions precedent and warranties in insurance policies, as well as an endorsement designed to enable its members to take advantage of some of the benefits of the Insurance Act 2015 in advance of it coming into force.
Its database includes a variety of publications and training materials.
156
Formed in 1985, the ... represents the UK general insurance, investment and long-term savings industry.
Association of British Insurers (ABI)
157
Association of British Insurers (ABI)'s role is to
* Be the voice of the UK insurance industry, leading debate and speaking up for insurers.
* Represent the UK insurance industry to government, regulators and policy makers in the UK, EU and internationally with the intention of driving effective public policy and regulation.
* Advocate high standards of customer service within the industry and provide useful information to the public about insurance.
* Promote the benefits of insurance to the Government, regulators, policy makers and the public.
158
In addition to its extensive high-level, macro policy (principles not contracts) and research work, the ABI also
publishes guidance from time to time to assist insurers and policyholders on issues as they arise. It did this in 2005, lending its support to the Contract Certainty Code of Practice.
159
The ABI has published guidance and information on products and topical issues such as
climate change,
cyber insurance,
mesothelioma and
asbestos.
160
The London marine reinsurance market commonly contracts using
Joint Excess Loss Committee (JELC) Excess Loss Clauses.
161
The Joint Excess Loss Committee (JELC) is run by
Lloyd's and the International Underwriting Association (IUA),
It promotes standardised wordings and clauses for excess of loss reinsurance contracts.
162
The Insurance Services Office, Inc. (ISO) is a provider of
statistical, actuarial, underwriting, and claims information and analytics; compliance and fraud identification tools; policy language; information about specific locations; and technical services.
163
ISO serves who?
```
insurers,
reinsurers,
agents and brokers,
insurance regulators,
risk managers, and other participants in the property/ casualty insurance marketplace.
```
164
ISO operates ...
an online repository of policy wordings on behalf of Lloyd's that can be used in the London Market by subscribing brokers and underwriters in the preparation of commercial (re)insurance contract wordings, specifically regarding risks that are domiciled in the USA.
165
The Aviation Insurance Clauses Group (AICG) was established in June 2005 by
the Lloyd's Market Association and the International Underwriting Association of London.
The AICG establishes non-binding standard wordings, clauses and variants for use in aviation insurance policies. Users are consulted on suggested clauses and can propose variant clauses themselves.
Since its formation, the AICG has published over 30 aviation wordings and clauses.
166
After 1 April 2013, the Government transformed the regulation of financial services in the United Kingdom through which Act?
the Financial Services Act 2012
167
Under the Financial Services Act 2012, who has responsibility for protecting the stability of the UK financial system as a whole and macro-prudential regulation?
the Bank of England
168
The Financial Policy Committee (FPC), a sub-committee within the Bank of England, has day-to-day responsibility for
macro-prudential supervision of regulated firms.
It may give directions and make recommendations to other regulators (i.e. the PRA and FCA - see sections D1B and D1C) for this purpose.
169
micro-prudential regulation is aimed at safeguarding
individual institutions
170
macro-prudential regulation is aimed at safeguarding
the system as a whole.
171
The FPC (Financial Policy Committee) is primarily concerned with
identifying, monitoring, and taking action to remove or reduce risks to the stability of the system in whole or in significant part (that is, 'systemic' risks).
Such risks are stated in the act to include those that may be attributable to structural features of financial markets. This would include things such as connections between financial institutions, or to the distribution of risk within the financial sector, or which arise from unsustainable levels of leverage or debt.
In the light of prior failures, the FPC is required to prepare and publish a financial stability report biannually. The report must include its views of the stability of the UK financial system and assessments of, amongst other things, the strengths and weaknesses of that system and risks to its stability.
172
The Prudential Regulation Authority (PRA) is
a subsidiary of the Bank of England, and is the (micro-)prudential regulator for (re)insurers.
173
The PRA's core or general objective is to:
promote the safety and soundness of the firms it regulates
174
The PRA's specific insurance objective is to:
contribute to the securing of an appropriate degree of protection for those who are or may become policyholders
175
The PRA has how many complementary statutory objectives, in its supervision of (re)insurers?
2
176
What gave the PRA a secondary objective?
The Financial Services (Banking Reform) Act 2013
177
What is the PRA's secondary objective?
to facilitate effective competition.
This objective only applies when the PRA is advancing its primary objectives and means that the PRA must be mindful of the likely competition effects of its actions.
178
In setting out its approach, the PRA has said that it...
sees a stable financial system that is resilient in providing the critical financial services the economy needs, as a necessary condition for a healthy and successful economy.
Whilst not operating a zero-failure regime, it seeks, as far as possible, to ensure that any firms that do fail do so in a way that avoids significant disruption to the supply of financial services. This will depend largely on the efficacy of the statutory resolution regime in place, including arrangements involving the Financial Services Compensation Scheme (FSCS).
179
The PRA's approach to supervision may be characterised as follows.
* It is based on judgment following evidence and analysis, rather than being narrowly rules based.
* It is forward looking.
* It is focused on those issues and firms which pose the greatest risk to stability and to policyholders. This will determine the frequency and intensity of supervision and this will increase in line with the risk posed to PRA's objectives.
180
What will have a significant impact on how the PRA delivers its objectives once implemented?
Solvency II - that is, the European-wide system for insurance regulation
(All insurers need to meet its requirements as to, for example, the assessment of capital adequacy, risk management and reporting for (re)insurers. )
181
What is the conduct of business regulator for the insurance industry.
the Financial Conduct Authority (FCA)
182
The FCA has responsibility for
supervising authorised persons and is funded entirely from fees levied on the firms it regulates.
183
The FCA has a single strategic objective of ensuring that the insurance and reinsurance markets function well. It has three operational objectives as follows:
* securing an appropriate degree of protection for consumers (the consumer protection objective);
* protecting and enhancing the integrity of the UK financial system (the integrity objective); and
* promoting effective competition in the interests of consumers in the markets (the competition objective).
184
Which two entities work alongside each other to create a 'twin peaks' regulatory structure.
The FCA and the PRA
185
The FCA and the PRA have agreed what?
a Memorandum of Understanding (MOU).
The MOU recognises that, whilst the PRA and the FCA have separate and independent mandates, it is essential that they co-ordinate in some areas and co-operate in others. Indeed, they have a statutory duty to do so and the MOU sets out the necessary high level framework.
186
The FCA/PRA MOU contains provisions about:
* information sharing;
* consultation in advance of policy and rule making;
* supervision of dual-regulated entities; and
* enforcement- the PRA has a veto over enforcement action if it is believed such action will threaten financial stability or result in the failure of a firm that would adversely impact the system.
187
The Lloyd's Act 1982 established
the Council of Lloyd's as the governing body of the insurance and reinsurance market, with authority to manage the affairs of Lloyd's and the power to regulate and direct the business of (re)insurance at Lloyd's.
188
Lloyd's appointments to the Council are now subject to whose approval?
the FCA
189
Lloyd's specifically has what powers
rule-making and enforcement powers, oversees risk in the market and has a role in ensuring capital adequacy.
The MOU provides that the FCA and the PRA will maintain co-ordination arrangements with Lloyd's in the support of their activities; these arrangements were agreed in June 2013.
190
(Re)insurance companies are subject to what regulatory bodies?
prudential regulation from the PRA and conduct regulation from the FCA.
191
Authorisation of dual-regulated firms is the responsibility of...
the prudential regulator;
it requires the FCA's consent before granting permission and the FCA will be fully involved in the process.
192
Who is the prudential regulator for Lloyd's and has responsibility for promoting the safety and soundness of Lloyd's and its members taken together, including the central fund.
the PRA
193
the PRA is the prudential regulator of:
Lloyd's and Lloyd's managing agents
194
What does the FCA regulate on a conduct basis?
the Corporation and the Managing Agents.
195
Who does the FCA regulate on a prudential and a conduct basis?
the Members' Agents and advisers and Lloyd's brokers.
In this context, conduct issues for the FCA include, for example, how the Corporation handles the auctioning of syndicate capacity and complaints.
196
(Re)insurance brokers are regulated by?
the FCA
197
The FCA Handbook is divided into 4 blocks:
High Level Standards
Prudential Standards
Business Standards
Regulatory Processes
198
High Level Standards
These standards apply to all firms and approved persons. For example, the Principles for Businesses (PAIN), which address the fundamental obligations of all firms under the regulatory system
199
Prudential Standards
This block sets out the prudential (or financial resource) requirements for firms
200
Business Standards
The detailed requirements relating to firms' day-to-day business which, In the context of the FCA and Insurance, can be found In the Insurance: Conduct of Business Sourcebook (!COBS)
201
Regulatory Processes
These manuals describe the operation of the FCA's and PRA's authorisation, supervisory and disciplinary functions
202
In issuing rules and guidance, the regulators are required to have regard to a number of regulatory principles. These include:
* the need to use resources In the most efficient and economic way;
* the responsibilities of the regulated firms' own senior management;
* the principle that the burdens and restrictions imposed by regulation should be proportionate to the benefits;
* the desirability of sustainable growth In the UK economy in the medium or long term;
* the desirability of each regulator exercising its functions in a way that recognises differences in the nature of, and objectives of, regulated businesses;
* the desirability, in appropriate cases, of publishing information relating to regulated businesses as a means of contributing to the advancement by each regulator of its objectives; and
* the principle that the regulators should exercise their functions as transparently as possible.
203
The first High Level Standard - Principles for Businesses (PRIN) - sets out the fundamental obligations of firms under the regulatory system in the form of a list of those principles. These are as follows. (11)
1. Integrity - A firm must conduct Its business with integrity.
2. Skill, care and diligence - a firm must conduct Its business with due skill, care and diligence.
3. Management and control - A firm must take reasonable care to organise and control Its affairs responsibly and effectively, with adequate risk management systems.
4. Financial prudence - A firm must maintain adequate financial resources.
5. Market conduct - A firm must observe proper standards of market conduct.
6. Customers' interests - A firm must pay due regard to the Interests of its customers and treat them fairly.
7. Communications with clients - A firm must pay due regard to the information needs of Its clients, and communicate Information to them in a way which Is clear, fair and not misleading.
8. Conflicts of interest - A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
9. Customers: relationships of trust - A firm must take reasonable care to ensure the suitability of Its advice and discretionary decisions for any customer who Is entitled to rely upon Its judgment.
10. Clients' assets - A firm must arrange adequate protection for clients' assets when it is responsible for them.
11. Relationship with regulators - A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.
204
the PRA is currently transitioning away from its Handbook Into
a new Rulebook.
205
The PRA rulebook is divided into three main sectors:
Banking and Investment Rules,
Insurance Rules, and
Other Rules for Non-authorised Persons.
The first two categories are further divided Into (Solvency II) directive and non-directive firms.
206
It is a rule that a firm must take reasonable care to establish and maintain such systems and controls as are appropriate to its business. One such high-level standard is the
Senior Management Arrangements, Systems and Controls (SYSC).
207
SYSC addresses...
operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
The standards provide guidance with regard to the establishing of systems and controls for the management of operational risk and, in particular, the use of insurance as a means of reducing the monetary impact orthis risk.
208
When using insurance, the SYSC guidance provides that the prospective insured should consider:
* the time taken for the insurer to pay claims;
* the financial strength of the insurer; and
* the.affect of any limiting conditions and exclusion clauses that may restrict cover to a small number of specific operational losses and may exclude larger or hard to quantify indirect losses (such as lost business or reputation al costs).
209
Insurance risk can be defined as...
fluctuations in the timing, frequency and severity of insured events, relative to the expectations of the firm at the time of underwriting, or in the timing and amount of claim settlements.
210
The (risk control) SYSC guidance provides that 'a firm should pay close attention to the wording of its policy documentation to ensure that these wordings do not expose it to more, or higher, claims than it is expecting. In so doing, the firm should consider:
1. whether It has adequate in-house legal resources;
2. the need for periodic Independent legal review of policy documentation;
3. the use of standardised documentation and referral procedures for variation of terms;
4. reviewing the documentation used by other insurance companies;
5. revising documentation for new policies in the light of past experience; and
6. the operation of law in the Jurisdiction of the policyholder.
211
Before entering into any form of insurance risk transfer agreement, (re)insurers should, amongst other things, ensure:
* that there are adequate legal checking procedures in respect of the draft agreement;
* that they understand the nature and limits of the agreement, giving particular attention to the wording to ensure that all of the required risks are covered;
* that the level of available cover is appropriate; and
* that all the terms, conditions and warranties are unambiguous and understood.
212
Within the FCA handbook is what sourcebook?
the Insurance: Conduct of Business Sourcebook (IC0BS).
It applies to (re)insurers and insurance Intermediaries and to contracts with retail customers ('consumers') as well as commercial customers.
213
Under IC0BS 2 (General Matters), insurers...
must take reasonable steps to communicate information in a way that is clear, fair and not misleading.
214
Under IC0BS 6 (Product Information), insurers...
are responsible for producing, and insurance intermediaries for providing, such information as to enable a customer to make an informed decision about the Insurance arrangements proposed.
If no insurance intermediary is involved, the Insurer is also responsible for providing the required information.
The insurer or intermediary must take reasonable steps to ensure that a customer is given appropriate information about a policy in good time and in a comprehensible form to enable them to make an informed decision. The extent of the information required will vary according to, for instance, the knowledge, experience and ability of a typical customer, whether the same information has been provided before, and the actual terms, conditions and exclusions of the wording.
This 'appropriate information' rule applies pre-conclusion and post-conclusion of the policy, and has an impact on, for example, mid-term changes and renewals. In the case of renewals, the intermediary should, therefore, notify a customer in good time before the expiry of the policy if it no longer deals with that insurer or is aware, for example, that the insurer is unwilling to invite renewal. Similarly, if renewal is to be invited, the intermediary should provide renewal terms to the customer, again in good time before the expiry of the policy.
Evidence of cover must be provided promptly after inception of the policy.
215
(Re)insurance can go through underwriting cycles that extend over several years. These are often termed ... and reflect the law of....
'hard' and 'soft' markets
supply and demand
216
premiums fall in a
soft market
217
premiums increase in a
hard market
218
What is particularly susceptible to market cycles?
Reinsurance - since terms for both proportional treaties and excess of loss contracts are agreed in advance of the actual treaty or contract period.
Whatever losses affect a reinsurance agreement during its currency, the agreed terms at inception are rarely amended for that particular period. Increases in rates in the reinsurance market will have a knock on effect in the insurance market, and this effect can be seen In the negotiation and issuance of commercial (re)insurance contract wordings.
219
Hard markets have historically followed
an unusually large loss, particularly a large natural peril event loss, such as an earthquake, a severe windstorm and sometimes an extensive flood, where losses are measured in billions of dollars.
Where, for example, large natural peril event losses occur simultaneously in different parts of the world, over a relatively short period of time, there is a pressure on insurers' own insurance and, in some cases, they can find it difficult to purchase insurance due to reductions in capacity. Insurers will have to negotiate the best terms for their renewals, including coverage and conditions.
220
In a hard market for commercial buyers:
- there will be a noticeable change in insurers' attitude to insurance contract wordings, in particular the scope of coverage.
- Insurer discipline will become very focused and customers' contract wording, - terms and conditions are likely to be scrutinised more carefully than in a soft market.
221
in a hard market an underwriter may be under instruction by its own reinsurer to focus its attention on
specific clauses and terms within the contract wording.
Examples could include clauses relating to the definition of natural perils (windstorm, earthquake or flood), clauses relating to terrorism, and extensions of cover in liability Insurances that pertain to defence costs for criminal acts relating to health and safety at work and corporate manslaughter.
In certain situations, new clauses or limitations that have been specifically drafted or issued under instruction or recommendation by re insurers could be added to existing wordings to limit or clarify the scope of existing coverage. In extreme situations, a (re)insurer may offer up its own contract wording as an alternative to the existing wording, which presents a challenge for both the insured and their brokers.
For the broker responsible for preparing the contract wording and acting on behalf of an insured, there will be a challenge to balance potential premium stability with maintaining the scope of existing coverage through negotiation with the (re)insurer.
222
A soft market normally arises after
a period of little major loss activity and competitive market forces, or rather the fear of such competitive forces.
This causes reinsurers to reassess their rating structures, the extent of coverage and how restrictive such coverage should be.
223
A soft market can also be a result of...
new insurance players in the market, offering competitive premiums and broad contract wordings.
(Re)insurance brokers will, therefore, use a soft market to challenge a (re)insurer on its attitude to risk, price and scope of coverage by encouraging clients to seek alternative quotations from different
(re)insurance markets.
This can lead to a breakdown In underwriter discipline, whereby the (re)insurer can be forced to accept significant reductions in rates and increases in the scope of coverage of (re)insurance contract wordings. While some (re)insurers have the ability to maintain underwriter discipline and a consistent approach throughout a soft market, others accept broader terms and conditions on existing or new pieces of business to ensure they do not lose the opportunity to participate in such business.
While (re)insurance may eventually rise, (re)insurers do not always recognise that by accepting a significant broadening of insurance coverage with a (re)insurance contract wording during a soft market, they may have lost ground and find it difficult to reinstate restrictions or tighten conditions lost during the soft market cycle.
224
Influences in the creation of contract wordings - Internal influences include:
* Insurers and brokers are under continuous pressure to maintain or increase volumes of business and to increase their competitiveness in the marketplace.
* Insurer appetite for attracting new business may mean there is a requirement to review and broaden existing coverages or to soften exclusionary and conditional language within commercial (re)insurance contract wordings.
* Insurer and/or broker marketing departments may decide that new insurance products need to be considered, whereby a new wording for these products will have to be prepared, reviewed and agreed.
* The sale and marketing of such insurance products needs to be factored in and unique selling points identified.
* Identifying gaps In existing market products will help the sellers of insurance to gain an advantage when promoting their product to potential buyers.
* Insurers will need to analyse past, and predict future, claims experience. Consideration needs to be given to the significance of broadening existing wordings and whether such changes will have the negative effect of increasing the frequency or severity of claims.
* Not all Insurers or brokers have a dedicated wordings drafting resource, so thought needs to be given to whether the existing or new wording will be drafted internally or by external lawyers and consultants.
* The way in which revised, existing products or new commercial (re)insurance products will be marketed and sold will have to be considered. For example, will the insurer market the product itself or use a broker or a coverholder by means of a delegated authority or binding facility.
* Will the new product have the ability to meet the demands of electronic trading platforms.
225
Influences in the creation of contract wordings - External influences include:
• New, emerging complexities in traditional insurance products can lead to the development of new products and concepts requiring new forms of contract wordings. Recent examples include emerging risks such as cyber insurance, cyber terrorism insurance, and supply chain insurance. Future risks might include insurance relating to the increased use of drones, driverless cars and artificial intelligence.
• Financial Ombudsman or court decisions on previously disputed commercial contract wordings may result in the requirement that existing wordings products have to be reviewed and adapted. A consequence of a major decision is that it could have identified a potential gap in coverage in standard commercial contract wordings, which would need to rectified in existing wordings or factored into the production of a new commercial product.
. • Changes in legislation governing particular aspects of risk can lead to the review and amendment of existing wordings. For example, International legislation governing the pollution and contamination of natural habitats has become a key factor in the design of new environmental liability products.
• There may be pressure from insurance bodies, which represent policyholders such as AIRMIC, for insurers and brokers to amend or revise certain areas of commercial contract wordings that have been seen or construed to be restrictive or unfair by policyholders. The Insurance Act 2015 was considered an opportunity for insurers and brokers to address specific areas of insurance contract wordings which were considered unfair. AIRMIC was a leading proponent of such changes.
• Competition from other insurers and markets introducing their own commercial Insurance products will often force insurers to revise wordings for their own products or to start the process of developing new wordings to provide similar or broader coverage than their competitors.
• Government pressure on the insurance industry to provide innovative and affordable products to consumers.
• FCA considerations such as the fair treatment of customers will be the guiding principle when insurers and brokers are selling products and services. From a contract wording perspective, this means that products should perform as firms have led consumers to expect.
226
• LMA and Lloyd's guidelines on consumer wordings provide detailed considerations when preparing contract wordings for individual consumers, although the guiding principles can easily be applied to any commercial contract wording. Areas that are covered by the latest guidelines include:
-
use of plain English;
- use of consistent terms within a wording;
- use of items in bold such as defined terms;
- clarity on what is covered and not covered by a contract wording;
- clarity of general conditions which are well-signposted;
- clarity on the policyholder's duties and responsibilities regarding disclosure, and the remedies available to an insurer in the event of a breach of a particular condition within the contract wording; and
- clear instructions on how a policy can be cancelled by either party, including the notice period and how return premiums may be calculated.
