Chapter 5 - Legal & Regulatory Requirements

Question 1

Who is required to purchase compulsory insurance?

Answer 1

1. Private individuals
2. Professionals & businesses

Question 2

What compulsory insurance would private individuals need to purchase?

Answer 2

1. 3rd party motor insurance
2. Public liability in respect of the ownership of dangerous wild animals/dogs

Question 3

What compulsory insurance would professionals & businesses need to purchase?

Answer 3

1. Motor insurance - for every business which uses motor vehicles on the road
2. Employers liability insurance - for every business that has employees
3. Professional negligence/indemnity
4. Public liability - e.g. riding schools

Question 4

What are the 2 main reasons why certain forms of insurance are compulsory?

Answer 4

1. To provide funds for compensation
2. In response to national concerns

Question 5

What are the 5 types of compulsory insurance?

Answer 5

1. Motor 3rd party
2. Employers’ liability
3. Public liability - e.g. for riding schools
4. Liability for dangerous wild animals & dogs
5. Professional negligence/indemnity

Question 6

What is motor 3rd party, as a type of compulsory insurance?

Answer 6

•Covers: 3rd party property damage & 3rd party bodily injury/death

•This is the most basic level of motor insurance & it is a legal requirement under the road traffic act 1988

Question 7

What is employers liability, as a type of compulsory insurance?

Answer 7

•Employers get insurance against their liability to pay compensation to employees who sustain bodily injury or disease arising from employment

•This is under the employers liability (compulsory insurance) act 1969

•Normally written by UJ composit company market insurers, not LM

Question 8

What is the minimum required limit of indemnity for employers liability, as a type of compulsory insurance?

Answer 8

Minimum required limit of indemnity is £5m, though insurance market provides £10m as a standard

Question 9

What is the ‘employers liability tracing office’?

Answer 9

Claimants can use this to try & identify the insurers that provided employers liability cover to their employers

Question 10

What is public liability in relation to riding schools, as a type of compulsory insurance?

Answer 10

•Riding schools required to have this under the ‘riding establishments act 1970’

•It indemnifies the insured against claims arising from the use of the insured’s horse, including injuries sustained by the person riding the horse & members of the public

•Also, indemnifies the horse riders against any liability they incur for injury to members of the public, arising out of the hire or use of the riding school horses

Question 11

What is liability for dangerous dogs & wild animals, as a type of compulsory insurance?

Answer 11

•This is compulsory for private individuals who own dangerous wild animals or dogs

•It’s likely to be in the form of an extension to another insurance, such as home insurance

Question 12

What is professional negligence/indemnity, as a type of compulsory insurance?

Answer 12

Professionals like solicitors, accountants, doctors, & dentists are required to have this insurance as a condition of having a license to practice

Question 13

Who does compulsory insurance protect & what is it there for?

Answer 13

•Compulsory insurance are liability insurances, which try to protect innocent victims

•Liability insurances are long-tail, so losses & claims take time to be notified, developed, & resolved

•Defending a claim against you can be expensive, so most insurances mean insurers will defend the claim against insureds, which removes the financial burden of legal fees

Question 14

What is a difference between how non-compulsory & compulsory insurance operates?

Answer 14

•In non-compulsory insurance, you can’t breach warranty (a promise between insured & insurer) or good faith

•If warranty is breached, then insurance is suspended for period of the breach, & if good faith is breached then insurer can come off a risk

•But, this doesn’t apply to compulsory insurance as the insurer can’t refuse to deal w/ 3rd party claims

Question 15

What can the insurer claim from the insured if they don’t abide by the ‘employer’s liability (compulsory insurance) regulations 1998?

Answer 15

Insurer can claim an extra payment from the insured

Question 16

What 3 things do the the ‘employer’s liability (compulsory insurance) regulations 1998 state?

Answer 16

1. Insured doesn’t keep info from the insurer
2. Insured should comply w/ legal requirements for the protection of employees against risk of injury or disease
3. Insured should take care to protect employees against risk of injury or disease in the workplace

Question 17

What is compulsory insurance & how does it operate in USA?

Answer 17

•Each state has compulsory motor insurance for commercial owners, but not private

•Some states require employers to buy short-term disability insurance for their employees

•Each state regulates workers compensation (i.e. employers liability insurance) programme

Question 18

What is ‘workers compensation’ as a compulsory insurance in USA?

Answer 18

•It provides coverage for employees who are injured or become ill at work

•It provides medical expenses, death benefits, lost wages, & rehab

•In exchange for coverage, employees can’t sue their employer unless the employer has intentionally harmed the employee or failed to carry the required coverage

Question 19

What is ‘short-term disability insurance’ as a compulsory insurance for some states in USA?

Answer 19

•Some states require employers to buy this for their employees

•It covers illnesses & disabilities not directly related to their employment

•It pays out a weekly benefit related to earnings for a set period of time

Question 20

What is compulsory insurance in Turkey?

Answer 20

•There is some compulsory motor insurance

•Property owners have to purchase insurance against earthquake risks

Question 21

What is compulsory insurance in Australia?

Answer 21

They have a similar level of compulsory 3rd party motor insurance to the UK

Question 22

What is compulsory insurance in Germany?

Answer 22

They have 3rd party liability insurance in relation to any event for which a German court might consider you negligent

Question 23

What are the 2 legislations that relate to insurance contracts?

Answer 23

1. Consumer rights act 2015
2. Contracts (rights of 3rd parties) act 1999

Question 24

What does the ‘consumer rights act 2015’ state?

(This is a legislation that relates to insurance contracts)

Answer 24

•States that an ‘unfair term’ in a consumer construct will not be binding on that consumer, unless they choose to rely on that term

•So, terms & notices in consumer contracts have to be fair - they should be transparent, prominent, & expressed in plain/intelligible language

Question 25

What is the ‘contracts (rights of 3rd parties) act 1999’? (This is a legislation that relates to insurance contracts)

Answer 25

• Reformed the privity rule (that only people who were party to the contract came force the terms of the contract) •So, there are circumstances where a 3rd party will have a right to enforce a term of a contract & could sue for breach of contract

Question 26

What conditions need to be in place for the ‘contracts (rights of 3rd parties) act 1999’ to be enforced by 3rd parties? (This is a legislation that relates to insurance contracts)

Answer 26

1. The contract must make express provision for the enforcement or the 3rd party must be expressly identified in the contract 2. The remedies allowed are those usually permitted (damages, injunction, or specific performance) •Injunction = a remedy that the court awards, which is an order to prevent a party from doing something •Specific performance = court orders that a party performs a particular act (e.g. to comply w/ a contract they’ve tried to breach)

Question 27

How does the ‘contracts (rights of 3rd parties) act 1999’ relate to cargo insurance? (This is a legislation that relates to insurance contracts)

Answer 27

1. Cargo insurers receive claims from parties who aren’t the original buyer (they’re whom the goods & insurance has been sold on) 2. As long as insurers see the chain of sales of the goods & associated insurance policy that leads back to the original insured, & the person presenting the claim has insurable interest at time of loss, then claim will be paid

Question 28

What is ‘insurance premium tax’ (IPT)?

Answer 28

A tax levied by the UK government on general insurance premiums in the UK

Question 29

What are the 2 rates of ‘insurance premium tax’ (IPT)?

Answer 29

1. Standard - rate is 12% 2. Higher - rate is 20% - it is for travel insurance & insurance sold in conjunction w/ the purchase of vehicles & elecEricka appliances (& are sold as part of a wider deal, such as extended warranty)

Question 30

How does ‘insurance premium tax’ (IPT) operate in insurance?

Answer 30

1. Broker collects premium tax & premium from insured, then gives to the insurer 2. Insurers pay premium tax to the tax authorities in the UK (Her Majesty’s Revenue & Customs, HMRC) on a quarterly basis •Premium tax must be shown on documentation when risk is being processed through the central markets databases by Velonetic

Question 31

What types of insurance are exempt from ‘insurance premium tax’ (IPT)?

Answer 31

•Most long-term insurances; reinsurance; insurance on ships, aircraft & international goods in transit, & most risks located outside the UK •But, these may be liable for similar taxes imposed by other countries

Question 32

Who does ‘senior managers & certification regime’ (SM&CR) apply to? (This is a regulatory framework)

Answer 32

Insurers & brokers/intermediaries

Question 33

What is ‘senior managers & certification regime’ (SM&CR)? (This is a regulatory framework)

Answer 33

•It focuses on the most senior individuals in a firm who hold key roles & if governance controls are lacking in their business area then there’ll be greater disciplinary action •Government introduced a ‘duty of responsibility’, where senior managers are required to take reasonable steps to prevent a regulatory breach from occurring - (this formed part of the Bank of England & financial services act 2016)

Question 34

What 3 things are firms required to do under the ‘senior managers & certification regime’ (SM&CR)? (This is a regulatory framework)

Answer 34

1. Ensure senior managers have a statement of responsibilities 2. Produce a ‘firm responsibilities map’ that knits this together 3. Ensure senior managers are pre-approved by the regulators before carrying out their roles

Question 35

What 3 things do the regulators want the ‘senior managers & certification regime’ (SM&CR) to do? (This is a regulatory framework)

Answer 35

1. Encourage staff to take personal responsibility for their actions 2. Improve conduct at all levels 3. Make sure firms & staff clearly understand & can demonstrate who does what within the firm

Question 36

What are the 3 parts of the ‘senior managers & certification regime’ (SM&CR)? (This is a regulatory framework)

Answer 36

1. Senior managers regime 2. Certification regime 3. Rules of conduct

Question 37

What is the ‘senior managers regime’, which is the 1st part of the ‘senior managers & certification regime’ (SM&CR)? (This is a regulatory framework)

Answer 37

•Applies to persons performing the senior role in a firm, which are know as ‘senior management functions’ (SMFs) by the FCA & PRA •Any firm planning a new senior manager appointment or a material change in role for currently approved individuals must submit an application to the regulators for approval •A statement of responsibilities should be prepared for each senior manager - this should be completed on the individual CVs, personal development plan, job description, organisation chart showing reporting lines, & firm’s responsibilities map

Question 38

What is the ‘firms responsibilities map’ (which is part of the ‘senior managers regime’ in the 1st part of the ‘senior managers & certification regime’ (SM&CR))? (This is a regulatory framework)

Answer 38

It sets out the firm’s management & governance arrangements, including reporting lines & responsibilities

Question 39

What is the ‘certification regime’, which is the 2nd part of the ‘senior managers & certification regime’ (SM&CR)? (This is a regulatory framework)

Answer 39

•Applies to individuals who aren’t carrying out SMFs, but the regulators have deemed their roles capable of causing significant harm to the firm or its customers •The regime requires firms to assess the fitness & propriety of persons performing other key roles & to formally certify this at least annually

Question 40

What is the ‘rules of conduct’, which is the 3rd part of the ‘senior managers & certification regime’ (SM&CR)? (This is a regulatory framework)

Answer 40

•This applies to senior managers, certified persons, & other employees •Need to ensure the person is fit & proper, so when reviewing them firms need to consider: honesty, integrity, reputation, financial soundness, competence & capability, if they satisfy any relevant FCA training & competence requirements •Firms must collect additional evidence when assessing candidates for senior manager positions, certification functions, & non-exec director roles - including: criminal record checks & regulatory references covering the past 6 years

Question 41

What are examples of behaviours that the FSA has considered unacceptable for the ‘rules of conduct’, which is the 3rd part of the ‘senior managers & certification regime’ (SM&CR)? (This is a regulatory framework)

Answer 41

1. Insider dealing & misusing market info 2. Failing to disclose a conflict of interest 3. Deliberately misusing the assets or confidential info of a customer 4. Failing to answer regulators’ questions or attend meetings/provide documents 5. Failing to take reasonable steps to monitor or take action after a breach is identified

Question 42

What are the 2 tiers of the ‘rules of conduct’, which is the 3rd part of the ‘senior managers & certification regime’ (SM&CR)? (This is a regulatory framework)

Answer 42

1. Individual conduct rules - act w/ integrity, due skill, care, & diligence; be open & cooperative w/ regulators; treat customers fairly & pay due regard to them; & observe proper standards of market conduct 2. Senior manager conduct rules - (1) ensure business which you’re responsible for is controlled effectively; (2) ensure business which you’re responsible for complies w/ regulatory system; (3) ensure you delegate to appropriate person & you oversee the discharge of the delegated responsibility effectively; (4) disclose any info that the FCA & PRA would expect notice

Question 43

Who is the compliance officer & what is their main role? (This is a regulatory framework)

Answer 43

•They report to the governing body (the board) of the firm & they’re regulated by PRA & FCA as they hold a senior management function •Main role: ensure their firm abides by UK law & the rules/regulations set by the regulator •They’re vital to insurers & brokers as there are serious consequences of failing to abide by the regulatory rules

Question 44

What are the functions undertaken by a compliance officer? (This is a regulatory framework)

Answer 44

1. Communication of company’s policies & organising training 2. Completion of regulatory returns, such as governance, finance, & complaints 3. Reviewing company procedures to ensure they’re compliant 4. Maintaining the company’s compliance manual 5. Checking that all stages of business process are in accordance w/ the compliance manual

Question 45

What is the ‘money laundering reporting officer’ (MLRO) / nominated officer? (This is a regulatory framework)

Answer 45

•Organisations need to have money laundering checks/proceduress in place, so an individual is nominated as the MLRO •They’re regulated by the FCA & PRA, as it’s a senior management function