Chapter 6 - Insurance Intermediation Flashcards
(59 cards)
1
Q
What is the law of agency?
A
Broker is the agent & they serve the principal
2
Q
In what situation is the insurer the principal and the broker the agent?
A
When the insurer gives the broker authority to settle claims or underwrite (binding authority) on their behalf
•But, this can give rise to ‘conflict of interest’, so heed to put up ‘Chinese/ethical walls’ - e.g. separate people performing the roles relevant to each relationship - so, no one is disadvantaged by the broker acting for the other
3
Q
What are the 3 ways an agency agreement is created?
A
- By agreement
- By ratification
- By necessity
4
Q
What is agency by agreement?
A
Generally agency agreement is expressed in writing or can be inferred by behaviour
5
Q
What is agency by ratification?
A
Some behaviour is accepted/condoned after the face & the principle is prepared to stand by their agency
6
Q
What is agency by necessity?
A
Usually in an emergency situation, where someone has to make a decision as no one w/ actual authority is present to do so
7
Q
What are the 5 duties agents have towards their principals?
A
- Follow the principals instructions
- Act in good faith towards their principal
- Don’t sub-delegate w/out permission
- Account for funds
- Act w/ due care & skill
8
Q
Brokers owe a ‘duty of care’ to their client, what happens if they breach this?
A
•Brokers have an obligation under the tort law to the person who has been harmed by this breach of the duty of care
• Breaches of this can lead to claims of professional negligence against brokers
9
Q
What are some examples of a broker breaching ‘duty of care’ to their client?
A
- Failing to explain terms & warranties & their effect on their client
- Failing to ensure that the broker understood their client’s instructions
- Failing to ensure that the insurance was placed w/ suitable insurers & had suitable terms
10
Q
What are the 3 options the principal has if an agent acts outside their authority?
A
- Ratify their actions & continue as nothing happened
- Ratify their actions & make a claim against the agent for damages
- Expose the agent to claims from the 3rd party that thought the agent was acting w/in their authority
11
Q
What are the 10 types of intermediaries/brokers?
A
- Wholesale broker
- Retail broker
- Producing broker
- Single-tied agent
- Multi-tied agent
- Independent intermediary
- Surplus lines broker
- Open market correspondent
- Lloyd’s broker
- Non-Lloyd’s broker
12
Q
What is a wholesale broker?
A
They have direct contact with the insurer
13
Q
What is a retail broker?
A
They have direct contact with the client
14
Q
What is a producing broker?
A
They have contact with the client & they produce the work for the client
15
Q
What is a multi-tied agent?
A
•They represent insurers - they sell a number of different insurer’s products, but only 1 product per insurer
•E.g. they sell insurer A house insurance product & insurer B car insurance product
•They don’t work in LM
16
Q
What is a single-tied agent?
A
• They represent insurers - they sell a number of products from a single insurer
•They don’t work in the LM & are commonly in a high-street agency
17
Q
What is an independent intermediary?
A
•This is a traditional LM broker who works for their client (insured or reinsured)
•They take an unbiased view of the entire market (LM & elsewhere) & advise their client on best options for their needs
18
Q
What is a surplus lines broker?
A
If LM is used to write US business, then this broker must be used in the chain
19
Q
What is an open market correspondent?
A
•They introduce business to Lloyd’s directly or via a Lloyd’s broker on an open market basis, but they aren’t part of Lloyd’s
•Certain territories (e.g. Canada & Italy) need additional approvals by Lloyd’s to introduce business to Lloyd’s, so they’ll need to be sponsored by a managing agent or Lloyd’s brokers
20
Q
What does it mean if business is placed on ‘open market’ basis?
A
The risk is individually placed, rather than being attached to any pre-existing delegated UW agreement, such as a binding authority or lineslip
21
Q
What is a Lloyd’s broker?
A
Brokers can apply to Lloyd’s for this
22
Q
What is a non-Lloyd’s broker?
A
They’re regulated by the UK regulator or their own home-state regulator (if overseas), but they haven’t obtained Lloyd’s accreditation
23
Q
What are the 8 stages of the broker’s role in the placing process?
A
- Reviewing the client’s needs
- Putting together a market reform contract (MRC) & additional info (e.g. proposal forms, loss records, etc) to obtain quotes
- Reviewing quotes w/ the client
- Finalising the placement
- Compiling documentation for submission to Velonetic - e.g. MRC, London Premium Advice Note (LPAN), & tax split
- Requesting premium from the client
- Submitting documentation to Velonetic
- Making changes to the risk - e.g. making endorsements & obtaining agreement from insurer
24
Q
Why is market solvency important in the ‘reviewing client’s needs’ stage as part of the broker’s role in the placing process?
A
If insurers can’t pay claims, then the broker may be in a receipt of a claim for professional negligence
25
What happens in the ‘finalising the placement’ stage as part of the broker’s role in the placing process?
1. Broker checks for ‘signing down’ issues (i.e. where the written lines total to more than 100%)
•If on paper: the UWs will ink their stamp & proportions on MRC
•If electronically (via PPL or Whitespace): insurers agreement to participate is recorded w/ date & time stamps
26
What happens in the ‘submitting documentation to Velonetic’ stage as part of the broker’s role in the placing process?
1. In Accounting & Settlement, brokers upload documents to central market doc repository, the ‘insurers market repository’ (IMR)
2. This system sends messages to Velonetic to review the docs, enter the date onto the database, & give the disk a ‘signing number & date’
3. Velonetic moves premium funds from broker’s bank account to the insurer
27
What is a written line vs a signed line?
Written line = the proportion that the UW writes on the MRC
•Broker can reduce w/out asking, unless UW has sated ‘line to stand’ next to their stamp
Signed line = this is when the risk enters the market database & this may be less than the written line as the total cannot be more than 100%
28
What are the 6 stages of the broker’s role in the claims process?
1. First advice - 1st notification of loss is from insured to broker & broker assists client in putting together info for insurer
2. Expert instructions - insurer instructs experts through the broker, unless insurer asks experts if a certain claim is covered
3. Further updates - provides updates as claim progresses
4. Negotiation
5. Settlement - broker receives money from insurer & forwarded it to the client
6. Recoveries/subrogation
29
What happens in the ‘recoveries/subrogration’ stage as part of the broker’s role in the claims process?
•Insurers have right to subrogate once they’ve indemnified the insured
•The broker can make the insurers aware of any additional amounts that may be added into the claim against any 3rd party
30
What are ‘Terms of Business Agreements’ (TOBAs) & who are they with?
•They’re market agreements that capture the terms & conditions under which a broker does business w/ various parties
•A broker has TOBAs w/ insurers, clients, & possibly ‘producing brokers’
•The LMA, IUA, & LIIBA have produced model TOBAs to assist
31
What are the 9 parts of an insurer’s TOBA w/ a broker?
1. Regulatory status - both warrant they’re duly authorised to conduct ‘insurance mediation activities’
2. Broker’s authority
3. Remuneration - brokerage
4. Holding money/taxes - broker holds funds for insurer, but relies on insurer for taxes
5. Compliance - both must comply w/ their obligations
6. Ownership & access to data & records
7. Law & jurisdiction
8. Conflict management
9. Confidentiality - both maintain this & only disclose as required to perform their obligations
32
What is the ‘broker’s authority’ section of an insurer’s TOBA w/ a broker?
•Includes broker’s authority to hold premium funds on behalf of the insurer
•An insurer can grant ‘risk transfer’ to the broker, so any money once collected by the broker is deemed ‘paid’ to the insurer - if insurer doesn’t trust broker then have non-risk transfer TOBA, so broker can’t hold funds on insurer’s behalf
•FCA has rules relating to client money & UK regulated brokers must comply
33
What is the ‘ownership & access to data & records’ section of an insurer’s TOBA w/ a broker?
• Historically, broker maintained the placing & claims info, & insurer could take copy if they wanted
•Both agree to comply w/ Data Protection Act 2018 & GDPR
34
What is the ‘law & jurisdiction’ section of an insurer’s TOBA w/ a broker?
States where any dispute between the insured & insurer will be heard
35
What are the 8 parts of a broker’s TOBA w/ a client?
1. Identity of client
2. Claims notification
3. Disclosure - broker to put client on notice as to their duty of disclosure during placing process
4. How brokers are paid - in addition to fee insured pays broker, the insurer can also allow broker to retain comission
5. How monies are held - broker holds money on trust for client & also if insurer has ‘risk transfer TOBA) w/ broker
6. Data protection - broker complies w/ GDPR & Data Protection Act 2018
7. Complaints - broker’s process & client can refer to the FOS
8. Dispute resolution
36
What are the 3 types of broker remuneration?
1. A flat fee
2. Commission
3. Other fees/commission
37
What is a flat fee, as a type of broker remuneration?
•This is payable by the client
•The broker must provide the client w/ any fees that will be payable before the client starts doing business w/ them - this is under the FCA Insurance: Conduct of Business rules (ICOBS)
38
What is a commission/brokerage, as a type of broker remuneration?
•Paid by the insurer & broker may earn this for placing the business
•Insurer will agree the broker can retain part of the premium charger to the client
39
What is gross premium vs net premium?
•Gross premium = premium charged to the client
•Net premium = amount received by the insurer (gross premium - brokerage)
40
What are other fees/commission, as a type of broker remuneration?
•Brokers can earn additional commissions by charging a ‘collecting commission’ on claims - this is usually around 1% of the claims value
•If broker is acting as a coverholder under a contract of delegated UW authority, then the insurer can pay a coverholder commission for each risk bound & may also pay profit commission if business is successful
•Brokers may have in-house technical teams which provide info to insured or insurer, so they’ll charge a fee for this
41
What is the Insurance Distribution Directive (IDD)?
(This is a UK regulation that came into force in 2018)
This regime made it stricter & more specific professional requirements for cross-border entry to markets within the EU
•These are linked to the ability of the regulator to control & assess the knowledge & competence of employees in the regulated organisations
42
Who does the Insurance Distribution Directive (IDD) apply to?
(This is a UK regulation that came into force in 2018)
1. Any sellers of insurance products
2. Anyone who assists w/ the admin & performance of insurance contracts, including those acting for insurers
3. Ancillary insurance intermediaries - although excluded if the insurance is complementary to the goods/service provided, providing they cover breakdown, loss/damage to goods, other risks linked to travel booked w/ provider, & when premium is less than EUR 600
43
What are the 3 carve-outs within the definition of ‘insurance distribution’ in the Insurance Distribution Directive (IDD)?
(This is a UK regulation that came into force in 2018)
1. Provision of info on an accidental basis to a customer in intent of another professional activity
2. Management of claims as an insurer on a professional basis & the providing of loss adjusting services
3. Provision of data & info on potential policyholders to insurance companies
44
What are the 2 general principles for the Insurance Distribution Directive (IDD)?
(This is a UK regulation that came into force in 2018)
1. Distributors must act honestly, fairly, & professionally in accordance w/ the best interest of customers
2. All info provided by distributors must be fair, clear, & not misleading
45
What is the principle in relation to brokers receiving remuneration, outlined in the Insurance Distribution Directive (IDD)?
(This is a UK regulation that came into force in 2018)
Distributors must disclose the nature of remuneration & the basis for it - (e.g. fee/brokerage, etc)
46
What does the FCA 3-pillar risk framework that they regulate brokers on look at?
1. Assessment of the firm’s conduct - are the interests of consumers & market integrity at the heart of how they run?
2. Event-driven work which allows a flexible response to anything that arises
3. Reviewing issues & products when required
47
What is the FCA regulation for brokers in relation to client money rules?
•In a broker/client TOBA, the broker must be clear about their provisions for holding their clients money, must indicate if they’ll hold insurer money, & indicate who will receive interest earned on these funds
•In the FCA handbook, there are rules concerning client money: ‘Client Asset rules’ (CASS)
48
What are the 3 ‘Client Asset rules’ (CASS) in the FCA handbook, which are for brokers in relation to client money rules?
1. Brokers must arrange adequate protection of clients assets (premium or claim funds) for which they’re responsible for
2. Client money should be paid out to clients 1 business day after receipt by the broker
3. Broker should keep client’s money separate from the broking firm’s money - i.e. keeping the funds in segregated accounts
49
The ‘Client Asset rules’ (CASS) in the FCA handbook states brokers should keep client’s money in a segregated account to the brokers’, what are the 2 types of segregated accounts?
1. Statuary trust account = broker can’t fund payment out of accounts in which they hold the client’s money - so, the trust only exists for the client’s money
2. Non-statuary trust account = broker funds payment out of accounts in which they hold client’s money - a broker could pay claim to their client before the insurer pays the money to the broker
50
What does the UK Data Protection Legislation consist of?
1. UK General Data Protection Regulation (UK GDPR)
2. Data Protection Act (DPA) 2018
51
What is the UK Data Protection Legislation?
•They govern the processing of personal data in the UK & transfer from UK outside the EU to 3rd countries or international organisations
•Personal data applies to electronic data & data in manual filing system
•It gives data subjects rights & places obligations on data controllers & processors
•Personal data must be processed in accordance w/ the 7 data protection principles
52
What are the 7 data protection principles that personal data must be processed in accordance with, according to the UK Data Protection Legislation?
1. Lawfulness, fairness, & transparency
2. Purpose limitation - data only processed for reasons it was obtained for in 1st place
3. Data minimisation - use minimum amount of data required
4. Accuracy
5. Storage limitation - info shouldn’t be kept longer than necessary
6. Integrity & confidentiality-must have security measures in place to protect data
7. Accountability
53
What is lawful processing under the UK Data Protection Legislation?
Organisations need to identify a legal basis for processing data:
•Consent
•Contract - processing is necessary to give effect to a contract
•Legal obligation - necessary to comply w/ the law
•Vital interests - necessary to protect someone’s life
• Public task - public authorities rely on the data
•Legitimate interests
54
What are the 8 legal rights individuals have under UK Data Protection Legislation?
1. Right to be informed
2. Right of access - can find out if organisation is using/storing their personal data (if submit ‘subject access request’, SAR, then company respond within 1-2 months)
3. Right to rectification - can have inaccurate data rectified or complete if incomplete (company has 1 month to respond)
4. Right to erasure - (company has 1 month to respond)
5. Right to restrict processing
6. Right to data portability - can transfer data from IT system of 1 organisation directly to another (e.g. when changing banks)
7. Right to object - (company has 1 month to respond)
8. Rights in relation to automated decision making & profiling - individuals can obtain human intervention
55
What should data controllers do under the UK Data Protection Legislation?
1. Demonstrate compliance w/ the legisalstion
2. Need a risk register where data breaches are enyered & maintain evidence of this
3. May need to appoint a data protection officer
4. Need data protection impact assessment if personal data is sensitive/high risk
56
Who & when should organisations report data breaches to under the UK Data Protection Legislation?
Information Comissioner’s Office (ICO), when there’s likely to be a risk to data subjects
57
What are the consequences of serious data breach to organisations under the UK Data Protection Legislation?
ICO may levy fines up to £17.5m or 4% of annual global turnover if higher
58
What are the 2 aims of Digital Operational Reailience Act (DORA), as an EU regulation that applies to brokers & insurers from 2025?
1. Strengthen the info & communication technology security of financial organisations operating in Europe
2. Make sure that the financial sector in Europe is able to stay resilient in the event of a severe operational digital disruption
59
What is the key challenge of Digital Operational Reailience Act (DORA), as an EU regulation that applies to brokers & insurers from 2025?
While financial services companies are regulated, the entities that they use for the management of info & communication technology may not be
