LM2 - Chapter 6

Question 1

Broker duties towards principals

Answer 1

• follow their instructions
  -act in good faith
• do not sub-delegate w/o permission
• account for funds
• act with all due care and skill (E&O)

Question 2

What can a principal do if a broker acts outside their authority

Answer 2

• ratify their actions and carry on
• ratify actions then make a claim for damages
• refuse to ratify and expose the agents to claims from the third party

Question 3

How to create an agency agreement

Answer 3

• necessity
• agreement
  -ratificiation

Question 4

Duty of Care

Answer 4

• act within standard in the relevant market
• if the broker fails this, they have an obligation under tort law to the person breached

Question 5

What could include a breach?

Answer 5

-Failing to:
- ensure insurnce was placed with suitable insurers
- placed on suitable terms
- understood the clients instructions
- explaining terms which can affect clients

Question 6

Wholesale broker

Answer 6

This broker has direct contact with the insurer. There is no reason why they cannot also have contact with the client if they are the only broker in the chain,
but where there are several brokers, this term is used for the one closest to
the insurer

Question 7

Retail broker

Answer 7

This is the other end of the chain and as with the wholesale broker; there is
nothing to prevent this broker being the only broker in the chain.
However, in a longer chain, the retail broker has the contact with the
ultimate client.
The retail and wholesale brokers could be two entirely separate broking firms,
or two firms which have a business relationship/alliance or they could be two
offices of the same broker.

Question 8

Producing broker

Answer 8

This term is used to describe the broker (individual or organisation) which has
the contact with the client and creates or produces the work for the client

Question 9

Single tied agent

Answer 9

A single tied agent is a representative of the insurer, not the insured.
Single tied agents are most common in a high street agency selling a number
of products from a single insurer. In this situation, the agent cannot advise the
client on other insurers’ products but is restricted to the products offered by
their principal.
These agents do not work in the London Market.

Question 10

Multi-tied agent

Answer 10

This is similar to the single tied agent in that the principal is still an insurer.
In this case however, the agent is selling a number of different insurers’
products – but only one product per insurer. For example, they might be tied
to Insurer A for their house insurance product and to Insurer B for their car
insurance product.
As with the single tied agent, this agent cannot offer independent advice
to a client about products in the wider market and does not work in the
London Market.

Question 11

Independent intermediary

Answer 11

This is the traditional London Market broker, which is not tied into any insurer
and works for their ultimate client who is the insured or reinsured.
This agent can take an unbiased view of the entire market (London and
elsewhere) and advise the client on the best options for their particular needs.

Question 12

Surplus lines broker

Answer 12

For much of the business emanating from the USA, the London Market is what
is known as a ‘surplus lines market’ which means that it can only be used if the
local or ‘admitted’ market has been shown the risk but is not able or willing to
take it on.
If the London Market is used, then a licensed surplus lines broker must be used
in the intermediary chain and the details of that broker form part of the data
captured about the risk on the Market Reform Contract (MRC).

Question 13

Open market correspondent

Answer 13

An open market correspondent (OMC) is an intermediary but is not a Lloyd’s
approved coverholder (a party holding delegated authority from a Lloyd’s
syndicate to write insurance business on its behalf). However, they introduce
business to Lloyd’s either directly or via a Lloyd’s broker on an open
market basis.
Open market means that the risk is individually placed rather than being attached to any pre-existing form of delegated underwriting agreement such as a binding authority or a lineslip.
There are certain territories where brokers/intermediaries that want to introduce
business into Lloyd’s need to have this additional level of approval by
Lloyd’s and need to be sponsored in this approval by a managing agent or
Lloyd’s broker.
The list of territories where this is required is not particularly large but it does
include areas such as Canada and Italy which are sizeable sources of business
into the market

Question 14

Lloyd’s Broker

Answer 14

Although it is not a requirement of placing business in the Lloyd’s market, a broker who is already approved by their own regulator can apply to Lloyd’s to go through a separate accreditation process. If successful they can then call
themselves a Lloyd’s broker

Question 15

Non-Lloyd’s broker

Answer 15

This is a broker regulated either by the UK regulator or their own home state
regulator (if overseas) but which has not obtained Lloyd’s accreditation.

Question 16

Placing process - clients needs

Answer 16

• review the clients needs and recommend insurance options available
• consider which markets to approach to obtain quotes; also identify any unacceptable markets (security committee)

Question 17

Placing process - slip

Answer 17

• slip and/or proposal forms are used to present risks to insurers.
• In addition there could be surveys/ loss records etc
• broker must ensure they have all relevant material from the client

Question 18

Reviewing quotes w/ clients

Answer 18

Advise the client on differences between quotes to enable the client to make final decision

Question 19

Finalising the placement

Answer 19

• the broker must communicate with the markets to confirm their lines
• get stamps on the slip and proportions
• check any signing down issues

Question 20

Submission to Xchanging

Answer 20

• includes slip and LPAN (premium info) and splitting out any tax relating to the risk)
• tax varies by country so the broker needs to know if overseas could tax be paid in london or if it comes through london or if it will be paid by the insurer

Question 21

Premium from client

Answer 21

• must rely insurers requirements to the insured in good time and warn of any issues if not paid in time
  (premium payment conditions)

Question 22

Documentati0on on Xchanging

Answer 22

Premium and risk dataa move via a system called accounting and settlement - can be uploaded to central market repository (insurance market repository).
This sends messge to Xchanging asking them to review documents, enter data onto databases and give the risk a signing number and date (unique reference)
The premium move is facilitated by Xchanging from broker to insurer

Question 23

Making changes to the risk

Answer 23

• the broker should advise the insurer on the change to the risk by creating the endorsement paperwork

Question 24

Claims - first advice

Answer 24

the first notification of a loss is the insured to the broker. The broker has to put together the info to present to insurers

Question 25

Expert Instructions

Answer 25

- instruction is often made through the broker

Question 26

Experts fees

Answer 26

Collected from the insurer by the broker but many do not provide this service

Question 27

Claims negotiations

Answer 27

The broker must negotiate on behalf of the client - or explain to the client why the insurer is correct

Question 28

Claim settlement

Answer 28

Insurers pay claim funds to the broker to go to the insured. The broker must pass it on quickly

Question 29

Recoveries/subrogation

Answer 29

Insurers can subrogate after they have indemnified the insured - this is done in the name of the insured so the broker has to make sure the client cooperates

Question 30

TOBAs

Answer 30

market agreements used to capture the ts&cs under which broker does business with various parties

Question 31

Who does a broker have TOBAs with?

Answer 31

Insurers, clients, 'producing brokers'. In lloyds there is a TOBA for each managing agent

Question 32

Insurer TOBA - regulatory status

Answer 32

The broker and the insurer both warrant to each other that they are duly authorised to (in the case of the broker) conduct what is called ‘insurance mediation activities’ (i.e. broking) and (in the case of the insurer) insurance business and that they will tell each other should that authorisation be suspended for any reason or they become insolvent

Question 33

Insurer TOBA - Brokers authority

Answer 33

This includes the broker’s authority to hold premium funds on behalf of the insurer. If a broker is granted ‘risk transfer’ by the insurer within a TOBA, any money once collected by the broker is deemed paid to the insurer, even though it is not physically in their bank account. Clearly, an insurer should grant a ‘risk transfer’ TOBA only to a broker with which they are comfortable, as the broker will be holding funds on the insurer’s behalf. If the insurer is unsure about the broker (perhaps they are in the early stages of dealing with them or they do not meet financial security criteria for the insurer) then a non-risk transfer TOBA is more appropriate; this does not allow the broker to hold any funds on the insurer’s behalf. The UK regulator (FCA) also has a number of rules relating to client money with which any broker regulated in the UK must comply. It is important that a broker that is not regulated in the UK (for example because they are not UK-based) complies with their own regulator’s rules in this regard.

Question 34

Insurer toba - renumeration

Answer 34

sets out brokerage

Question 35

Insurer TOBA - holding money/taxes

Answer 35

Broker has responsibility to insurer in relation to funds held but will account to the insurer in relation to any taxes paid on insurers behalf.

Question 36

Insurer TOBA - compliance

Answer 36

Each party will comply with their respective obligations including contract certainty and financial crime/bribery avoidance.

Question 37

Insurer TOBA - ownership/access to data

Answer 37

The traditional paper-based process in the London Market relied on the broker maintaining the master placing and claims information – and updating insurers as required. Insurers could take copies of documentation as they wished (for example they might copy the MRC/ slip when they agreed their written line) but rarely maintained a full copy of any claims file or kept copies of every document that they might have reviewed during the placing process. In the case of any disputes between the insured and insurers, the issue of access to documentation sometimes arose where certain documents were held by the broker. This was a particular issue if allegations were made that some documents were not shown to insurers at the time of placing. If the matter of ownership and access to data and records is clarified in the TOBA, there is less chance of a dispute later.

Question 38

Client TOBA - claims

Answer 38

This allows the broker to give guidance to the clients as to the requirements in the event of a claim.

Question 39

Client TOBA - disclosure

Answer 39

This allows the broker to put the client on notice as to their duty of disclosure during the placing process.

Question 40

Client TOBA - payment

Answer 40

payment for services + brokerage

Question 41

Client TOBA - money holdings

Answer 41

This makes clear that the broker holds money on trust mainly for the client, but also occasionally for the insurer if they have a ‘risk transfer’ TOBA with them. The TOBA with the client should also make clear which party may retain any interest made on funds (for example the premium) being held by the broker.

Question 42

Broker renumeration - flat fee

Answer 42

This is payable by the client. Under the FCA Insurance: Conduct of Business rules (ICOBS) any broking firm must provide a client with details of any fees that will be payable before the client incurs any fees. If, for any reason, the actual fee cannot be stated beforehand, the basis for its calculation must be provided. If any further fees might be incurred during the life of a policy for other activities, the broker must also advise the client up front about them.

Question 43

Broker renumeration - brokerage

Answer 43

The broker may earn a commission (or ‘brokerage’, as it is better known in the London Market) for placing the business. Unlike the flat fee payment, brokerage is paid by the insurer rather than the insured client. In arranging brokerage, the insurer agrees that the broker can retain, or hold back, part of the premium charged to the client when transferring it to the insurer. The premium charged to the client is what is known as the ‘gross premium’ and the amount received by the insurer (which is the gross premium less the brokerage retained by the broker) is called the net premium. If a commercial client asks the broker, they must tell them what commission/ brokerage they are receiving from the insurer. However, the broker does not have to volunteer the information to a commercial client.

Question 44

Broker renumeration - other fees

Answer 44

Some brokers earn additional commissions by charging a ‘collecting commission’ on claims (usually around 1% of the claims value). This means that the insurer pays 101% of the value of the claim, but the insured receives only the 100% component. If a broker is acting as a coverholder under a contract of delegated underwriting authority, the insurer can pay a coverholder commission for each risk bound and may also pay a profit commission should the business be successful. Another example of a fee or commission that can be earned by a broker is for specialist technical advice such as on engineering matters. Some brokers have in house technical teams which can provide information both to the insured and to the insurer and will charge a fee for the service.

Question 45

Insurance Distribution Directive (IDD)

Answer 45

The Insurance Distribution Directive (IDD) came into force in the UK on 1 October 2018, replacing the previous Insurance Mediation Directive (IMD). Although the IDD was an EU directive it was brought into UK law by specific legislation

Question 46

IDD application

Answer 46

* All sellers of insurance products, including those who sell directly to customers. * Any person whose activities consist of assisting with the administration and performance of insurance contracts. This includes those acting for insurers, for example, by performing claims management activities. * Ancillary insurance intermediaries. However, the regime for these organisations has a lighter touch. Furthermore, an ancillary organisation will be excluded from the regulation completely if the insurance is complementary to the goods or services provided. This is provided that the insurance covers, for example, breakdown, loss or damage to goods or other risks linked to travel booked with the provider, and where the premium is less than €600.

Question 47

Insurance distribution carve outs

Answer 47

* the mere provision of information on an incidental basis to a customer in the context of another professional activity, if no further steps are taken to assist the customer in concluding an insurance contract; * the management of claims as an insurer on a professional basis and the provision of loss adjusting services; and * the mere provision of data and information on potential policyholders to insurance intermediaries or insurers, if no further steps are taken to assist a customer in concluding an insurance contract.

Question 48

IDD general principles

Answer 48

* Distributors must always act honestly, fairly and professionally in accordance with the best interest of customers. * All information provided by distributors must be fair, clear and not misleading. Furthermore, in relation to any remuneration received, distributors must disclose: * the nature of the remuneration; and * the basis for that remuneration (fee/brokerage, etc.).

Question 49

FCA - risk framework

Answer 49

The FCA, which now regulates brokers for all aspects of their business, uses a three-pillar risk framework looking at: * assessment of the firm’s conduct, using the question ‘are the interests of consumers and market integrity at the heart of how the firm is run?’; * event-driven work which allows a flexible response to anything that arises; and * reviewing issues and products when required

Question 50

FCA - client money rules

Answer 50

In relation to the broker/client TOBAs, a broker must be clear about their provisions for holding their client’s money and, for example, indicate whether they will also be holding insurer money and who will receive any interest earned on these funds. The FCA handbook contains some specific rules concerning client money, which are known as the Client Assets rules (or CASS for short). The basic concept is that the broker must arrange adequate protection in respect of all client assets for which they are responsible. Client assets could be premium funds on their way to the insurer (if the broker does not hold a risk transfer TOBA for the insurer), or they could be claims funds on their way from the insurer to the client

Question 51

How can brokers hold clients money

Answer 51

Brokers can keep client funds in one of two types of segregated account: a statutory trust account and a non-statutory trust account. The main difference between them is the broker’s ability to fund payments (such as the premium) out of the accounts ahead of receiving funds into the account

Question 52

Statutory trust account

Answer 52

A broker must not fund payments out of accounts in which they hold the client money, if those accounts are statutory trusts. The trust in this case exists only for client money which the broker has actually received.

Question 53

Non-statutory trust account

Answer 53

A broker may only fund payments out of accounts in which they hold the client money, if they are defined as non-statutory trusts. In this case, the trust is not set up by operation of any particular law but by the broker declaring the account to be a trust account into which client money will be placed. For this type of account, if the broker wants to extend credit to the client then they are at liberty to do so, but should have systems and processes in place to ensure that the client pays them eventually. If they use non-statutory trust accounts, a broker could pay the claim to their client before the insurer pays the money to the broker

Question 54

Data protection act 2018

Answer 54

The DPA 2018 came into effect in the UK in May 2018, to coincide with the implementation of the EU GDPR. It sets out the framework for data protection law in the UK.

Question 55

DPA 2018 elements

Answer 55

Main elements of the DPA 2018: * Ensuring that sensitive health, social care and education data can continue to be processed, to ensure confidentiality in health and safeguarding situations. * Restricting the rights to access and delete data where there are legitimate grounds for doing so (e.g. for national security purposes). * Setting the age from which parental consent is not needed to process data online. * Providing the Information Commissioner's Office (ICO) with enhanced powers to regulate and enforce data protection laws

Question 56

Who does the UK GDPR apply to?

Answer 56

The UK GDPR applies to the United Kingdom, including Northern Ireland, and replaced the previous European Union (EU) GDPR. The UK GDPR places legal obligations on controllers and processors. For instance, firms are required to maintain records of personal data and processing activities, and a firm has significant legal liability if it is responsible for a breach. Controllers are not relieved of their obligations where a processor is involved. The UK GDPR places obligations on controllers to ensure their contracts with processors comply with the regulations.

Question 57

What information does the UK GDPR apply to?

Answer 57

It applies to personal data of an identified living individual. However, the definition of personal data reflects changes in technology and in the way in which information is collected. It makes it clear that information such as an online identifier, e.g. an IP address, can be personal data. It also applies to both automated personal data and to manual filing systems where personal data is accessible according to specific criteria. This is similar to the EU GDPR but wider than the definitions in the previous UK data protection legislation. It could include chronologically ordered sets of manual records containing personal data. Personal data that has been anonymised, such as where it is key-coded, can fall within the scope of the UK GDPR depending on how difficult it is to attribute such data to a particular individual.

Question 58

GDPR principles

Answer 58

Under the UK GDPR, the data protection principles set out the main responsibilities for organisations. The most significant addition is an emphasis on accountability. The UK GDPR requires firms to show how they comply with the principles – for example, by documenting the decisions they take about a processing activity

Question 59

Lawful processing - consent

Answer 59

Consent must be a freely given, specific, informed, and unambiguous indication of the individual's wishes. There must be some form of positive opt-in; consent cannot be inferred from silence, pre-ticked boxes or inactivity, and firms need to make it simple for people to withdraw consent. Consent must also be separate from other terms and conditions and be verifiable. Where a firm relies on someone's consent, the individual generally has stronger rights, for example to have their data deleted.

Question 60

Lawful processing - contract

Answer 60

The processing is necessary for a contract a firm has with the individual, or because they have asked the firm to take specific steps before entering a contract

Question 61

Lawful processing

Answer 61

3. Legal obligation The processing is necessary for a firm to comply with the law (not including contractual obligations). 4. Vital interests The processing is necessary to protect an individual's life. 5. Public task The processing is necessary for a firm to perform a task in the public interest or for its official functions, and the task or function has a clear basis in law. 6. Legitimate interests The processing is necessary for a firm's legitimate interests or the legitimate interests of a third party, unless there is a good reason to protect the individual's personal data which overrides those legitimate interests.

Question 62

UK GDPR - right to be informed

Answer 62

* Individuals have the right to be informed about the collection and use of their personal data. * This must be provided to individuals at the time the personal data is collected from them.

Question 63

UK GDPR - right of access

Answer 63

* Individuals have the right to find out if an organisation is using or storing their personal data. * They can exercise this right by submitting a subject access request (SAR) to the organisation concerned. * A company should respond to an SAR within one month; it can take an additional two months in certain circumstances.

Question 64

UK GDPR - right to rectification

Answer 64

* Individuals have the right to have inaccurate personal data rectified or completed if it is incomplete. * An individual can make a request for rectification verbally or in writing.

Question 65

GDPR - right to erasure

Answer 65

* Individuals have the right to have their personal data erased, also known as 'the right to be forgotten'. * The right is not absolute and only applies in certain circumstances.

Question 66

GDPR - right to restrict processing

Answer 66

* Individuals have the right to request the restriction or suppression of their personal data. * This is not an absolute right and only applies in certain circumstances. * When processing is restricted, an organisation is permitted to store the personal data, but not use it.

Question 67

GDPR - right to data portbility

Answer 67

This allows individuals to obtain and reuse their personal data for their own purposes across different services.

Question 68

GDPR - right to object

Answer 68

* This gives individuals the right to object to the processing of their personal data in certain circumstances. * Individuals have an absolute right to stop their data being used for direct marketing.

Question 69

GDPR - Rights in relation to automated decision making and profiling

Answer 69

* An individual has the right not to be subject to a decision based solely on automated processing. * Processing is 'automated' where it is carried out without human intervention and where it produces legal effects or significantly affects the individual.

Question 70

GDPR - accountability and governance

Answer 70

Accountability is one of the data protection principles under the UK GDPR. Firms are expected to put into place comprehensive but proportionate governance measures. Good practice tools such as privacy impact assessments and privacy by design are now legally required in certain circumstances. Practically, this is likely to mean more policies and procedures for organisations, although many will already have good governance measures in place.