I10TB3 2023 Reference

Insurance
broking
fundamentals
I10: 2023 Study text
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2 I10/October 2022 Insurance broking fundamentals
© The Chartered Insurance Institute 2022

All rights reserved. Material included in this publication is copyright and may not be reproduced in whole or in part
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written permission must also be obtained before any part of this publication is stored in a retrieval system of any
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Every attempt has been made to ensure the accuracy of this publication. However, no liability can be accepted for
any loss incurred in any way whatsoever by any person relying solely on the information contained within it. The
publication has been produced solely for the purpose of examination and should not be taken as definitive of the
legal position. Specific advice should always be obtained before undertaking any investments.
Print edition ISBN: 978 1 80002 559 2
Electronic edition ISBN: 978 1 80002 560 8
This edition published in 2022
Author and updater

Justyn Larcombe, BEd (Hons), ACII has worked in the insurance industry for almost 20 years. He has held senior
roles in a number of insurance broking organisations and more recently as a trainer and financial services coach.
Reviewers for the first edition

Jeremy Court, ACII, Bluefin Group.
Barry Hulin, FCII, Churchill Insurance Consultants Ltd.
Acknowledgement
The CII thanks the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for their kind
permission to draw on material that is available from the FCA website: www.fca.org.uk (FCA Handbook:
www.handbook.fca.org.uk/handbook) and the PRA Rulebook site: www.prarulebook.co.uk and to include extracts
where appropriate. Where extracts appear, they do so without amendment. The FCA and PRA hold the copyright for
all such material. Use of FCA or PRA material does not indicate any endorsement by the FCA or PRA of this
publication, or the material or views contained within it.
The CII thanks the Association of British Insurers for its kind permission to draw on material that is available on the
Association of British Insurers website: www.abi.org.uk and to include extracts where appropriate. Where extracts
For reference only

appear, they do so without amendment. The ABI holds the copyright for all such material. Use of ABI material does
not indicate any endorsement by the ABI of this publication, or the materials or views contained within it.
While every effort has been made to trace the owners of copyright material, we regret that this may not have been
possible in every instance and welcome any information that would enable us to do so.
Unless otherwise stated, the authors have drawn material attributed to other sources from lectures, conferences, or
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Typesetting, page make-up and editorial services CII Learning Solutions.
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3
Using this study text

Welcome to the I10: Insurance broking fundamentals study text which is designed to
support the I10 syllabus, a copy of which is included in the next section.
Please note that in order to create a logical and effective study path, the contents of this
study text do not necessarily mirror the order of the syllabus, which forms the basis of the
assessment. To assist you in your learning we have followed the syllabus with a table that
indicates where each syllabus learning outcome is covered in the study text. These are also
listed on the first page of each chapter.
Each chapter also has stated learning objectives to help you further assess your progress
in understanding the topics covered.
Contained within the study text are a number of features which we hope will enhance
your study:
Activities: reinforce learning through Key points: act as a memory jogger at

practical exercises. the end of each chapter.
Be aware: draws attention to important Key terms: introduce the key concepts
points or areas that may need further and specialist terms covered in each
clarification or consideration. chapter.
Case studies: short scenarios that will Refer to: Refer to: extracts from other CII study
test your understanding of what you texts, which provide valuable information
have read in a real life context. on or background to the topic. The
sections referred to are available for you
to view and download on RevisionMate.
For reference only

Consider this: stimulating thought Reinforce: encourages you to revisit a
around points made in the text for which point previously learned in the course to
there is no absolute right or wrong embed understanding.
answer.
Examples: provide practical illustrations Sources/quotations: cast further light

of points made in the text. on the subject from industry sources.
In-text questions: to test your recall of On the Web: introduce you to other
topics. information sources that help to
supplement the text.
At the end of every chapter there is also a set of self-test questions that you should use to
check your knowledge and understanding of what you have just studied. Compare your
answers with those given at the back of the book.
By referring back to the learning outcomes after you have completed your study of each
chapter and attempting the end of chapter self-test questions, you will be able to assess your
progress and identify any areas that you may need to revisit.
Not all features appear in every study text.
Note
Website references correct at the time of publication.
For reference only
5
Examination syllabus
Insurance broking
fundamentals
Objective
To provide knowledge and understanding of the roles and responsibilities of insurance broking
organisations, including:
• their interaction with insurers;
• their interaction with clients;
• regulatory and financial issues affecting them; and
• conduct issues.
Summary of learning outcomes Number of questions

in the examination*
1. Understand the insurance broking market. 12
2. Understand the role and responsibilities of the insurance broker in the provision of 20
insurance products and services.
3. Understand contract and agency in relation to insurance brokers and their client. 6
For reference only

4. Understand the key legal and regulatory issues affecting insurance brokers. 15
5. Understand the key financial issues affecting insurance brokers. 12
6. Understand issues relating to the conduct and culture of insurance broking business. 10 case study related
questions
* The test specification has an in-built element of flexibility. It is designed to be used as a guide for study and is not a statement of actual
number of questions that will appear in every exam. However, the number of questions testing each learning outcome will generally be within
the range plus or minus 2 of the number indicated.
Important notes
• Method of assessment: 65 multiple choice questions (MCQs) and 2 case studies, each comprising
5 MCQs. 2 hours are allowed for this exam.
• This syllabus will be examined from 1 January 2023 until 31 December 2023.
• Candidates will be examined on the basis of English law and practice unless otherwise stated.
• This PDF document is accessible through screen reader attachments to your web browser and has
been designed to be read via the speechify extension available on Chrome. Speechify is an
extension that is available from https://speechify.com/. If for accessibility reasons you require this
document in an alternative format, please contact us on online.exams@cii.co.uk to discuss your
needs.
• Candidates should refer to the CII website for the latest information on changes to law and practice
and when they will be examined:
1. Visit www.cii.co.uk/qualifications
2. Select the appropriate qualification
3. Select your unit from the list provided
4. Select qualification update on the right hand side of the page
Published October 2022

©2022 The Chartered Insurance Institute. All rights reserved. I10
1. Understand the insurance broking 4.6 Explain the responsibilities of insurance brokers as
market. required by data protection legislation.
1.1 Explain the rationale for insurance brokers in the
5. Understand the key financial issues
insurance market.
affecting insurance brokers.
1.2 Describe and understand the role of different types
5.1 Explain the different monies held by an insurance
of non-life insurance brokers in the insurance
brokers.
market.
5.2 Explain the importance of the impact of the
1.3 Describe the services offered by insurance brokers
Insurance Distribution Directive 2018 in relation to
and the different ways they are remunerated.
handling money.
1.4 Explain the various roles within an insurance broking
5.3 Explain the importance of retaining clients and
organisation.
finding new business for insurance brokers.
2. Understand the role and responsibilities
6. Understand issues relating to the
of the insurance broker in the provision
conduct and culture of insurance broking
of insurance products and services.
business.
2.1 Explain the role of the insurance broker in meeting
6.1 Explain the importance of good conduct in relation to
client needs by providing insurance products and
dealing with insurers and clients.
services.
6.2 Explain the impact of culture on the way that
2.2 Explain the role of the insurance broker in
business is conducted by an insurance broking
negotiating and placing insurance contracts.
organisation.
2.3 Explain the role of the insurance broker in selecting
6.3 Describe how insurance brokers handle complaints.
insurers.
6.4 Explain how errors and omissions occur and are
2.4 Explain the role of the insurance broker in the design
reported and handled in insurance broking
and operation of insurance programmes.
organisations.
2.5 Describe the role of the insurance broker in the
6.5 Explain the issues relating to mis-selling of insurance
For reference only

claims process.
products.
2.6 Describe the role of the insurance broker in
supplying additional services.
2.7 Explain the role and responsibilities of the insurance
broker in relation to delegated authority agreements.
3. Understand contract and agency in

relation to insurance brokers and their
client.
3.1 Describe the duties of an insurance broker as an
agent.
3.2 Explain how conflicts of interest could arise in
relation to insurance broking business and how to
deal with them.
3.3 Describe the items that should be included in a
Terms of Business Agreement (TOBA) between
insurance brokers and insurers, and between
insurance brokers and their clients.
4. Understand the key legal and regulatory

issues affecting insurance brokers.
4.1 Describe the role of the Financial Conduct Authority
in the regulation of insurance brokers.
4.2 Explain the importance of achieving positive
customer outcomes and the fair treatment of
customers.
4.3 Describe the purpose of the Insurance: Conduct of
Business sourcebook (ICOBS) and the application to
insurance brokers.
4.4 Explain the importance of training and competence
within insurance broking organisations.
4.5 Explain the responsibilities of insurance brokers in
relation to sanctions checking, money laundering,
bribery, corruption and with regards to the
Employers' Liability Tracing Office (ELTO).
Published October 2022 2 of 3

©2022 The Chartered Insurance Institute. All rights reserved.
7
Reading list Post magazine. London: Incisive Financial

Publishing. Monthly. Contents searchable
The following list provides details of further online at www.postonline.co.uk.
reading which may assist you with your
studies. Reference materials
Concise encyclopedia of insurance terms.
Note: The examination will test the
syllabus alone. Laurence S. Silver, et al. New York:
Routledge, 2010.*
The reading list is provided for guidance
only and is not in itself the subject of the Consumer Insurance (Disclosure and
examination. Representations) Act 2012. London: HMSO,
The resources listed here will help you 2012. Available via www.legislation.gov.uk.
keep up-to-date with developments and Data Protection Act 1998. Available via
provide a wider coverage of syllabus topics. www.legislation.gov.uk.
Dictionary of insurance. C Bennett. 2nd ed.
CII study texts
London: Pearson Education, 2004.
Insurance broking fundamentals. London:
CII. Study text I10.
Examination guide
Books and eBooks
‘Claims against insurance brokers’. Chapter If you have a current study text enrolment,
16 in Insurance claims. 4th ed. Alison the current examination guide is included
Padfield. Tottel, 2016. and is accessible via Revisionmate
(ciigroup.org/login). Details of how to access
‘Lloyd's brokers and other agents of the
Revisionmate are on the first page of your
assured’. Chapter in Lloyd’s: law and
study text. It is recommended that you only
practice. Julian Burling. Oxon: Informa Law,
For reference only

study from the most recent version of the
2014.*
examination guide.
The law of insurance broking. 3rd ed.
Christopher Henley. London: Sweet &
Maxwell, 2016.
Exam technique/study skills
The law of insurance contracts. Malcolm A There are many modestly priced guides
Clarke. 6th ed. London: Informa, 2009. available in bookshops. You should choose
one which suits your requirements.
Winning client trust : the retail distribution
review and the UK financial services
industry's battle for its clients' hearts and
minds. Chris Davies. London: Ecademy
Press, 2011.*
Journals and magazines
Insurance age. Incisive media. Monthly.
Contents searchable online at
www.insuranceage.co.uk.
Insurance day. London: Informa. Daily
except weekends. Articles searchable online
at www.insuranceday.com.
Insurance times. London: Newsquest
Specialist Media. Weekly. Contents
searchable online at
www.insurancetimes.co.uk.
Financial adviser. London: FT Business.
Weekly. Available online at
www.ftadviser.com.
Money marketing. London: Centaur
Communications. Weekly. Available online at
www.moneymarketing.co.uk.
* Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only).
Published October 2022 3 of 3

©2022 The Chartered Insurance Institute. All rights reserved.
For reference only
9
I10 syllabus
quick-reference guide
Syllabus learning outcome Study text chapter
and section
1. Understand the insurance broking market.
1.1 Explain the rationale for insurance brokers in the insurance 1A
market.
1.2 Describe and understand the role of different types of non-life 1B
insurance brokers in the insurance market.
1.3 Describe the services offered by insurance brokers and the 1C
different ways they are remunerated.
1.4 Explain the various roles within an insurance broking 1D
organisation.
2. Understand the role and responsibilities of the insurance broker in the provision of
insurance products and services.
2.1 Explain the role of the insurance broker in meeting client needs 2A
by providing insurance products and services.
2.2 Explain the role of the insurance broker in negotiating and 2B
placing insurance contracts.
2.3 Explain the role of the insurance broker in selecting insurers. 2C
2.4 Explain the role of the insurance broker in the design and 2D
For reference only

operation of insurance programmes.
2.5 Describe the role of the insurance broker in the claims process. 2E
2.6 Describe the role of the insurance broker in supplying additional 3A
services.
2.7 Explain the role and responsibilities of the insurance broker in 3B
relation to delegated authority agreements.
3. Understand contract and agency in relation to insurance brokers and their client.
3.1 Describe the duties of an insurance broker as an agent. 4A
3.2 Explain how conflicts of interest could arise in relation to 4B
insurance broking business and how to deal with them.
3.3 Describe the items that should be included in a Terms of 4C
Business Agreement (TOBA) between insurance brokers and
insurers, and between insurance brokers and their clients.
4. Understand the key legal and regulatory issues affecting insurance brokers.
4.1 Describe the role of the Financial Conduct Authority in the 5A
regulation of insurance brokers.
4.2 Explain the importance of achieving positive customer outcomes 5B
and the fair treatment of customers.
4.3 Describe the purpose of the Insurance: Conduct of Business 5C
sourcebook (ICOBS) and the application to insurance brokers.
4.4 Explain the importance of training and competence within 5D
insurance broking organisations.
4.5 Explain the responsibilities of insurance brokers in relation to 5E, 5F
sanctions checking, money laundering, bribery, corruption and
with regards to the Employers' Liability Tracing Office (ELTO).
4.6 Explain the responsibilities of insurance brokers as required by 5G
data protection legislation.
5. Understand the key financial issues affecting insurance brokers.
5.1 Explain the different monies held by an insurance brokers. 6A
Syllabus learning outcome Study text chapter

and section
5.2 Explain the importance of the impact of the Insurance 6B
Distribution Directive 2018 in relation to handling money.
5.3 Explain the importance of retaining clients and finding new 6C
business for insurance brokers.
6. Understand issues relating to the conduct and culture of insurance broking business.
6.1 Explain the importance of good conduct in relation to dealing with 7A
insurers and clients.
6.2 Explain the impact of culture on the way that business is 7B
conducted by an insurance broking organisation.
6.3 Describe how insurance brokers handle complaints. 7C
6.4 Explain how errors and omissions occur and are reported and 7D
handled in insurance broking organisations.
6.5 Explain the issues relating to mis-selling of insurance products. 7E
For reference only

11
Introduction
This study text provides knowledge and understanding of the roles and responsibilities of
insurance broking organisations, their interaction with insurers and clients, the regulatory
environment in which they operate as well as both financial and conduct issues.
For the client or consumer of insurance (known as the insured), the insurance market may
seem complex with a vast number of insurance products on offer from many different sellers.
The insurance marketplace in the UK is highly regulated and some insurances are
compulsory by law. The intermediary, or insurance broker, is there to help and advise their
clients, matching their needs to appropriate insurance products. The insurance broker also
provides services to the insurer, bringing them new clients and allowing insurers to
concentrate on the business of insurance. It is because the broker stands between both the
insured and the insurer, and the fact that the broker is often paid by the insurer (in brokerage
commission), that the role of the intermediary can be quite complex. This complexity may
give rise to a potential for conflicts of interest between parties that requires careful
management.
The role of the intermediary in an insurance agreement – where the broker brings the
insured and insurer to contract – is of great importance, especially where the risks are
complex. But the broker’s role does not end there. Insurance brokers maintain the
relationship with the insured throughout the lifetime of the insurance contract; many will help
manage claims in addition to offering other services.
This study text begins by clarifying the role of the insurance broker by explaining how the
insurance broking market operates, the types of intermediaries and the services they offer as
well as the classes of insurance most commonly transacted by insurance brokers.
We will cover one of the main roles of the insurance broker – the provision of insurance
For reference only

products and services to meet client needs. The different types of insurance broker such as
Lloyd’s brokers, wholesale brokers and reinsurance brokers will also be explained, along
with the different activities insurance brokers are involved in.
The laws of contract and agency are important topics because they underpin the relationship
between the broker and their principal (the insured), as well as the relationship with the
insurer. An understanding of the law of agency within the context of the insurance contract is
covered in detail, as are the key legal and regulatory issues affecting insurance brokers.
Finally, the financial conduct and culture issues affecting insurance brokers are considered,
including the way different monies are handled, how complaints are dealt with, the
management of errors and omissions, and the importance of good conduct when dealing
with both insurers and clients.
This study text is intended to provide an introduction to the fundamentals of insurance
broking in an insurance market that is constantly evolving, and to demonstrate the
importance of this profession within the insurance industry as a whole.
For reference only
13
Contents
1: The insurance broking market
A The need for insurance brokers 1/2
B Types of insurance broker 1/9
C Services offered by insurance brokers and how they are remunerated 1/17
D Roles within an insurance broking organisation 1/23
2: Role of the broker in meeting client needs

A Provision of products and services 2/2
B Negotiation and placement 2/5
C Selection of an insurer 2/14
D Design and operation of insurance programmes 2/19
E Claims negotiation, collection and payment 2/22
3: Other roles of insurance brokers

A Risk management and additional services 3/2
B Delegated authority agreements 3/7
For reference only

4: Contract and agency law
A Duties of an insurance broker as agent 4/2
B Conflicts of interest 4/5
C Terms of business agreements (TOBAs) 4/7
5: Legal and regulatory issues

A The Financial Conduct Authority (FCA) 5/2
B Achieving positive customer outcomes and fair treatment of customers, 5/9
including Consumer Duty
C Insurance: Conduct of Business Sourcebook (ICOBS) 5/13
D Training and competence 5/17
E Financial crime 5/18
F Employers’ Liability Tracing Office (ELTO) 5/21
G Data protection 5/22
6: Key financial issues facing insurance brokers

A Monies held by an insurance broker 6/2
B Insurance Distribution Directive (IDD) 6/4
C Retaining clients and finding new business 6/5
7: Conduct and culture

A Good conduct 7/2
B Culture in an insurance broking organisation 7/6
C Complaints 7/7
D Errors and omissions (E&Os) 7/12
E Mis-selling 7/14
Self-test answers i
Cases xiii
Legislation xv
Index xvii
For reference only

Chapter 1
The insurance
1
broking market
Contents Syllabus learning
outcomes
Introduction
A The need for insurance brokers 1.1
B Types of insurance broker 1.2
C Services offered by insurance brokers and how they are remunerated 1.3
D Roles within an insurance broking organisation 1.4
Key points
Question answers
Self-test questions
For reference only

Learning objectives
After studying this chapter, you should be able to:
• explain the rationale for insurance brokers in the insurance market;
• describe the classes of insurance that are more likely to be transacted by insurance
brokers;
• describe the types of non-life insurance brokers in the insurance market, including Lloyd's,
wholesale and reinsurance brokers;
• describe the services offered by insurance brokers and the different ways they are
remunerated; and
• explain the various roles within an insurance broking organisation.
Chapter 1 1/2 I10/October 2022 Insurance broking fundamentals
Introduction
In this opening chapter we will provide a broad overview of what insurance brokers do and
why they exist. We will discuss the different types of insurance broker, the range of services
they offer their clients and the different classes of business transacted by insurance brokers.
We will also describe the different ways brokers can be paid. This chapter will also include a
description of the different roles within insurance broking organisations. The aim is to provide
the foundations for a more detailed study of these topics in the subsequent chapters.
Key terms
This chapter features explanations of the following ideas:
Added value Agent Appointed British Insurance

services representative (AR) Brokers’ Association
(BIBA)
Brokerage Broker networks Cedant Churn
Conflicts of interest Consolidation Delegated authority Financial Conduct
Authority (FCA)
Independent Intermediaries Introducer appointed Mediation
financial adviser representative (IAR)
(IFA)
Placing Platform Principal Producing broker Reinsurance
Limited (PPL)
Retail Retail broker Retrocession Risk management
For reference only

Segmentation Sub-broker Transparency Volume overrider
Wholesale broker
A The need for insurance brokers

Before we provide a rationale for the existence of insurance brokers in the insurance market,
it is first necessary to clearly understand what we mean by the term ‘insurance broker’.
A1 What is an insurance broker?

As this unit is called ‘Insurance broking fundamentals’, and you may work for an organisation
that calls itself an ‘insurance broker’, it would be reasonable to assume that the term
‘insurance broker’ is clearly understood and that no further explanation is necessary. For
those with many years’ experience of working in the insurance industry this will be the case,
but to those who are new to the industry it may not be so clear!
How this term came into use within the insurance market, and how it continues to be used, is
explained in the compulsory certificate level unit IF1: Insurance legal and regulatory. We
recommend that you now refer to this material to ensure that you have a clear
understanding of:
• the various types of intermediaries that exist within the insurance market;
• how the term ‘insurance broker’ is generally used now within the market to describe
organisations that offer independent advice; and
• the special rules that apply to intermediaries who wish to use the title ‘Lloyd’s broker’.
Refer to
Refer to IF1, chapter 2, section D
Chapter 1 The insurance broking market 1/3
Chapter 1
Key points to note:
The insurance market consists of many Examples of such intermediaries include introducer appointed
different categories of insurance representatives (IARs) and appointed representatives ARs).
intermediary. These include These are not truly independent intermediaries and are not
intermediaries who are authorised to insurance brokers. They may be solicitors, estate agents, travel
conduct insurance mediation on behalf agents or veterinary practices, for example, and are not the focus of
of a company to whom they are this unit.
contractually tied (such as an insurer.
Insurance brokers are, in effect, The Financial Conduct Authority (FCA) – the UK regulator of
independent intermediaries. insurance brokers – makes no distinction between the term ‘broker’
and ‘independent intermediary’. The same applies to this unit,
although we shall use the term ‘broker’ or ‘insurance broker’
throughout this study text.
Refer to
Refer to chapter 5 for a definition of insurance mediation
Question 1.1
Who is an independent intermediary?
a. One who is authorised to conduct insurance mediation on behalf of a company to □
whom they are contractually tied.
b. An introducer appointed representative (IAR). □
c. One who is authorised to conduct insurance mediation offering unbiased advice. □
d. A solicitor who is also an appointed representative (AR). □
For reference only

Before moving on, there is a further aspect to introduce – the law of agency. The application
of the law of agency to the activities of insurance brokers further distinguishes them from
other types of intermediaries.
We will explain this concept in detail later on, but at this stage it is sufficient to understand
the following important points:
• In common law, everyone who acts on behalf of another person is an ‘agent’.
• An agent is one who is authorised by the ‘principal’ to bring them into a contractual
relationship with another (known as the ‘third party’, in legal terms).
• In the insurance market, it is the insurance broker who acts as an agent in bringing the
principal, their client (insured), into a contractual agreement with the third party, the
insurer.
The diagram below illustrates the relationship between all three parties.
Contract is made between the
insurer and insured only
Insured Insurer
Broker
Information flows from insured to

insurer through the broker
The main distinguishing feature of an insurance broker compared to other intermediaries is

that, when placing business, their clients are their principal, and not usually the insurer or the
third party to whom they are introducing business.
A2 Why do insurance brokers exist?

Having established what an insurance broker is, we can now identify their role within the
insurance market and provide a rationale for their existence. A very brief reminder of how
insurance brokers became established will enhance our understanding.
A2A The evolution of the insurance broking industry
Although the term ‘insurance broker’ was only recognised from a regulatory perspective in
1977, insurance intermediaries of one sort or another have always had a role in the
insurance market and would have been a key element of the Lloyd’s market from its
earliest days.
The term ‘insurance broker’ became a regulated term under the Insurance Brokers
(Registration) Act 1977. This Act was designed to prevent the bogus practices of firms
holding themselves out as brokers but in fact acting as representative of one or more
preferred insurance companies. The 1977 Act was subsequently repealed and so there is in
fact no legal recognition of the term.
The general insurance market was self-regulated by an independent organisation known as
the General Insurance Standards Council (GISC) until the Financial Services Authority (FSA)
took over this role from 14 January 2005 until 31 March 2013. Since then, insurance broking
firms have been regulated by the FCA.
The insurance broking business is largely associated with general insurance, although, until
2001, insurance brokers would regularly transact both general insurance and life insurance.
However, more onerous regulation was introduced so that life insurance, pensions and
investment advice is now provided by independent financial advisers (IFAs).
A2B The role of the broker
Insurance brokers have a unique position in the transaction of insurance. They are
For reference only

positioned between the insurer and their clients and ensure the two parties reach a
contractual relationship in a binding and transparent way. The buyer (the insured) can of
course purchase insurance products directly from the seller (the insurer). However, the buyer
may not be knowledgeable about the options available or understand some of the
complexities of the policy wording; perhaps the buyer lacks the time to make all the
arrangements, or simply wants to make a choice based on a wide range of options. In this
case, the buyer may seek advice from a specialist adviser, the insurance broker, who is able
to offer independent, impartial advice and communicate with insurers on their client’s behalf.
The insurance broker may charge the insured (their client) a direct fee for their services.
However, for smaller policies, it is more common for the broker to take a commission
payment from the premium (known as brokerage) where they have a pre-negotiated
agreement with the insurer.
Be aware
The complexities of the remuneration process can be confusing for clients as it is the
insurer who makes the payment to the broker from the premium. This has also been the
cause of potential conflicts of interest for the broker. The subjects of conflicts of interest
and broker remuneration are discussed in greater detail in chapter 4 and chapter 1,
respectively.
It is important at this stage to understand that the broker has a unique position between the
insurer and the insured and that the relationship is wholly dependent on trust; trust between
the broker and their clients and between the broker and the insurer. The broker, as agent,
owes a legal duty of care to their client (sometimes also known as the ‘principal’). The FCA
rules are imposed in addition to these legal duties.
A2C The benefits of insurance brokers to their clients
Some clients choose to buy their insurance products through an insurance broker rather than
buying the policy directly from an insurer. Some insurers sell all their products on a ‘direct’
basis, using internet technology and investing heavily in advertising and marketing (for
example, personal lines products, such as motor, home and travel insurance). By cutting out
the broker, these insurers can keep their costs down which allows them to sell their products
Chapter 1
at very competitive prices. So why exactly do some insureds buy their insurance products
through brokers, even though it may be more expensive to do so?
The main reasons are as follows:
• Convenience. Some clients do not have the time or inclination to research the insurance
market and compare quotations. Although price comparison websites have made it easier
to obtain a range of quotations, brokers ensure that documentation is prepared correctly
and will communicate with insurers on behalf of their clients. Most brokers offer a range of
service methods to suit their clients which range from face-to-face (home or workplace
visits, where the size of the business makes this practical), to telephone, email or web-
based methods (such as electronic data interchange (EDI)).
• Expert knowledge. For the more complex products, such as commercial lines, most
clients prefer to use insurance brokers. According to the Association of British Insurers
(ABI), 81% of all businesses bought their insurance through brokers in 2012 (source: UK
Insurance Key Facts Report, September 2013). Using a broker reduces the chance of an
unfavourable outcome for the insured as brokers have a responsibility to ensure the client
understands the product which they are contractually entering with the insurer.
• Independent quotation. Brokers are independent, not usually tied to any product or
insurer. They should be able to obtain a range of covers from insurers without the need
for the client to fill in forms or repeat their information. Due to their size and influence with
insurers, brokers may be able to obtain more favourable terms for their clients than if the
client searched the market for a product directly.
• Complexity of product. Brokers can understand the technical complexity of multiple
cover, combined policies and to negotiate for cover extensions to ensure that the client’s
insurance needs are properly met. In addition, some insurers will only offer their products
to clients if they have a broker. Insurers can then trust the broker to explain the product in
full to the insured.
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• Assistance with claims. Although not all brokers offer a full claims service, when the
client has a claim they will very often look to the broker to negotiate on their behalf, often
obtaining a more favourable outcome with an insurer than an individual could.
• Existing relationship or connected business. Many clients may simply stay loyal to the
same firm, or more usually, the same individual over many years. This may be the case
for a family business where the broker has in depth personal knowledge of their client
and trust has been established. The insured may also wish to place their private
insurances with the same broker who looks after their commercial polices and vice versa.
• Other services. Brokers are increasingly offering a wider range of services to their clients
with whom they have established a relationship of trust. This is in the interest of the
broker, as the more services purchased by the insured, the harder it is for the client to
move to another broker.
The UK insurance broker market

• General insurance brokers contribute 1% of GDP to the UK economy.
• Brokers arrange 70% of all general insurance with a premium totalling £62.4bn and
87% of all commercial insurance business.
• Members of the British Insurance Broking Association (BIBA) employ over
100,000 staff.
Source: www.biba.org.uk.
On the Web
The ABI’s annual Key Facts publication is an excellent source of statistics and information
on the UK’s insurance industry: www.abi.org.uk.
Question 1.2
Which of these statements best describes a key benefit of using an insurance
broker?
a. The quote will always be the cheapest. □
b. There is no need for the client to understand the insurance product, as the □
broker can do this for them.
c. All brokers offer a full claims service. □
d. Brokers can provide technical advice for complicated insurance products. □
A2D The benefits of insurance brokers to insurers
There are a number of benefits to insurers of distributing their products through insurance
brokers:
• Convenience. Clients can be demanding in terms of the level of interaction they require
and the amount of administration required in setting up their policies. Additionally, dealing
with complaints can be time-consuming. Insurers are better able to concentrate on their
core business of underwriting and paying claims if brokers take on the activities involved
in interacting with the insured. In addition, risk information can be presented to insurers in
a standardised, pre-agreed format and all negotiations and communication can be made
from a position of knowledge by both parties.
• Technical expertise. Some insurance products can be complex; the insurer can trust
that the broker will explain the more technical aspects of the policy to their clients so that
they are not surprised by their policy cover in the event of a claim.
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• Peace of mind. Insurers are able to trust that the broker has disclosed the required risk
information for the insurer to be able to underwrite the policy, with the knowledge that the
broker has explained the possible consequences of non-disclosure of material facts to
their clients.
• Cost benefits. Not having to administer each policy directly with the client means the
insurer saves time and money. Insurers can delegate tasks to brokers such as the issuing
of a policy and premium collection. However, it should be noted that brokers will generally
charge insurers work transfer fees for carrying out work on their behalf.
Consider this…
Does your firm produce policy documents for insurers? What other services does your firm
provide for clients on behalf of insurers?
Activity
Does your firm use a standard insurer submission form? If so, find out if there are different
forms for different insurers or different classes of business.
A3 Market organisations
There are several insurance market organisations and professional bodies. We will outline
the role of insurance broking-specific organisations here.
A3A British Insurance Brokers’ Association (BIBA)
Prior to 1977, there were four organisations representing insurance brokers. In 1977 these
four broking bodies merged to form the British Insurance Brokers' Association (BIBA). Its
membership was confined solely to insurance brokers who were registered under the
Insurance Brokers (Registration) Act 1977, though now it is open to all independent
intermediaries. In 2011 BIBA merged with the Institute of Insurance Brokers.
BIBA is the major non-statutory trade association for insurance intermediaries, with a
membership of more than 2,000 regulated firms. It draws its members’ attention to the need
to comply with the fundamental principles governing the professional conduct of insurance
brokers and other intermediaries. Its rules emphasise the need to conduct business with
utmost good faith and to represent the interests of their customers.
Chapter 1
BIBA seeks to maintain and improve the highest standards of business behaviour and to
protect and enhance the interests of its members for the benefit of the general public.
On the Web
Visit BIBA’s website www.biba.org.uk/about/about-biba/ to find out more about their
mission statement.
London Market Regional Committee (LMRC)

The position regarding representation of London Market brokers is complex. Up until the end
of 2008, BIBA operated through a virtually autonomous trade body representing the interests
of Lloyd’s brokers operating in the London and worldwide insurance and reinsurance
markets. This was the London Market Insurance Brokers’ Committee (LMBC), which was the
only representational body at the time. However, the LMBC was disbanded at the beginning
of 2009.
In June 2009, BIBA announced the formation of the London Market Regional Committee
(LMRC) as a replacement of the old LMBC. As a body it was integrated into BIBA’s existing
regional committee structure. The LMRC consulted with members on the areas they wanted
the committee to address in order to develop its strategy and objectives.
The intention of the LMRC is to maintain a lobbying role and to represent the sector to the
FCA, Europe, the UK Government and the London and the International Insurance Brokers’
Association (LIIBA), on areas of mutual interest and to avoid duplication of work.
A3B London and the International Insurance Brokers’
Association (LIIBA)
LIIBA is an independent trade body representing the interests of insurance and reinsurance
brokers who operate in the London and international markets. It effectively took on the role
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performed by the LMBC from 1 January 2009. There is overlap between the LMRC and
the LIIBA.
LIIBA’s mission is to ensure that ‘London remains where the world wants to do business by
continuing the transformation of market processes and maintaining the highest professional
standards’. LIIBA’s key priorities are:
• representing members’ interests to government, regulators, the European Union and
international bodies to establish a proportionate regulatory framework;
• to modernise the London Market’s business processes to be competitive and efficient,
delivering an improved client service;
• supporting members with regard to legislative and technical changes; and
• strengthening relationships with Lloyd’s, the London Market Association (LMA) and the
International Underwriting Association (IUA) on a range of market issues.
On the Web
www.liiba.co.uk
A4 Classes of business handled by insurance brokers

We have already identified the key benefits for individuals and businesses of purchasing
insurance from insurance brokers rather than directly from insurers. However, many
individuals and SMEs choose not to use insurance brokers at all and even some larger
organisations may buy some of their insurance products directly.
The increased use of the internet and price comparison websites has certainly contributed to
this trend. Some insurers have specifically designed products that are only available to
customers directly and have established call centres to service these clients. One example is
Bermuda headquartered Hiscox Ltd, which offers small business and home insurance
products directly to clients as well as distributing more complex insurance policies through
brokers.
It would be fair to say that while brokers can handle all classes of insurance, some are more
suited to being handled by brokers on behalf of their clients than others.
Three major classes of business
Personal lines Commercial Specialties
A4A Personal lines

Personal lines insurance products are purchased by private individuals. Examples of these
products include household buildings and contents, private motor, travel and private medical
insurance. Personal lines customers are classified as consumers by the FCA. Insurance
brokers are deemed to owe a higher duty of care to consumers than to commercial
customers because a consumer is defined as acting for purposes which are outside their
trade or profession.
In the UK, brokers’ share of the household market is 20% and 35% for private motor (ABI
2013); a significant fall over the last 25 years. It is this sector where there is greatest
competition and where an insured can make a purchase online either directly with the insurer
or through a price comparison website.
A4B Commercial
According to the ABI, insurance brokers’ share of the UK commercial market has slightly
increased over the last decade from 81% to 87%. Although insurance for small commercial
risks is more commonly available directly from an insurer, larger, more complex commercial
risks are almost exclusively sold through brokers. According to a recent report by
Datamonitor (Commercial Insurance Distribution Report), businesses employing less than
ten people (SME market) are less likely to use an insurance broker than those with ten
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employees or more.
A4C Specialties
For specialist risks, such as marine, aviation or construction, customers are almost
exclusively serviced by insurance brokers. As each risk is unique, there is unlikely to be an
‘off the shelf’ product and so brokers are required to place the risks individually and design
the insurance programme on an exclusive basis.
A4D Why are some classes of business more suited to insurance
brokers?
Despite the benefits of using a broker, some classes of insurance are more likely to be
purchased directly. Other classes of insurance are only available to purchase through
brokers. This is usually due to the nature of the risk, including the following variables:
• Complexity of risk. As a rule of thumb, the more complex the risk, the more likely it is to
be handled by a broker. For complex risks that may have a non-standard profile (that is,
there are not enough risks of their type for an insurer to establish standard underwriting
criteria), multiple asset types, or any other unusual aspect, an insurer is more likely to
distribute its products through a broker and take confidence from the fact that a broker
will be able to understand the technicalities of the cover. In the same way, the insured
may also take confidence from the fact that the broker will have specialist knowledge to
make certain that the risk is properly insured. Examples of complex risks include high
value jewellery, high value fine art, performance cars, marine, aviation, construction,
manufacturing and food.
• Size of risk. In the same way that more complex risks are likely to be handled by
brokers, the higher the value of the asset or sum insured, the more likely a broker is to be
involved. Higher sums insured take up more of the insurer’s financial capacity (the total
amount of risks it can accept) and may prevent it from accepting other business. It
provides a concentration of risk that an insurer may not be comfortable with unless there
is a broker involved.
Chapter 1
• Location of risk. Some risks may be located in high risk areas such as flood plains, or
parts of the world affected by storms. Insurers are unlikely to offer cover unless they fully
understand the risk and without a broker involved, a client is unlikely to be able to provide
favourable risk data.
Example 1.1
Mr Brown has just purchased a new home in an area that is prone to flooding. However,
the property was built on top of a low hill and according to the previous owner has never
been flooded. Mr Brown has tried to obtain insurance directly through the internet but each
time his request for cover has been declined as the postcode indicates a flood risk on the
insurer’s underwriting database.
Mr Brown contacts an insurance broker and explains the situation. The insurance broker is
able to negotiate cover on a bespoke basis, having explained the individual
circumstances.
In addition, some organisations may have assets in a number of different countries and
these may require a broker to put together an insurance programme in multiple territories.
• Availability of cover. Some risks are very specialist, such as kidnap and ransom, or
motor track insurance (cover allowing a car owner to drive their car round a racing circuit).
Only a few insurers may offer cover in these specialist areas. Brokers may have specific
market knowledge to identify the few insurers who specialise in this type of cover. If the
risk is highly specialised, it may require a specialist broker who has experience in the
niche area and who may have negotiated a specialist arrangement with a chosen insurer
(known as a delegated authority).
Activity
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List ten different insurable risks. Next to each risk, write down if you think they would be
most likely to be insured using a broker or directly with an insurer.
Question 1.3
Which of these risks is best suited to be purchased through an insurance broker?
a. A standard single trip travel cover. □
b. A motor policy for an experienced driver with five years no claims bonus. □
c. A commercial policy for a company with several locations. □
d. A mobile phone. □
B Types of insurance broker

Since 2001 the insurance broking market has experienced consolidation as larger firms
acquired smaller firms in order to reach their client base. It is thought that increasingly
demanding regulation may have contributed to smaller firms’ willingness to sell-out to bigger
firms. In 2001, there were approximately 5,000 insurance broking firms in the UK but this
figure has fallen to an estimated 3,500 today (source: Datamonitor, BIBA, FCA). Despite the
reduced number of firms, the insurance broking market remains highly competitive.
There are many different types of insurance broker in the UK. The majority of insurance
broking firms employ less than five people but there are also global insurance brokers with a
worldwide network of offices.
Global firms
Lloyd’s UK-only-based
brokers firms
Types of
Online brokers insurance Consolidators
broker
Reinsurance Niche sector

brokers businesses
Wholesale
brokers
B1 Global firms
These are large organisations employing thousands of people in many different countries.
Global firms have grown rapidly, principally through acquisition, as a response to the needs
of the world’s largest companies with turnovers in excess of £500m and operating in more
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than one territory. These companies need insurance brokers who also operate in many
territories and who have the capability to arrange and manage global insurance programmes
which could involve policies in more than 100 territories.
B2 UK-only based firms

These are the most common types of broking firm in the UK. They range from single
principal businesses with one office employing two or three people to regional brokers with
several offices – usually concentrated in one area – to national brokers with multiple offices
and perhaps employing several hundred people.
These firms are usually located near to their clients and may be quite well known locally.
They usually conduct business on a retail basis (i.e. directly with their clients) and may have
a presence on the high street, allowing people to drop in and transact business face to face.
They may be specialists in one niche type of business, or generalists, catering for all types of
insurance for their clients, both commercial and private.
B3 Consolidators
These are broking firms whose principal method of growth is through mergers and
acquisitions, which result in a smaller number of larger firms. A consolidating broker may
target a small broker in order to access their book of business.
An example of a consolidating broker is Towergate. Unlike global brokers who may buy large
brokers, consolidators tend to purchase much smaller brokerages. When mergers and
acquisitions were at their peak, hundreds of firms were purchased in this way (source:
Insurance Age, May 2007).
B4 Niche sector businesses

These are firms who are key players in specialist areas of the market (for example, classic
car insurance). They may have arranged a specialist delegated authority agreement with
an insurer to provide a unique policy for their client base.
They are likely to have almost exclusive access to a particular client base, such as an affinity
scheme (an agreement with an organisation whose members have a common purpose or
risk profile such as a workplace federation, or club). These firms are likely to be small and
only offer a very limited product range. They tend to be very close to their client base and
Chapter 1
may, for example, attend the same events as their clients, regularly increasing their brand
awareness and profile.
Refer to
Refer to Delegated authority agreements on page 3/7 for details of delegated authority
arrangements
B5 Wholesale brokers
Generally speaking, a broker arranging contracts of insurance directly on behalf of the
insured or policyholder is a retail broker (also known as a producing broker). A wholesale
broker's clients, on the other hand, are other brokers. In this situation, the wholesale broker
has no contact with the policyholder. Instead, they are engaged by a retail broker to access
preferential markets and policy coverage. Generally, wholesale brokers are remunerated by
a percentage of the overall commission available. This is quite common among Lloyd's
brokers who provide access to the Lloyd's market for other brokers around the world.
The majority of risks placed at Lloyd's of London come from outside the UK. Only brokers
who have accepted the Lloyd's direct routing procedures may place business in the Lloyd's
market. For this reason, many of the risks presented to Lloyd's brokers come from other
brokers who have direct contact with their clients in, say, the USA.
When a retail broker seeks access to a different market to the one in which they operate
(such as Lloyd’s or a market in a different country to where the risk is located) through
another broker, they are said to be the producing broker or sub-broker. The broker who has
access to the market is known as the wholesale broker. It is possible for these roles to be
performed by two offices of the same broking firm.
A wholesale broker will deal with retail brokers who need assistance to place the full cover
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for their client. In this instance, the wholesale broker is the agent and the other broker is the
client or principal. This is illustrated in the following diagram:
Retail Wholesale
The insured broker broker Insurer
(principal) (agent)
When using wholesale brokers, the retail broker has the same duty of care to their client as
they would to any other client. There will be a terms of business agreement (TOBA) between
both brokers to make sure that they understand their responsibilities.
Be aware
TOBAs are the market agreements used to record the terms and conditions under which a
broker does business with various parties. These will be discussed in more detail in
chapter 4.
Reinforce
A wholesale 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. A wholesale
broker is usually acting on behalf of a retail or producing broker. The retail/producing
broker is therefore the broker’s client.
A retail broker is at 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 ultimate contact with the 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.
B6 Reinsurance brokers
These are brokers who specialise in the placement of reinsurance contracts on behalf of
their clients, who are often insurers. For this function to be performed successfully there
must be a party wishing to buy and a party wishing to sell. The broker’s skill is identifying
buyers and sellers and then negotiating a deal.
Refer to
Refer to IF1, chapter 2, section G
The UK reinsurance market is well established. According to Lloyd's annual report for 2016,
31% of all business written in Lloyd's is reinsurance. Reinsurance is defined as an insurance
contract where the buyer is itself already an insurer, and it is the biggest class of business
transacted in Lloyd's. In 2015, AM Best magazine stated that Lloyd's was the third largest
reinsurer in the world based on premium.
Consider this…
What do you think is the purpose of reinsurance?
Just as individuals, corporations and public bodies may feel the need to transfer risk, so too
do insurers. They achieve this by using the services of a reinsurance broker who approaches
a reinsurer that specialises in accepting business originally underwritten by insurers.
Reinsurance may be on an individual risk basis, an event basis or on a portfolio (wide range)
of risks covering losses from the operation of some catastrophe peril, for example.
The purpose of reinsurance is:
For reference only

• to smooth peaks and troughs in claims experience;
• to protect the portfolio of risks being insured;
• to provide improved customer service; and
• to provide support for insurers entering new areas of business.
An insurer would want to reinsure a risk when it potentially stands to lose financially as a
result of any claim payment. The insurer would pass some (or all) of the risk to another
insurer as reinsurance. Although in theory the whole of an individual risk could be reinsured,
this would make no sense, so insurers tend to reinsure only part of the risk that they hold. In
this way, reinsurance may be used to share losses on a risk-by-risk basis.
Losses can arise in different ways. Those which an insurer would wish to avoid or minimise
by the use of reinsurance may be of catastrophic proportions: for example, Hurricane Irma
which hit the USA and Caribbean in September 2017, where the financial resources of an
insurer without reinsurance would be stretched to breaking point. Reinsurance acts as a
cushion to protect insurers against such eventualities. A catastrophic loss can mean a very
large loss on an individual risk, as well as a loss resulting from an accumulation of losses
arising from a single catastrophic event.
B6A The reinsurance market
Reinsurance brokers are specialists in the reinsurance market. They may be separate
reinsurance broking firms or teams within larger insurance broking firms.
There are three types of reinsurer:
• specialist reinsurance companies who do not transact original (direct) insurance
business;
• Lloyd’s syndicates; and
• insurance companies that also act as reinsurers.
The reinsurance broker seeks to place the risks of their clients (insurance companies,
Lloyd’s syndicates and other reinsurers) with these reinsurers.
Where a reinsurer places reinsurance with another reinsurer, this is known as retroceding
and the risk placed in this way is a retrocession. The second reinsurer is also known as a
Chapter 1
retrocessionaire. The reinsurance broker’s clients are the ceding insurer (also known as a
cedant) or the reinsurer.
The following diagram illustrates the way the risk is transferred:
Client Insurer Reinsurer Retrocessionaire
Question 1.4
Which of the following is not a purpose of reinsurance?
a. To smooth peaks and troughs in claims experience. □
b. To protect an insurer’s property risk portfolio from the damaging effect of multiple □
claims following a storm.
c. To improve the service a broker offers to their clients. □
d. To provide support for insurers who have decided to write a new liability line. □
B7 Online brokers
Online brokers are broking firms who operate mainly through the internet. They compete with
other low-cost insurers who offer their products directly to customers by making it possible –
using call centres and full cycle electronic processing – for them to purchase their policies
online. The cover they offer for sale online tends to be for less complex risks and,
correspondingly, the price is at the lower end of the premium spectrum.
The service is quite basic but there is a high degree of ‘churn’ (turnover of clients from one
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insurer to another at renewal), so service is less important than price.
B8 Lloyd’s brokers
These are broking firms who are authorised to transact business at Lloyd's of London. They
may do so exclusively, or in conjunction with other insurance providers, but they must be
registered with the Council of Lloyd's to act as 'Lloyd's brokers'. The distinction is still made
in the market, even though greater access to the Lloyd's market has now been granted to a
wider range of intermediaries by virtue of the Legislative Reform (Lloyd's) Order 2008. To
be registered, brokers must satisfy the Council as to their expertise, financial standing and
integrity. Once appointed the words 'and at Lloyd's' may be used on letterheads and name
plates. Lloyd's places additional regulation to that of the FCA on its brokers.
Insurance brokers who transact insurance business at Lloyd’s (known as Lloyd’s brokers)
have exactly the same role as any other insurance broker in that they are agents of their
clients and their role is to meet their clients’ needs.
The fundamental factors distinguishing Lloyd’s brokers from other insurance brokers are:
• the market in which they operate;
• their methods of transacting business; and
• many of the risks they place.
These differences will be explained in the following sections.
B8A The Lloyd’s market
The Lloyd’s market is an institution, not an insurer. It is an organisation providing facilities for
the placing of risks in its own market. It is one of the oldest (it has been underwriting
insurance business for 327 years) and most respected insurance markets in the world and is
still considered by many as being the ‘global centre of insurance’. Lloyd’s forms part of the
wider London insurance market. Many sizeable or complex industrial risks from all over the
world are placed in the London market, and Lloyd’s in particular has established a reputation
for insuring ‘unusual’ risks. Lloyd’s accepts risks from more than 200 countries worldwide.
The Lloyd’s market is made up of syndicates (groups of private individuals or corporate
members) who carry the risks by providing financial backing or capacity (an agreed limit to
the amount of business an insurer can underwrite in a year).
Each syndicate employs a managing agent and it is the managing agent who appoints the
underwriter who may accept risks on behalf of the syndicate. The number of syndicates has
reduced significantly over the last 20 years, although the amount of capacity has actually
increased each year since 1999. Many of the syndicates specialise in certain types of
business, for example, marine, aerospace, property, construction and energy.
Managing agents are companies specifically established to manage the underwriting of one
or more syndicates. Lloyd’s managing agents are dual-regulated, which means they have to
be approved by the Prudential Regulation Authority (PRA) to carry on PRA-regulated
activities and any business conduct activities are regulated by the Financial Conduct
Authority (FCA).
Lloyd’s no longer has its own separate code of conduct for Lloyd’s brokers and relies instead
on the FCA rules for authorised persons. New bylaw arrangements are in place to ensure
that the same minimum standards apply to all brokers placing business at Lloyd’s. Guidance
has also been published on dealing with non-Lloyd’s brokers.
If a broker wishes to access the Lloyd’s market but does not wish to pursue the direct routing
procedures – registering to transact business at Lloyd’s directly – they may access the
Lloyd’s market by using the services of a Lloyd’s broker. In this circumstance, the Lloyd’s
broker is termed a wholesale broker and the originating broker, a sub-broker or producing
broker. These roles are discussed in more detail in Wholesale brokers on page 1/11.
B8B Methods of transacting business at Lloyd’s
Business is transacted at Lloyd’s in three ways:
1. face-to-face between the broker and the underwriter;
2. through the use of a delegated authority; and
3. through businesses set up outside Lloyd’s by syndicates (these can be treated in the
same way as other insurance companies).
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Refer to
Refer to Delegated authority agreements on page 3/7
There are some unique practices in the face-to-face placing process at Lloyd’s. Lloyd’s is
known as a ‘subscription’ market. This means that for the majority of risks, the risk is shared
among a number of participating underwriters who ‘follow’ the terms set by the lead
underwriter.
The process of placing a risk at Lloyd’s is as follows:
Step 2 Step 3
Step 1 The slip is presented to
The broker receives an The risk is presented to
the lead underwriter by other underwriters until
initial enquiry from the the total amount of risk is
client. means of a ‘slip’.
underwritten.
Step 6 Step 5 Step 4

The risk is recorded The broker revisits the The quote is presented
centrally and documents underwriters to bind the to the client.
are issued to the client. risk.
Step 1
Lloyd’s brokers will receive initial enquiries from their clients in exactly the same way as any
other broker. The exception may be that because such a large amount of Lloyd’s business
originates from other countries, many of the risks are presented to Lloyd’s brokers by a sub-
broker (an intermediary who is not a Lloyd’s broker and who will usually receive their
instructions from the insured or policyholder). The broker should make sure they are in
possession of all the material facts.
Step 2
A broking submission is prepared and this is presented on a standard form – the Market
Reform Contract (MRC), known colloquially as a ‘slip’. This sets out the key information in a
Chapter 1
standardised form to be presented to insurers but can be supplemented with additional
material relevant to the risk (such as survey reports).
Consider this…
Can you think of any advantages for the broker and the insurer in using a standardised
risk submission form?
One of the key roles the Lloyd’s broker must then fulfil is to use their skill and knowledge to
approach the most suitable combination of underwriters. The unique characteristics of the
subscription market mean that Lloyd’s syndicates rarely accept 100% of the risk in full
themselves. Instead they can take a fixed percentage of the risk, depending on their
available capacity and their attitude towards the individual risk. It is very important that the
broker carefully selects which underwriter to approach first (the ‘lead’) as they will dictate the
terms that other insurers will follow (the ‘following’ market). The lead should be a recognised
specialist in the risk area and have the right capacity, knowledge and credibility so that the
best terms can be negotiated and the ‘following’ market is reassured that the risk is
acceptable to an underwriter with an established reputation in the field.
Step 3
The broker then presents the slip to the ‘following’ underwriters until the slip is complete and
100% of the risk has been underwritten. Each portion of the risk is known as a ‘line’. If more
than 100% of the risk is underwritten, then each underwriter’s line is reduced proportionally
(a process known as ‘signing down’). Although each ‘following’ underwriter can offer
different terms, once they have initialled under their line (this is where the term ‘underwrite’
originates), they have then ‘bound’ themselves to issue the policy.
Step 4
The Lloyd’s broker will prepare a quotation in the same way as any other broker, making a
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recommendation and allowing the client to make a fully informed decision.
Step 5
When the client has given their instruction to the broker, the broker must then ‘bind’ the risk
by revisiting all the insurers and asking them to confirm or ‘ink’ their line on the slip. Although
the term ‘inking’ refers to the traditional way of stamping and scratching (signing or initialling)
a paper slip, in today’s market most risks are bound electronically. The final confirmation
creates the contract between each insurer and the client.
Step 6
The broker submits information to a company called Xchanging Ins-sure Services (XIS),
often referred to as ‘the Bureau’. XIS is an organisation which manages the central market
database for Lloyd’s risk data. It also assists in the movement of premium funds from the
broker to the insurers.
The insured then receives a document evidencing their contract of insurance. The contract
certainty concept requires that this document must set out the details of the insurance
obtained and be provided to the client no later than 30 days after inception (although this is
reduced to five days for some personal insurances).
It should also be noted that the Lloyd’s broker may play a slightly different role to other
brokers in relation to claims, in that they may become more involved in claims negotiation if
the claim is contentious. Another Xchanging company, Xchanging Claims Services (XCS),
maintains the Lloyd’s central claims database and is able to move claims money from the
insurer back to the broker for payment to the client.
B8C Placing Platform Limited
As part of the London Market modernisation programme, where face-to-face negotiation is
supported and facilitated by electronic risk capture, placing, signing and closing, Placing
Platform Ltd (PPL) – a new electronic platform, has been developed to support more
flexible negotiation and faster placement.
PPL was designed to make the market easier to do business with and offers many benefits
that help the speed of underwriting response, broker turnaround and document production.
Accuracy is also improved as documents are produced automatically without manual
intervention. PPL offers flexibility and recognises that face-to-face negotiation is an essential
part of the market and all contact/negotiation between brokers and underwriters will
continue. The PPL system has been developed to support this process. Syndicates at
Lloyd’s are now obliged to place a certain percentage of their business through this new
platform.
On the Web
placingplatformlimited.com
Question 1.5
Which of the following is not a method of transacting business at Lloyd’s?
a. Through delegated authority schemes. □
b. On a face-to-face basis between broker and insurer. □
c. Through businesses set up outside Lloyd’s by syndicates. □
d. On a face-to-face basis between the insured and insurer. □
B8D Lloyd’s risks
Lloyd’s is a specialist market and many of the risks placed at Lloyd’s are therefore quite
unique, and only 18% of these risks come from within the UK.
Lloyd’s has featured in the headlines for being the place where an actresses’ legs or a
musician’s fingers could be insured, but the reality is that the majority of the risks insured at
Lloyd’s are of a much more standard class.
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On the Web
Find out more about Lloyd’s brokers on the Lloyd’s website: www.lloyds.com/about-lloyds.
B9 Broker networks
In recent years a number of insurance broker networks have come into existence. Their
methods of operation may vary but they have been developed to enable what are otherwise
independent brokers to use the collective buying power to obtain better terms and conditions
for their clients, improve service standards from insurers, achieve higher levels of brokerage
and develop own-branded products. This has enabled smaller brokers to compete with
larger firms.
Activity
Identify a broker network and establish their size and unique selling point.
B10 Organisation and segmentation

Broking firms may organise themselves in various ways. How they do so is usually a result of
their size, in order to allow them to be managed effectively as they grow. Most brokers divide
their business into different segments (for example, by class of insurance: commercial,
personal or specialty). In addition, they may further subdivide their business according to role
or function (for example, client service or new business, broking and back office). In a small
firm, this distinction may be blurred and a client service executive (often called an account
executive) may be trained in both commercial and personal lines business, or property and
motor, for example. They may also be expected to service existing clients as well as look for
new business opportunities.
Refer to
Refer to Roles within an insurance broking organisation on page 1/23 for more on the
types of roles within a broking firm
Chapter 1
Brokers segment their business to allow them to provide the most appropriate level of
service to the client while remaining cost-effective for the broker. A common term for the
segmented group is ‘division’. Typical methods of segmentation include:
• Class of insurance. Here, the business is structured to focus on specific areas of
expertise, such as construction, aviation or marine. In larger brokers, each division may
be further segregated into geographical areas (such as North America) and into service
or broking teams, for example.
• Trade. Here, the divisions reflect specific client trade sectors, such as retail or property
owners. The divisions retain and gain new clients by becoming experts in the relevant
trade segments.
• Client size. Clients of different sizes need different service levels and expertise.
Commercial business is often segmented by client size (usually measured in terms of
turnover, for example, small–medium enterprise (SME), middle market (turnover from
several million to £100m), large/global (in excess of £100m).
• Premium size. Typically, due to how brokers are paid for their services, they will earn
more from their clients the larger the premium. This means they can afford to segment
the service offering according to the premium. A good example is the personal lines
market. It would not be financially viable to offer clients with lower premiums the same
level of service as a high net worth (HNW) client who might qualify for a home visit.
For larger commercial accounts, brokers may tend to offer terms net of commission and
charge a fee for their services. This could lead to a more formal contract as to what
services will be offered and at what price so that other services not included would be
charged for as an extra.
An example of how a broker may segment its business is shown in the simplified
organisation chart for an aviation division below.
For reference only

Managing Director Aviation
North America Europe
Small/medium Small/medium
Large clients Large clients
clients clients
Sales Service Sales Service Sales Service Sales Service
C Services offered by insurance brokers and

how they are remunerated
Brokers perform an increasing range of different services for both their clients and the
insurer.
The main services they offer can be classified as follows:
• traditional broking services;
• risk management;
• added value services; and
• services to insurers.
C1 Traditional broking services

A broker’s primary responsibility is to their client.
If you asked a number of your colleagues what they consider to be the essential functions a
broker should perform for their clients, you would, in all likelihood, receive a number of
different views. These varying responses can, however, be distilled into the following core
broking functions:
• Review the client’s insurance needs. This is fundamental. Brokers must establish the
client’s requirements before they can recommend an insurance product. These
requirements are known as the customer’s ‘demands and needs’.
• Decide on the most appropriate market for the risk. Once the client’s demands and
needs have been established, the broker must decide on the suitability of an insurance
policy. To do this the broker must take account of the:
– level of cover;
– cost of the contract;
– cover terms;
– financial security of the insurers; and
– claims service offered by insurers.
• Negotiate terms and conditions with the insurer. This is an essential skill for
insurance brokers and once more reflects the fact that the client is the broker’s principal
and not the insurer. This subject is discussed further in Negotiation and placement on
page 2/5.
• Provide advice to their client. The provision of independent advice to their clients is the
distinguishing feature of an insurance broker and this is where the expertise of the
insurance broker is demonstrated – in making a recommendation supported by good
quality information. This advice (for example, regarding the policy cover or price) should
be offered at policy inception and renewal and whenever the client requests it. A good
broker will have accurate, timely and relevant information available in an accessible form
as and when their clients require it.
• Negotiate renewals. Most brokers seek long-term relationships with their clients and the
For reference only

acquisition of new clients can be expensive. Therefore, it makes good financial sense to
ensure clients renew their policies each year. Brokers have a responsibility to ensure that
a client’s demands and needs are kept up to date and that the most appropriate
insurance cover is offered each year.
Brokers should understand the client’s needs at renewal (they may have changed during
the insurance period) and have an understanding of the insurance market and any new
products that may have become available. However, it may not be in the client’s interests
to move from one insurer to another each year, pursuing the lowest premium. Insurers
often value customer loyalty and offer reductions in premium or cover enhancements to
encourage renewal. This is where the broker’s negotiation skills are so valuable. It may
also be possible to secure a claim settlement that may be outside the scope of the
insurance cover where a client has an established and profitable renewal history with that
insurer. It is the broker’s responsibility to understand and communicate these issues to
their clients.
Balancing the needs of new clients with those of existing clients is a key consideration for
insurance brokers and this is discussed in further detail in Retaining clients and finding
new business on page 6/5.
• Advise and assist clients when they have a claim. The type of service offered by
brokers when a client has a claim varies between brokers. This subject is discussed in
more detail in Claims negotiation, collection and payment on page 2/22.
• Design and operation of insurance programmes. This service is offered by brokers to
clients with more complex insurance needs, where a client may have multiple asset
types, possibly in more than one country (e.g. large commercial companies). Here, the
broker must source a range of insurance products and place them together in an
insurance programme that caters for all the different risks their clients may face. This
subject is discussed further in Design and operation of insurance programmes on page 2/
19.
Consider this…
If you have a motor insurance policy, have you ever been offered an incentive to renew
your insurance policy with the same provider?
Chapter 1
Change to FCA rules on renewal transparency for retail general
insurances
In April 2017 the FCA introduced new regulatory rules, which affect personal insurances.
These require insurers and intermediaries selling retail general insurance products to:
• disclose last year’s premium on renewal notices (accounting for mid-term adjustments
where relevant);
• include text to encourage consumers to check their cover and shop around for the best
deal at each renewal; and
• identify consumers who have renewed with them four consecutive times, and give
these consumers an additional prescribed message encouraging them to shop around.
These changes were introduced following an FCA consultation into concerns about levels
of consumer engagement and their treatment by firms at renewal, and the lack of
competition that resulted from this.
The consultation concluded that price increases were not transparent at renewal and that
long-standing customers were paying more than new customers for the same insurance
product. As a result, consumers often defaulted to renew products that were not good
value or had become unsuitable for their changing needs.
C2 Risk management and added value services

The business of insurance broking is fundamentally about dealing with clients’ risks.
Together with the development of traditional broking services, the last 25 years have seen
developments in the complexity of the process of managing and transferring risk. Now
insurance brokers are increasingly offering additional services to their clients in helping them
to manage risk (risk management) and offering solutions to the management of their risk in
For reference only

non-traditional ways (through added value services).
Refer to
Refer to IF1, chapter 1, section B1
C2A Risk management services
Risk management may be defined as:

The identification, analysis and economic control of those risks which threaten the assets
or earning capacity of an enterprise.
All businesses need to manage the risks they face. This involves:
• identifying risk;
• evaluating risk; and
• controlling or eliminating risk (this can include traditional risk transfer to an insurer).
Larger companies often have their own risk management departments run by a dedicated
risk manager. However, most companies rely on external specialists (including insurance
brokers, insurers, specialist risk management firms or independent consultants) to offer
advice and support.
The role of the broker in risk management is to support their clients in achieving their risk
management objectives. Therefore, brokers could assist their clients with one or all of the
following activities: risk identification, evaluation, control and transfer.
If a company can demonstrate that it is managing its risks well, the insurer may be able to
offer more favourable terms (regarding price and cover) than it could offer a similar company
that may not be as efficient at managing its risks. As we have already identified, one of the
key roles of the insurance broker is negotiating terms and conditions with the insurer on
behalf of their clients. It stands to reason that a broker who has been involved in the
management of their client’s risks will be in a good position to be able to negotiate with
insurers from a strong position of knowledge.
Refer to
Refer to chapter 3 for more on risk management services
C2B Added value services

Added value services are also known as ‘specialist risk consultancy services’. Examples of
added value services a broker might offer their clients include: property surveys, business
continuity planning, business interruption reviews, health and safety consultation, liability
surveys, motor fleet risk management, environmental risk surveys, post-loss control surveys,
and disaster recovery services.
Property surveys This is where a client’s property is surveyed to establish risk information or to offer
risk reduction advice.
Business continuity Brokers may work with their clients to identify their exposure to internal and external
planning threats and how they can continue operations in the event of, say, a power failure,
fire or supply chain interruption. The broker assists their client in putting in place a
plan to help the business get itself up and running again as quickly as possible.
Business interruption This is where a client’s whole business model is examined to identify weaknesses or
reviews key dependency on outside agencies or internal processes. Solutions for potential
business failures are suggested which can be put in place if they become a reality in
conjunction with the business continuity plan.
Health and safety Legislation in this area has become increasingly demanding. Therefore, although a
consultation broker may be able to identify a potential weakness in their client’s health and safety
policy, the specialist nature of different businesses means that the broker is more
likely to contract out to a specialist provider if the broker’s client needs further
reviews, recommendations or corrective actions.
Liability surveys Brokers may identify a potential liability issue while conducting a survey, such as a
food safety issue, but they are then likely to call in a specialist if further
For reference only

recommendations are required.
Motor fleet risk Brokers may have clients who have a high premium expenditure on their motor fleet
management insurance. Brokers can assist their clients by investing time in managing the risks
faced by their motor fleet, reviewing fleet risk management procedures, driver
handbooks and the use of telemetrics (a form of usage-based insurance using
machine-to-machine technology, which allows insurers to capture detailed driving
data) or by arranging advanced driving skills training for fleet drivers (once again,
through a third party).
A useful source of information when considering fleet risk management is claims data
which could provide useful pointers as to the cause of frequent accidents, such as
young drivers, emergency engineers on call and drivers with more than one accident.
This could indicate where time and money could be spent in reducing risk.
Environmental risk These are surveys that assess the impact of their client’s business on the
surveys environment, both from an operational and a historical perspective, i.e. how their
client’s business has impacted on the environment in the past.
Post-loss control This is where a broker will offer an ‘active involvement’ in the claims process and
surveys may assist clients in submitting claims, negotiating with adjusters and offer other
‘hands on’ assistance at the time of a claim.
Disaster recovery Here, brokers may become even more closely involved with assisting their clients at
services the time a claim is made. Specific activities include access to public relations and full
crisis management.
Many insurers offer some of these services as well (such as property services), but they may
do so for their own benefit. For instance, in order to eliminate uncertainty by improving data
capture (i.e. by improving the quality of information obtained), by establishing exact sums
insured. They may also make requirements for their clients that become essential to the
continuance of cover. However, added value services offered by the broker are primarily for
the benefit of their clients.
C3 Services to insurers
Brokers provide a number of benefits to insurers. In order to enable insurers to focus on their
core business of underwriting, brokers will often offer a range of services that they will carry
out on the insurer’s behalf.
Chapter 1
The key services that brokers offer insurers are:
• A cost-effective distribution network.
• Technical expertise in data capture and risk presentation.
• Assistance with preparation and issuing of documentation.
• Checking the accuracy of an insurer’s documentation, including pricing.
• Premium collection.
• First contact for all the insured administrative issues.
• Technical expertise to explain cover issues to clients.
• Support with claims management.
• Support with client’s risk management.
• Holding regulatory responsibility in terms of sanctions checking and handling
client money.
In summary, although the broker’s first responsibility is to their principal – their client – there
are a number of services brokers provide to insurers both directly and indirectly.
Question 1.6
What is the main advantage to an insurer when brokers offer additional services?
a. It allows the insurer to concentrate on its core business of underwriting. □
b. It means insurers do not have to issue documentation. □
c. It is a regulatory requirement. □
d. It gives the broker an additional revenue opportunity. □
For reference only

C4 Broker remuneration
One of the rights owed by the principal to their agent is the right to be remunerated.
Insurance is based on trust. The client trusts the broker that they will arrange insurance in
accordance with their instructions, and the insurer trusts the broker that the underwriting
information is correct and fully disclosed. However, traditionally, brokers have been paid
commissions which were not always disclosed to clients.
More recently there has been a move towards ‘transparency’ of earnings and brokers are
now commonly paid a fee by their clients. Transparency engenders trust between the broker
and their clients. However, there is still a wide range of different ways in which brokers can
be paid and these will be discussed in the following sections. Currently, brokers may be paid
either by the insurer (as a commission or brokerage) or directly by the client (through fees).
Brokers may not be paid both a fee and a commission for the same service they have
provided.
The law of agency imposes a duty on the agent to account to their principal for their
earnings. The law of agency empowers consumers to request the amount of commission the
broker is earning and many brokers voluntarily disclose this information. Brokers must
disclose their commission if asked by a commercial customer.
Reinforce
Refer to ICOBS 4: Information about the firm, its services and remuneration on page 5/
14 to see the specific rules ICOBS 4 imposes on the broker in relation to remuneration.
Refer to
See chapter 4 for more information about remuneration
C4A Commissions
Commission, also known as brokerage, is paid by the insurer by way of a reimbursement of
an agreed percentage of the premium. The amount of commission might be stated on the
TOBA between the insurer and the broker but it is normal practice for the rates of
commission to be published elsewhere, either by way of a separate document or website.
Frequently the commission would be agreed on a per case basis and would form part of the
quotation document from the insurer to the broker. In general insurance, commission is
earned when a new policy is issued, additional cover arranged and at renewal. Insurance
brokers might refund commission when a return premium is paid but if their TOBA states
otherwise they may allow refunds net of commission.
The level of commission, usually expressed as a percentage, varies between insurers and
the class of business. Generally, a higher commission is paid by insurers where the broker
operates a delegated authority. This is because the broker may be doing some of the
activities that an insurer would have been doing, such as underwriting or producing
documentation.
Commission is always paid net of Insurance Premium Tax (IPT). That means the IPT is first
calculated and deducted before applying the commission rate to establish the commission
payment due. For most general insurance policies, IPT is set at 12%. However, for some
policies, such as travel insurance, IPT is set at the higher rate of 20% (the same rate as
value added tax (VAT)).
Example 1.2
The following is a simple example of how commission is calculated for a home insurance
policy.
One of your clients has just paid the renewal premium for their home insurance policy, a
gross premium of £500.
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The insurer pays you a commission of 15% for this home insurance policy. To calculate
the commission payment, you must first work out the IPT:
IPT = £500 x 12% = £60
The next part of the calculation is:
Premium − IPT x rate of commission, so £500 − £60 x 15% = £66
In addition, brokers may earn volume overriders or contingent commissions. These are
paid by the insurer on a whole account basis and vary depending on profitability and/or
growth of the account. These payments are sometimes not well understood by clients and
may cause conflicts of interest for the broker.
Enhanced brokerage is paid by an insurer where the broker operates a delegated authority
agreement for administration services and profit commission, based on the profitability of the
facility. Once again, enhanced brokerage may lead to potential conflicts of interest.
C4B Fees
Fees are paid by the insured to the broker for the service they provide. The fee should be
agreed prior to the contract and the basis for how the fee is calculated should be explained
clearly to the client.
Fees are generally not reimbursed to clients following mid-term adjustments, which results in
a lower premium. The reverse is also true that additional fees are not payable for increased
covers. For smaller risks insurance brokers might charge an administration or policy fee
because the commission earned is not sufficient for the work involved in arranging and
placing the insurance. Such fees should be agreed prior to the contract and explained clearly
to the client and separately shown on any invoices and other documents.
Chapter 1
Other fees include:
• Fees for services to insurers, for example, client behaviour data. These fees are
becoming more common among the bigger brokers. Here, a fee is paid by the insurer to
the broker for the provision of information on their clients. For example, the broker
provides feedback to the insurer stating the reasons why clients did or did not accept their
quotation.
• Work transfer fees are paid by insurers for certain work the broker carries out on their
behalf, such as invoicing premiums for individual tenants on block property polices,
administration of delegated authorities, issuing policies and conducting underwriting
surveys.
Brokers may also earn fees or commissions from premium finance companies.
Question 1.7
What is considered the most transparent form of broker remuneration?
a. Fees. □
b. Commission. □
c. Brokerage. □
d. Contingent commission. □
Activity
In October 2004, the insurance industry was rocked by Eliot Spitzer, New York’s attorney
general. The legal action he took against the world’s largest insurance broker affected the
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way many insurance brokers across the world conduct their business. Read this article in
The Economist, which was written at the time, to better understand the importance of
client transparency of earnings: www.economist.com/node/3308447.
D Roles within an insurance broking

organisation
In this final section we will look at some of the key roles brokers perform within broking
organisations.
Broking organisations range greatly in size and specialism. In smaller broking firms, staff
may be expected and trained to adopt a number of different roles whereas in larger
organisations, individuals are more likely to adopt a single, more specialised role. Some
broking organisations may only perform a limited number of roles and look to outsource
other functions.
The common roles found in most insurance broking firms are as follows:
• Client service. Client service is an essential activity for all brokers as their primary
responsibility lies with their clients.
The role of servicing usually encompasses the following activities:
– Dealing with everyday enquiries, answering post, emails and telephone calls from
clients.
– Managing the renewal of existing clients’ policies.
– Visiting clients where appropriate.
– Sourcing new products and services in line with clients’ demands and needs.
– Invoicing and collecting premiums.
– Checking documentation from insurers or issuing documents directly to clients.
– Attending insurer surveys to agree risk improvements and timescales.
– Keeping clients informed of legal and market developments which might have an
effect on their insurances, e.g. civil justice reforms.
Servicing staff may have titles such as ‘account manager’ and are usually led by a
service team leader. The role is usually a technical one and attention to detail is essential.
Servicing staff must also have good communication and listening skills. Most brokers
organise their service teams according to class of business.
• New business. New business or business development (less often referred to as sales)
is the core of any broking organisation.
No broker will be able to achieve 100% client retention year-on-year, so for brokers to
grow they need to find a way of acquiring new clients. In recognition that the skills
required of new business staff may be very different to those of the service team, many
brokers operate separate new business teams dedicated to new client acquisition. This
may be a telesales team making cold calls, or a team of people following up warm leads
from the service team. New business teams are often incentivised differently to servicing
staff and may be paid on the basis of their performance. In recognition that different
classes of business are more suited to particular acquisition methods, most brokers
segregate their new business staff accordingly.
• Broking. Many brokers expect their service staff to negotiate renewal terms directly with
insurers or new business staff to negotiate new business quotations. However,
particularly for larger risks, some brokers recognise the need to have specialist brokers
who only negotiate and place business.
Generally referred to as ‘placing brokers’, these brokers place business on behalf of their
colleagues who will usually handle all client contact, and good terms can be negotiated
while managing the relationship with the insurer (this is known as agency management).
The disadvantage is that quite often the broking staff are removed from contact with the
client and may not know particular risks as well as servicing or new business staff.
• Claims. Different brokers offer different levels of service to their clients in the event of a
claim, ranging from a full claims service to no service at all.
Some brokers expect their service teams to manage claims while others have separate
For reference only

claims specialists who deal with every aspect of the claim for their clients. The larger the
broker and the more specialised the risk, the more likely the broker is to have a specialist
claims department.
Some brokers may offer loss assessor fee insurance so that the services of a loss
assessor are provided free to clients for major losses.
Refer to
Refer to Claims negotiation, collection and payment on page 2/22 for more on claims
• Management. Management staff are responsible for ensuring that the objectives are
achieved for the area they manage.
Brokers adopt different management structures depending on the nature of their
business, ranging from a very ‘flat’ structure where there are few managers, to a much
more ‘hierarchical’ (also known as ‘pyramidal’) structure, where there are different layers
of management at every level. The lowest level of management is often the team leader,
responsible for between four and ten staff, right up to managing director or chief
executive officer. Each division has a senior manager, often known as the divisional
director and each function is usually led by a manager who has a position on the board of
directors, for example, the finance director.
Activity
Find out the organisational structure for your company or division and identify the different
levels of management and management roles.
• Compliance.The regulation of insurance broking organisations has increased over the

last decade. It has become increasingly important for brokers to ensure that the way they
operate is in accordance with regulators’ requirements, for example, FCA rules in the UK.
This is known as compliance. Most brokers now employ compliance staff and, if the
organisation is large enough, will have a dedicated compliance team headed by a
compliance officer. Compliance staff will ensure that all of the broking procedures are
established correctly and that there is a plan in place to ensure they are adhered to and
monitored on a regular basis.
Chapter 1
• Product development. Some brokers have a separate product development team who
are responsible for identifying gaps in the existing product range and the services they
offer to their clients.
This may be in response to a request from their clients or as a deliberate plan to
distribute new products and services. The product development team must work closely
with the existing client servicing team as well as insurers, to understand client needs and
to negotiate or source new insurance products from the most appropriate insurer.
• Back office functions. These are general business functions, including finance, IT, HR
and marketing, and are vital to the smooth operation of an insurance broking
organisation.
Most large broking firms retain these functions ‘in-house’ but smaller organisations may
find it makes economic sense to outsource some or even all of these functions to a third-
party provider.
Brexit
The UK left the European Union (EU) on 31 January 2020, following the referendum on 23
June 2016. A transition period applied until 31 December 2020, during which the UK
continued to follow all the EU's rules.
From 11pm on 31 December 2020, UK insurers and intermediaries lost their passporting
rights to conduct business in the European Economic Area (EEA). To continue servicing
their EEA clients, many UK insurers and intermediaries decided to operate through new or
existing subsidiaries in the EEA, while the UK agreed to EEA firms continuing their
activities for a limited period of time, if they entered the UK's Temporary Permissions
Regime (TPR) at the beginning of 2020.
The EU has expressed its opposition to 'post box' European operations. And, it has
challenged arrangements where a new European operation was set up by the UK insurer
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purely to deal with EU business post Brexit, with no or few employees physically present
in the relevant Member State.
Regarding the run-off period for existing insurance contracts, the UK has allowed EEA
insurers a 15-year period to continue servicing such contracts with UK insureds. The
matter is more complex for UK insurers’ contracts with EEA insureds, as every EU State
has implemented different rules which apply to UK insurers in its jurisdiction.
Negotiations about an equivalence regime between UK and EU regulation started in
March 2021 but have since broken down. It is unlikely the EU will grant equivalence to the
UK's regulatory regime, due to the expected divergence by the UK from EU rules in the
future, particularly in respect of Solvency II. Equivalence under EU law occurs where a
third party's regulatory framework is sufficiently similar to EU standards that firms from that
country are given access to the EU market. Equivalence is granted at the discretion of the
EU Commission and can be withdrawn or changed at any time. It is not, therefore, the
same as the passporting status enjoyed by UK firms before Brexit.
From the UK's perspective, the EU Solvency II regime has been criticised because of its
imposition of high-risk margin requirements. In fact, during the Queen's Speech on 10
May 2022, it was announced that the Financial Services and Markets Bill will revoke
retained EU law on financial services, replacing it with an approach to regulation that is
designed for the UK.
Please note: This is the position at the time of publication. Any relevant changes that may
affect CII syllabuses or assessments will be announced as they arise on the qualification
update page for the unit.
Key points
The main ideas covered by this chapter can be summarised as follows:
The need for insurance brokers
• The term ‘insurance broker’ is generally used now within the market to describe
organisations that offer independent advice.
• In the insurance market, it is the insurance broker who acts as an agent in bringing the
principal, their clients, into a contractual agreement with the third party, the insurer.
• The main distinguishing feature of an insurance broker compared to other
intermediaries is that, when placing business, their clients are their principal, and not
usually the insurer or the third party they are introducing business to.
• There is a wide range of benefits for both the client and the insurer in using
insurance brokers.
• Some classes of business are more suited to being transacted through a broker
than others.
• Major classes of business handled by insurance brokers are personal lines,
commercial and specialties.
Types of insurance broker
• There are many different types of insurance broker in the UK. The majority of
insurance broking firms employ less than five people, but there are also global
insurance brokers with a worldwide network of offices and a range of types in between
including regional, national, reinsurance and Lloyd’s brokers.
• Retail brokers act directly for their clients, the insured.
For reference only

• Wholesale brokers place risks on behalf of other brokers (known as producing or sub-
brokers) with their markets, but do not deal directly with the insured.
• Reinsurance brokers seek to place the risks of their clients (insurance companies,
Lloyd's syndicates and other reinsurers) with a reinsurance company to smooth peaks
and troughs in claims experience, to protect the portfolio of risks being insured, to
improve customer service and support insurers entering new areas of business.
• The reinsurance market consists of specialist reinsurance companies, Lloyd's
syndicates and insurance companies who also act as reinsurers.
• Any broker can become registered to transact business at Lloyd's, provided that they
satisfy the Lloyd's Council as to their expertise, integrity and financial standing.
• There are three methods of transacting business at Lloyd's: face-to-face, through
delegated authority or through businesses set up outside Lloyd's by syndicates.
Services offered by insurance brokers and how they are remunerated
• Insurance brokers offer traditional broking services, risk management and added value
services, and services to insurers.
• Commission, also known as brokerage, is paid by the insurer by way of a
reimbursement of an agreed percentage of the premium.
• Fees are paid by the insured to the broker for the service they provide.
Roles within an insurance broking organisation
• Traditional roles within insurance brokers include: client service, new business,
broking, claims, management, compliance, product development and back office
functions.
Chapter 1
Question answers
1.1 c. One who is authorised to conduct insurance mediation offering unbiased advice.
1.2 d. Brokers can provide technical advice for complicated insurance products.
1.3 c. A commercial policy for a company with several locations.
1.4 c. To improve the service a broker offers to their clients.
1.5 d. On a face-to-face basis between the insured and insurer.
1.6 a. It allows the insurer to concentrate on its core business of underwriting.
1.7 a. Fees.
For reference only

Self-test questions
1. What is the difference between an independent intermediary and an intermediary?
Give an example of each.
2. State four reasons why an insured might buy insurance from an insurance broker.
3. State four types of insurance broker.
4. What are the three fundamental factors which distinguish Lloyd's brokers from other
insurance brokers?
5. State three purposes of reinsurance.
6. Describe the role of the retail insurance broker.
7. State four typical methods of segmentation.
8. What are the traditional broking services?
9. State five added value services a broker may offer.
10. State the three classes of business handled by insurance brokers.
11. Why are some classes of business more suited to insurance brokers?
12. Identity four roles within an insurance broking organisation.
You will find the answers at the back of the book
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2
Chapter 2
Role of the broker in
meeting client needs
outcomes
Introduction
A Provision of products and services 2.1
B Negotiation and placement 2.2
C Selection of an insurer 2.3
D Design and operation of insurance programmes 2.4
E Claims negotiation, collection and payment 2.5
Key points
Question answers
For reference only

Self-test questions
Learning objectives
• explain the role of the insurance broker in meeting client needs by providing insurance
products and services;
• explain the role of the insurance broker in negotiating and placing insurance contracts;
• explain the role of the insurance broker in selecting insurers;
• explain the role of the insurance broker in the design and operation of insurance
programmes; and
• describe the role of the broker in the claims process.
2/2 I10/October 2022 Insurance broking fundamentals
Introduction
Having established what insurance brokers do, the different types of insurance broker and
Chapter 2
the range of services they offer, in this chapter we will be looking in more depth at the most
important activity all brokers undertake: meeting their clients’ needs.
Under the law of agency the broker as agent has a number of duties to their principal: their
clients. These duties will be explained in more depth in chapter 4, but to summarise, brokers
have a legal duty to act in the best interests of their clients. In addition, as we will see in
chapter 5, the Financial Conduct Authority (FCA) requires the broker to conduct their
business in line with the fair treatment of customers.
The UK financial regulatory framework was designed to protect consumers, and putting the
customer’s needs first is both a legal obligation and a regulatory requirement. When broking
firms have a ‘customer first’ culture and everything they do is aimed at the provision of high
quality client service, there are also benefits to the business. Satisfied clients are not only
more likely to keep insuring through the same broker (resulting in a high client retention or
‘renewal rate’), but they are also more likely to recommend the firm to their friends and
associates. This should contribute to the establishment of a good reputation with customers,
insurers and competitors alike.
The traditional broking services, also known as the core broking functions, can be
summarised as follows:
• provision of products and services;
• negotiation and placement;
• selection of insurers;
• claims negotiation, collection and payment; and
• the design and operation of insurance programmes.
For reference only

The quality performance of these core broking functions is essentially how insurance brokers
meet their clients’ needs and each will be explained in more detail in this chapter.
Key terms
This chapter features explanations of the following terms and concepts:
Contract certainty Demands and needs Duty of disclosure Fair analysis

Fair presentation Fraud Hard market Law of agency
Loss experience Material Material facts Remuneration
circumstances
Soft market Statutory Suitability statement Utmost good faith
Warranties
A Provision of products and services

There are many general insurance products which allow individuals and businesses to
exchange the uncertainty of a potential loss for the financial certainty of paying a premium
with the potential of receiving a payout in the event of a successful claim. This mechanism –
where risk is transferred to an insurance company in exchange for a premium – has many
benefits for the insured. Purchasing insurance products through insurance brokers also has
many benefits for both individuals and businesses. It could be argued that the provision of
these products and services is the primary role of insurance brokers. They must do this in
line with their clients’ needs, and the identification of their needs is a fundamental activity
and one on which the regulator provides specific guidance. This can be found in the
Insurance: Conduct of Business Sourcebook (ICOBS) 5 and also in the FCA’s Principles for
Business (PRIN) 6 where it states ‘A firm must pay due regard to the interests of its
customers and treat them fairly’. Further details of both ICOBS and PRIN can be found in
chapter 5.
Chapter 2 Role of the broker in meeting client needs 2/3
Reinforce
If you have not already studied the IF1 unit, we recommend that you refer to chapter 1,
section A, which discusses the concept of risk before moving on.
Chapter 2
A1 Identification of client needs
One reason as to why clients use the services of insurance brokers is because they may not
know about or understand the intricacies of insurance. They may be unclear about the
product they require and may need help in understanding how the policy they have or are
considering buying will help them. Brokers, therefore, have an important role to play in
helping clients to understand their insurance requirements, and they can achieve this
through:
• identifying and clarifying a client’s requirements – known as their demands and needs;
• identifying an insurance product/service that best matches these requirements using their
in-depth skills and knowledge of the industry;
• providing information and advice on the products available; and
• explaining the result (of purchasing a particular product) to their client in terms the client
can understand.
Consider this…
What kinds of questions do you think a broker’s clients might have about their personal
insurance needs in the following scenarios:
• A potential client who has just bought a house with a mortgage provided by their bank.
• A retired client who is going on a skiing holiday with their children and grandchildren.
• An existing household client who has just bought an expensive ring.
For reference only

• A client who is about to have an extension built to their home.
Some clients may have a full understanding of their insurance requirements, however, many
clients may only have a general idea of which type of product they want. The broker can use
their expertise to assist their client in distinguishing between their demands and needs. For
example, a client’s demand or want may be to obtain an insurance policy for their car, as
they know the law requires them to have one. However, each motor policy has different
features (such as third-party or fully comprehensive cover, inclusive breakdown cover or a
replacement car following an accident, for example) which are suited to different clients
depending on their requirements. These requirements are the client’s needs. Clients may be
unaware of their needs and it is through the broker’s help that these needs can be
established.
So how do brokers establish a client’s demands and needs? The answer is by asking
questions. This process is quite deliberate and usually requires the completion of a
proposal form.
Most brokers follow an established format with different questionnaires for different types of
insurance or business. Examples of proposal forms are included as appendices 2.1 (for
home and contents insurance) and 2.2 (for motor insurance). Both are available on
ciigroup.org/login. Supplementary information is also gathered on a less formal basis during
telephone conversations or during client visits.
The questionnaire forms the basis for the document which outlines the client’s demands and
needs: the demands and needs statement. The regulator requires a copy of this document,
and it is also distributed to the client and must be agreed by all parties. Ideally, it is only
when this agreement has been reached that the broker should commence their search for
the most suitable insurance policy for their client.
A2 The process of providing insurance products

Most brokers follow a standard process in order to establish their client’s needs and provide
them with the most appropriate products.
The following diagram shows the process:

Chapter 2
Step 3
Step 1 Step 2
Confirm the client’s
Establish a client’s wants Complete data capture
demands and needs and
(e.g. a motor, travel or using a method
provide them with a copy
household policy). appropriate to the class
of the proposal form.
of business
Step 5
Recommend the product
to the client ensuring that Step 4
Step 6 they have all the product Source the appropriate
Formally arrange cover information and include a product, having
and bring the insurer and statement of how the considered the full
the client to contract. product meets the client’s range of the client’s
demands and needs – demands and needs.
the suitability
statement.
Step 1
This is generally when first contact is made with the client. The client will have identified their
wants; this may be in response to a new risk or the renewal of an existing policy.
Step 2
The broker then asks relevant questions to gather sufficient information about the risk and
For reference only

what the client wants, to establish what the client actually needs in terms of insurance
coverage. Traditionally, brokers asked clients to complete a proposal form to support this
important step and ensured they gathered all the relevant information to allow a complete
search for the most appropriate insurance (step 4). However, while this is still the standard
method of data capture for some classes of business, such as professional indemnity,
proposal forms are not widely used anymore. In the London Market, paperless placement is
now much more common. This is achieved via Placing Platform Limited (PPL).
Step 3
The broker uses the proposal form to complete a demands and needs statement, which is
then shown to the client to obtain their agreement (this is recorded).
Step 4
The statement then forms the basis of the search for the most appropriate insurance policy.
At this stage, the broker must, as a minimum, explain if any warranties or conditions apply
and the repercussions for non-compliance, and make sure the following matters are taken
into account:
• whether the level of cover is sufficient for the risks that the customer wishes to insure;
• the cost of the contract, where it is relevant to the customer’s demands and needs; and
• the relevance of any exclusions, excesses (the first part of any claim for which the client
is responsible), limitations or conditions in the contract.
Be aware
A warranty generally means a guarantee or promise which provides assurance by one
party to the other that specific acts or conditions are true or will be met by either the
insurer or the insured.
Step 5
Once the most appropriate insurance policy has been obtained, the broker has a duty to fully
explain their recommendation and how it will deliver the client’s demands and needs, in a
way the client can understand. It may be the case that the broker has not been able to meet
all of the client’s demands and needs, and if so, the broker must make this clear.
The broker can do this by using a suitability statementwhich needs to record:

• the customer’s demands and needs;
• how the recommendation addresses these demands and needs; and
Chapter 2
• the reasons for the recommendation.
The purpose of the suitability statement is to ensure that customers have the necessary
information to make an informed choice about whether or not to buy a specific insurance
contract and whether a contract continues to meet their needs.
Activity
Ask your manager for copies of proposal forms for as many different classes of business
as possible. How do they differ? Does your firm have a standard suitability statement?
Refer to
Refer to chapter 5 for more on the FCA
The identification and arrangement of suitable insurance products and services is the
primary role of the broker and the FCA places particular emphasis on these processes and
there are specific rules which must be followed. However, it could be argued that most
brokers do this automatically and understanding clients and their needs is simply good
business practice. The better the broking firm understands its clients, the better it will be at
providing suitable insurance products.
A2A Electronic placement
Platform Placing Limited (PPL) is a widely-used platform for the electronic placement of
business within the London Market. PPL enables brokers and insurers to quote, negotiate,
For reference only

bind and endorse business digitally. Risks can be placed electronically to support face-to-
face negotiations, removing paper from the process and creating a digital information flow
and audit trail. Brokers and insurers use a range of different systems other than PPL, but
utilising this technology for electronic placement is likely to render the traditional proposal
form a thing of the past.
B Negotiation and placement

Not only does the broker need to understand and record the client’s demands and needs but
they also need to collect all the relevant risk data, including the material facts, so that they
can be presented to a suitable insurer and the most appropriate insurance product can be
obtained.
The more certainty and understanding an underwriter has regarding any particular risk, the
more accurately they will be able to underwrite the risk. Armed with all the facts, a broker is
fully equipped to negotiate the best possible policy terms for their client – i.e. the widest
cover at the most competitive price, in line with the customer’s needs. The process of
negotiating and placing insurance is the way in which client needs are ultimately met, and is
known in the insurance market as ‘broking’ the contract.
B1 Material facts
Insurance contracts are contracts of utmost good faith (uberrimae fidei).
A summary of the principle of utmost good faith was given in the case of Rozanes v. Bowen
(1928), as follows:
As the underwriter knows nothing and the man who comes to him to ask him to
insure knows everything, it is the duty of the assured…to make a full disclosure to
the underwriter without being asked of all the material circumstances. This is
expressed by saying it is a contract of the utmost good faith.
Insurance contracts rely on all parties to the contract observing utmost good faith, and
historically their legitimacy was dependent on the insured making full and complete
disclosure of all the material facts relating to the contract.
A material fact was defined in s.18(2) of the Marine Insurance Act 1906 as:
Every circumstance is material which would influence the judgement of a prudent
insurer in fixing the premium or determining whether he will take the risk.
Chapter 2
Generally speaking, a material fact was something that had a bearing on the risk insured, for
example:
• household insurance: the risk address has a thatched roof; or
• motor insurance: the proposer has had three claims in the previous year.
B1A Impact of the Consumer Insurance (Disclosure and
Representations) Act 2012 on duty of disclosure
However, the Marine Insurance Act 1906 was perceived as:
'…archaic, unclear and unfair.' (Law Commission 2012)
It was argued that the act and the principal of utmost good faith allowed insurers to
unreasonably avoid the settlement of claims to individuals and a need was identified to
clarify the law.
As a result, the Consumer Insurance (Disclosure and Representations) Act 2012 came
into force, allowing consumers more protection and, in effect, rendering the principal of
utmost good faith obsolete in consumer insurance contracts during pre-contractual
negotiations.
Under the Consumer Insurance (Disclosure and Representations) Act 2012, consumers are
only required to take reasonable care not to make a misrepresentation when providing
information before a contract is entered into.
The Act replaces the duty of consumers to volunteer information before taking out insurance,
with a duty to take reasonable care to answer the insurers’ questions fully and accurately.
For reference only

The Act only allows insurers to avoid paying a claim in a situation where the
misrepresentation was either deliberate, reckless or careless.
Refer to
See also ICOBS 8: Claims handling on page 5/16
Be aware
The Consumer Insurance (Disclosure and Representations) Act 2012 applies to
‘consumers’ and not to business/commercial customers.
The Act emphasises the need for brokers to ensure that their clients supply all the material
facts so that they can make detailed and accurate presentations to underwriters. It may not
always be clear whether a fact is material or not; there may be certain information which
improves an underwriter’s perception of a risk, but is not necessarily material. In this
situation, it is preferable for the broker to present all of the information, as it is in the interests
of both the broker and their client to present their client in the best possible light. A key
principle within the Act is to disclose information with clarity and urgency, even where there
is doubt that the information is material; this demonstrates the skill and professionalism of
the broker and is, therefore, in the best interests of all parties.
Example 2.1
Bob buys a house and is looking for insurance. The house is built about 100 metres from
a stream which runs through the centre of the village. Bob understands that four years ago
Chapter 2
the house was damaged by flooding but he was not the owner of the property at the time.
Should he declare this?
Yes. Insurers would certainly want to know about this and consider whether they would
want to apply a higher rate or impose terms. In reality, the insurer would probably already
be aware of the risk (through the use of mapping systems which can also identify
subsidence) and probably also be aware of the claim through a shared database. They
might send a surveyor, and if the house was well above the stream they might well accept
the risk at standard rates and terms.
Other helpful guidelines on the topic of material facts include the following:
• discuss information with colleagues and insurers, but if you are still in doubt, disclose;
• non-disclosure will certainly prejudice your client, whereas disclosure rarely will;
• where applicable, loss information should include details on insured and uninsured
losses; and
• failure to show certain very large losses in a claims experience because they are ‘old’ –
say, more than five years – is naïve. The passage of time does not necessarily render a
fact ‘immaterial’. Most seasoned underwriters will be aware of the majority of large losses
in their sector over the past, say, ten years, so omission simply makes the broker appear
unprofessional. Therefore, judgment is required by brokers to decide what is and what is
not a large loss and what is and what is not ‘old’.
Ultimately, the purpose of insurance is risk transfer but, by not disclosing potential materials
facts, a risk is introduced into the insurance itself which potentially defeats the object.
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The client’s loss experience is one of the key material facts that should be disclosed to
underwriters. The data that needs to be captured includes insurance claims made and also
any uninsured losses that have occurred.
Uninsured losses include:
• self-insured losses, e.g. losses where insurance had deliberately not been taken out; and
• unintentionally uninsured, e.g. where the policy did not operate to cover the loss or where
the sum insured was insufficient.
Together with the requirements that the Consumer Insurance (Disclosure and
Representations) Act 2012 places on brokers, they also have a duty under the Marine
Insurance Act 1906 to disclose:
• every material fact known to them, including facts which in the ordinary course of
business ought to have been communicated to them; and
• every material fact which the insured is bound to disclose, unless it comes to the
insured’s attention too late to communicate to the broker.
Be aware
Clients may not be aware of the application of the law of material facts to insurance
contracts so the broker has a responsibility to ensure that they explain those facts that are
material and those that are not.
Question 2.1
You are assisting your client to insure a house she has just purchased. Which of the
Chapter 2
following is not a material fact?

a. The construction of the house. □
b. There is a stream nearby but it runs outside her boundary fence. □
c. The fact that the person she bought the house from made an accidental damage □
claim for a broken window just before they moved out.
d. A household claim she made while at a previous address. □
Under the Act, it is the duty of the consumer to take reasonable care not to make a
misrepresentation to the insurer before the contract is entered into. This modifies the
consumer’s duty of utmost good faith by removing the obligation to disclose all material facts.
They need only to respond honestly and with reasonable care to questions asked.
One unintended consequence of the Consumer Insurance (Disclosure and Representations)
Act 2012, is the potential for personal lines proposal forms to increase dramatically in length
as insurers seek to ask as many questions as possible. There may be a greater temptation
for some clients to ‘look to their brokers’ to complete some or even all of their proposal form.
This should be avoided as the proposal form remains the basis of the contract between the
insurer and the insured.
B2 Insurance Act 2015

The Insurance Act 2015, effective since 12 August 2016, seeks to extend the reforms made
previously to consumer contracts of insurance.
For reference only

The Act applies to commercial (non-consumer) insurance policies and amends insurance
law in three main areas:
• the pre-contractual duty of disclosure and the effect of misrepresentations at that stage;
• the effect of warranties contained in the policy; and
• insurers’ remedies for fraudulent claims.
B2A Duty to make a fair presentation of the risk
The Insurance Act modifies the duty of utmost good faith that underlies insurance contracts
by introducing the duty of ‘fair presentation’. The duty to volunteer information is retained
(unlike the position for consumer insurances) and a commercial proposer must either:
• disclose to insurers ‘every material circumstance’ which the insured knows or ought to
know; or
• provide the insurer with ‘sufficient information’ to put a prudent insurer on notice that it
needs to make further enquiries into those ‘material circumstances’.
B2B Material circumstance
The Act sets out what is deemed a ‘material circumstance’ by stating:
A circumstance or representation is material if it would influence the judgement of
a prudent insurer in determining whether to take the risk and, if so, on what terms.
Be aware
In effect, the definition has not changed from the previous position within the Marine
Insurance Act 1906 (refer back to Material facts on page 2/5 on material facts).
Material circumstances are: • those that the insured ought to know in the ordinary course of conducting
their business. They include information known by the insured’s senior
management and the persons responsible within the business for arranging
Chapter 2
insurance.
• information that should reasonably have been revealed by a reasonable
search of information held within the insured’s own organisation.
• information held by others, such as the insured’s brokers.
Material circumstances are not: • confidential information acquired through a business relationship
unconnected to the contract of insurance.
The insured does not need to • matters known to individuals who participate on behalf of the insurer in
disclose material circumstances deciding whether to take the risk and on what terms (for example,
which are already known, or underwriting teams);
ought to have been known, by
• knowledge which is held by the insurer and is readily available to the
the insurer. This includes:
person deciding whether to take the risk; and
• matters known by an employee or agent of the insurer, which should
reasonably have been passed on to the person deciding whether to take
the risk (for example, the claims department).
B2C Good faith

The disclosure must be made in a reasonably clear and accessible manner, material
representations of fact must be ‘substantially correct’ and material representations of
expectation or belief must be made in ‘good faith’. Individuals will be deemed to know
matters they suspected and which they would have known had they not deliberately
refrained from confirming or enquiring about them.
B2D Remedies for non-disclosure
Prior to the implementation of the Insurance Act, an insurer would be entitled to avoid the
For reference only

whole contract where the commercial proposer had failed to disclose all material information.
The undisclosed information did not need to relate to a loss; instead, the insurer simply had
to show that it was unknown to the insurer and was material to the risk.
The Insurance Act distinguishes between breaches of duty which are:
• deliberate or reckless; and
• those which are innocent or negligent.
Apart from fraud, under the Insurance Act an insurer will only be entitled to avoid a policy
entirely where the breach of duty of fair presentation is ‘deliberate or reckless’ and where
the insurer can show that it would not have entered into the contract had it known the
information or would only have done so on different terms. The insurer may also retain any
premium paid.
Where the breach is neither reckless nor deliberate the remedies provided in the Act are less
severe.
They are intended to be proportionate and to reflect what the insurer would have done if it
had known of the undisclosed information before entering into the contract.
So, an insurer will only be able to repudiate a claim and avoid a policy entirely where it can
show that it would not have written the policy at all.
Be aware
The Insurance Act still preserves the insurer’s right to avoid a policy where fraud is
involved.
B2E Contracting out of the Insurance Act 2015

It is possible for the parties to the insurance contract to agree that the provisions of the
Insurance Act 2015 will not apply, and therefore that the previous law on disclosures
would apply. The Insurance Act requires insurers to be very transparent in their
explanations to the proposers on the impact of contracting out; if an insurer is not, any
‘contracting out’ within the documentation may have no legal effect.
B2F Impact on warranties

The Act makes important changes to the effect of warranties contained in insurance
contracts:
Chapter 2
• Breach of warranty no longer automatically terminates the contract. Instead, an insurer’s

liability will be suspended from the time of the breach until the breach is remedied.
• Insurers are not entitled to avoid a claim where the insured’s breach did not relate to the
loss, but the insured must be able to show that non-compliance with the term could not
have increased the risk of loss which actually occurred.
‘Basis of the contract’ clauses are abolished. Some proposal forms contain a statement
allowing insurers to void a claim if any information provided, no matter how unimportant, is
inaccurate. This change brings commercial and business insurances in line with the
approach already applied to personal lines business under the Consumer Insurance
(Disclosure and Representations) Act 2012.
B2G Fraudulent claims
The Act clarifies insurers’ position in the event of a fraudulent claim being made. It provides
insurers with clear statutory remedies when a policyholder submits a fraudulent claim.
On the Web
www.legislation.gov.uk/ukpga/2015/4/contents/enacted
B3 Data capture
Although the emphasis has shifted towards the insurer asking for the full extent of risk
information, it is still beneficial to clients to disclose all material facts and it is in the client’s
best interest to provide as much other information or data to the broker as possible. The
For reference only

function of capturing the right data from the client is a prime part of the broker’s service. The
more information the underwriter has about a particular risk, the weaker the threat of
uncertainty. If uncertainty can be eliminated at the underwriting stage, the underwriter may
feel more confident about providing their best terms to the client.
All material facts need to be collected and documented prior to presentation as underwriting
information.
Refer to
Refer to IF1, chapter 5, sections C and D to remind yourself of the different types of
material facts that concern possible physical and moral hazards
It is important for brokers to fully ‘know’ their clients; the more knowledge brokers have of
their clients, the better able they are to understand their needs and the more information they
will be able to present to underwriters. Every time a broker interacts with their client, or a
potential client, they can gather information that may be useful to the underwriter. There are
also a number of formal ways in which the broker can compile underwriting information.
These include:
• proposal forms;
• PPL and other electronic placement systems;
• insurers’ questionnaires;
• brokers’ questionnaires;
• survey reports; and
• statements of fact.
For most classes of business a substitute for proposal forms has evolved over recent years
involving the use of statements of fact, as well as electronic placement platforms such as
PPL. Underwriting information is gathered over the telephone, at face-to-face meetings or
electronically, and that information is then combined into a statement of fact. These
documents state the known information on which insurers have relied upon to underwrite the
risk. These forms may be signed before or after the contract is made, however, they are
often not signed at all.
There is a danger that incorrect statements are made which could invalidate the contract but
only when a claim comes to light.
Chapter 2
Example 2.2
The statement of fact states a property is built of non-combustible materials on its external
surfaces, such as brick, tile or slate, often referred to as ‘standard construction’, when in
fact, a significant portion of the roof is felt on timber which is both combustible and less
robust than a tiled roof. This blows off in a storm and a claim is made, and insurers now
realise the risk was higher than originally thought.
Each method has advantages and disadvantages for the broker and the client.
These are summarised in the following table with an explanation of each method.
Method Description Advantages Disadvantages
Proposal forms These are required for certain • They are a • Some clients dislike
specialised risks such as comprehensive method of completing a form which
professional indemnity risks. collecting relevant data. they may see as the
• They provide an ideal broker’s responsibility to
The function of the proposal
opportunity to remind the complete.
form is to present
standardised information that client about their duty of • The forms tend to be
will enable the insurer to disclosure, what the standardised, therefore,
underwrite the risk. As the consequences are if they some of the questions
client has to sign the proposal fail to disclose and what may not be relevant and
form and warrant the truth of constitutes a material fact. clients may need to be
the information, it actually • They may also provide an reassured and
provides the basis for the opportunity for the broker advised when
contract of insurance between to discuss with their client completing them.
the insurer and the client. other insurance needs
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they may have, thus
Therefore, the broker should
generating more
not complete the form on
business.
behalf of the client but they
can provide advice on the
meaning of the questions and
on what information should be
included.
Statement Frequently used in home, car • Selling and buying of • Assumptions can be
of fact and straightforward SME insurance is made made by both insurers
business. simpler. and the insured which do
not come to light until a
claim is made.
Insurers’ These are used when the risk • They ensure all the • They are tailor-made to fit
questionnaires is too large or complex for a correct information is the risk, so take time to
standardised proposal form. requested and questions structure and can be quite
The questionnaire is usually that are not relevant can onerous for the insured to
tailored to the needs of the be avoided. complete.
particular client and risk, and
may be used in conjunction
with other risk information
such as client accounts,
product information and
detailed loss analysis.
Method Description Advantages Disadvantages
Brokers’ In some cases, particularly for • Forms may be sent in • They should not be relied
questionnaires larger risks or where the client advance of a face-to-face on as the only source of
Chapter 2
has many different sites, meeting, allowing the data capture. If they are
brokers may use their own client the opportunity to sent to the client to
questionnaires to gather review the content and complete as a substitute
information. gather the appropriate for a face-to-face
risk information. This meeting, the broker risks
Brokers’ questionnaires vary
provides a clear focus for losing touch with the
in complexity, depending on
the meeting. client and the forms may
the risk. These forms should
• Complementing these be inadequately
only be used to supplement
forms with a face-to-face completed.
other means of gathering
information or as guides for visit saves time and can • They can be time-
brokers to capture all of the reduce potential errors. consuming and expensive
essential information. for the broker.
• They may not capture all
insurer information
requirements.
Survey reports For complex risks, brokers • This method will generally • Not all insurers accept a
may need to conduct a formal capture the most physical broker’s survey and may
underwriting survey to fully risk information, as well only quote based on the
understand the risk and the as provide an findings of their own
client’s approach to risk understanding of how the surveyor.
management. risk/business is run. • Surveys are expensive as
Such a survey may even be they need to be
required by the insurer. They conducted by an expert
take the form of a site visit and the broker may not
where a broker’s technical have such expertise
expert identifies key risks and ‘in house’.
exposures with the client and
a detailed survey report is
For reference only

completed and used to
present to insurers.
Using a ‘joint survey’ may be the broker’s best approach to capturing data about their client.
The function of capturing the right data from the client is a prime part of the broker’s service.
In a ‘joint survey’, the insurer sends their own expert to meet the client but the broker or their
risk surveyor is in attendance to represent their client and explain the kind of information the
insurer requires and why they require it. It is often during these joint surveys that the broker
may identify additional risks which can also be insured and they are also on hand to explain
any potential risk improvements the insurer may require before offering terms.
B4 Risk presentation and negotiating terms

Having collected and documented all of the material facts, the broker’s next task is to
present the risk to insurers through the use of a comprehensive underwriting submission.
The complexity of this task depends on the complexity of the risk, ranging from a simple
household policy to a policy for a large multinational company. Within the submission, the
broker needs to ensure they provide:
• an accurate specification of cover (the exact cover required, including the class of
business, commencement date, sums insured and limits of indemnity, as well as the
policy wording that is to be used); and
• all material underwriting information (this varies in complexity between risks).
Ensuring an accurate specification of cover is explained to the underwriter at the
commencement of the negotiation process will eliminate confusion while the policy is being
put together. It should also reduce the need for any follow-up calls or meetings between the
broker, underwriter and client. This is one of the reasons why first establishing the demands
and needs of the client is so important.
One area of potential confusion when negotiating terms is where the insurer offers terms
subject to their ‘standard wording’. Here, the broker must check carefully that this wording
meets the requirements of their client, and that their client is fully aware of the possible
limitations imposed. This is particularly important when considering warranties, where it is
common practice by insurers to impose ‘standard’ warranties which are embedded within
their policy wordings.
Example 2.3
Examples of warranties include:
Chapter 2
• Fire insurance: all oily rags are placed in metal receptacles and removed daily from
the building; no more than an express amount of paraffin is kept on the insured’s
premises at any one time.
• Theft: premises are not left unoccupied at night; certain types of approved locks
are fitted.
Warranties are fundamental to the contract and can be used aggressively by an insurer to
reduce either the risk of loss by forcing an insured to comply or giving them the opportunity
to decline losses. Non-compliance will allow insurers to repudiate the claim so it is essential
clients are not only aware of their existence but also understand the implications of non-
compliance.
B4A Risk presentation and good practice
The more detail the broker is able to supply in the underwriting submission presented to an
underwriter, the more likely the insurer is to provide preferential terms. A detailed
underwriting submission also reduces the risk that a future claim might be refused by an
insurer on the grounds of inadequate information or even non-disclosure. The depth of
information will always be dependent upon the size and complexity of the risk. However, the
principle remains the same – time invested in this key activity will always be rewarded by a
better service to the client.
The qualities and objectives of a good submission can be summarised as:
• influencing the underwriter positively (reassuring them that the broker knows the
risk well);
For reference only

• positively and accurately presenting the key features of the risk;
• understanding what information the underwriter needs;
• comprehensively and fully presenting all material, providing an explanation for anything
that may need further clarity in a concise way; and
• ensuring the client’s best interests are represented.
It should be noted that risks are presented to London Market underwriters on a standard
form known as the Market Reform Contract (MRC), colloquially known as a ‘slip’.
The MRC was introduced in July 2007 and has six sections headed as follows:
• risk details;
• information;
• security details;
• subscription agreement (the rules to be followed for processing transactions and
administrating amendments);
• fiscal and regulatory; and
• broker remuneration and deductions.
The MRC ensures the content of the risk presentation is aligned with the needs of contract
certainty requirements.
Although already considered to be good practice, the Insurance Act 2015 bans ‘data
dumping’, and emphasises the expectation for brokers to present the risk to the underwriter
in a thorough, but concise and accessible manner.
B4B Negotiation with insurers and contract certainty
It is essential that the client understands the product they are purchasing at the point of sale.
It is the broker’s responsibility to achieve agreement and understanding between their client
and insurers. Issuance of documentation (including a full policy wording) is one of the ways
in which this understanding can be evidenced and the FCA requires that policy wordings are
issued to the insured ‘promptly’. The market has interpreted the word promptly slightly
differently for consumers and commercial customers (policy documentation is more
commonly issued to consumers faster than commercial customers), and this does follow the
FCA’s perception that consumers are at greater risk than commercial customers. The
deadline for issuing full documentation to clients varies between broking firms and also
within the commercial and personal lines departments. The previous regulator, the FSA,
through its Contract Certainty Code of Practice, introduced market standards of within 7 days
Chapter 2
to a consumer and within 30 days to a commercial customer.
On the Web
Visit the London Market Group website and review the Contract Certainty Code of
Practice document at: lmg.london/document/contract-certainty-code-of-ptractice-
september-2018.
Contract certainty as a concept means that all the terms and conditions of the insurance
policy have been agreed before any insured or insurer commits to the contract.
To make certain that this happens, when the broker is negotiating cover with an insurer, they
should ensure:
• agreed wordings with insurers are made central to the negotiation process and used
throughout;
• all clauses are specified in full; and
• clauses that will affect the premium are separated from those that are standard and those
that will require specific negotiation.
When presenting claims information, it is helpful for the underwriter if the broker conducts
some analysis of the information. This could be quite complex for a commercial client with
multiple work sites and would need to include some proposed risk management to reduce
the risk of any repetition of similar claims in the future. For example, for a client with a history
of fire damage claims, the broker would need to present how the fire detection and
protections have been upgraded – perhaps through the installation of a sprinkler system or
For reference only

an upgraded heat detection system, or through new procedures put in place for the use of
certain heat equipment. For a simpler risk which has had a number of claims of less than
£500, the broker could just propose an increase in the level of excess to £500.
Throughout the negotiation of an insurance contract, the broker’s role is to ensure that the
client’s best interests are served. During the negotiation, brokers may need to explain certain
risk features in more depth to reassure the underwriter. In addition, the broker will need to
constantly try to obtain the best possible terms from the insurer in line with their client’s
demands and needs, which may need to be referred to during negotiation.
Consider this…
In what timescale does the insurance broking firm you are most familiar with require
insurance documentation to be issued to its commercial and personal lines clients?
C Selection of an insurer
Before the negotiation and presentation of the risk, the insurance broker has a very
important decision to make. As independent intermediaries, insurance brokers are free to
choose which insurer to use and must decide which insurer’s products best meets their
client’s needs.
In this section, we will look at how broking firms select the insurers they trade with in general
as well as how they select the most appropriate insurer for a client's individual risk.
C1 Selecting an insurer to trade with

There is a range of positive and limiting factors that will affect a broker’s choice of insurer to
trade with. The limiting factors include regulation, financial security, class of business,
administration and broker selection.
Regulation In the UK, regulated insurance brokers can only deal with regulated insurers. There are
currently almost 1,000 insurance firms in the UK able to carry out general insurance
business.
Chapter 2
Financial security Other than regulated status, the financial security of an insurance company (their ability to
pay claims) is the overriding factor that brokers must take into account when choosing an
insurer to trade with. Large broking firms have specialist teams (known as market security),
who regularly monitor insurers’ financial security. Smaller brokers will also have procedures
in place. Financial security can be assessed by looking at the credit rating given insurers
by rating agencies (such as Standard & Poor’s or AM Best), reading the financial press and
looking at other indicators.
Class of business Not all insurers will underwrite all classes of insurance, and even within each class,
insurers tend to specialise in certain lines of business. For example, an insurer may only
offer household products for high value homes (a subclass of personal lines business
known as high net worth). The task of the broker is to find an insurer who specialises in the
class of business that best matches the broker’s client base.
Administration There are administrative costs and practicalities involved with each insurer relationship, or
agency agreement, as it is known. Therefore, even the largest insurance brokers would not
deal with every single insurer.
Broker selection Insurers are also selective about which brokers they work with. They too have
administrative costs associated with agency agreements and the broker needs to provide
the insurer with a reasonable premium income stream and be prepared to meet the
insurer’s terms of business. Terms of business agreements (TOBAs) are always
exchanged between insurers and brokers. There needs to be a relationship of mutual trust
between the insurer and the broker. Reputation is important and relationships take time to
develop so insurers also like to select the brokers they already work with.
Refer to
Refer to Wholesale brokers on page 1/11 and Terms of business agreements (TOBAs) on
For reference only

page 4/7 for more on TOBAs
The positive factors which brokers should take into account when selecting an insurer to
trade with are credit facilities, additional income, ease of payment, provision of support and
sales literature, and reputation and experience.
Credit facilities Some insurers may offer credit facilities for a broker’s clients and this can provide an
added benefit. The time the insurer gives the broker to pay client premiums also varies
(from 90 days for some of the largest brokers down to 30 days or less for smaller firms).
This also gives the broker some flexibility, may help with administration and also have
financial implications.
Additional income Insurance premiums are normally calculated on the basis that they are paid at the outset,
allowing insurers to invest these to create additional income which indirectly keeps
premiums down.
Ease of payment Insurers can offer facilities for the premium to be paid in a monthly direct debit, but as they
are losing some of the investment opportunity they will normally charge for this service.
However, insurers may offer to do this at no extra cost to provide a competitive advantage.
Provision of Some insurers provide support and sales (support service) literature and this is particularly
support and sales useful for smaller brokers that do not have the budget to produce their own literature, or
literature technical sales guides which help to provide essential information for their clients and
prospects.
Reputation and Some insurers may have a reputation for specialising in a particular line or class of
experience business. With experience comes a degree of flexibility in terms of how business is carried
out that can be useful to the broker and their client. Using an insurer which is a household
name and has a good reputation can provide reassurance to a broker and their clients.
Some insurers may have a reputation for settling claims more quickly than others or
providing good quality service for the broker.
A final point to consider is the subject of broker remuneration. It is important to understand

that not every insurer offers the same level of payment. Traditionally, brokers were paid by
commission (also known as brokerage) which formed part of the client premium.
Increasingly, particularly for commercial business, brokers do not take commission and
instead discount an element of the client’s premium and charge them a fee. This method is
more transparent. However, where commissions are still paid, there is nothing wrong with
considering the level of commission offered, although brokers must remember that the
interests of their clients must come first.
Chapter 2
Refer to
Refer back to Broker remuneration on page 1/21 for more on broker remuneration
C2 Insurer panels and fair analysis

With almost 1,000 regulated insurance companies in the UK to choose from (source: ABI,
2013), the broker’s task of selecting insurers to trade with may seem daunting. Due to the
complexities of dealing with a number of insurers, it might seem to make sense simply to
deal with one insurer that the broker has had a good experience with. However, it is the fact
that brokers are able to choose from a wide range of insurers – depending on the needs of
their clients – that makes them unique.
The FCA provides specific guidance on how brokers should select insurers and give advice
to their clients in the Insurance: Conduct of Business Sourcebook (ICOBS) 4. ICOBS
states that when quotations are put forward, brokers are required to tell their client the basis
on which they have carried out the broking on each risk. If a sufficiently large number of
insurance contracts have been considered from the relevant sector of the insurance market,
the broker is able to make a recommendation based on a fair analysis of the market.
Refer to
Refer to chapter 5 for coverage of the ICOBS rules
For a ‘fair analysis’ to take place, the broker must:

• consider an adequate number of insurers, large enough for the broker to demonstrate
For reference only

their knowledge of the insurers operating in the relevant market sector; and
• be able to evidence the analysis by adhering to and documenting a set process.
The process of fair analysis is illustrated below:
Step 3
Step 1 Refine the list of potential
Step 2 insurers based on the
Data capture and establish
Identify the potential insurers client’s demands and needs
the client’s demands
for that class of business. and produce a shortlist of
and needs.
potential insurers.
Step 6
Select a recommended
insurer and present the Step 4
quotation to the client, Step 5 Refine the shortlist using
making it clear why your Provide a broking specialist broking knowledge
recommendation best suits submission and negotiate and expertise. Ensure that is
their demands and needs terms. documented with reasoning,
and that the quote was leaving a minimum of five
obtained through fair insurers.
analysis.
It is not necessary to annotate every potential insurer for that class of business. However,
the broker must show, in writing, why the insurers reviewed at the shortlist stage did or did
not go forward to the final list of insurers to be approached. Many brokers use a standard
broking form to show which insurers were approached. An example of a broking form can be
found as appendix 2.3 (available on ciigroup.org/login).
Question 2.2
Before making a recommendation to a client based on fair analysis, the broker
Chapter 2
must first:
a. Prove they have followed the relevant process. □
b. Record all telephone conversations with the insurers and all conversations with □
the client.
c. Approach every market available. □
d. Obtain terms using a delegated authority and documenting the results. □
Activity
Find out how your firm documents a fair analysis. Do you have standard broking
documents for different classes of business?
Insurers should be selected according to product features, premiums and the service offered
to the insured, not just according to the benefits for the broker.
C3 Assessing insurers for a specific risk

Having identified a number of suitable insurers to trade with and captured the client’s risk
information and demands and needs, the broker must then decide which insurers to
approach in order to conduct fair analysis for the specific risk.
The main criteria for assessing which insurers to approach include: quality of service,
breadth of cover, flexibility, innovation, capacity, geographical spread, technical advice and
For reference only

specialist expertise, claims service, price, survey and risk control, premium financing,
continuity, and reputation and experience.
These assessment criteria are explained in more detail in the following table:
Assessment criteria Feature
Quality of service The better the service provided by the insurer to the broker, the better the service the
broker can provide to the client. An insurer should be able to provide, among other
things, a fast quotation, efficient and accurate production of documents, timely
payment of claims and an efficient accounting system.
Breadth of cover Insurers regularly change the amount of cover they offer depending on the trading
conditions. Some insurers offer additional cover, sometimes at no cost. As previously
mentioned, the broker should at all times source the most appropriate cover for the
client’s demands and needs.
Flexibility The willingness of an insurer to adapt the terms and conditions of its quotes to the
client’s specific needs.
Innovation The insurer’s ability to step outside the conventional in order to accommodate
complex risks or meet individual client needs.
Capacity Insurers are required to maintain enough capital in reserve to pay the potential future
claims of all their clients. Capacity is a finite commodity and as a result, insurers may
become selective about the types of risks they choose to accept. This will affect the
terms and cover they offer. Simplistically, an insurer with a large capacity may be
able to offer better terms.
Geographical spread For clients with a wide geographical spread, an insurer who also has a large number
of offices over a number of regions will provide administrative benefits, particularly for
multinational risks.
Technical advice and The accessibility of an insurer’s technical experts to brokers and clients.
specialist expertise
Claims service An insurer’s willingness to pay out on a claim and the administrative interaction
between client and insurer when there is a claim. This includes the speed of
appointment of loss adjusters, rapid decision-making and quality of communication.
Assessment criteria Feature
Price Price may be very important in terms of a client’s demands and needs. Sourcing a
competitive price is a key task of the broker and insurers will all have different
Chapter 2
premiums depending on the features of the risk. It is the broker’s task to seek the
insurer who can offer the most competitive price and to generate competition
between insurers for the risks they hold.
Survey and risk control Insurers may provide risk surveys. This can be an advantage but they need to be
completed with the cooperation of the client and in a timely manner. Risk control
advice can also be helpful but may also be onerous or expensive for the client to
implement.
Premium financing These are credit facilities, which may be helpful for some clients.
Continuity There are benefits for clients that stay with their existing insurer. For example, clients
that have a poor loss history may find it difficult to secure appropriate terms
elsewhere, and a client that has been loyal to an insurer over time and not made a
claim may be able to secure a favourable decision over a claim that may not
necessarily be covered.
Reputation and Certain insurers may have developed great experience in underwriting a particular
experience type of risk. Here, the broker can feel confident about seeking a quotation and the
insurer may even suggest different cover options.
C4 Confirming terms to the client

Having obtained a number of quotations from the shortlisted markets, the broker will then
analyse each quotation, explain the differences between the terms to the client and make a
recommendation which the broker feels best matches the client’s demands and needs.
This exercise is complex as it is not simply a case of 'the cheapest is best'. Even where the
price is the most important issue for the client, it may be at the cost of cover benefits that
might save the client money in the long run. Explaining this to clients can be a challenging
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task. In line with the client's demands and needs, the broker must still consider all the issues
discussed above before arriving at a recommendation.
When presenting and explaining terms to the client, the objectives are to:
• convey the terms accurately and concisely;
• ensure the client understands the cover and the terms and conditions that may apply;
• ensure that the client understands where the cover may not match their requirements;
• provide a record of the advice to the client;
• bring special payment or standard credit terms to the client’s attention; and
• provide full details of the insurers.
This is also an opportunity for the broker to provide guidance on the meaning and
importance of:
• disclosing material facts;
• the importance of having up-to-date sums insured; and
• warranties and policy conditions such as security or fire protection requirements and
storage of property.
Terms and conditions must be confirmed in writing. If the quotation is for a renewal, a good
presentation of terms to the client would include the following:
• last year’s terms with last year’s values;
• last year’s terms on this year’s values;
• this year’s terms on this year’s values;
• competing or alternative terms on this year’s values;
• percentage differences by line and in total; and
• a mention of any key differences between this year and last year’s terms, such as cover
or excess changes.
It is at this stage that the suitability statement and demands and needs statement are
presented. The suitability statement will need to record:
Chapter 2
How the
The client’s recommendation
The reasons behind
demands and addresses those
the recommendation.
needs. demands and
needs.
This will provide the client with enough information to make an informed choice about
whether and what to purchase, thereby satisfying the FCA’s requirement, while providing
good quality advice and service.
Having provided complete and final agreement of all the terms between the insured and the
insurer, the broker can accept a written instruction from their client to proceed with the cover
and inform the insurer to commence the contract at the date agreed. If it is not possible to
obtain a written instruction, the broker should make an immediate written record of the
conversation and send a written confirmation to the client. All contract documentation must
be provided, ‘promptly’ according to the Contract Certainty Code of Practice.
Refer to
Refer to ICOBS 6: Product information on page 5/15 for more on contract certainty
Question 2.3
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When presenting a renewal quotation to a client, a good presentation would include:
a. Percentage differences by line only. □
b. Percentage terms in total. □
c. The fact that the excess has not changed. □
d. This year’s terms on this year’s values. □
D Design and operation of insurance

programmes
Designing an insurance programme involves the expert matching of a client’s risk needs, risk
appetite (the amount of risk that an organisation or individual is willing to take on in pursuit of
their strategic objectives) and budget with an insurer’s capabilities and preferences, in the
context of what is available in the market at the time. The broker’s objective in designing an
insurance programme is to meet the client’s demands and needs. So each programme will
be different and tailored to what the client wants, in line with their own individual approach to
the risks they face.
Programme design is no different from any other activity an insurance broker may undertake;
it is only the level of complexity that changes. Brokers still have the same obligation to
provide ‘fair advice’ to clients. Programme design should form the strategy for broking the
client’s risks and provides the platform from which the broker can approach their chosen
markets.
Programme design will evolve during the broking process as initial assumptions about the
client’s needs are replaced by facts. The way the insurance market reacts to the client’s risks
and how the client then responds will also have an impact on the way the programme is
designed. Programme design should be treated as a continually evolving process rather than
a one-off exercise.
Programme design requires the broker to have a good knowledge of their client and this
includes having an understanding of:
• the client’s business and their markets;
Chapter 2
• the client’s exposures, loss experience and risk profile (the frequency and severity of their
claims);
• the client’s ability and appetite to retain risk and the market’s expectation of imposed
levels of self-insurance;
• how the client values services surrounding the insurance contract, for example, risk
management, claims handling, multi-site (and multi-national) coordination – all of which
can be expensive; and
• the client’s organisation and management style, for example, the degree of central control
to make decisions, or the amount of autonomy the organisation’s management has to
make decisions in different parts of the company.
The majority of a client’s insurance needs can usually be met by the provision of a single,
standard policy. Even smaller, commercial customers can have their needs met on a single
‘commercial combined’ policy. However, as a client’s risks become more complex and
increase in value, it may be necessary to bring together a number of different policies. In
order to avoid potential gaps or duplications of the same cover, a considered approach is
required. The client’s total insurance expenditure may need to be reviewed by looking at the
amount of risk it retains and the amount it transfers to an insurer, in order to achieve a cost-
effective way to provide the protection the client wants.
For example, it may be cost-effective to increase a client’s excess in return for a reduction in
their premium. The excess can be deducted from the amount the insurer pays the insured in
the event of a claim (which is why it is also referred to as the deductible). Insurers offer lower
premiums in return for a higher excess – as a higher excess can eliminate the higher
frequency, low value claims – while encouraging the insured to take responsibility for risk
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management and ‘participate’ in the risk itself.
D1 Key issues in programme design

The key issues brokers face in designing insurance programmes for their clients, and key
questions they must consider, include:
• Risk retention. What level of risk does the client wish to retain (i.e. their level of excess)
and what level will an insurer impose? Few insurances are issued free of excess because
the cost of handling small value claims is disproportionate and would increase the
premium. They also bring a degree of care by the insured knowing that they would have
to fund part, if not all, of a claim. Lower premiums might be attractive to an insured for
accepting a higher excess than normal.
• Packages and combining policies. Can savings be achieved by packaging? (This is
where a number of risks are combined in a single policy with a single insurer; for
example, a commercial combined policy.) Another question to consider is: can additional
cover be added by trading some of the premium saved by packaging? Also, can an
insurer offer cover for a high-risk business if it is offered with other lower risk elements?
• Programme term. Will an insurer agree to fix its rates in return for a longer-term policy?
An example would be when a three-year long-term agreement (LTA) is arranged instead
of a one-year policy. The insurer may offer a reduced rate if it is certain that it will cover
the risk for longer, provided the risk remains claim-free or the annual claims experience
falls under an agreed threshold. In addition, if rates are expected to increase in the future,
this becomes very attractive for the broker. If the client needs financial stability, can this
be achieved by an LTA?
Insurers are more frequently offering rate stability agreements where they agree to
maintain the same rates and terms for a set period of two, three or four years. These
have safeguards built in so that if the loss ratio is poor, insurers can change their terms at
renewal, and the insurers would not be obliged to renew. These agreements are often
combined with low claim rebates which would give a refund of premium based on the loss
ratio of the previous year and always subject to the insurance being renewed.
• Limits. Does the client have accurate sums insured; do they really need such high limits
of cover?
• Specialist cover. How can the programme be structured to include special cover, such
as terrorism, environmental liability or product financial loss cover? For example, can they
be included with other cover or do they need to be purchased separately?
Chapter 2
• Insurers. Which markets are interested in writing the risk and how will they respond to
the proposed programme structure?
D2 Global programmes
Many multinational companies have a global view of their business operations and have
adopted a similar approach to their insurance needs. Thus, a demand has arisen for both
brokers and insurers that are capable of providing a comprehensive service in many different
territories throughout the world. This demand can be met through global programmes, where
the risks of a multinational company are consolidated into one insurance programme,
arranged centrally by one insurance broking company.
There are a number of advantages for companies in using global programmes, including
consistency in cover, central control and potential savings through economies of scale.
There is also a range of disadvantages, such as a reduced number of insurers to choose
from, the risk of upsetting local relationships and the contentious allocation of the premium
between different sites.
D3 The insurance market cycle

One of the key criteria when assessing the suitability of insurers is capacity: the amount of
capital invested in insurers, which influences the amount of insurance business written, their
selectivity of particular risks and the rates they charge.
The capacity of any insurer and indeed, the insurance market in general, fluctuates over
time. When there is high capacity, caused by the capital markets investing in insurance,
insurers may relax their underwriting terms and take on more risk. This results in an increase
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in claims. The higher frequency of claims and higher claims costs, coupled with lower
premiums, drives capital out of the market. This is known as a ‘soft market’. When this
occurs, the number of claims increase and the returns on invested capital are reduced.
When the capital markets invest less, there is less capacity and insurers write less business.
This in turn increases competition between brokers to find an insurer willing to quote.
Insurers are able to increase their premiums and restrict cover as they become more
selective in the business that they write. This is known as a ‘hard market’. This increases
profitability, and once more the capital markets invest in insurance and the insurance market
cycle begins again. This process is illustrated below.
capital markets invest
in insurance
premiums exceed new insurers and underwriting
claims vehicles emerge
competition for restricted insurers’ capacity

capacity increases rates increases
Insurance market
cycle
insurers’ capacity insurers write
reduces more business
capital markets withdraw competition

from insurance lowers rates
claims exceed
premiums
The operation of the market cycle and the different stages of the cycle are important to
understand as they affect the availability and price of insurance products in the market. As
different classes of business may be relatively more profitable than other classes of business
to a given insurer at any one time, different classes of insurance may have their own market
cycles. An example of this in the UK is motor insurance, which tends to be the most
competitive class of business. As such, it often shows signs of ‘hardening’ or ‘softening’
before other classes follow. In terms of insurance programme design, and particularly global
programme design, brokers need to understand the different stages of the cycle for the
different markets involved so that the best markets are approached at any one time (i.e. the
markets where the conditions are soft), in order to obtain the best terms for the client.
Chapter 2
Consider this…
At what stage of the market cycle is the class of business you are most familiar with in
your firm? Is this the same stage for other parts of the business?
There are several implications of the insurance market cycle in programme design. If
insurers begin to announce losses, it is likely that premiums will rise and the market will
‘harden’. Brokers can prepare their clients for this by seeking possible LTAs, encouraging
their clients to invest in risk management to improve their risk or retaining more risk. If
insurers announce profits, it could signal the beginning of a softer market and brokers may
consider encouraging their clients to retain less risk while maintaining the same premiums,
or conducting a full marketing exercise to see if other insurers can provide a more
competitive offering.
Question 2.4
A number of insurers have released profits warnings and as a result, you are
considering the effect this may have on the insurance programmes of your larger
commercial clients.
What might be the most appropriate advice to give them?
a. Encourage them to retain less risk and transfer more to insurers. □
b. Invest more in risk management to improve the risk. □
c. Invest less in risk management. □
For reference only

d. Reduce the level of deductible. □
E Claims negotiation, collection and payment

Insurance is an intangible commodity. When the insured suffers an insurable loss and makes
a claim, it is an opportunity for the insured to experience the service of the insurer. With
recent developments in technology, many insurers deal directly with the insured over the
telephone or via the internet. Other insurers delegate claims handling to specialist claim
administration companies. But what role does the broker play in the event of a claim? When
a broker’s client suffers a loss, it could be argued that this is when their client needs the most
assistance and many brokers still provide a service to their clients at the time of a claim. In
this section we will look at the different methods brokers can adopt when their client makes
a claim.
E1 Methods of dealing with claims

When a client informs their broker that they want to make a claim, the broker should respond
as follows:
Broker receives
a claim
No authority Broker acts

to handle for customer
Must inform Claims

Must pass Full claims
client they advocacy
notification to service
cannot deal service
insurer promptly
with the claim
Traditionally, brokers handled all claims on their client’s behalf – both processing the claim
and dealing with the insurer on behalf of the client if there were problems or delays (this is
known as acting as the client’s advocate). Now, the approach taken is much more selective,
Chapter 2
depending on the type of claim and the client’s requirements.
However the broker deals with claims, the regulator imposes the obligation to do so promptly
and fairly.
There are four ways for a broker to deal with a claim:
1. No service. In this case, the broker has no authority to deal with a claim. The broker
must notify the insurer promptly and inform the client that they cannot deal with the claim.
There are two main reasons as to why the broker may offer no service. Firstly, they may
feel they are simply slowing the process down and that it would be more efficient for the
insured to liaise directly with the insurer. Secondly, a number of protocols have been
introduced following civil justice reforms that impose strict timelines on insurers in the
event of certain claims and some insurers prefer total control of the process.
2. Claims advocacy role. Here, the insured deals directly with the insurer but the broker
retains a claims advocacy role – assisting and advising the client if there are any
problems with the claim or the policy cover. The insurer will engage with the broker if
there are any issues.
3. Full claims service. Some brokers still offer a full service, dealing entirely with the
insurer on the client’s behalf, appointing loss adjusters, collecting claims payments from
the insurer and paying the client directly. This service can be time-consuming and
expensive and may slow the claim down, introducing an additional link in the chain, so
this service tends to be offered for larger clients on more specialist or complex risks.
4. Delegated authority claims handling. Under a delegated authority agreement the
broker takes full responsibility for claims up to an agreed financial limit with insurers,
effectively acting as the insurer and authorising claims payments on their behalf. Care
For reference only

must be taken to avoid a conflict of interest as the broker may have dual principals –
acting for the insured when arranging the policy and for the insurer when settling a claim.
Activity
Find out what role your firm plays in claims management. Does it vary between
departments?
E2 Brokers’ activities when dealing with claims

Where the broker provides a claims service for their client, the broker should ensure their
client is treated fairly, receiving indemnity in accordance with the terms of their policy.
Whatever the type of claim, the broker should monitor it closely, and so far as they are able,
guide the progress of the parties towards a settlement that is fair and acceptable to both.
The basic activities of the broker in relation to dealing with claims include:
• advising the client as to whether the claim is insured or not;
• giving immediate notification of losses to insurers;
• advising the client of their rights and obligations under the policy;
• arranging for the completion of appropriate claims forms;
• ensuring that where necessary, adjusters are appointed and briefing the client on the role
of the adjuster;
• assisting the client in preparing the necessary documents and information in support of
the claim in order to best present the claim to the insurer;
• collecting claim payments from insurers; and
• attending site meetings with the adjuster and the insurer’s personnel.
Larger brokers may also offer additional services, such as post-loss surveys, collection and
presentation of claims documentation, provision of specialist claims staff to assist the client
in negotiating large, complex or technical claims, and providing a detailed claims analysis to
assist in future insurance placement or the risk management process.
E3 Insurance fraud
According to the Association of British Insurers (ABI) the value of fraudulent insurance
claims uncovered by insurers rose to a record £1.3bn in 2016. Insurers are spending £200
Chapter 2
million per year to investigate fraud. Fraudulent claims add approximately 5% to the
premiums of honest policyholders. The broker has responsibilities in relation to fraud; a
broker who pursues a claim on their client’s behalf when they know it is fraudulent is
committing an offence. The law of agency does not override a broker’s duty to comply with
the law.
Two main
types of
insurance
fraud
Opportunistic fraud: Organised fraud:

the individual or firm exaggerates or this is where a criminal gang takes
inflates a genuine claim to increase out insurance policies with the
the value of a payout. In some specific intention of
cases an entire claim may be committing fraud.
fabricated.
Question 2.5
What is the most appropriate response to take if you discover your client is making a
claim for a higher value than the loss they suffered?
a. The law of agency takes precedent and your client’s claim should be pursued. □
For reference only

b. The claim is fraudulent so the claim should not be reported to insurers but the □
policy does not need to be cancelled.
c. The claim should not be pursued as to do so would be fraudulent. The insurer □
should be informed.
d. The claim may be pursued as long as you have informed the insurer. □
Key points
Chapter 2
Provision of products and services
• Client’s requirements are also known as their demands and needs.

• Brokers help clients understand their insurance requirements by:
– identifying and clarifying a client’s requirements;
– identifying an insurance product/service that best matches these requirements
using their in-depth skills and knowledge of the industry;
– providing information and advice on the products available; and
– explaining the result (of purchasing a particular product) to their client in terms the
client can understand.
• The demands and needs statement forms the basis for the broker’s search for the
most appropriate insurance policy.
• The suitability statement records:
– the customer’s demands and needs;
– how the recommendation addresses these demands and needs; and
– the reasons for the recommendation.
Negotiation and placement
• A material fact is information that would influence a prudent insurer in deciding whether
a risk is acceptable and, if so, the premium, terms and conditions to be applied.
For reference only

• Brokers can compile underwriting information through:
– proposal forms;
– insurers’ questionnaires;
– brokers’ questionnaires;
– survey reports; and
– statements of fact.
• The Consumer Insurance (Disclosure and Representations) Act 2012 rendered the
principle of utmost good faith obsolete in consumer insurance contracts. Under the Act,
consumers are only required to take reasonable care not to make a misrepresentation
when giving information. The Consumer Insurance (Disclosure and Representations)
Act 2012 applies to consumers and not commercial customers.
• The Insurance Act 2015 amended the existing duty of utmost good faith for UK
commercial customers to disclose all material facts to a duty of fair presentation, i.e. to
make an insurer aware of the material circumstances surrounding the risk. This law
came into force in August 2016.
Selection of an insurer
• For a ‘fair analysis’ to take place, the broker must:

– consider an adequate number of insurers, large enough for the broker to
demonstrate their knowledge of the insurers operating in the relevant market sector;
and
– be able to evidence the analysis by adhering to and documenting a set process.
• There are a number of assessment criteria for selecting an insurer for a particular risk.
• When presenting and explaining terms to the client, the objectives are to:
– convey the terms accurately and concisely;
– ensure the client understands the cover and the terms and conditions that may
apply;
– ensure that the client understands where the cover may not match their
requirements;
Key points
– provide a record of the advice to the client;
– bring special payment or standard credit terms to the client’s attention; and
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– provide full details of the insurers.
Design and operation of insurance programmes
• The insurance market operates in a cycle. Insurance rates can go up or down

depending on which stage in the cycle the market is at any given time.
Claims negotiation, collection and payment
• There are four ways a broker can deal with a claim: no service, claims advocacy, full
service and through delegated authority claims handling.
• There are two types of insurance fraud: opportunistic and organised.
For reference only

Question answers
2.1 c. The fact that the person she bought the house from made an accidental damage
Chapter 2
claim for a broken window just before they moved out.
2.2 a. Prove they have followed the relevant process.
2.3 d. This year’s terms on this year’s values.
2.4 b. Invest more in risk management to improve the risk.
2.5 c. The claim should not be pursued as to do so would be fraudulent. The insurer
should be informed.
For reference only

Self-test questions
1. What is the process of identifying and clarifying a client's requirements known as?
Chapter 2
2. When submitting a risk to an underwriter, what must a broker ensure they provide?
3. List three limiting factors affecting a broker's choice of insurer to trade with.
4. List three of the objectives when presenting and explaining terms to the client.
5. What does the suitability statement need to record?
6. State the four ways a broker can deal with claims.
7. List four activities a broker might undertake when dealing with a claim.
8. What is opportunistic fraud?
9. List four key issues faced by brokers in designing insurance programmes.
10. What is a hard market?
11. PPL is a form of:
a. Regulatory licence
b. Electronic placement
c. Paperless accounting tool
d. Pre-placement filing system
For reference only

Other roles of
3
insurance brokers
Chapter 3
outcomes
Introduction
A Risk management and additional services 2.6
B Delegated authority agreements 2.7
Key points
Question answers
Self-test questions
Learning objectives
For reference only

• describe the role of the insurance broker in assisting clients to manage risk;
• describe the role of the insurance broker in supplying additional services; and
• explain the role and responsibilities of the insurance broker in relation to delegated
authority agreements and wholesale business.
Introduction
In the previous chapter, we reviewed the more traditional roles of the insurance broker in
meeting client needs. In this chapter, we are going to review some of the other ways in which
the insurance broker meets their client’s needs in the insurance market place.
Key terms
Chapter 3
Binding authority Bordereau Captive insurance Coverholder

company
Managing general
agent (MGA)
A Risk management and additional services

So far, we have concentrated on the role of the broker in assisting their clients with
transferring risk to an insurer. However, there is a growing trend within businesses to take
more control of the various risks they face and manage them themselves, rather than
transfer them to an insurer. In this section we will firstly discuss the nature of risk
management, the process of good risk management, risk identification, risk analysis and risk
control. We will then consider the role of the broker in each of these areas and how they can
assist their clients in taking more control of the risks they face.
Refer to
For reference only

Refer back to Risk management services on page 1/19, for a definition of risk
management
In a commercial context, risk management is often a well-defined and scientific process,

attempting to answer questions such as ‘How much will it cost if things go wrong?’ and ‘What
are the chances of the risk becoming a reality?’ In a personal sense, most individuals make
less precise calculations, often preferring instead to simply protect against those things that
seem capable of inflicting some kind of financial disaster, such as fire or theft.
Risk management has a number of key benefits. These include:
• a reduction in the potential for loss by identifying and managing hazards;
• provision of greater shareholder confidence in a company’s ability to manage its risks. For
companies quoted on the stock market there is a legal requirement to identify all
significant risks to which the business is exposed and to explain in the annual report how
these are being managed;
• a disciplined approach to quantifying risks; and
• a potential reduction in insurance premiums where an insurer can see that a company is
positively engaged in managing its risks.
Formal risk management is usually associated with businesses rather than individuals,
although individuals with very substantial assets may adopt a more formal approach to the
way in which they deal with their risks.
At this stage it is worth refreshing your knowledge of risk by referring back to the IF1 study
text. It is important that you have a clear understanding of:
• the categories of risk;
• the types of risk that can be insured; and
• the components of risk.
Refer to
Refer to IF1, chapter 1, sections C and D
Chapter 3 Other roles of insurance brokers 3/3
Question 3.1
Which of the following is not a benefit of risk management?
a. The reduction in the potential for loss by identifying a fire hazard and fitting fire □
extinguishers.
b. The introduction of a formal loss register to help identify a company’s risks. □
c. The reduction in an insurance premium where an insurer can see that a company □
has installed a new sprinkler system.
□
Chapter 3
d. The replacement of uncertainty of the size of a loss with the certainty of a fixed
premium.
A1 The risk management process

The focus of good risk management is on the identification and treatment of defined risks.
Risk management should be a continuous and developing process embedded in a firm’s
strategy. It should address methodically all the risks surrounding the firm’s current, past and
future activities. The risk management process has three steps:
Risk identification Risk analysis Risk control
Let us look at each step in more detail.

A1A Risk identification
The first step is to identify all the existing threats to the company as well as all the potential
future threats. Only some of these risks will be insurable but all need to be managed. For
example, in the case of a retail shop, petty theft and shoplifting are real risks. It would be
For reference only

impractical to insure against these but the risks need to be managed or funding set aside to
cover their costs.
Many organisations now appoint a specialist risk manager but for many conventional risks,
an insurer may become involved in helping to identify existing and potential risks by
conducting a survey. Even if the risk is not ultimately insured, the client still has the benefit of
the insurer’s advice concerning the risk. Some brokers also conduct risk surveys.
A1B Risk analysis
In this step the identified risks are evaluated or analysed to predict likely losses in the future.
Risk managers do this by examining past loss patterns, in much the same way that insurers
assess a risk when considering what premium rate to set.
A1C Risk control
If the risk is considered to have the potential to adversely affect the business, a course of
action should be taken to control, reduce or even eliminate it, depending on the perceived
severity and the costs to the business in doing so. The techniques of risk control and
elimination include the following:
Avoidance Action is taken to avoid entirely any possibility that an undesirable event will happen.
Reduction The process of taking active steps to reduce the degree of hazard presented by a risk that
cannot be eliminated or to reduce the frequency of occurrence.
Prevention Involves the introduction of physical controls to minimise or prevent the possibility of a loss
occurring.
Minimisation Requires physical measures that, while not preventing the loss from taking place, will
lessen the extent of the damage as far as possible.
Transfer Transferring the risk to others outside the business, not just insurers.
Risk avoidance is the most effective course of action but the measures that may need to be
taken to do this may be prohibitively expensive.
For example, if a manufacturer carries out some paint spraying, the following risks may be
identified:
• damage caused by accidentally spaying other people’s property because the area has
not been sealed properly; and
• employees becoming ill having inhaled paint fumes.
The manufacturer could eliminate the risk by not spraying, by paying a third party to do it or
by funding a more efficient, fully sealed area. It could also buy insurance that would pay out
in the event of damage to other property. Risk analysis needs to be conducted to understand
the costs of each choice and thereby decide how the risk should be controlled, reduced or
Chapter 3
managed.
There are two distinct aspects to controlling risk and these are illustrated in the following
diagram:
Two distinct
risk control
aspects
Financial controls such as making

Physical controls such as installing sure that contracts are carefully worded
sprinklers and alarm systems. (for example, arranging for a security
firm to accept responsibility for cash
while in its control).
Risk elimination, or even risk reduction, must always be subject to the test of whether the
For reference only

cost of doing so is reasonable compared to the cost of the feared event happening.
A2 The role of the broker in risk management

Traditionally, the main role of the broker was to provide advice on the selection of insurers,
execute instructions and provide, in the case of larger firms, a risk survey service. However,
within the past 25 years, the whole process of managing and transferring risk has become
more sophisticated.
Smaller to medium-sized companies now often tend to call more upon the services of
insurance brokers and others for their risk management needs, while some larger clients
now tend to have built up their own highly skilled risk management departments, relying on
outside agencies only to a limited extent. As the theory and practice of risk management
have developed, the insurance broking industry has recognised the need for many additional
technical services in support of risk management programmes. Other parties, such as
insurers and independent consultants, have also recognised this need.
What most businesses – large or small – look for in brokers is help and assistance in
developing a programme of risk management in order to achieve their risk management
objectives. Thus, the broker can be involved in one or all of the basic functions of
identification, analysis, control and management transfer.
Through risk identification, brokers can help their clients by conducting broker surveys. This
requires quite specialist skills and not every broker will have the capability in-house.
However, brokers can still arrange for an insurer to conduct a survey and attend themselves
on behalf of the client. The process of data capture is a form of risk identification. An
experienced broker may be able to identify risks the client was not aware of during data
capture for other risks.
Through risk analysis, brokers can assist clients by examining their previous claims history
and they may suggest ways in which the risk can be managed more effectively. This may
include, for example, increasing the level of excess to eliminate small, high frequency claims.
Finally, through risk control, brokers and insurers assist in the areas of loss prevention and
controlling a risk. They do so by imposing requirements and making recommendations
designed to improve a risk (for example, suggesting the fitting of an intruder alarm for office
contents insurance) following the completion of a survey. These are key elements of the
pre-risk surveyor’s report and are aimed at either improving the risk to an acceptable
standard from the insurer’s point of view or offering a premium reduction as an incentive for
worthwhile risk improvements.
Brokers must ensure that their knowledge of their client’s business remains up to date. This
may mean developing their expertise in say, composite panelling and other types of building
construction, or changes in the law that may extend potential liability. Increasingly, larger
brokers now employ specialist in-house risk managers with specific risk management skills
and knowledge of industry sectors that can be utilised to assist their clients in managing
their risks.
Chapter 3
Consider this…
Why don’t commercial customers insure all their risks?
A3 Specialist risk management services

While both insurers and brokers can offer risk management services, care should be taken
to identify who will ultimately benefit from the service. Insurers often include an element of
risk management within the insurance offering but it may be for their own benefit. For
example, conducting a survey to obtain underwriting information or impose limitations or
requirements – such as risk improvements, clauses or warranties – on the insurance offered.
A broker should be able to offer their services for the benefit of the client to help them to
identify and manage their risk. They do this by offering it as an additional, optional service for
which the client pays a fee. They may do so with in-house specialists or have arrangements
with specialist companies or sub-contractors.
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Property
surveys
Disaster Business
recovery continuity
services planning
Post-loss Business
control interruption
surveys reviews
Services may
include:
Environmental Health and

risk surveys safety
consultation
Motor fleet risk Liability

management surveys
Refer to
Refer back to Added value services on page 1/20
Activity
Find out if your firm offers any risk management services. If so, consider what benefits
they offer your clients.
Do the insurers you use offer risk management services and if so, do they directly benefit
your clients?
A3A Captive insurance companies and alternative risk transfer (ART)

While the broker’s traditional role is to arrange for the transfer of their client’s risks through
an insurance arrangement with (typically) a proprietary insurance company, there are
other ways in which risk can be transferred. One alternative for larger commercial clients is
to transfer their risks to a captive insurance company.
Proprietary insurance companies

Most of the insurance companies in this group are registered under the Companies Act
1985. They are owned by shareholders who, in buying shares, contribute to the share
Chapter 3
capital of the firm.

Proprietary companies are limited liability companies. This means that a shareholder’s
liability for the company’s debts is limited to the nominal value of the shares they own (the
originally stated face value of the shares). Some are publicly quoted companies with a
share value stated in the recognised financial exchanges such as the FTSE in London.
This applies to many of the ‘household names’ in insurance.
Captive insurance companies are, most commonly, a wholly-owned subsidiary of the client’s
business or a ‘rent-a-captive’ (a vehicle designed to fund risk, which is not owned or
controlled by the client). Brokers may own or manage many of these rent-a-captives.
A captive is just an insurance company but it is provided with capital by the owning company
and normally only accepts the company’s risks.
The captive may be based offshore, which can provide tax benefits, and any underwriting
profit can be used to offset future premiums or a dividend may be taken. There are costs
associated with its management and the company has to be properly funded and provided
with capital like any other insurer, although using a captive run by a broker can reduce
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the costs.
As well as the considerable costs of creating and running captives, they may only be efficient
for larger companies, and the tax issues relating to captives may become the subject of
tighter regulatory scrutiny in the future.
Despite the drawbacks, there can be a number of benefits of captive companies for firms.
These include the ability to:
• self-insure in a structured way;
• act as a focus for risk management activity;
• deal with claims in a more efficient and timely way;
• provide cover for risks that the traditional market may not write; and
• retain premium in-house that would otherwise go to an insurer.
As well as captive insurance companies, there are other ways in which risk can be
transferred in non-traditional ways and brokers can and should be involved in meeting client
needs in different ways.
Collectively, the other ways in which risk can be transferred are known as alternative risk
transfer (ART).
While the details of ART are beyond the scope of this syllabus, it is useful to refer to the CII’s
online insurance dictionary which defines alternative risk transfer as:
A generic phrase to denote various non-traditional forms of (re)insurance and
techniques where risk is transferred to the capital markets. More broadly it refers
to the convergence of (re)insurance, banking and capital markets.
A3B Additional services offered by insurance brokers
In addition to specialist risk management services, some brokers may also offer other
services to both their clients, the insurers they use and even other broking organisations.
These services, which are usually only provided by larger, multi-national insurance broking
organisations may include:
• Broker networks: a business or an alliance formed to provide specific services and

access to markets for smaller firms enabling them to compete and obtain buying power
and access to services such as compliance, marketing and training.
• Statistical analysis of insured trends such as loss analysis: data is becoming more
valuable and many organisations are willing to purchase data if it adds value to their
business. Brokers have access to client data which, once analysed, can be valuable to
both the client and to the insurer. This is particularly true in relation to statistical analysis
of losses. In larger organisations, losses sustained which are not transferred to an insurer
through an insurance policy may not be known to the insurer. Therefore, the broker is in a
unique position to understand these losses and provide data to the insured and the
Chapter 3
insurer. However, many of the broker’s clients will expect this service to be included as
part of the fee they pay. Therefore, brokers may only be able to charge insurers for this
service. An example is Aon’s Professional Services, who provide data to clients and
insurers on competitors, risk analysis, global economic trends and other data that adds
value to the operation of their clients and insurers.
• Security services: associated with people travelling to hazardous areas.
• Premium finance: offering clients a line of credit to pay their premiums.
• General risk consultancy: such as political risk and contract risk management.
B Delegated authority agreements

A delegated authority agreement is a scheme whereby an insurer delegates underwriting
authority to a third party (such as a broker or a managing general agent (MGA)). In simple
terms, they are a way in which an insurer can use external resources to assist in the running
of its business.
There are a number of ways in which insurers delegate specific tasks to third parties. In this
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section we will focus on the delegation of authority by an insurer to an insurance broker, but
you should be aware that insurers can delegate tasks such as underwriting and claims to a
number of different entities. As much as 40% of the revenue at Lloyd’s is derived from the
operation of delegated authorities to various coverholders around the world.
In this section we will also consider:
• how delegated authorities operate;
• the activities that can be delegated; and
• the benefits and challenges for all parties to the delegated authority contract.
We will also look at some of the wider roles insurance brokers can take on in the delegated
authority process other than when they are acting as coverholder.
Before considering the role and responsibility of the broker in relation to delegated authority
schemes, it is important to understand some of the specific terminology relating to this
subject.
Coverholder An entity to which an insurer can give delegated authority. In the context of this
topic, the coverholder is the broker but it can be an independent organisation or
even a company in the same group as the insurer.
Binding authority The contract under which delegated authority is given to a third party.
Bordereau The report provided by the coverholder of the risks written and claims reported,
normally provided monthly.
Managing general agent An organisation that underwrites insurance risks and which owes its primary
(MGA) duties to one or more insurance companies or providers of insurance capacity.
MGAs may be owned and operated by insurance broking firms but they are not
insurance brokers or wholesalers of insurance products.
B1 How delegated authorities operate

The process of operating a delegated authority scheme is as follows:
1. Insurer or coverholder sees a business opportunity and presents their case

to the other party.
2. Coverholder and insurer draw up an agreement and procedures.

Chapter 3
3. Coverholder operates the delegated authority in accordance with the terms.
4. Coverholder interacts with the insurer as agreed, ensuring they do

not exceed their authority and the correct information is provided on
the bordereau.
5. Insurer conducts regular audit checks in line with the agreement to ensure
coverholder is acting correctly.
Step 1: The business case

Insurers choose to delegate their authority to third parties for a number of reasons. In all
circumstances, there must be a business case for doing so. From an insurer’s perspective,
they might choose to delegate authority to an insurance broker (coverholder) in order to:
For reference only

• access business that would not otherwise come directly to an insurer;
• access the knowledge and experience of the insurance broker (coverholder); and
• access a number of risks for which it would not be financially viable to underwrite
themselves individually.
There are other benefits for the insurer but the key point to remember is that an insurer must
have a good business case for delegating an authority before they agree to enter into any
contract with a third party. A full business plan with projected income and expenditure should
be developed before an agreement is activated.
In the same way, the insurance broker will also need to establish a clear business case
before it agrees to take on the extra responsibilities of acting as a coverholder. The main
benefits of taking on this role for the broker are access to a high quality market and the
opportunity to offer their clients access to a unique insurance product that has been
specifically designed for them. By conducting the underwriting activity in-house, a delegated
authority agreement serves as both a cost-effective and administratively efficient way for a
broker to place business.
The insurance broker will have more control over the issuing of documentation which can
bring more efficiency and provide a better service to clients. They may issue bespoke
documentation which could include, for example, issuing separate policy schedules for
individual properties which are insured as part of a property investor’s larger property
portfolio.
Step 2: Agree authority
Once a business case has been established for both parties, they need to agree the level of
authority that will be delegated and the procedures that need to be followed. It should be
noted here that the agreement is still subject to the same level of regulatory control as other
parts of the insurer’s and coverholder’s activities. The insurer will need to ensure it has a
robust method of auditing and checking that the coverholder is acting within the terms of the
agreement. By entering into such an agreement, the insurer and the coverholder both risk
reputational damage if either party does not fulfil their obligations.
From an insurance broker’s perspective, the potential for a conflict of interest to arise (where
the broker is acting as both the agent of the insurer as well as agent of the client) will need to
be managed. This can be achieved by ensuring that those involved in the operation of the
delegated authority are kept separate from staff involved in client management.
Step 3: Operation of the agreement

The coverholder will need to operate the agreement within the agreed terms. They may need
to employ additional staff to take on the increased responsibilities and ensure they employ
staff with relevant skills and experience, as well as deliver an adequate training plan.
The agreement will specify those individuals as the coverholder, with the authority to accept
and bind risks. Details of those individuals’ experience and qualifications will need to be
established before being given such authority. Insurers might insist on a formal test
beforehand or subsequently to be satisfied of their competence. The coverholder will interact
with the insurer, referring risks to the insurer for their input, within the agreed limits.
Chapter 3
Reinforce
Under a delegated authority, the broker or other intermediary has authority to underwrite
risks on behalf of the insurer(s). This means that while operating a delegated authority, the
broker is the agent of the insurer, not the client/insured, which can cause conflict of
interest issues.
Step 4: Ongoing interaction

The coverholder and the insurer will both be monitoring the effects of the agreement on
business performance, especially in the early stages of the agreement, to ensure it is
meeting the pre-agreed financial targets. Adjustments to the authority limits can be made at
this stage. The coverholder provides risk information and claims details in the form of a
monthly spreadsheet – the bordereau.
Step 5: Audit and monitoring
At regular intervals, as agreed in the authority agreement, the insurer will conduct a detailed
audit, which may involve looking at client files (both paper and electronic) and checking the
coverholder’s procedures. This is an essential part of the delegated authority agreement
For reference only

process and will lead to increased confidence or at the very least provide an opportunity for
the insurer to rectify any issues it finds.
The worst case scenario is that the insurer withdraws its authority if it finds that the
coverholder has deliberately breeched the agreement for any reason, but particularly if they
have exceeded the limits of agreed authority.
Activity
Find out if your firm operates any delegated authority agreements on behalf of insurers.
What activities has the insurer delegated to your firm?
B2 Activities that can be delegated

The insurer can delegate a range of activities. These might include underwriting, credit
control, document issuance and management, claims, and recoveries.
Activity Comments
Underwriting Underwriting is the most common activity that can be delegated. The extent to which it is
delegated can be carefully controlled and ranges from full authority (where risks are
accepted and rates set by the coverholder) to a ‘prior submit’ situation where the
coverholder refers every risk to the insurer.
Credit control The premium is paid by the insured to the coverholder. Here it is the responsibility of the
coverholder to collect the premiums and make sure they keep detailed records for the
insurer.
Document issuance The coverholder is normally responsible for issuing documentation once a risk is bound.
and management
Claims Claims settlement authority can be delegated but usually within limits. A claims fund can
also be provided to the coverholder to speed up settlements.
Recoveries Where a claim has been settled and a recovery can be made from another party,
responsibility for doing this can also be delegated to a coverholder.
The extent to which the actions are delegated will be carefully agreed and documented.
Specific limits will be agreed in advance to ensure the coverholder’s activities are managed
and controlled and authority is not exceeded.
B3 The benefits and challenges of delegated authority

agreements
There is a range of benefits and challenges associated with delegated authority agreements
for the insurer, the coverholder and the customer.
Chapter 3
These are summarised in the following table:
Benefit Challenge
Insurer’s position:
Ability to access business held by brokers who would Loss of control.

not usually want to reveal this to insurers in normal
circumstances.
More cost-efficient underwriting which allows the insurer Coverholder may not report their activity adequately.
to place small risks in bulk that would not be economical
to underwrite individually.
Lower operating costs per risk, even with an increase in Regulatory issues can occur because local tax or other
commission payments to the coverholder. requirements are not being complied with.
Ability to access and use the knowledge, experience If claims or any other delegated service is poor it
and reputation of the coverholder. impacts on the insurer’s brand.
Cost-effective way of trying out a new area of business Risk of funds being mis-managed and disorganised with
rather than employing a new set of underwriters. other insurer funds.
Localised quick claims handling provides good Risk that coverholder may sub-delegate without
For reference only

customer service. authorisation.
Coverholder’s (broker’s) position:
Efficient mechanism for obtaining cover for low value, Potential dependency on single market.
high volume business, but still with high-grade security.
Access to a unique product on a bespoke policy for their Increased workload with potentially new staff required
clients. and training burden.
Full autonomy subject to their degree of authority. Potential reputational damage if insurer fails.
Speed of underwriting, claims and documentation Potential conflict of interest between insurer and client.
means improved service for their clients. (See Conflicts of interest on page 4/5.)
Potential for increased commission levels. Increased reporting and audit requirements.
Customer’s position
Faster service. May not know who their actual insurer is.
Local service; high quality security.
It is also worth noting that the broker may be involved in delegated authority agreements
without being the coverholder. Brokers can also identify potential coverholders and bring
them to contract with an insurer they know. In this instance their client is the potential
coverholder, which could be a company or even an existing client. Here, the broker would be
paid an introductory fee by the insurer and may still be involved with negotiating the
agreement between both contracting parties and advising the coverholder once the
agreement is in place.
Be aware
Underwriting is the most common activity that an insurer can delegate to a coverholder.
The extent to which it is delegated can be carefully controlled and ranges from full
authority (where risks are accepted and rates set by the coverholder) to a 'prior submit'
situation where the coverholder refers every risk to the insurer.
B4 Managing general agents (MGAs)

MGAs are one of the fastest growing sectors within the UK insurance market. Over 300
MGAs currently underwrite over 10% of the UK’s £47 billion general insurance market
premiums.
MGAs underwrite business on behalf of their principal, the insurer who provides capacity for
the MGA. Although the MGA underwrites in line with the terms and conditions of the insurer,
it does not carry risk itself and is, therefore, considered as an intermediary by the regulator,
the FCA.
Chapter 3
When establishing an MGA, the broker/organisation looks to an insurer to provide capacity
and then may draw up an agreement using their own wording to suit the needs of their
clients. In order to avoid any potential conflicts of interest, the MGA is kept separate from the
insurance broking operation and the insurance broker uses the MGA (which may have its
own branding) as just another market. Favourable terms may apply to the broker, providing
they can be justified in the interests of the client. The MGA may not simply exist to write the
business of the broker they are owned by; they may also compete for the business of
other brokers.
As a key part of the insurance market in the UK, MGAs have their own trade association.
Formed in 2011, the Managing General Agent’s Association (MGAA) was established to
provide MGAs with specific representation to lobby on their behalf, communicate their
considerable benefits and drive best practice. As a not-for-profit organisation, the MGAA and
its board of directors and specialist committees focus 100% on shaping the future of
delegated underwriting in the UK.
On the Web
You can find out more at www.mgaa.co.uk.
For reference only

Key points
Risk management and additional services
• Risk management is the identification, analysis and economic control of those risks
which can threaten the assets or earnings capacity of an enterprise.
• Insurance brokers can play a key role in managing risk at each stage and can also
provide a number of specialist risk management services to their clients.
Chapter 3
• Captive insurance companies are commonly a wholly-owned subsidiary of a business

or a financial vehicle designed to fund the risks of a particular organisation.
Delegated authority arrangements
• Delegated authority agreements are schemes where an insurer delegates underwriting

(or other) authority to a third party known as a coverholder who may conduct business
on its behalf in accordance with the terms of the agreement.
• The insurer can delegate a range of activities including underwriting and claims.
For reference only

Question answers
3.1 d. The replacement of uncertainty of the size of a loss with the certainty of a fixed
premium.
Chapter 3
For reference only
Self-test questions
1. What is risk management?
2. List four benefits of risk management.
3. List eight specialist risk management services which could be offered by a broker.
4. What is ART?
5. How does the delegated authority process operate?
Chapter 3
6. What can an insurer delegate?

For reference only

Contract and agency law
4
outcomes
Introduction
A Duties of an insurance broker as agent 3.1
Chapter 4
B Conflicts of interest 3.2
C Terms of business agreements (TOBAs) 3.3
Key points
Question answers
Self-test questions
Learning objectives
For reference only

• describe the duties of an insurance broker as agent;
• explain how conflicts of interest could arise in relation to insurance broking business and
how to deal with them;
• describe the items that should be included in a terms of business agreement (TOBA)
between insurance brokers and insurers; and
• describe the items that should be included in a TOBA between insurance brokers and
insurers, and insurance brokers and their clients.
Introduction
In chapter 1 we introduced you to the law of agency. In this chapter we will look at some of
the obligations and duties this law imposes on brokers as agents of their principal, some of
the potential conflicts of interest this may lead to and how they can be managed. We will also
look at the duties a principal has to their agent. We will close this chapter by explaining the
exchange of terms of business agreements (TOBAs) between brokers and their clients
and between brokers and insurers.
Key terms
Accountability Contingent Fiduciary Good faith

commission relationship
Indemnity Outsourcing Overrider Placing broker
Chapter 4
Statutory Terms of business Third party Tort

agreement (TOBA)
A Duties of an insurance broker as agent

Insurance brokers are carrying out their duties as an agent of their principal when they:
• establish their client’s needs;
• negotiate with insurers on their client’s behalf;
• take instructions from their client to place insurance;
• negotiate with an insurer in the event of a claim;
For reference only

• make a mid-term adjustment to a client’s policy;
• cancel an insurance policy on their client’s instructions;
• negotiate a renewal; and
• provide advice and make recommendations to their client.
This list is in no way exhaustive.
Activity
Can you think of other examples where an insurance broker carries out their duty as an
agent of the insured?
Under the law of agency, the parties have specific names at law:
The client
= The principal The broker
= The agent
Only when a broker is clear on this point will they be able to assess the duties and
responsibilities they have to each party involved in that activity.
A broker acts as agent for their principal (their client) in bringing them to contract with
another, a third party (the insurer).
Principal Agent Third party
Refer to
Refer back to The need for insurance brokers on page 1/2
Chapter 4 Contract and agency law 4/3
The law of agency imposes a number of legal duties on brokers when acting as agents for
their principal.
The law of agency requires brokers to:
• perform all their principal’s lawful instructions and do this in a timely fashion – the duty of
obedience;
• exercise reasonable skill and care in the performance of their principal’s instructions – the
duty of due skill and care;
• act at all times in the best interests of their principal, to avoid conflicts of interest and to
disclose to their principal fully any circumstances which may give rise to the appearance
of a conflict – the duty of good faith; and
• account to their principal for all monies they may have received on their principal’s behalf
and keep a record – the duty of accountability.
As a general rule, an agent must themselves perform the duties imposed on them by the
agency; this is the duty of personal performance. Agents are not allowed to delegate their
Chapter 4
tasks to someone unless their principal has given them permission. They are, however,
allowed to delegate tasks that are purely mechanical and involve no question of judgment,
advice or discretion, such as accounts or information technology, for example. Many brokers
enter into a business relationship with a third party to provide these types of secondary
services, which allows the broker to concentrate on its core functions. This arrangement is
known as outsourcing.
Activity
Find out what your firm’s core functions are. Are there any activities that your firm
outsources?
For reference only

The duties of accountability and good faith are key for brokers as they are often paid
commission directly by an insurer. The amount brokers are paid must be disclosed on
request of the principal and many brokers now disclose their commissions as a matter of
course in an effort to become more transparent and establish a relationship of trust. Any
additional commissions, such as profit commission, must be disclosed automatically. You
should note that payment by fee, rather than commission is becoming more common.
Refer to
Refer to Broker remuneration on page 1/21, for more on broker remuneration
Agents stand in a fiduciary relationship with their principal and must therefore not use their
position for their own benefit. The term ‘fiduciary’ relates to holding something in trust for
another. Brokers must account to their principal for all money they receive on their principal’s
behalf and must keep a proper record of all transactions. This duty extends beyond ‘money’
to any property they receive, for example policy documents.
Reinforce
Refer back to IF1, chapter 3, section E, and remind yourself of the duties the insurance
broker has as agent.
Question 4.1
In which instance is the broker not acting as an agent for their principal?
a. When a client calls a broker to confirm they are happy with a renewal quotation. □
b. When adding a new item of jewellery to a client’s household policy. □
c. When completing a demands and needs questionnaire. □
d. When chasing a client for payment. □
A1 Duties of a principal
Under the law of agency, the principal also owes key duties to their agents:
• Remuneration: brokers, as agents, have a right to remuneration agreed by their
principal.
Where none has been fixed, the agent has a right to what is customarily considered
reasonable in the particular business, or to what is considered appropriate in the
circumstances. To earn their commission or fee, the broker must prove that they were the
effective cause of any transaction. Brokerage is earned on inception of the contract;
however, when the broker actually ‘earns’ the commission has been the subject of legal
argument. (The legal cases are beyond the scope of this study text and are covered in
the diploma level unit: M81.) This is not always understood by clients. This is why it is
good practice for brokers to make this fact clear in their TOBAs with their clients and their
insurers.
• Indemnity: subject to any express terms in the agency agreement, an agent has a right
to claim from their principal an indemnity against all expenses or loss incurred when
Chapter 4
acting on their behalf. Additionally, the principal must not conceal or misrepresent any
information that may materially affect an underwriter’s decision to issue a policy.
Refer to
Refer to Terms of business agreements (TOBAs) on page 4/7 for details of TOBAs
A2 Relationship of agent to principal

An insurance broker is considered to be the agent of the insured when:
• giving advice on types of cover or the placing of insurance; or
For reference only

• giving advice to the insured on how to make a claim.
Insurance brokers, as agents of their principal, may at different times act on behalf of the
insured and insurer.
A retail broker is usually acting on behalf of the insured, and this is illustrated below.
Insurer Retail broker The insured
Examples of retail brokers include high street motor brokers, where a large proportion of
business is transacted face-to-face in the broker’s office, or the commercial division of a
national broker, where instructions are taken directly from commercial clients.
A wholesale broker is usually acting on behalf of a retail, producing or sub-broker. The
retail/producing/sub-broker is therefore the broker’s client, and not the insured. This is
illustrated below.
Wholesale
Insurer Retail broker The insured
broker
An example of a wholesale broker is a Lloyd’s broker specialising in North American

property, where all the business is brought to them by US-based retail brokers.
A reinsurance broker is usually acting on behalf of a ceding insurer. The ceding insurer is,
therefore, the reinsurance broker’s client. This is illustrated below.
Reinsurer Reinsurance broker Insurer
Many larger reinsurance brokers have specialist reinsurance divisions, but some brokers
specialise purely in the placement of reinsurance.
These examples are quite straightforward, however, there are occasions when the broker
may be acting as an agent of the insurer as well as retaining a relationship with the client.
An insurer can delegate some of their authority to insurance brokers. In operating a
delegated authority, the broker is clearly acting as the agent of the insurer. The broker should
take extreme care to separate the delegated activities from their activities as a retail broker,
as being agent to both the insurer and the insured can cause conflicts of interest (see
Conflicts of interest on page 4/5). The need for this separation can be seen in the case of
North and South Trust Company v. Berkeley (1970):
[The broker] wore the…[insured’s] hat and the underwriter’s hat side by side and,
in consequence, as was only to be expected, neither hat fitted properly. The
[insured] had a legitimate complaint…and can claim damages if and to the extent
that the partial dislodgement of their hat caused them loss or damage…
In addition to operating a delegated authority, an insurance broker is an agent of the
insurer when:
• an insurer authorises an insurance broker to receive and handle proposal forms on its
behalf and confirm cover;
• an insurance broker surveys and describes a property on an insurers’ behalf; and/or
• an insurance broker has authority to collect premiums and does so.
Chapter 4
Consider this…
An insurance broker travels 50 miles to visit a client to discuss the renewal of their
insurances and take an instruction. Under the law of agency does the broker have the
right to ask the client to reimburse his mileage?
In law, yes, although in practice it would be unlikely. Subject to any express terms in the
agency agreement, an agent has a right to claim from their principal against all expenses
incurred when acting on their principal's behalf.
A3 Law and legislation

The law of agency is the main law under which brokers operate. However, brokers, like any
For reference only

other individual or organisation, also have a common law duty, under the principal of tort,
which can have a significant impact on the way that they operate. The principal of tort relates
to the obligations we all have to one another, despite the absence of a contractual or other
legal relationship between us. An example is our responsibility not to hurt others by our own
negligence.
Under the principal of tort, brokers are legally responsible to their principal (or any other
party) in the event that they fail to use reasonable care. This duty of care is also owed by
brokers to insurers. This means that the broker must honour any undertaking given to an
underwriter and not withhold any material information. Therefore, the broker must present to
the underwriter all information at their disposal which the underwriters need to make a fair
and reasonable assessment of the risk.
Refer to
Refer back to Negotiation and placement on page 2/5
Brokers are also required to abide by the law of the land in which they are operating. This is
known as statute law and you should know that there are two types of statute law which
affect insurance brokers: insurance-related legislation (such as the Marine Insurance Act
1906) and non-specific legislation (such as the Data Protection Act 2018 (DPA 2018).
B Conflicts of interest
The law of agency states that agents must always act in their principal’s best interests. There
are occasions when the broker may be acting on behalf of an insurer as well as their clients,
and in these situations, brokers must act in the interest of both parties concurrently.
The law of agency states that brokers must avoid potential conflicts and must fully disclose
to their principal any circumstances that may give rise to the possibility of a conflict. The
situations where a conflict of interest may arise will be discussed in the next section. We will
also look briefly at ways in which a broker may be able to manage conflicts of interest.
B1 Situations where a conflict of interest can arise

Brokers, by their very nature, operate as mediators between the insurer and the insured to
bring the two parties to a contractual agreement. This unique position can bring the broker
into situations where they may need to manage conflicting interests. Some of the more
common situations are as follows:
• Delegated authorities. If the broker is acting as an underwriter, or if they have authority
to settle claims, there may be a conflict of interest for the broker between meeting the
needs of their client and those of the insurer. This is especially the case if the broker is
incentivised by the insurer by way of a profit commission. The broker, in this instance,
would benefit financially by avoiding unprofitable business and may be tempted to place
risks with a better claims history on to the delegated authority, while directing other risks
to other markets, potentially at the detriment of those clients. This conflict can be
managed by operating the delegated authority at ‘arm’s length’, with a different team
managing clients.
• Close links with an insurer. A situation where a broker is owned by an insurer, or an
Chapter 4
insurer is owned by a broker can lead to a potential conflict.
Example 4.1
In 1998, Hiscox insurance company sold its share in RK Harrison, an insurance broker
which specialised in distributing Hiscox insurance products, as this caused a potential
conflict of interest.
• Insurance and reinsurance. Larger broking organisations conduct both insurance and
reinsurance broking operations. Where a broker is both the direct placing broker and the
reinsurance broker, there may be a conflict. This can be managed by separating the
business and ensuring proper barriers are in place between business functions. For
example, Marsh, Aon and Willis have reinsurance operations that are separate legal
For reference only

entities.
• Lloyd’s brokers. Traditionally, Lloyd’s brokers perform duties for Lloyd’s underwriters,
such as claims settlement. Consent of the insured is required if the broker is acting on
behalf of the insurer (even where the activity may benefit the client).
• Contingent commissions/overriders. This is a situation where the broker receives a
payment from an insurer which is dependent (i.e. contingent) on the actions of the broker.
Examples include the placement of a certain level of business with an insurer or the
recommendation of a particular supplier. The implication of receiving such commissions
or overriders is that it may influence the decisions on where to place their client’s
business due to the additional income it may generate.
• Other inducements. These include fees paid by premium financing companies, cash
gifts or soft loans (financing that offers flexible or lenient terms for repayment, usually at
lower than market interest rates, occasionally interest free) paid by insurers, payable in
return for certain targets being met. Such payments have been the subject of scrutiny by
the Financial Conduct Authority (FCA) and several high profile fines have been imposed.
• Acting for two or more clients with similar interests.
This may be the case where two or more of the same broker’s clients are:
– involved in the same claim;
– competing for limited market capacity;
– involved in the same financial transaction (such as an acquisition or disposal of a
business); or
– competing for the same contract.
Refer to
Refer to Broker remuneration on page 1/21 for broker remuneration and transparency
Activity
Research the Spitzer review, its origins and its outcomes. Ask your compliance officer if
your firm changed or amended any of its procedures in the aftermath of this review.
The FCA carried out a thematic review in 2014, which considered whether intermediaries
who work with small to medium-sized enterprises effectively identify conflicts of interest and
how they handle the potential conflicts which arise from intermediary remuneration. The FCA
published its report, TR14/9, in May 2014.
On the Web
www.fca.org.uk/your-fca/documents/thematic-reviews/tr14-09
B2 Managing, identifying and resolving conflicts of interest

An agent can only have one principal at any one time and, therefore, brokers have a duty to
manage any potential conflict or ‘appearance’ of a conflict.
This is not just a responsibility for senior management. The FCA has made a number of
recommendations relating to the management of conflicts and reminds brokers that:
Chapter 4
All staff in an intermediary should be aware of conflicts and should be responsible
for ownership of conflicts arising out of their own conduct.
However, due to the very nature of broking activity, and in particular, due to the fact that
brokers act for more than one client and place business with more than one insurer, some
conflicts may be inevitable. Generally, to remedy such conflicts, clear disclosure and the
agreement of all parties should be made.
The FCA requires all brokers to identify and manage conflicts of interest, and full disclosure
and transparency is needed in order to manage and avoid conflicts. Brokers do this primarily
through independent file reviews, either as formal internal audits, or at least a file review by
an individual not involved in the placing process. These systems must be fully supported by
senior staff.
For reference only

Question 4.2
Which of the following is least likely to lead to a potential conflict of interest?
a. Placing an insurance policy by means of fair analysis of the market. □
b. Operating a delegated underwriting authority. □
c. Accepting contingent commissions. □
d. Attending an expensive corporate event at the insurer’s expense. □
C Terms of business agreements (TOBAs)

In order to manage conflicts of interest, meet client needs and satisfy the regulatory
requirement to disclose certain information to clients, broking firms now produce formal
written agreements with insurers and their clients: TOBAs. In the case of Lloyd’s there would
be an individual TOBA entered into by the broker with each MGA with which they are doing
business.
There is no standard template that has to be used, however, a number of market
organisations, including the ABI and BIBA, have provided guidance on what to include in
these agreements and how they should be structured.
All TOBAs should be clear and succinct, reflect the business relationship, define and allocate
responsibilities and rights, and ensure compliance with regulatory or statutory rules. These
written agreements cover four key elements:
1. Regulatory information.
2. The broking firm’s TOBA.
3. Details of the services provided.
4. The broker’s remuneration.
C1 Insurer TOBA with a broker

The items which are found in a TOBA between insurers and brokers include: regulatory
status, broker’s authority, ownership and access to data and records, law and jurisdiction,
commission, conflict management, and confidentiality.
The following table describes each of these items in more detail.
Regulatory status The broker and the insurer both warrant to each other that they are duly authorised to (in
the case of the broker) conduct 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.
Broker’s authority 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
Chapter 4
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 the 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. For more details see Insurer funds on page 6/4 - Insurer funds.
The 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.
Ownership and If the matter of ownership and access to data and records is clarified in the TOBA, there is
access to data and less chance of a dispute later.
records
For reference only

Law and In any contract it makes sense to agree where – and under what rules – any dispute
jurisdiction between the insured and insurers will be heard.
Commission This section deals with any payments of commission from the insurer to the broker
(brokerage).
Conflict Each party agrees to adopt procedures to ensure that conflicts are managed and identified.
management
Confidentiality Each party agrees to maintain the confidentiality of information received from the other and
disclose it only as required to perform their obligations in the conduct of business.
Question 4.3
What does a risk transfer TOBA allow the broker to do on behalf of the insurer?
a. Bind risks. □
b. Hold funds. □
c. Agree claims. □
d. Pay experts’ fees. □
Insurers and insurance brokers also exchange TOBAs when they decide to transact
business in the form of an agency agreement. Often there will be differences in the terms
(often in relation to payment terms) and these need to be agreed before commencement of
business.
Refer to
Refer to IF1, chapter 3, section F
C2 Broker’s TOBA with a client

The FCA requires a broker to provide its client with certain information before the client
commits to buying an insurance product. The regulatory information which must be provided
to the client before the conclusion of contract includes:
• details of the firm’s ownership;
• confirmation that the broking firm is a registered intermediary and the scope of its
authorisation, e.g. whether the firm merely arranges insurance policies providing
information only or whether it provides advice and makes a recommendation;
• the cooling-off period for consumers;
• details of the firm’s complaints procedures; and
• the availability of any compensation, e.g. the Financial Ombudsman Service (FOS) and
the Financial Services Compensation Scheme (FSCS).
Refer to
Chapter 4
Refer to Complaints procedures on page 7/9 for more information on the FOS
In addition to the regulatory information, a broker’s TOBA with a client should include the
following:
Authority to act and signing This section clarifies that the broker has authority to act on behalf of the client
and includes space for the client to sign indicating their acceptance of
the terms.
Broker information Key information on the broker is presented here, including the full name of the
firm as registered with the FCA. This means that the whole firm is committed to
fulfilling the terms.
For reference only

Duration of the contract and The contract can be open-ended, annually renewable/reviewable or for a
termination fixed term.
Client’s duty of disclosure This section reminds the client of their duty of disclosure and the potential
consequences of non-disclosure.
Insurer security This includes an outline of the firm’s policy in selecting insurers from an insurer
security perspective and reminds clients that the broker does not guarantee the
security of any insurer.
Remuneration The broker’s policy on remuneration is set out and explains the regulatory
disclosure obligations.
Payment terms The firm’s payment terms (for example, payment within seven days of invoice)
and the consequences of non-payment.
Client money This section explains how the firm will handle client money and comply with the
regulator’s requirements – in the UK, the FCA’s Client Assets Sourcebook
(CASS) rules.
Conflicts of interest The steps the broker will take to deal with any conflicts of interest as and when
they arise.
Claims against the firm This is a reminder that claims should be made against the firm and not against
an individual employee.
Limitation of liability This is a statement that may be included which sets out to limit a firm’s liability
in the event of a mistake.
Money laundering/data A statement of the broker’s obligations under law and the client’s rights under
protection/confidentiality the Data Protection Act 2018 (DPA 2018).
Law and jurisdiction A statement which defines which country’s law applies and under which
country’s jurisdiction the agreement falls.
Activity
Obtain a copy of the TOBA your firm sends out to clients.
Are there different versions for different classes of business?
From a client’s perspective, is it clear which services are being offered?
What is your firm’s procedure for sending out the TOBA? Is it just sent for new clients or
sent at renewal and are there any other documents sent out with the TOBA?
Chapter 4
For reference only

Key points
Duties of an insurance broker as agent
• The law of agency imposes four key legal duties on brokers when acting as agents for
their principal (their clients). These are the duty of obedience, the duty of due skill and
care, the duty of good faith and the duty of accountability.
• In return the broker, as agent, has a right to an agreed remuneration and to claim
indemnity against all expenses incurred when acting on their principal’s behalf.
Conflicts of interest
• Brokers act as mediators between the insurer and the insured. This unique position
can bring the broker into situations where they may need to manage conflicting
Chapter 4
interests.
• All staff in an intermediary should be aware of conflicts and should be responsible for
ownership of conflicts arising out of their own conduct.
Terms of business agreements (TOBAs)
• In order to manage conflicts of interest, meet client needs and satisfy the regulatory
requirement to disclose certain information to clients, broking firms produce formal
written agreements with their clients and insurers known as TOBAs.
• TOBAs should be clear and succinct, reflect the business relationship, define and
allocate responsibilities and rights and ensure compliance with regulatory or
statutory rules.
For reference only

Question answers
4.1 d. When chasing a client for payment.
4.2 a. Placing an insurance policy by means of fair analysis of the market.
4.3 b. Hold funds.

Chapter 4
For reference only

Self-test questions
1. List four duties of an insurance broker.
2. What does the law of agency require brokers to do when acting as agents of their
principal?
3. List five situations when a broker may need to manage a conflict of interest.
4. What four key elements should be included in a TOBA?
5. What is the difference between a risk transfer TOBA and a non-risk transfer TOBA?
Chapter 4
For reference only
For reference only
Legal and
5
regulatory issues
outcomes
Introduction
A The Financial Conduct Authority (FCA) 4.1
B Achieving positive customer outcomes and fair treatment of 4.2
customers, including Consumer Duty
C Insurance: Conduct of Business Sourcebook (ICOBS) 4.3
Chapter 5
D Training and competence 4.4
E Financial crime 4.5
F Employers’ Liability Tracing Office (ELTO) 4.5
G Data protection 4.6
For reference only

Key points
Question answers
Self-test questions
Learning objectives
• describe the role of the Financial Conduct Authority in the authorisation, supervision and
regulation of insurance brokers;
• explain the importance of achieving positive customer outcomes and fair treatment of
customers, including Consumer Duty;
• describe the purpose of the Insurance: Conduct of Business Sourcebook and the
application to insurance brokers;
• explain the importance of training and competence within insurance broking organisations;
• explain the responsibilities of insurance brokers in relation to sanctions checking, money
laundering, bribery, corruption and with regards to the Employer’s Liability Tracing Office;
and
• explain the responsibilities of insurance brokers as required by data protection legislation.
Introduction
We have already established that the insurance industry in the UK is a regulated industry
and it is not the intention of this unit to explain the overall regulatory framework that exists.
The focus of this unit is on explaining how the activities of insurance brokers are regulated
and the key pieces of legislation which directly impact upon them. In the UK, the Financial
Conduct Authority (FCA) is the regulator for all aspects of insurance sales and advice (which
includes these activities undertaken by both insurance broking firms and insurers). It is also
the body responsible for the authorisation of insurance broking firms. We shall also be
considering the implications for insurance brokers of key legislation, with particular focus on
the impact on their responsibilities.
Refer to
Refer to IF1, chapter 9, section I
Key terms
Authorisation Bribery and Competency Conduct regulation

corruption
Chapter 5
Consumer Duty Consumer protection Controlled functions Culture

Fair treatment of Governance Inducements Money laundering
customers
Positive customer Retail Mediation Sanctions Senior Managers
outcomes Activities Return and Certification
For reference only

(RMAR) Regime (SM&CR)
Supervision Vulnerable customer
A The Financial Conduct Authority (FCA)

The FCA has two main areas of regulatory responsibility in respect of insurance
broking firms:
Authorisation This is referred to by the FCA as prudential regulation, the aim of which – very
broadly – is to ensure that firms are financially sound. For example, does the firm
have adequate amounts of capital to run its activities? Are the directors suitable
people to be running an organisation?
Conduct of business The FCA refers to this as conduct regulation which – put simply – is concerned
with the relationship an authorised firm has with its customers. For example, how
does the firm handle its sales process and treat its customers?
Insurance broking firms must be authorised by the FCA if they intend to undertake any
regulated activity by way of business for remuneration.
A1 What are regulated activities?

As mentioned in the introduction, the FCA is responsible for all aspects of insurance sales
and advice (including complaints handling). Any firm – whether an intermediary (or for the
purposes of this course, an insurance broking firm) wishing to offer independent advice or an
insurer that undertakes these activities – which the FCA calls ‘insurance mediation’ activities
– must be authorised directly by the FCA.
Chapter 5 Legal and regulatory issues 5/3
The FCA definition of mediation is as follows:

The activities of introducing, proposing or carrying out any other work
preparatory to the conclusion of contracts of insurance or of concluding such
contracts, or of assisting in the administration and performance of such
contracts, in particular in the event of a claim.
Reinforce
Refer back to IF1, chapter 2, section D, and remind yourself of the FCA’s definitions of the
different categories of intermediaries. Make sure you understand how the term ‘insurance
broker’ fits into the wider intermediary picture: ‘insurance broker’ = ‘intermediary offering
independent advice’.
In terms of insurance mediation, the FCA identifies four main activities that are regulated:
• Arranging the purchase of general insurance policies.
• Advising on insurance purchases.
• Dealing as agent.
• Assisting in the administration and performance of insurance policies.
A1A Arranging
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This covers a range of activities including the introduction of potential clients to an insurance
broker, providing information on a product or assisting in the completion of a proposal form. It
involves the provision of facts about insurance products which must be done in a balanced
way so as not to influence the client’s decision.
A1B Advising
For reference only

It is implicit that an insurance broker should provide their clients with advice regarding
insurance products, cover and services. In fact, it is the provision of ‘independent advice’ –
the provision of an opinion on the merits of one insurance contract over another, having
taken into consideration their client’s needs – that differentiates insurance brokers from
intermediaries who are linked to one or more product providers.
A1C Dealing as agent
The role of the broker as agent has been discussed in chapter 4. An example of such an
activity includes entering into a contract of insurance with a client on behalf of an insurer, as
would be the case in the operation of a delegated authority.
A1D Introducing
According to the Insurance: Conduct of Business Sourcebook (ICOBS) the introduction
of business to an insurer or an insurance broker is also a regulated activity. Only firms
authorised by the FCA may carry out this activity. The area of introducing business is
covered in more detail in chapter 6.
A1E Administration
The whole area of client service, including the notification of a claim to an insurer or
negotiating a claim on behalf of a client is also a regulated activity, as is the production and
issuance of insurance documentation.
A2 Authorisation procedures
Having identified which activities are regulated and, therefore, the requirement for insurance
broking firms to become authorised, let us now look at the process of authorisation. This
process is largely a management responsibility and the detail is beyond the scope of this
study text.
It is important to understand the steps that must be followed to become authorised, as they
are fundamental to the operation of insurance brokers.
The diagram below illustrates the six steps to authorisation that insurance brokers need
to follow.
Step 1 Step 2 Step 3

Decide the scope of Understand the FCA’s Prepare an appropriate
authorisation. What Principles for Businesses business plan that
activities are your firm and how they would apply addresses the FCA’s
likely to undertake? to the firm. requirements.
Step 5
Step 6 Decide whether the
Decide which people will processes, systems and Step 4
be ‘authorised persons’ controls within the firm will Calculate the minimum
within the firm (i.e. take meet the FCA’s financial requirements for
responsibility for key requirements and are the business to operate.
regulated activities). adequate to manage the
business.
On the Web
www.fca.org.uk/firms/about-authorisation
Chapter 5
When authorising firms, the FCA will focus on the firm’s business model (how the firm
makes its money), governance (how the firm is managed, directed and controlled) and
culture (the shared values, standards and beliefs that define it), as well as the systems and
controls the firm intends to put in place especially over:
For reference only

• product governance – the control it has over the types of insurance products and
services the firm provides;
• end-to-end sales processes – all the procedures it follows when selling its products
from new business through to renewal; and
• prevention of financial crime – the procedures it has in place to identify and prevent all
types of financially related criminal activity.
Refer to
Culture is explained in more detail in Culture in an insurance broking organisation on page
7/6
Refer to
Refer to Money laundering on page 5/19 for laws that relate to money laundering
The FCA will assess whether applicants have a good understanding of how to ensure it
treats its customers fairly, or to use the wording of the regulator – ‘ensures it supports good
outcomes for its customers’. The following areas are considered:
• Corporate culture – to assess how effectively a firm identifies, manages and reduces
risk in the way it operates.
• Sales procedures – to assess how effectively the firms systems and controls in relation
to the sales process operate, including at the point of sale, post-sales, and services and
complaint handling.
• Product design – to determine whether a firm’s products or services meet customer
needs and are targeted accordingly.
A3 Supervising insurance broking firms

Once authorised, insurance broking firms are subject to ongoing supervision by the FCA to
ensure they comply with the conduct of business regulation principles and rules.
A3A Risk-based approach
The FCA has adopted a risk-based approach to supervision. In other words, it directs its
resources to firms it believes pose the greatest risk to customers in line with the FCA’s
operational objectives. The primary objective is consumer protection through the fair
treatment of customers.
High risk may not mean that a firm has a high risk of failure, only that, if it did fail, it would
have a high impact on its customers. The current supervisory system is intended to allow
quick action and attempts to address issues before they cause harm. As a result, higher risk
firms may have an assigned supervisor, with regular contact, while others may only be
contacted once every three to four years.
Each firm is categorised according to risk.
The system originally covered risk categories C1 (large banking and insurance groups with
very large number of retail customers) through to C4 (smaller firms including most
intermediaries). However, the FCA announced in September 2015 that it was making further
changes to its supervisory model, including how it classified firms, to support the sector-
based approach introduced as part of its ‘New Strategy’ in 2015. The FCA will continue to
Chapter 5
look at the way individual firms and people behave, but will also increasingly look at how
markets work as a whole, with greater emphasis on sector and market-wide analysis.
Part of the change to the FCA model is a move away from C1 to C4 conduct categories that
it has previously used. Firms are now categorised as either ‘fixed portfolio’ or ‘flexible
portfolio’. Fixed portfolio firms will continue to be subject to a programme of firm or group-
For reference only

specific supervision, while flexible portfolio firms will be subject to event-driven reactive
supervision.
The FCA approach will vary depending on the risks it has identified in each sector, but may
mean that, over time, some firms will see changes to how they are supervised. The
reclassification meant that around 70 firms moved from ‘fixed’ to ‘flexible’ portfolio or from
‘flexible’ to ‘fixed’.
Fixed portfolio firms are a small population of firms (out of the total number regulated by the
FCA) that, based on factors such as size, market presence and customer footprint, require
the highest level of supervisory attention. These firms are allocated a named individual
supervisor, and are proactively supervised using a continuous assessment approach.
The majority of firms are classified as flexible portfolio firms. These firms are proactively
supervised through a combination of market-based thematic work and programmes of
communication, engagement and education activity aligned with the key risks identified for
the sector in which the firms operate. These firms use the FCA Customer Contact Centre as
their first point of contact with the FCA as they are not allocated a named individual
supervisor. Contact Centre staff should have the expertise to deal with the majority of issues
and queries, and these will be passed onto the appropriate supervision area where
necessary.
Insurance brokers can be further subdivided broadly into three groups:
• small firms – around 98% of the number of regulated firms;
• medium-sized firms with a higher risk profile; and
• significant businesses.
On the Web
bit.ly/2lldgUL
The FCA’s supervision model is outlined in the regulatory Handbook and is based on
three pillars:
• Firm Systematic Framework (FSF): designed to assess a firm’s conduct risk, asking the
question ‘are the interests of customers and market integrity at the heart of how the firm
is run?’. This entails business model and strategy analysis embedding of the fair
treatment of customers, including governance and culture, product design, sales and
transaction processes, and post-sales services.
• Event-driven work: supervisory activity in response to issues that are emerging or have
recently happened. This is the flexible element of how the FCA allocates its supervisory
staff so that resources are devoted to situations and firms of heightened risk to
consumers. For example, whistle-blowing alleged misconduct or a spike in reported
complaints.
• Issues and products: thematic work on sectors of the market or products within a sector
that are putting or may put consumers at risk.
The FCA monitors the regulatory position of firms who deal directly with clients (such firms
are known as ‘retail’ firms) by requiring them to report on certain activities. Firms do this by
completing a Retail Mediation Activities Return (RMAR). Small firms produce these
reports every six months (for firms with revenue under £5m) or three months (firms with
revenue over £5m) on an integrated system known as GABRIEL (Gathering Better
Regulatory Information Electronically). Any issues are followed up by the FCA over the
telephone initially, or by way of a visit if required. RMAR forms are designed to capture data
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such as complaints information and these forms are the basis of the FCA’s supervision
activities.
A3B The Senior Managers and Certification Regime (SM&CR)
Some time ago, the FCA and PRA introduced a range of changes, with the aim of increasing
For reference only

individual accountability. Individuals who conducted controlled functions needed to be
approved by the FCA within an authorised firm. This was known as the Approved Persons
Regime.
The Approved Persons Regime has now been replaced by the Senior Managers and
Certification Regime (SM&CR), changing how people working in financial services are
regulated. SM&CR was applied to insurance brokers in December 2019.
The key aims of the SM&CR are to:
• encourage greater clarity of responsibilities;
• improve corporate governance, demonstrating clearer accountability for decision making;
• ensure that responsibility is clear and that firms don't rely on collective board
responsibility;
• identify who really runs the firm (i.e. senior management) removing, or at least limiting,
parent company involvement in a regulated firm;
• give the FCA a sound framework against which to take enforcement action against
individuals when serious issues occur; and
• place the responsibility for 'authorising' those who undertake significant harm functions,
such as an investment adviser, on the firm rather than the FCA (this is known as
certification).
The key features of the rules are as follows:
Senior Managers Regime This focuses on the most senior individuals who hold key roles or are
responsible for whole areas of relevant firms.
Firms need to:
• ensure each senior manager has a 'Statement of Responsibilities', setting
out the areas for which they are personally accountable;
• introduce a 'Firm Responsibilities Map' that knits these together;
• ensure that all senior managers are pre-approved by the regulators before
carrying out their roles; and
• ensure those who hold a senior management function are assessed for
fitness and propriety at least annually.
The Government has also implemented a 'statutory duty of responsibility' on
senior managers captured by the regime and this means senior managers will
be required to take the steps that are reasonable for a person in that position to
take, to prevent a regulatory breach from occurring. This further strengthens
the 'individual accountability' the regime intends to embed.
Certification Regime This applies to 'material risk-takers' (i.e. staff who are subject to the
Remuneration Code) and other staff who pose a risk of significant harm to the
firm or any of its customers (e.g. staff who give investment or mortgage advice
or who administer benchmarks).
Firms need to identify all certified individuals and then:
Chapter 5
• assess them as fit and proper;
• issue a certificate to each affected employee to this effect; and
• have procedures in place to re-assess the fitness and propriety of certified
staff on an annual basis including the requirement to issue an annual
certificate to confirm this.
The FCA no longer approves these individuals and it is the responsibility of the
For reference only

firm to confirm that the individual is fit and proper to undertake the role. This
places a great deal of responsibility on the employer to ensure sufficient
evidence is in place to support this internal approval (certification).
Conduct Rules These are high-level rules that apply directly to nearly all staff (apart from
ancillary staff, e.g. catering staff). Firms must ensure that staff who are subject
to the rules are aware of them and how they apply to their jobs. The Conduct
Rules apply to Senior Managers and staff in the Certification Regime.
A4 FCA powers
Once authorised, insurance broking firms will be supervised in an ongoing manner by the
FCA. If the firm is perceived to be a greater risk, it is likely that they will have a closer
supervisory relationship with the FCA.
Should they fall short of the regulator’s expectations, the FCA has power under the
Financial Services Act 2012 to:
• withdraw that firm’s authorisation;
• discipline both individuals and firms;
• impose penalties;
• apply to the court for injunctions (a court order requiring certain action to be stopped);
and
• prosecute.
The emphasis is on prevention rather than cure.
Consider this…
Has your employer had any supervisory contact with the FCA since April 2013?
Question 5.1
A risk is introduced to a wholesale insurance broker by a producing broker. Whose
responsibility is it to check that the appropriate authorities are in place?
a. The wholesale broker. □
b. The insurer. □
c. The producing broker. □
d. All the above. □
A4A Intervention
Current regulation has seen a shift from responding to issues as they arise to a more
proactive approach, which is aimed at tackling the root cause. Examples include action
where the FCA believes a firm is providing misleading information or to publicly disclose that
enforcement action has commenced. Firms would wish to avoid this information being made
public due to the potential damage it might cause to its reputation with clients, insurers,
competitors and shareholders. The FCA must first alert the firm of its proposed course of
action before commencing proceedings.
Chapter 5
Example 5.1
According to its Annual Report 2013/14, the FCA used its early intervention powers on
21 occasions across a range of sectors during the time period. These cases were each
identified as being a risk of harm to consumers and by intervening earlier than it would for
disciplinary action investigations, the FCA was able to obtain a good consumer outcome
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quickly and efficiently, and often with voluntary agreement from the firm involved.
A4B Discipline and enforcement

The FCA has a range of measures and sanctions available that can be taken against
individuals within insurance broking firms and the firms themselves when there is a need for
enforcement and disciplinary action. These include public censure, financial penalties,
prosecution for criminal offences, as well as civil and less formal remedies.
Public censure If the FCA believes that a firm has failed to meet a requirement imposed on it under
the Financial Services Act 2012, it may issue a public statement of misconduct. This
draws attention to the firm's or approved person's behaviour, damaging their
reputation and potentially hindering future success. A warning can be given first and
this approach may be an alternative, or in addition, to a financial penalty.
Financial penalties These may be imposed on a firm or an approved person where it has contravened a
requirement of the Financial Services Act 2012. In doing so a range of circumstances
will be taken into consideration, such as the firm’s or individual’s resources and their
disciplinary record.
Prosecution for criminal The FCA has the power to prosecute for a wide range of offences, such as carrying
offences on a regulated activity without authorisation or misleading the regulator.
Civil and less formal The FCA may take civil or regulatory action which could include injunctions,
remedies restitution and withdrawal of permission and/or authorisation.
In some cases the FCA may decide to take remedial action where disciplinary action is
deemed unnecessary. For example, it could vary or cancel permission of a firm, withdraw
terms of authorisation, withdraw an individual’s approved status or approval for a specific
function. A private warning is also possible. Although not made public, it may be considered
against future conduct.
Activity
For information about FCA fines, see: www.fca.org.uk/news/news-stories/2021-fines.
Were any of these fines for insurance brokers?
A5 Impact of regulation
The main implications for insurance brokers of the current regulatory environment are:
• It is a criminal offence to carry on regulated activities without authorisation.
• Regulated firms must establish that the insurers, other brokers or intermediaries they deal
with are properly authorised or exempt.
• Regulated firms are supervised by the FCA and must adhere to its rules and principles to
maintain their authorisation.
Broking firms and individual approved persons who breach the rules and principles may be
subject to FCA enforcement action.
B Achieving positive customer outcomes and

fair treatment of customers, including
Consumer Duty
The FCA’s Handbook contains a number of high level principles which apply to the way
brokers should conduct their business. In addition to these principles, the Handbook also
contains a number of specific rules. The FCA has established eleven Principles for
Businesses which are shown below.
Chapter 5
These principles provide the foundation for regulation and are quite wide ranging rather than
prescriptive in nature. They are a guide for authorised firms to achieve the strategic and
operational objectives of the regulator. These principles were loosely based on the
requirements of the law of agency.
For reference only

Reinforce
Refer back to Identification of client needs on page 2/3 to remind yourself of the
requirements agents have to their principals.
The Principles for Businesses are shown below:
Principles for Businesses (PRIN)
Principle Detail
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 A firm must pay due regard to the information needs of its clients, and
clients 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 A firm must take reasonable care to ensure the suitability of its advice and
of trust 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. Relations with regulators A firm must deal with its regulators in an open and cooperative way, and must
disclose to the FCA appropriately anything relating to the firm of which that
regulator would reasonably expect notice.
Note: The PRA applies Principles 1 to 4, 8 and 11 only. © Financial Conduct Authority
These principles cover every area of an insurance broking firm’s operations. We will now
focus on a few key areas. The first relates to Principle 6 and focuses on customers’ interests,
the basis for the TCF initiative.
B1 The fair treatment of customers

The previous regulator, the Financial Services Authority, initiated the concept of Treating
Customers Fairly (TCF). It was an attempt at putting principles-based regulation into
practice. TCF is now embedded in the operation of all insurance broking firms as a
fundamental aspect of regulatory compliance and the key to putting customers at the heart of
their business practices. Indeed, this is so much the case that the FCA now no longer refers
to TCF specifically, instead expecting organisations to adopt ‘the fair treatment of customers’
in all their activities and supporting the requirements of Principle 6.
The six FCA TCF outcomes are as follows:
• Outcome 1: Consumers can be confident they are dealing with firms where the fair
treatment of customers is central to the corporate culture.
• Outcome 2: Products and services marketed and sold in the retail market are designed
to meet the needs of identified consumer groups and are targeted accordingly.
• Outcome 3: Consumers are provided with clear information and are kept appropriately
informed before, during and after the point of sale.
• Outcome 4: Where consumers receive advice, the advice is suitable and takes account
Chapter 5
of their circumstances.
• Outcome 5: Consumers are provided with products that perform as firms have led them
to expect, and the associated service is of an acceptable standard and as they have been
led to expect.
• Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to
For reference only

change product, switch provider, submit a claim or make a complaint.
Firms are expected to embed the fair treatment of customers across the whole of its
operation from first contact with a potential client (and even before that when considering
what products to offer them) to ongoing client service. This process from start to finish is
known as the ‘product life cycle’. The way that the fair treatment of customers interacts with
the product life cycle is illustrated below.
The fair treatment of customers and the product life cycle
Product design and

governance
Firms should design products
based on customer needs and
identify its riskiness – the
product should
not expose customers to
unsuitable or unidentified risks.
Identify target markets

Complaints handling Is the product suitable for the
Is there a robust and auditable market? What information
procedure for handling should be provided to allow the
complaints? market to fully understand the
product?
After sales information

Is there evidence and Marketing and promoting
management information to
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the product
show that the client’s needs Is the promotion of the product
have been met and that in any way misleading or
they understand the product inaccurate?
fully (e.g. demands and needs
checklist, statement of price)?
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Sales and advice processes
Is the product suitable for the
client’s demands and needs?
Does the client fully
understand the product? Is
there contract certainty at the
point of sale?
The first operational objective of the FCA is consumer protection. Its focus is very much on
making sure individuals are not exploited. Although all clients should be treated fairly, the
FCA considers consumers to be at greater risk than commercial customers.
Consider this…
What is the FCA’s definition of a consumer?
B2 The FCA’s Consumer Duty

The FCA's Consumer Duty came into force in July 2022, with full implementation expected
by April 2023. It has implications for product development, marketing, sales and customer
support as well as compliance.
The regulator's intention in introducing the Consumer Duty was to achieve a higher level of
consumer protection in retail financial markets. It considered that too many financial firms
were not adequately considering their customers' needs.
In particular, the FCA felt many firms were providing:
• information which was misleading or difficult to understand;
• services which were not fit for purpose;
• products and services that did not represent fair value; and
• poor customer service.
The outcome is that consumers find it harder to make informed decisions and could
purchase products that are not appropriate for them.
The Consumer Duty applies to all regulated firms, but only to consumers, not to commercial
clients. It is made up of three distinct elements:
• The Consumer Principle. The overarching principle that firms must act to deliver good
outcomes for their clients.
• Cross-cutting rules. Rules spread across the FCA Handbook designed to amplify the
Consumer Principle. They require key behaviours and that firms take reasonable
steps to:
– avoid foreseeable harm to customers;
– enable customers to pursue their financial objectives; and
– act in good faith towards customers.
• Specific outcomes. A more detailed set of rules and guidance setting out expectations
for firm conduct. The conduct focuses on:
– Communications.
– Products and Services.
– Customer Service.
– Price and Value.
On the Web
The new rules in relation to Consumer Duty can be found at: https://www.fca.org.uk/
Chapter 5
publications/policy-statements/ps22-9-new-consumer-duty
B3 Vulnerable customers
In line with the fair treatment of customers, the FCA has published guidance on the
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treatment of vulnerable customers. The FCA defines a vulnerable customer as:
someone who, due to their personal circumstances, is especially susceptible to
harm, particularly when a firm is not acting with appropriate levels of care.
The FCA recognises that although consumers should take responsibility for their choices and
decisions, there are very real factors that might limit their ability to do so. It has, therefore,
published guidance on how intermediaries should deal with customers they think are
vulnerable.
On the Web
For the FCA's guidance, see: www.fca.org.uk/publication/finalised-guidance/fg21-1.pdf.
For further resources on vulnerability, see: www.fvtaskforce.com/resource-library.
Examples of vulnerability could include poor health, life events such as being recently
bereaved, and poor literacy or numeracy skills. They can affect a customer's ability or
willingness to make decisions or represent their own interests.
The FCA expects firms to provide vulnerable customers – whose needs might differ from
those of other customers – with an appropriate level of care to ensure they are treated fairly.
It believes senior leaders should create and maintain a culture that enables staff to take
responsibility for reducing potential harm to vulnerable customers.
The fair treatment of vulnerable customers should be embedded in policies and processes,
not just on the front line, but in areas such as product development, and should be part of a
healthy culture throughout firms. It is very similar to the FCA's expectation relating to the fair
treatment of customers in general.
To achieve good outcomes for vulnerable customers, firms should:

• Understand the needs of their target market/customer base.
• Ensure their staff have the right skills to recognise and respond to the needs of vulnerable
customers.
• Respond to customer needs throughout product design, customer service provision and
communications.
• Monitor and assess whether they are meeting and responding to the needs of customers
with characteristics of vulnerability, and make improvements where this is not happening.
C Insurance: Conduct of Business

Sourcebook (ICOBS)
The FCA moved from a principles-based approach to a risk-based approach and there are a
number of actual regulatory rules which are outlined in ICOBS. This section will look at the
rules as they apply to insurance brokers from a practical standpoint and only as a summary
of the wording in the sourcebook.
The rules and guidance found in ICOBS are the specific actions that should be taken to
support the Principles for Businesses.
ICOBS is divided into eight chapters as follows:
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• ICOBS 1: Application.
• ICOBS 2: General matters.
• ICOBS 3: Distance communications.
• ICOBS 4: Information about the firm, its services and remuneration.
• ICOBS 5: Identifying client needs and advising.
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• ICOBS 6: Product information.
• ICOBS 7: Cancellation.
• ICOBS 8: Claims handling.
ICOBS provides a means by which the FCA can reinforce its principles through specific
areas in the general insurance market. The focus of ICOBS is on achieving outcomes for
consumers and not a list of prescriptive processes for firms to follow. The intention is to
provide as much flexibility for firms as possible, while addressing key issues of potential
consumer detriment.
ICOBS delivers a blend of Guidance and Rules. After each statement in the Handbook is a
letter (G for guidance, R for rules). There are fewer rules, but where there are, they focus on
key areas of potential consumer risk such as the risk of mis-selling (for example, the rules
governing pure protection contracts such as income protection or payment protection
insurance (PPI)). Mis-selling is covered in more detail in chapter 7.
Activity
Go online or ask your manager to explain the PPI mis-selling scandal and how it impacted
both individuals and banking organisations.
We will now look at each section of ICOBS briefly, focusing on the implications for insurance
brokers.
Be aware
Rather than ‘client’, the FCA uses the term ‘customer’ – further dividing customers
between ‘consumers’ and ‘commercial customers’. For ease of reference in this section,
which quotes heavily from ICOBS, we have maintained the FCA terminology.
C1 ICOBS 1: Application
The first chapter defines the scope of the rules and the activities to which the rules apply.
These activities include, among others, insurance mediation activity.
Where there is a chain of brokers (for example, in a wholesale situation), the rules only apply
to the insurance broker or intermediary who is in contact with the customer. The ICOBS rules
do not apply to reinsurance or contracts of large risks where the risk is located outside the
European Economic Area (EEA), or for a commercial customer, where the risk is located
within the EEA.
Refer to
Refer back to Wholesale brokers on page 1/11
C2 ICOBS 2: General matters

The second chapter provides an explanation of the different categories of customer. It is here
that the definitions of ‘consumer’ and ‘commercial customers’ can be found. If it is unclear
whose capacity the customer is acting in, then they are treated as a consumer (with a higher
set of protective measures). Where a customer is acting in a private capacity and a
commercial one, they are to be treated as a commercial customer (with less generous
treatment).
Chapter 5
This chapter also covers communication to clients.

The following example of a specific rule illustrates the way in which ICOBS provides a
practical way for the FCA to ensure its Principles for Businesses and the TCF initiative can
be put into practice:
When a broker communicates information…to a customer or other policyholder,
For reference only

they must take reasonable steps to communicate in a way that is clear, fair and not
misleading (R).
By being prescriptive, the FCA can also enforce its disciplinary powers if a broker does not
obey the rule.
Rules and guidance are also provided on the subject of inducements (a benefit offered by a
firm, or any person acting on its behalf, with a view to that person or firm adopting a
particular course of action). The purpose is to ensure that the broker does not give, offer,
solicit or accept inducements if they are likely to lead to a conflict of interest with the duties
they owe to their customers, or lead to the customer being unfairly treated.
The chapter also covers record-keeping, financial promotion and exclusion of liability.
C3 ICOBS 3: Distance communications

This chapter is more relevant for insurers but it does apply where a broker distributes its
products through a distance sale or service scheme and the client has not had the benefit of
direct advice. It, therefore, applies to contracts concluded via the internet or through a call
centre. The key is that information in a durable medium must be supplied before the
conclusion of the contract. Once again, we see a requirement for protective measures for the
customer.
C4 ICOBS 4: Information about the firm, its services

and remuneration
Through ICOBS 4, the FCA requires that an insurance broker must disclose its status (e.g.
address and authorisation status). It can do this by using an initial disclosure document
(IDD), which is compulsory for consumer contracts and contains a list of details that must be
said about the firm.
Refer to
Refer back to Selection of an insurer on page 2/14
Under the heading ‘Scope of Service’, the broker needs to disclose:

• the extent to which the firm has searched the market;
• whether the advice is given on a restricted basis or a ‘fair analysis of the market’; and
• the extent to which the policy being recommended meets the clients demands and needs.
In relation to remuneration, the FCA only requires brokers to disclose their commission
earnings if asked by a commercial customer. However, as agents of their principal, brokers
also have a fiduciary duty not to earn any secret profit. Therefore, brokers have a duty in law
beyond the FCA requirement to disclose profit or contingent commissions from insurers for
example.
C5 ICOBS 5: Identifying client needs and advising

Guidelines are given for the sale of relevant insurance products. If a policy is sold, the client
must be able to claim a benefit from it and if not, they should be told. This applies to all or a
part of the cover. Some insurance products have ‘add-on’ additional covers, such as family
legal expenses added to household insurance.
Disclosure of material facts is an important part of the insurance contractual process.
Guidance on how brokers should explain the requirements to their customers is provided
here, including the need to ‘ask customers clear and specific questions about the information
relevant to the insurance policy being arranged or varied’.
There are rules concerning the assessment of a customer’s demands and needs and the
Chapter 5
suitability of a contract being recommended. The broker must provide a statement of the
customer’s demands and needs and give reasons for any advice given in relation to a policy.
They can do this using a suitability statement.
C6 ICOBS 6: Product information
For reference only

This chapter deals with the provision of information regarding the products being sold at
each stage of the contractual process. It is all about allowing the customer to make an
informed decision.
The type of information (it must be ‘appropriate information’) and its timing (it must be
delivered ‘in good time’) are specified in the rules. The information includes:
• full price disclosure (premium and any other costs should be separated);
• the contract law applicable (e.g. English law);
• complaints handling procedures;
• EEA State of the insurer and the head office address; and
• cancellation provision.
In relation to the provision of evidence of cover, we can see the link between the FCA’s
Principle 7 (‘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’) and the
TCF concept of customer focus, followed through to a specific requirement. ICOBS 6 1.11
states that a firm should provide evidence of cover promptly after inception of a policy and
firms need to take into account the type of customer. In practice, this is carried out through
the Contract Certainty Code of Practice.
ICOBS 6 covers the kinds of pre- and post-contractual information that should be provided,
including the policy summary or key features document.
Even when an insurer is preparing the policy, the broker still has responsibility to keep a
diary system so that they can chase the insurer where necessary and to set up a system to
check that the policy is correct once it has been received. If the policy is incorrect, some
brokers withhold the documents until the insurer has reissued the policy. Where a broker
decides to send out the incorrect documentation to their client, on the grounds that it is better
for them to have some documents than none, it is essential that the insurer’s agreement to
any potential corrections is received before the documentation is sent.
The key issue is that contract certainty is not purely about sending out documents on time. It
is about putting the customers first, ensuring that they have the full and correct information in
enough time to make an educated decision on the products they are purchasing.
C7 ICOBS 7: Cancellation
The rules covered in chapter 7 relate to cancellation rights for consumers and the effects of
cancellation. The majority of general insurance contracts issued to consumers are subject to
14-day cancellation rights. This is not strictly a cooling-off period as the rules allow for some
insurers to charge for services provided. If the policy is cancelled, the consumer is entitled to
a refund within 30 days.
C8 ICOBS 8: Claims handling

The way in which claims must be handled by insurers and intermediaries are set out in
ICOBS 8.
Most of these rules apply to insurers in their capacity as product providers and not to
intermediaries. The general rule is that an insurer is responsible for the handling of claims,
whether they carry out this work personally or it is delegated or outsourced to another
organisation.
An insurer must:
• handle claims promptly and fairly;
• provide reasonable guidance to help a policyholder make a claim and appropriate
information on its progress;
• not unreasonably reject a claim (including by terminating or avoiding a policy); and
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• settle claims promptly once settlement terms are agreed.
Refer to
Refer back to Negotiation and placement on page 2/5
For reference only

Where the policyholder is a consumer, ICOBS 8 sets out certain circumstances in which the
rejection of a claim is unreasonable, unless there is evidence of fraud.
The following table shows these circumstances and how they have changed with the
enforcement of the Consumer Insurance (Disclosure and Representations) Act 2012:
Contracts entered into or variations agreed before 6 Contracts entered into or variations agreed on or
April 2013 after 6 April 2013
Non-disclosure of a fact material to the risk which the Misrepresentation by a customer, which is not a
policyholder could not reasonably be expected to have qualifying misrepresentation under the Consumer
disclosed. Insurance (Disclosure and Representations) Act 2012.
This is discussed in more detail below.
Non-negligent misrepresentation of a fact material to
the risk.
A breach of warranty or condition unless the A breach of warranty or condition unless the
circumstances of the loss are connected with the circumstances of the loss are connected with the
breach. breach.
You will note that the specific definition of when rejection of a claim would be unreasonable
applies when the policyholder is a consumer; nonetheless commercial insurers do have a
more general duty not to unreasonably reject a claim.
There are specific rules relating to brokers in the claims settlement process which are
outlined in ICOBS 8. Brokers must act with skill, care and due diligence and not put their own
interests above those of their client. Any conflict of interest must be resolved with the client’s
approval of the proposed arrangement.
In addition, even where the broker is not offering a claims service, brokers should be aware
of the duties imposed on insurers (timescales and the duty to keep the customer informed of
progress). A key issue is that brokers need to ensure they do not impede or delay the
performance of the insurer’s duties. A broker’s involvement may not help the client reach a
quick conclusion and sometimes a broker may even slow the progress down. A skill brokers
need to learn is when to step in and when to leave the insurer and client to communicate
directly.
When determining whether it is unreasonable to reject a claim, the provisions of the

Insurance Act 2015 with regards to remedies for a breach of the duty of fair presentation
and warranties must be taken into account.
Refer to
Refer to Insurance Act 2015 on page 2/8 for more on the Insurance Act 2015
Question 5.2
According to the rules in ICOBS 6, which of the following are not required to be
disclosed to a commercial customer by a broker at the time of a sale unless asked?
a. The price. □
b. The level of commission. □
c. Complaints handling procedures. □
d. Cancellation provision. □
D Training and competence
Chapter 5
In this section we will look at a key issue where the FCA expects insurance brokers to
achieve certain standards; that of training and competence.
Competence means having the skills, knowledge and expertise needed to discharge the
responsibility of the employee’s role, including a good standard of ethical behaviour. The
For reference only

FCA states that there are three key areas of training and competence that all firms need to
consider:
• assessing competence;
• maintaining competence; and
• record-keeping.
Refer to
Refer to IF1, chapter 10, section D
The FCA places great importance on the quality of the service provided and particularly the
advice given by firms to clients.
The FCA provides guidance in two ways:
• the Senior Management Arrangements, Systems and Controls (SYSC) sourcebook which
describes the high level competence requirement; and
• the Training and Competence (TC) sourcebook which outlines more specific
requirements for certain activities.
The rules are quite clear that a firm must satisfy themselves of the suitability (honesty and
competency) of those acting on its behalf. The two key principles are that a firm must:
• employ personnel with the skills, knowledge and expertise necessary for the discharge of
the responsibilities allocated to them; and
• take into account the nature, scale and complexity of its business, and the nature and
range of financial services and activities undertaken in the course of the business.
For brokers with retail clients (those they deal with directly rather than through another
intermediary), the TC sourcebook also provides extra requirements. These include the
requirement to supervise employees until they demonstrate the necessary competence to
carry on the activity. The assessment of an employee’s competence must follow a clear set
of criteria and procedures. Firms must have in place a detailed written manual for this
assessment and the maintenance of competency through every stage of an employee’s
development.
The principle is that an employee is supervised until assessed to be competent and then the
competency must be maintained through continuing professional development (CPD). Many
firms have adopted a points-based system which rewards training and development on an
ongoing basis. At the end of a twelve-month period, CPD points must add up to an agreed
threshold relative to the employee’s role. The CII supports and promotes CPD, and points
can be awarded for a number of activities, including internal and external training courses,
and professional qualifications.
Activity
What system does your firm have in place to record your individual training and how does
it assess whether you are competent at your job?
Once a person is deemed competent their name is added to a list of competent persons
which every firm is required to maintain. The FCA does not prescribe how competency is
achieved so each individual firm has responsibility for its own employees.
The maintenance of competency must take account of:
• technical knowledge and its application;
• skills and expertise; and
• changes in the market and to products, legislation and regulation.
Maintaining competence not only satisfies the FCA but also benefits the business. Having a
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well trained and competent workforce provides better service for clients. Happy clients
contribute to productivity and profitability for every firm. Records of training must be kept for
at least three years.
Question 5.3
For reference only

In terms of training and competence, which of the following is not expected of firms
by the FCA?
a. For all a firm’s employees to follow the FCA’s training programme. □
b. For employees to be appropriately supervised. □
c. For employees’ competence to be regularly reviewed. □
d. For firms to maintain a list of all competent persons whom they employ. □
E Financial crime
In this section we will look at the way that financial crime affects the way insurance brokers
operate.
Financial crime is defined in law as fraud, dishonesty, misconduct in, or misuse of
information relating to, a financial market or handling the proceeds of crime.
Insurance brokers operate in the financial services sector. Along with many other types of
business in the sector which involve the remote deposit of money (payment of premiums)
and the withdrawal of money (payment of claims or return of premiums for example), broking
operations are exposed to potential financial crime by criminals and terrorists, both on a
large or a small scale.
The two key issues are:
• money laundering; and
• bribery and corruption.
Both areas are covered by specific legislation defining what represents a criminal offence.
E1 Money laundering
Money laundering is the process by which criminals and terrorists convert money that has
been obtained illegally into legitimate funds. A criminal may use illegally obtained cash to
purchase legitimate insurances and then cancel it shortly after to get a return premium or
‘clean money’.
Refer to
Refer back to IF1, chapter 9, section L
The money laundering process has three specific stages:
Integration
Layering Criminal accesses the
Placement To conceal the origins of ‘clean’ money legitimately
Purchase of an the money, additional – by return premium or
insurance policy. transactions or transfers even through a claim
may be made. payment.
The laws that relate to money laundering have three strands:

• specific laws that define what represents a criminal offence and the penalties that apply;
• money laundering regulations that apply to a range of firms carrying on activities in the
Chapter 5
financial sector (but not specifically to general insurance); and
• regulatory rules and guidance which may apply in different ways to different firms.
There are specific laws that relate to money laundering (although they do not apply directly
to intermediaries):
For reference only

• Criminal Justice Act 1993. This Act requires individuals not to be actively involved in
money laundering, collusion or concealment, but also that they report any knowledge or
suspicion of money laundering.
• Proceeds of Crime Act 2002 (POCA). The POCA further extends the range of offences
for money laundering. It sets up an agency whose purpose is to recover the proceeds of
criminal activity. There are provisions for fines, confiscation or restraint orders. Offences
under the Act include concealing, disguising, converting or transferring criminal property,
acquiring, possessing or using criminal property and failing to disclose that someone else
is engaged in money laundering. Linking with the Criminal Justice Act 1993, relating to
the failure to report actual knowledge or suspicion of money laundering, it introduces the
concept of 'tipping off' a suspected person a criminal offence. The implications for
insurance brokers are that all employees of any firm must report any suspicious activity.
• Serious Crime Act 2007. The Act extends a range of serious crime orders and amends
the POCA in a number of ways. It also created the Serious Organised Crimes Agency
(SOCA) which merged into the larger National Crime Agency (NCA) in 2013.
• Money Laundering Regulations Act 2017. These regulations cover a wider range of
businesses (including life assurance companies and financial advisers) and areas such
as customer due diligence, policies and procedures, registration and enforcement.
On the Web
www.nationalcrimeagency.gov.uk
Although they do not specifically apply to general insurance, the Money Laundering
Regulations 1993 and 2007 created systems to prevent and control money laundering, as
well as ensure that effective training is in place.
The 2007 Regulations apply to a wider range of businesses than outlined in 1993 and cover
the following areas:
customer due policies and

registration enforcement
diligence procedures
The FCA has a responsibility to prevent and detect money laundering and has produced a
range of regulatory rules and guidance. Regulated persons should be aware of the risk that
their business could be used in connection with the commission of financial crime. The FCA
requires firms to take appropriate measures (in relation to their conduct, administration and
employment) to prevent financial crime, facilitate detection and monitor its incidence.
The rules insist that firms must have in place systems and controls, which must include
giving their employees suitable training with regard to money laundering. They also need to
document their procedures and appoint a money laundering reporting officer (MLRO) who
takes overall responsibility for maintaining effective anti-money laundering systems and
controls within the firm. The MLRO:
• takes responsibility for the firm’s compliance with the rules concerning the systems and
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controls that must be in place to combat money laundering; and

• acts as the focal point for all the firm’s anti-money laundering activities.
Anyone who suspects that money laundering is taking place must report this to the MLRO.
The MLRO must then decide if the suspicions need to be reported to the NCA. Anyone who
reports their suspicions will have their identity protected outside any potential investigation.
For reference only

Activity
Your firm will have nominated a specific person to take responsibility for following up any
suspected money laundering activity, known as the money laundering reporting officer or
MLRO. Who is your firm’s MLRO? Where can you find your firm’s regulations and
procedures in relation to money laundering?
E2 Bribery and corruption

Under the terms of the Bribery Act 2010, there are four criminal offences:
• giving, promising or offering a bribe;
• requesting, agreeing to receive or accepting a bribe;
• bribing a foreign public official; and
• failure by a commercial organisation to prevent active bribery being committed on its
behalf.
For insurance brokers, particularly those who operate in several countries, it is the last point
that has caused the most concern. The ‘failing to prevent’ bribery offence has resulted in
very large fines for inadequate measures being taken to prevent financial crime. The
regulator suggests that there should be a culture of anti-corruption in the organisation, led by
the directors as well as a clear code of conduct. It also suggests a named senior individual
should take responsibility for anti-corruption systems and controls.
The FCA has also suggested that a procedure should exist relating to gifts and hospitality,
setting out what is and what is not acceptable. Many firms have a ‘gift register’ where
employees record any corporate hospitality undertaken.
On the Web
The FCA published a report in November 2014 following their review of how small
insurance broking firms manage their corruption and bribery risks. The report is available
from: www.fca.org.uk/your-fca/documents/thematic-reviews/tr14-17.
Consider this…
An insurer invites you to attend a corporate golf day. What is the procedure your firm
would expect you to follow before you reply to the insurer?
E3 Client verification and sanctions checking

Under the regulatory rules and guidance, firms are told to take all practical measures to
check the identity of new clients and that their addresses are genuine.
For individuals, checks can be done by a visit to the client’s home or by verification with
another reputable institution such as the client’s bank. Guidelines state that client verification
should be ‘photographic’, such as a passport or a valid photo driving licence. For companies,
it would be necessary to establish the full name, registered number and business address to
check they do legally exist by, for example, obtaining a copy of its Certification of
Incorporation or searching the relevant company registry. Proof of identity should also be
obtained before any financial transactions are completed. Records must be kept for
five years.
Insurance brokers may deal with clients from all over the world. Governments may ban
organisations or individuals from doing business, or even ban businesses and individuals
from doing business with governments or countries where necessary. These bans are known
as sanctions and are imposed as a way of controlling the access to funds for regimes,
companies or persons who are felt to be less than desirable – possibly due to links to
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terrorism or other crimes.
HM Treasury is responsible for the implementation and administration of international
financial sanctions in effect in the UK, as well as licensing exemptions to financial sanctions,
domestic designations under the Terrorist Asset Freezing etc. Act 2010, and directions
given under Schedule 7 to the Counter-Terrorism Act 2008. It provides information on its
For reference only

website to alert users to any sanctions imposed.
Insurers are required to check the identities of organisations and individuals against the
sanctions list. This is known as sanctions checking. Many brokers have also adopted this
practice as part of the client identification process, as working with sanctioned individuals/
entities can result in a large fine or up to seven years in prison.
As well as checking the sanctions list, broking firms need to be able to prove to the FCA that
they have procedures in place to comply with UK sanctions requirements. Members of the
British Insurance Brokers’ Association (BIBA) have a responsibility to ensure that they have
suitable measures in place and as part of their membership they have access to
SanctionsSearch, which enables firms to screen their client list against HM Treasury’s
sanctions list.
F Employers’ Liability Tracing Office (ELTO)

The Employers’ Liability Tracing Office (ELTO) was introduced by the insurance industry to
make it easier for employees to search for employers' liability insurance policies using a
central database. This database contains all new and renewed EL insurance policies from
April 2011, policies from before April 2011 that have new claims made against them, and
policies that were identified through the previous tracing service. Employers’ liability (EL)
claims may not be made until long after an employee has left a particular company or after
the company has changed insurers. It can be hard for them to make a claim against an
insurer they may not be able to trace. The ELTO makes it easier for them to do so.
Brokers have certain requirements, placed on them by the FCA, to enter data onto the ELTO
database, just as they are required to access SanctionSearch.
A new section of the ELTO website has been created specifically for insurance brokers. This
section aims to provide intermediaries with information and resources to help in the supply of
EL policy information, ensuring compliance with the Financial Conduct Authority (FCA)
regulations.
On the Web
For more information on ELTO, visit: www.elto.org.uk/media/1073/
broker_guide_elto_2017.pdf.
G Data protection
In this section, we will look at the:
• Data Protection Act 1998 (DPA 1998);
• Data Protection Act 2018 (DPA 2018); and
• General Data Protection Regulation (GDPR).
G1 Data Protection Act 1998

The Data Protection Act 1998 (DPA 1998) came into effect in March 2000 and replaced
(and extended) the Data Protection Act 1984 (DPA 1984). The Act was concerned with the
regulation of personal data and did not confine itself to computer data.
Personal data is data that consists of information relating to a living individual (the data
subject) who can be identified from that data, with or without other information that the data
controller (the person who determines the purposes for which personal data is being
processed) has in their possession.
Chapter 5
The Act also differentiated between types of personal data. Some of the data was classed as
‘sensitive data’ which included, among other items, data about a person’s racial or ethnic
origin, religion and criminal record. Stricter rules applied to the holding and transferring of
such data. The Act put in place eight principles to make sure that personal information was
handled properly:
For reference only

1. Information containing personal data shall be processed fairly and lawfully.
2. Personal data shall only be held for specified and lawful purposes.
3. Personal data must be adequate, relevant and not excessive.
4. Personal data must be accurate and up to date.
5. Personal data held for any purpose(s) shall not be kept for any longer than necessary for
that purpose(s).
6. Personal data shall be processed in accordance with the rights of data subjects under
the Act.
7. Appropriate security measures shall be taken against unauthorised access to, or
alteration, disclosure or destruction of, personal data and accidental loss or destruction of
personal data.
8. Personal data shall not be transferred to a country outside the EU unless that country has
an adequate level of protection for the data subject.
The Act provided the data subject with certain rights. These included the right to:
• have access to data held on them;
• prevent data processing likely to cause damage or distress to them;
• prevent data processing for the purpose of direct marketing;
• avoid automatic decision-taking based on incorrect data;
• compensation if the individual suffers damage as a result of any contravention of the Act
by a data controller;
• apply to the court to enforce the rectifying, blocking, erasing or destroying of incorrect
data; and
• make a request to the Information Commissioner for an assessment to be made as to
whether any provision of the Act has been contravened.
G2 Data Protection Act 2018 (DPA 2018)

The DPA 2018 came into effect in the UK in May 2018, to coincide with the implementation
of the EU GDPR. Since Brexit, the key principles, rights and obligations remain the same.
However, there are implications for the rules on transfers of personal data between the UK
and EEA countries.
Be aware
DPA 2018 has been amended to reflect the UK GDPR and remains the legislation
governing data protection in the UK.
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 ICO with enhanced powers to regulate and enforce data protection laws.
– For the most serious data breaches, it can levy fines of up to £17.5 million or 4% of
annual global turnover.
– The ICO can bring criminal proceedings against a data controller or processor if they
have altered records following an SAR with the intent to prevent disclosure.
G3 General Data Protection Regulation (GDPR)

Who does the UK GDPR apply to?
The UK GDPR applies to data controllers and processors in the United Kingdom, including
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Northern Ireland. Prior to its introduction, the European Union (EU) GDPR applied.
The UK GDPR places legal obligations on 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
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places obligations on controllers to ensure their contracts with processors comply with the
regulations.
What information does the UK GDPR apply to?
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 – e.g. 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.
Sensitive personal data
The UK GDPR refers to sensitive personal data as 'special categories of personal data'.
These categories include:
• race;
• ethnic origin;
• politics;
• religion;
• trade union membership;
• genetics;
• biometrics (where used for ID purposes);
• health;
• sex life; or
• sexual orientation.
Principles
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.
Consider this…
Data Protection Principles under the UK GDPR
The following principles apply to all personal data:
1. Lawfulness, fairness and transparency: data should be processed lawfully; data should
be handled in ways people would expect giving consideration to the effect of
processing the data on the individuals concerned; and there should be full compliance
with the obligations of the 'right to be informed'.
2. Purpose limitation: data should only be collected for specified, explicit and legitimate
purposes and not further processed in a manner that is incompatible with those
purposes.
3. Data minimisation: data should be adequate, relevant and limited to what is necessary
in relation to the purposes for which it is processed.
4. Accuracy: data should be accurate and, where necessary, kept up to date.
5. Storage limitation: kept in a form which permits identification of data subjects for no
longer than is necessary for the purposes for which the personal data is processed.
6. Integrity and confidentiality: data should be processed in a manner that ensures
appropriate security of the personal data, including protection against unauthorised or
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unlawful processing and against accidental loss, destruction or damage, using

appropriate technical or organisational measures.
Lawful processing
For processing to be lawful under the UK GDPR, firms need to identify a lawful basis before
For reference only

they can process personal data and document it. This is significant because this lawful basis
has an effect on an individual's rights. The six lawful bases for processing data are:
1. Consent
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.
2. Contract
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.
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.
Rights
The UK GDPR contains similar rights to the EU GDPR, creates some new rights for
individuals and strengthens some of those that existed under previous data protection
legislation.
Right to be informed • 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.
Right of access • 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.
Right to rectification • 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.
Right to erasure • 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.
Right to restrict processing • 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.
Chapter 5
Right to data portability • This allows individuals to obtain and reuse their personal data for their own
purposes across different services.
Right to object • This gives individuals the right to object to the processing of their personal
data in certain circumstances.
For reference only

• Individuals have an absolute right to stop their data being used for direct
marketing.
Rights in relation to • An individual has the right not to be subject to a decision based solely on
automated decision making automated processing.
and profiling
• Processing is 'automated' where it is carried out without human intervention
and where it produces legal effects or significantly affects the individual.
Accountability and governance

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.
Breach notification
The UK GDPR introduces a duty on all organisations to report certain types of data breach to
the ICO, and in some cases to the individuals affected.
Transfers of personal data to third countries or international organisations
To ensure that the level of protection of individuals afforded by the UK GDPR is not
undermined, restrictions have been imposed on the transfer of personal data outside the EU,
to third countries or international organisations.
The UK GDPR still applies directly to firms operating in the EEA post-Brexit, and to any
organisations in Europe that send data to firms in the UK. These UK transfer rules broadly
mirror the EU GDPR rules, but the UK has the independence to keep the framework
under review.
Question 5.4
Who does the GDPR apply to?
a. Data controllers and data processors. □
b. Data controllers only. □
c. Data processors only. □
d. Individuals who have personal data held by a firm. □
Chapter 5
For reference only

Key points
The Financial Conduct Authority (FCA)
• In the UK, the FCA is the regulator for all aspects of insurance sales and advice (which
includes these activities undertaken by both insurance broking firms and insurers).
• The FCA is the body responsible for the authorisation of insurance broking firms and
also for the conduct of business between the broking firm and its customers.
• The four main activities that are regulated by the FCA are: arranging the purchase of
insurance, advising, dealing as agent and assisting in the administration and
performance of insurance policies.
• When assessing brokers who seek authorisation, the FCA looks at how the applicant
supports good outcomes for their customers through their corporate culture, sales
procedures and product design.
• The FCA monitors the regulatory position of firms which deal directly with clients by
requiring them to report on certain activities by completing an RMAR.
• The FCA has certain powers over firms if they fall short of the regulator’s expectations.
The FCA’s emphasis is on prevention rather than cure.
Chapter 5
Principles for Businesses (PRIN)
• The FCA has published eleven Principles for Businesses which apply to the way
brokers conduct their business.
• The previous regulator, the Financial Services Authority (FSA), initiated the concept of
Treating Customers Fairly (TCF).
For reference only

• TCF is now embedded in the operation of all insurance broking firms as a fundamental
aspect of regulatory compliance and the key to putting customers at the heart of their
business practices.
• The FCA now no longer refer to TCF specifically, instead expecting organisations to
adopt ‘the fair treatment of customers’ in all their activities and supporting the
requirements of Principle 6.
Insurance: Conduct of Business Sourcebook (ICOBS)
• ICOBS provides a blend of regulatory rules and guidance which apply to insurance
brokers and is divided into eight chapters.
• ICOBS provides a means by which the FCA can reinforce its Principles through
specific areas in the general insurance market.
Training and competence
• Training and competence is an area where the FCA expects insurance brokers to
achieve certain standards. Competence means having the skills, knowledge and
expertise needed to discharge the responsibility of the employee’s role, including good
standards of ethical behaviour.
• The maintenance of competency must take account of technical knowledge and its
application, skills and expertise, changes in the market/products/legislation and
regulation.
Financial crime
• Financial crime is defined in law as fraud, dishonesty, misconduct in, or misuse of

information relating to, a financial market or handling the proceeds of crime. The two
key areas are money laundering and bribery and corruption.
• Money laundering is the process by which criminals and terrorists convert money that
has been obtained illegally into legitimate funds. There are three specific laws relating
to money laundering.
• There are four criminal offences under the Bribery Act 2010.
Key points
Employers’ Liability Tracing Office (ELTO)
• The ELTO was introduced by the insurance industry to make it easier for employees to
search for employers' liability insurance policies using a central database.
• Brokers are required by the FCA to place certain information on the database; there is
now a section on the ELTO database specifically for brokers.
Data protection
• The Data Protection Act 1998 (DPA) related to the regulation of personal data and
provided individuals with protection from organisations who had lost, disclosed without
authorisation or retained inaccurate information about them.
• The Data Protection Act 2018 came into effect in May 2018 to replace the DPA. It aims
to modernise data protection laws to ensure they are effective in the years to come.
• The General Data Protection Regulation (GDPR) was also adopted in May 2018 and
has the force of law across all EU Member States.
• The GDPR places specific legal obligations on data controllers and processors.
• The GDPR applies to personal data – its definition is more detailed than the DPA,
reflecting changes in technology and in the way in which information is collected.
Chapter 5
For reference only

Question answers
5.1 d. All the above.
5.2 b. The level of commission.
5.3 a. For all a firm’s employees to follow the FCA’s training programme.
5.4 a. Data controllers and data processors.
Chapter 5
For reference only
Self-test questions
1. What are the FCA's main areas of regulatory responsibility in respect of insurance
broking firms?
2. How does the FCA define insurance mediation?
3. What are the four main activities that are regulated in terms of insurance broking?
4. When authorising firms, what is the FCA likely to focus on?
5. What powers does the FCA have under the Financial Services Act 2012 should an
authorised insurance broker fall short of the regulator's expectations?
6. What are the main regulatory implications for insurance brokers of the current
regulatory environment?
7. What is the purpose of the FCA's Principles for Businesses?
8. What is the aim and focus of ICOBS?
9. What is CPD?
10. In relation to financial crime, what are the two key issues and their supporting
legislation?
Chapter 5
11. Why did the FCA place a Customer Directive requirement on regulated firms?
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Key financial issues facing
6
insurance brokers
outcomes
Introduction
A Monies held by an insurance broker 5.1
B Insurance Distribution Directive (IDD) 5.2
C Retaining clients and finding new business 5.3
Key points
Question answers
Self-test questions
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Learning objectives
Chapter 6
• explain the different monies held by an insurance broker including broker funds, client
money and insurers’ money (including risk transfer);
• explain the importance of the impact of the Insurance Distribution Directive (IDD) in
relation to handling money; and
• explain the importance of retaining clients and finding new business for insurance brokers.
Introduction
In this chapter we will discuss the key financial issues which affect insurance brokers. In
particular, how they account for and manage their money, the money they may hold for their
clients and the money owed to insurers. We will also look at some of the financial
implications of retaining clients in comparison to finding new ones.
Key terms
Broker funds Client assets Client Assets Insurance

Sourcebook (CASS) Distribution Directive
(IDD)
Mid-term adjustment Renewal retention Sales culture Training and
competence
A Monies held by an insurance broker

As well as their own funds, insurance brokers may at any one time hold money belonging to
their clients (known as client assets) and insurers. For example, they may receive money
from an insurer which is to be paid to the client in the settlement of a claim, or as a return
premium. They may also receive money from their clients which is due to the insurer, such
as a premium payment. These funds need to be managed properly to ensure clients are
confident that their assets are being looked after and that the UK insurance market is
regarded as a safe place to conduct business.
For reference only

Within its rules set out in the Client Assets Sourcebook (CASS), the Financial Conduct
Chapter 6
Authority (FCA) places particular emphasis on the provision of adequate protection of client
money. The FCA has stated that the safe custody of client assets is a critical component for
the success of the UK financial services industry.
Activity
Find out more about client assets on the FCA website: www.fca.org.uk/firms/markets/
client-assets.
The FCA requires that intermediaries take the necessary steps to protect customers against
intermediaries’ inability to transfer premiums to insurers, or an amount of a claim or a return
premium to the insured.
One of the steps to be taken by intermediaries is to adopt client asset systems and controls.
If these systems and controls fail, it can cause serious financial detriment to customers and
damage to the reputation of the entire UK financial market. The aim of this regulation is to
minimise the risk of financial loss from firms failing and exiting the market, and to mitigate the
damaging effects of such failures on consumers.
A1 Broker funds
Brokers receive income in a variety of ways. This includes fees directly from their clients for
their services, as well as commissions, which are paid to the broker as part of the premium.
The broker must segregate their firm’s funds from clients’ and insurers’ money, which must
be held in a separate bank account written under trust.
The basis of how commission can be withdrawn is stated in each insurer’s terms of business
agreement (TOBA). Normally commission cannot be withdrawn by the broker until the full
premium has been paid by cleared funds. Earned commission must be removed from this
account at least every 25 business days or when a client money calculation is done,
whichever is the sooner.
Refer to
Refer back to Terms of business agreements (TOBAs) on page 4/7 for details of TOBAs
Chapter 6 Key financial issues facing insurance brokers 6/3
A2 Client assets
Brokers may receive monies from an insurer which belongs to their client; these are known
as client assets. These may be in the form of a claim settlement, where the insurer pays the
broker and the broker then passes the funds on to their client.
Normally, the insurer pays the client directly, but brokers who offer a full claims service may
arrange for the insurer to transfer the money to the broker first, allowing the broker to take a
more hands-on approach to claims management. If a broker has a delegated claims
authority from the insurer they may hold a special claim fund and pay the client directly,
within the terms of the agreement from this fund. The claim fund is provided by the insurer
for use exclusively for paying the claims of the broker’s clients in accordance with the terms
of the delegated claims authority.
Brokers may also receive money from the insurer in the form of return premium. A return
premium may be paid to a client if they make a change to their policy during the term of the
contract, which results in a reduction of their risk. This is known as a mid-term adjustment.
For example, a household client may call their broker to inform them that they have sold an
item of jewellery which was previously insured under their household contents policy. This is
likely to generate a return of the premium that was paid at the inception of the policy. The
return premium due to the client is a client asset and should be returned to the client without
delay. Of course, a client may also notify their broker that they have bought an expensive
piece of art and this may generate an additional premium, which the client must pay.
The FCA prohibits most brokers from holding client money, return premiums or claims
payments, unless agreed by clients who may wish for that money to be held against future
transactions. All client money must be held in a segregated bank account which cannot be
used by the broker. The account is simply a holding account for onward transmission to the
client. The insurer bears the risk of money being lost if the broker fails to transfer claims
money or return premiums where risk transfer takes place between insurer and broker. The
For reference only

potential for loss may arise if the broker engages in fraud. In the event of a failure of the
Chapter 6
broker to transfer money or return premiums, the insurer agrees to subordinate its interests
beneath those of the client.
Question 6.1
Which of these would not be classed as client assets?
a. A return premium from an insurer following a mid-term adjustment. □
b. A claim settlement from an insurer. □
c. An insurance premium. □
d. A return premium following cancellation of a policy. □
Activity
Find out the procedure your firm follows for paying clients’ return premiums. Is the process
fully automated or is there a manual process to follow?
Does your firm have a minimum timescale for paying return premiums?
What do you think happens to the commission your firm has received at the inception of
the policy when a return premium is sent to a client?
A3 Insurer funds
When clients pay their premiums, this money belongs to the insurer. As soon as the broker is
paid, the money becomes the property of the insurer and it cannot be refunded (even if the
client expressly wishes) unless the insurer consents. Just as client assets are held in a
separate account, so too must insurer funds be held in a trust bank account once cover
commences.
The FCA makes it clear that the different types of money (broker, client and insurer) may
only be placed in the same account, which could result in ‘co-mingling’, if the broker has the
insurer’s permission to do so. This agreement would be stated in their TOBA.
Some insurance brokers may be granted 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 the 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.
B Insurance Distribution Directive (IDD)

Insurance Distribution Directive
The requirements of the Insurance Distribution Directive 2016/97/EC (IDD) have
For reference only

applied to firms since 1 October 2018. This means that although the UK has now left the
Chapter 6
EU, the IDD is still in force in the UK as it is part of UK law.

The IDD sets out consumer protection provisions in insurance and the scope of regulation
includes all firms that sell, advise on, or conclude insurance contracts and those who
assist in administering and performing them, including those that shortlist as part of a
selection process (such as aggregators), or introduce insurance. However, just providing
general information about insurance products, insurers or brokers without collecting such
information has been excluded, as is providing data on potential policyholders to insurers/
brokers.
The key provisions of the Directive are:
• Professionalism. All firms engaged in any of the activities covered by the Directive
must possess appropriate knowledge and ability to complete their tasks and perform
their duties adequately, such as: the insurance market; applicable laws governing
insurance distribution; claims handling; complaints handling; assessing customer
needs and business ethics standards/conflict of interest management. Staff must
complete at least 15 hours of professional training or development per year.
• Commission disclosure. Pre-contractual disclosure of the intermediary and the
nature, not amount, of their remuneration (whether commission, fee or other type of
arrangement). This could be waived for contracts involving large risks or for
professional customers. The pre-contract disclosure regime extends to insurance
undertakings. Firms must state what type of firm they are (intermediary or insurer) and
whether they provide a personal recommendation. Firms that sell insurance on a non-
advised basis must ensure that the products they are selling fulfil the customers most
fundamental needs.
• New product governance requirements, which are largely in line with the FCA’s
product governance requirements.
• A new category of insurance settler called Ancillary Insurance Intermediaries. This
includes connected travel insurance providers that don’t sell or introduce insurance as
their main business, but still do so and therefore are subject to selling rules.
• New duties applicable to insurance companies that are selling products through
companies that are not authorised by the FCA.
• A requirement for all general insurance firms in the retail and small corporate market to
provide customers with Insurance Product Information Documents. An IPID is a
short, pre-contractual, non-personalised product summary document, the layout of
which is fixed and must follow closely what is prescribed in the IDD. One must be
issued to every retail customer purchasing a general insurance product, regardless of
the channel being used, ahead of closing a sale or renewal. The purpose is to allow
customers at the quotation stage to compare similar products offered by different
insurers in an easy-to-follow consistent way so they can see at-a-glance the
differences between products and make informed decisions. The requirement to
provide an IPID only applies to consumer insurance contracts. This requirement now
forms part of ICOBS 6.
One of the key requirements of the IDD is a policy summary, the ‘Insurance Product
Information Document’ (IPID). This is to help individual customers understand what’s
included in their cover and should be supplied at each quotation, renewal or for a mid-term
significant change. The IPID should be provided in addition to the current documentation.
C Retaining clients and finding new business
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As businesses, insurance broking firms are no different from other organisations, in that one
Chapter 6
of the main reasons they exist is to generate income. Indeed, for firms with shareholders,
growth is expected.
Some brokers have a very strong sales culture and the efforts of their staff are focused
towards the acquisition of new business. Others may concentrate on their existing clients;
the provision of excellent service with the aim of renewing as many policies each year as
possible.
In the late 1990s, many brokers sought to achieve growth by amalgamating with and
acquiring other brokers in order to increase the number of customers they managed.
Insurance brokers such as Towergate and Giles are examples of broker consolidators, who
built substantial businesses by buying out other, smaller brokers to gain a bigger market
share. As credit became less available after 2007, this trend slowed and now most brokers
achieve growth through new business and retaining their existing customers.
One of the best ways to achieve growth is through investment in sales. It can also be
effective to focus on retaining existing business. The next section looks at the key issues of
client retention and new business development.
C1 Client retention
There are highly competitive markets for some classes of business. Motor insurance is an
example of this; the insured may move their business between brokers in order to get a
better deal each year. This is known as ‘churn’. Other classes of business tend to be more
‘sticky’, that is, they tend to remain with the same broker at renewal. This may be due to the
complexity of the risk making it very difficult to move between brokers.
Skilled brokers will ensure that they do not give their clients any reason to look for a new
broker. They may do this through providing a high-quality service during the term of a
contract by being responsive to their client’s needs and, at renewal, by conducting a review
of the market to reassure their clients that they are still getting the best possible value. Many
clients will be content to pay a little more for a high-quality service. However, clients may
dispose of assets, or pass away, so it will never be possible for a broker to retain 100% of its
clients each year. The percentage of clients that do renew contribute to the broker’s renewal
retention figure.
The renewal retention figure is a key figure for brokers and most firms will be aware of their
retention figures for all their business units. Client retention of greater than 95% is a common
goal for insurance brokers. Retention indicates the level at which clients are satisfied with the
service provided as well as the quality and price of the products. Retaining clients over a
long period is financially beneficial as the costs associated with acquiring new clients can be
high. These costs include marketing and advertising as well as sales staff costs (who may be
incentivised financially to find new clients).
The broker may not be able to influence all of the reasons as to why a client may want to
move their business. However, they can certainly control the level of service they offer, which
is why it is so important to recruit and retain quality staff and provide an appropriate level of
training. Training and competence contributes directly to the provision of quality service
and, therefore, better retention of clients.
Broking firms need to ensure they invest in client service by employing quality staff and
providing them with adequate training, as well as investing in good IT and communications
systems.
Quality staff Service staff may have different character traits to sales staff. They should be
diligent and able to concentrate on details. A common analogy for service staff
is to liken them to a farmer who builds and cultivates a relationship.
Adequate training Training in terms of the products and also skills-based training, e.g. telephone
technique and communications skills.
Good IT systems and These are the tools the staff must use to deliver quality service.
communication
Firms should also seek to maintain a well-motivated and contented workforce.

Clients like continuity in staff because insurance broking is very much about developing and
For reference only

maintaining good relationships of mutual trust. A firm with a high staff turnover may,
Chapter 6
therefore, have a lower client retention rate. A good-quality workforce requires strong
leadership and management, and a team culture where everyone is valued and working
towards the same goals. Many firms believe their greatest asset is their staff. The same firms
may recognise the link between good quality staff and the retention of clients.
Consider this…
How does your firm seek to maintain or improve morale in the workforce?
Question 6.2
Why is client service so important to most broking firms?
a. It is more expensive to retain clients than find new ones. □
b. The regulator expects a minimum retention rate. □
c. Client service contributes directly to client retention. □
d. To avoid customer complaints. □
C2 New business
No insurance broker will ever be able to retain all its clients, therefore, in order to achieve
growth brokers need to find new clients. This is often referred to as ‘new business’.
Growth can also come from an existing client in the form of cross-selling (the sale of an
additional insurance to an existing client, for example, selling motor insurance to a
household insurance customer, and a new type of insurance, such as cyber liability), or up-
selling (selling the client more of the same product, for example, adding jewellery to a
household contents policy).
Some broking firms are very focused on finding new clients and achieve success in new
business. These firms are likely to have:
• A strong sales culture. All staff from board level and below understand the importance
of sales.
• An effective sales process. This is a set of simple techniques to achieve new business,
applied in a well organised, disciplined way.
• Good quality monitoring and management information. Firms may have a sales
database which is used to forecast new business and to help manage the sales process,
as well as providing key information such as client contact details.
• The right incentivisation of staff. Incentivisation is the financial (or other) reward for
sales staff when they achieve a sale. Typically, sales staff could command quite high
salaries because of their potential to bring in new business. Therefore, some brokers may
pay lower basic salaries and offer a share of the new income to the sales person. This
motivates sales staff to find new clients.
• The right staff. Sales staff tend to be quite different in character to service personnel.
They may be more outgoing, less detail focused and slightly more independent. The
common analogy for sales staff is to liken them to hunters who get their energy from the
‘hunt’ for the new opportunity.
• Senior management support. Acquiring new business can be expensive and time-
consuming compared with renewing existing business. The marketing, promotion and
incentivisation of staff can be expensive and have long lead times. Sometimes, in order
for a new business proposal to be competitive, fees have to be cut, so the business may
not be profitable during the first year. This kind of business acquisition is known as a ‘loss
leader’ and it may generate new income in the future. This requires strong managerial
support.
Many firms do not have separate sales teams. They expect all their general staff to be able
For reference only

to sell their products. However, specialist sales teams do allow firms to concentrate on new
Chapter 6
business in a structured way and they show that the broker recognises that sales and
service staff may have different skill sets. Some brokers may even employ specialist
telesales teams or pay telesales companies for leads. These teams are constantly calling
prospects and generating leads for others to follow up. If there is no relationship between the
broker and the prospect, the call is known as a ‘cold call’. Where leads are from existing
clients or from prospects where there is some form of relationship or recommendation, the
lead is known as a ‘warm’ one.
Some broking firms source their new business from introducers and there are a number of
regulatory procedures to follow if the lead comes from outside the company. Other firms may
have an ‘affinity’ relationship with a different organisation which has links with potential
clients.
Example 6.1
An example would be an insurance broker who specialises in insuring printing companies
which has links with an industry body, e.g. a printing federation whose members are
printing companies. Here, the broker may offer a share of their profits with the federation
group in return for an introduction.
Due to the cost of new business, it is always important to retain clients for as long as
possible. Therefore, as we have seen, both client retention and the acquisition of new
business are important and both require investment for an insurance broker to achieve
successful and sustainable growth.
Question 6.3
What are firms who achieve success in new business likely to have?
a. A large advertising budget. □
b. A strong sales culture. □
c. Sales staff paid on a commission-only basis. □
d. A focus on high quality service. □
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Chapter 6
Key points
Monies held by an insurance broker
• The FCA requires that intermediaries take the necessary steps to protect customers
against intermediaries’ inability to transfer premiums to insurers, or an amount of a
claim or a return premium to the insured.
• Brokers receive income in a variety of ways, including fees directly from their clients for
their services, as well as commissions, which are paid to the broker as part of the
premium. The broker must segregate their firm’s funds from clients’ and insurers’
money and pay the premium to the insurer before they take the commission.
Insurance Distribution Directive (IDD)
• The Insurance Distribution Directive (IDD) came into force on 22 February 2016 and is
a revision and replacement of the Insurance Mediation Directive 2002.
• The aim of the IDD is to make it easier for firms to trade across borders, strengthen
policyholder protection and provide a level playing field.
Retaining clients and finding new business
• In order to retain their clients, broking firms should invest in quality staff, good IT
systems and communication, and provide adequate training.
• To achieve growth, brokers need new clients.
For reference only
Chapter 6
Question answers
6.1 c. An insurance premium.
6.2 c. Client service contributes directly to client retention.
6.3 b. A strong sales culture.
For reference only

Chapter 6
Self-test questions
1. What are the three types of fund a broker is likely to hold?
2. Suggest four reasons why a broking firm may achieve success in new business.
For reference only
Chapter 6
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Conduct and culture
7
outcomes
Introduction
A Good conduct 6.1
B Culture in an insurance broking organisation 6.2
C Complaints 6.3
D Errors and omissions (E&Os) 6.4
E Mis-selling 6.5
Key points
Question answers
Self-test questions
For reference only

Learning objectives
• explain the importance of good conduct in relation to dealing with insurers and clients;
• explain the impact of culture on the way that business is conducted by an insurance
broking organisation;
• describe how insurance brokers handle complaints;
Chapter 7
• explain how errors and omissions occur, are reported and handled in insurance broking
organisations; and
• explain the issues relating to mis-selling of insurance products.
Introduction
In this final chapter we will look at one of the key issues in insurance broking today: the
conduct and culture of insurance broking business. In particular, we will explain the
importance of good conduct when dealing with insurers and clients and the impact of culture
on the way insurance brokers conduct their business. We will also describe how complaints
are handled and explain how errors and omissions occur, are reported and managed.
Finally, we will look at the issues relating to the mis-selling of insurance products. These
issues are not just internal ones for insurance brokers; they are very much in the public eye.
The way insurance brokers conduct their business – their values and goals – has an impact
on public opinion and the perception of the insurance broking market and the financial
market. It is perhaps fitting that this is the concluding chapter on this subject; the issues we
will consider are a strong focus of the Financial Conduct Authority (FCA) and of great
importance to the whole industry.
Key terms
Complainant Corporate culture Eligible complainant Ethics

Financial Inclusive customer Market conduct Mis-selling
Ombudsman Service outcomes
(FOS)
Resolution Strategic objectives Trust capital
A Good conduct
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In June 2014, the Chief Executive Officer of the FCA, Martin Wheatley, made a speech
entitled ‘Good conduct and market integrity’. In the speech he made it clear that the priority
of the FCA, following the economic crisis, was to emphasise the importance of conduct,
ethics and risk prevention in the financial services sector. He made the point that the reform
of conduct is building momentum on a global scale, and not just in the insurance industry:
All around the world, reform of conduct is dominating industry – to the point that
Chapter 7
we’re seeing financial centres actively competing on issues like market integrity
and cleanliness.
Activity
Read the transcript of Martin Wheatley’s speech, which is available on the FCA website:
bit.ly/2y5Fgxa.
In addition, within the FCA’s Principles for Businesses, Principle 5 gives guidance on market
conduct: the way brokers operate in the insurance market and interact with insurers. It
states that a ‘firm must observe proper standards of market conduct’. Also, Principle 6
outlines how brokers should interact with and respect their customers’ interests; it states that
‘a firm must pay due regard to the interests of its customers and treat them fairly’.
Conduct, in an insurance broking context, refers to the way brokers carry out their business,
in every interaction they have with their clients and insurers. In order to demonstrate good
conduct, insurance brokers must be open, honest and transparent. They must also meet or
exceed expectations, while generating trust.
In the following sections we will look at the importance of good conduct in relation to dealing
with clients and insurers, and the ways in which good conduct can be put into practice. The
law of agency and the regulatory framework mean brokers are required to demonstrate good
conduct but it is much more than that. Good conduct also makes good business sense and
can enhance brokers’ reputation and brand.
Good conduct is also closely associated with ethics. Ethical standards can be achieved
through doing what is right, not just what is required. As a professional body, the Chartered
Insurance Institute (CII) has produced a code of ethics which applies to all its members. The
Chapter 7 Conduct and culture 7/3
CII’s Code of Ethics may not have the force of law but it can impose penalties for failure to
comply. The Code is supplemented by a Financially Inclusive Customer Outcomes
companion guide.
On the Web
You can access the CII Code of Ethics by visiting: www.cii.co.uk/media/9223937/
cii_code_of_ethics.pdf.
The Financially Inclusive Outcomes companion guide can be found at: bit.ly/3OcCoVh.
Question 7.1
Which of the following best describes good conduct in an insurance broking context?
a. Being open, honest and transparent, and meeting or exceeding expectations while □
generating trust.
b. Being transparent with earnings. □
c. Following FCA guidance. □
d. Ensuring the fair treatment of customers. □
A1 Good conduct when dealing with clients
Insurance broking is a business of trust.
Brokers arrange insurance policies which are promises to pay, often at some distant point in
the future. From the insured’s perspective, the only time when they can truly test if the broker
For reference only

and insurer have kept their word is when they have a claim. Trust is, therefore, an essential
part of the business process and is built up every time the broker meets or exceeds client
expectations. That means brokers are very much in control of the level of trust their clients
have for them.
Many companies see trust as a commodity which must be earned and refer to it as ‘trust
capital’. Client trust in their broker is the result of good conduct, and this involves treating
clients fairly and paying due regard to their interests. If a client trusts their broker, they are
Chapter 7
more likely to continue to place their business with them. However, trust may take time to
build and it can be lost very quickly.
Good conduct can be shown in many different ways.
Some examples of the ways in which brokers can demonstrate good conduct when dealing
with clients include:
• provision of service excellence;
• high quality of advice and experience;
• transparency of earnings;
• good quality literature and documentation;
• efficient handling of complaints; and
• avoidance of errors and omissions (E&Os).
Reinforce
Refer back to The fair treatment of customers on page 5/10, and remind yourself of the
obligations the FCA places on insurance brokers in regard to the fair treatment of
customers.
A1A Service excellence

Trust is the result of good conduct and is generated when the broker meets or exceeds client
expectations. Service is a key area where client expectations can be met or exceeded.
Examples of the ways in which brokers can achieve service excellence include:
• always completing what has been agreed by the deadline;
• returning client calls and messages promptly;
• ensuring good communication at all times, in the manner that the client wishes to
communicate;
• knowing your client;
• ensuring procedures are in place to reduce mistakes (such as a ‘second pair of eyes’
check); and
• contributing to a client culture where the client’s needs come first.
Example 7.1
Exceeding clients' expectations
AB plc is a medium-sized insurance broker specialising in personal lines and small
commercial business. As the service manager of the servicing division, you have become
concerned over the following:
• low levels of client retention;
• high turnover of staff;
• the increasing amount of time you are spending dealing with customer complaints;
• a growing back-log of work due to the number of documentation mistakes being made;
and
For reference only

• an awareness that some staff are quite rude to clients on the telephone.
You have decided to introduce a staff training programme that is intended to address
these issues. In conjunction with your training officer, you have decided to focus on the
following client service skills:
• The importance of client integrity: never promising anything that cannot be delivered in
order to keep a client happy in the short-term.
Chapter 7
• The importance of managing work-flow and an efficient diary system to ensure client
calls and messages are answered in chronological order.
• Communication training, to include role-play in telephone conversations, dealing with
difficult customers and knowing how to put the customer first.
You are also aware that there are no current procedures in place to check letters and
documentation before they are sent to clients. A system could be introduced where team
leaders check all work before it leaves the department, or a buddy system is created,
where account managers work in pairs to check each other's work.
You are also considering establishing a client service level agreement form where
minimum service standards are documented and sent to all clients, which would include a
commitment to respond to any queries within certain timescales.
Finally, poor quality service could be an indication of an unhappy workforce. The high
turnover is also an indication that your staff morale may be low. What kinds of things do
you think may help improve staff motivation and contentment in their work?
Where a broker strives for service excellence, they will generally demonstrate good conduct.
Despite this, service is also a common area where brokers fail to meet client expectations.
This can lead to the loss of that client’s business or a complaint that could damage the
reputation of the broker.
Reinforce
The delivery of good client service has also been discussed in almost every chapter of this
study text, so it may be useful to refer back to the following topics before moving on:
• Chapter 1: the benefits of clients using insurance brokers.
• Chapter 2: the way brokers meet client needs.
• Chapter 3: the other services insurance brokers could offer their clients.
• Chapter 4: how contract and agency law imposed obligations of brokers to deliver
quality service.
• Chapter 5: how the regulator imposed additional requirements on brokers to ensure the
customer was protected and placed at the centre of a broker’s operation.
A1B Transparency of earnings

A broker’s financial integrity is essential in generating their clients’ trust. Being open about
what you earn is an important element of this. There are regulatory rules regarding
commission disclosure but some brokers choose to disclose more than required by the FCA
and do not accept certain types of remuneration. These actions are examples of good
conduct.
Reinforce
Refer back to Broker remuneration on page 1/21, to remind yourself of the topics of broker
remuneration and transparency.
A1C Quality of literature and documentation

The promise to pay and even the services provided by a broker are intangible. Literature and
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documentation are tangible and indicate the quality of the broker’s service. It is important
that documentation is issued without errors; something as simple as spelling a name wrong
may not only be problematic in the event of a claim, it can also lead to a reduction in trust.
Procedures should be in place to ensure documentation is not issued until it has been
checked.
Clearly, brokers are in business to make a profit, but the cheapest marketing materials may
Chapter 7
not be the best and it can be worth investing in sales and marketing material as well as
quality documentation. Where the insurer provides documentation, brokers should check it
for errors and whether they are satisfied with the quality of the paper or the printing. For
example, they should discuss this with the insurer as the broker will be judged by the client
on the documents they are issued.
A1D Efficient complaint handling
Even with the highest service levels, it is inevitable that clients will make a complaint at some
stage. The way that a complaint is handled and managed, regardless of fault or even the
outcome, will either increase the level of trust or decrease it depending on the client’s
expectations of what they think the outcome should be. If a client complains, the broker must
have a robust and effective complaints procedure in place and the client should be dealt with
courteously and efficiently.
A1E Avoidance of errors and omissions (E&Os)
Service excellence and good procedures and practices, including suitable experience and
training, will reduce the risk of E&Os. However, as is the case with complaints, it may never
be possible to totally eliminate the risk of an E&O occurring. The key is to understand how to
deal with this effectively and learn from any mistakes.
A2 Good conduct when dealing with insurers

Although brokers are agents of the insured and not the insurer (except in a delegated
authority situation), it is still important that brokers display good conduct in all of their
dealings with insurers.
When entering their client into a contractual relationship with an insurer, the broker should
act in good faith. The insurer relies on the broker to give it all of the underwriting information
and not to present the risk in a dishonest way. For this reason, it is important that the broker
obtains all of the material facts from their client. If the insurer discovers that the risk has been
misrepresented, it may damage the trust between the insurer and the broker.
Refer to
Refer back to Material facts on page 2/5
Consider this…
A broker specialising in household insurance is contacted by a new client. The broker fails
to explain that all recent losses must be disclosed, even those that did not result in a
claim. The client discloses a recent theft claim, however, does not mention an escape of
water claim that was reported, but was settled in the end by the insured and not
the insurer.
What impact will this have on the trust between the insurer and the broker if, as part of the
underwriting process, the insurer subsequently discovers the undisclosed escape of water
on a central claims database?
Do you think it may influence the insurer in any way with future submissions from
this broker?
One area where brokers need to display good conduct is in their management of an insurer’s
money. Brokers must ensure they keep to any agreed payment dates for the transfer of
funds and should make sure they collect the premiums from their clients efficiently and within
any agreed timescales. Once again, good conduct enhances reputation and a broker who is
seen as reliable and trusted by their insurers will benefit from the best insurer terms, and this
will, in turn, benefit their clients.
For reference only

Reinforce
Refer back to Insurer funds on page 6/4 and Insurance Distribution Directive (IDD) on
page 6/4, and remind yourself of the strict regulatory rules relating to the brokers’ handling
of insurer money.
B Culture in an insurance broking

Chapter 7
organisation
Corporate culture refers to the shared values, attitudes, standards and beliefs that
characterise members of an organisation and define its nature. Corporate culture is rooted in
an organisation’s goals, strategies and structure, and its attitudes to staff, customers,
investors and the greater community. An organisation’s culture should be established at the
very highest level by its board members but it must also be shared by every employee.
Different broking firms may have different cultures.
Some organisations are very focused on growth and may have a sales culture instilled at
every level. Others may concentrate on service and have a strong ‘client first’ culture. There
may be a culture of innovation, where employees are encouraged to think outside of
established standards; this culture is prominent in IT organisations. A ‘green’ culture may
also exist, where the organisation’s impact on the environment – their ‘carbon footprint’ – is
carefully considered. This type of culture has become quite prominent among businesses in
recent years.
B1 The impact of corporate culture

A company with a strong corporate culture will be very focused on its overall aim and its
strategic objectives will be known and understood by everyone in the company. Strategic
objectives are set by the senior management team at board level and tend to be long-term
goals. Strategic objectives provide an overarching purpose for every activity at all levels.
Activity
Find out what your firm’s strategic objectives are and think about how this affects the firm’s
culture.
Insurance brokers are no different from other organisations in that the type of culture they
have is decided by the board of the company. The strength of the culture is dependent on
the level at which the culture is understood and shared by the employees. Culture is difficult
to establish and how it is instilled is largely a management issue and beyond the scope of
this study text. However, culture is not just an issue for senior managers; it is something that
every employee contributes to.
Companies with a strong corporate culture are likely to:
• have a clear strategic goal, so that their staff and resources can focus on achieving it;
• have an effective method of communicating the strategy to staff;
• be able to monitor activity and adapt processes and procedures accordingly;
• set clear targets and goals that are related to the strategic goal; and
• reward success in relation to achieving the strategic goal.
Culture is important because it influences the way that a firm deals with its clients and
insurers and also the way it is perceived by the public. The FCA recognises the importance
of public opinion as it influences overall confidence in the financial market. Therefore, it is
important for brokers to identify and adopt a positive culture which will influence everything it
does and help to establish its reputation and brand.
Question 7.2
A company with a strong corporate culture is unlikely to do which one of the
For reference only

following:
a. Provide a clear strategic goal. □
b. Reward success. □
c. Be very focused on its overall aim and its strategic objectives will be known □
and understood by all of those within the company.
Chapter 7
d. Regard monitoring activity as unimportant. □
C Complaints
The FCA places expectations on authorised firms to embed the principle of the fair treatment
of customers (as identified in the FCA’s Principle 6) into the product life cycle. One of the key
ways the FCA expects the fair treatment of customers to be part of a firm’s culture and day-
to-day operations is through the establishment of a ‘robust and auditable procedure for
handling complaints’. In this section, we will identify what a complaint is and how brokers
should handle them, including the regulatory requirements.
Refer to
Refer back to The fair treatment of customers on page 5/10
C1 Definition of a complaint
The FCA defines a complaint as any oral or written expression of dissatisfaction, whether
justified or not, from, or on behalf of, a person about the provision of, or failure to provide, a
financial service or a redress determination, which alleges that the complainant has suffered
(or may suffer) financial loss, material distress or material inconvenience.
Reinforce
For more information on the FCA’s definition of an ‘eligible’ complainant see Complaints
procedures on page 7/9 of this chapter.
All complaints from eligible complainants are subject to FCA complaints-handling rules and
eligible complainants have a right of access to the Financial Ombudsman Service (FOS).
For non-eligible complainants, firms must have in place, and operate, appropriate
procedures for registering and responding to the expression of dissatisfaction.
A redress determination is defined by the Financial Conduct Authority as:

...a written communication from a respondent under a consumer redress scheme which:
• sets out the results of the respondent’s determination under the scheme;
• encloses a copy of the Financial Ombudsman Service’s standard explanatory leaflet;
and
• informs the complainant that if he is dissatisfied, he may now make a complaint to the
Financial Ombudsman Service and must do so within six months.
Glossary, FCA Handbook
In summary, it is clear that a complaint does not have to be made in writing and that the
client does not have to say, ‘I am making a complaint’, for a complaint to be made.
C2 Regulatory requirements
The FCA Handbook includes the rules and guidance for brokers in relation to complaints.
The FCA requires all brokers to:
• have a formal procedure for dealing with complaints;
• inform their clients of this procedure (including the address and telephone number to
write to or call). They must also inform their clients of how to complain to the FOS; and
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• manage complaints in accordance with the stated procedures, which the broker should
document in the authorised firm’s compliance manual.
Information regarding a broker’s complaints procedure is likely to be included in their terms
of business agreement (TOBA).
Activity
Chapter 7
Ask for a copy of your firm’s complaints procedures and read through them before
completing this section.
Many brokers have adopted complaints procedures which are wider in scope than is strictly
required by regulation. This is because they recognise that it is good commercial practice to
handle complaints efficiently and, when successful, it is a method of meeting or exceeding
clients’ expectations.
Firms may also wish to resolve any complaints before they escalate and avoid exposure to
E&O claims. As well as being required to report complaints, brokers will also wish to look for
any emerging patterns or recurrences to enable them to remedy any issues with their
procedures or systems and simply to improve standards. Complaints are not good for a
broker’s reputation and neither do they enhance customer loyalty.
It is worth remembering that a complaint gives a firm the opportunity to do two
important things:
• put things right for the client in the hope that they will retain their business; and
• identify possible problems within their organisation that they can improve.
It can be argued that someone who makes a complaint in some ways cares about the
business, which is why they have taken the trouble to do so. Others may decide to go
elsewhere without giving a reason and, therefore, the firm doesn’t know why or how they
could improve.
C3 Complaints procedures
The following diagram illustrates a typical complaints procedure, but every firm may have a
slightly different approach:
Step 3:
Step 1: Investigate and respond
Identification – is there a Step 2: within timescales and
complaint? Report and record. decide who should be
responsible.
Step 4:
Step 6: Step 5: Resolution in an
Make improvements. FOS involvement? appropriate, timely and
fair way by an
independent person.
Step 1: Identification
The most important part of the process is that a complaint is recognised. The definition of a
complaint should be understood by all staff so that it can be managed effectively.
The following issues should also be understood:
• Is this a genuine complaint or just a simple service issue?
• Is this a simple complaint? (Is it a complaint that can be resolved by the person receiving
the complaint, to the client’s satisfaction, within three days, and at no cost?)
• Is it a complex complaint? (Is it a complaint which cannot be resolved by the person
receiving it, or is unlikely to be resolved within three days?)
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Consider this…
i. A client complains that you promised to send them their policy document and it is still
on your desk. Is this a simple or complex complaint?
ii. A client complains that they asked for cover for their new factory last year and there is
no mention of it in the policy they have just received. According to your firm’s
complaints procedure, what should you now do?
Chapter 7
Step 2: Report and record
All complaints will need to be recorded and kept on file or on a master complaints log. If it is
a complex report, management must be informed.
Step 3: Investigate and respond
All complaints must be investigated and followed up within timescales established in the
firm’s procedures. When a client makes a complaint, they must be kept well informed and
reassured that it is being investigated. Here, the complaint will be allocated to an individual
to take full responsibility. It may be a department head, or a specialist complaints team, but it
must be a person independent of the complainant (the person who made the complaint).
Step 4: Resolution
This must be done in an appropriate, timely and fair way by an independent person. The
client may not accept the resolution and they should be informed of their options if this is
the case (i.e. to complain to the FOS).
Step 5: The FOS
The FOS is a service in the UK which settles disputes between businesses providing
financial services and their customers. It is an independent organisation set up by the
Government and its decisions are independent of the court system and demonstrate the
Ombudsman’s expectations of fairness of treatment for the consumer.
Step 6: Make improvements
The final stage is also a key one. Is there a pattern of complaints or repetition of the same
issues? If so, it may be necessary for the broker to review their procedures or systems.
Good brokers will learn from the complaints made against them and will strive to avoid
similar complaints in the future.
Question 7.3
Which of the following statements is true in relation to handling complaints?
a. A complex complaint is always made in writing. □
b. A complex complaint involves losses in excess of £1,000. □
c. A simple complaint does not need to be reported. □
d. A simple complaint can be resolved within 24 hours. □
The Financial Ombudsman Service (FOS) is a free, independent and impartial service that
deals with unresolved disputes. Membership is compulsory for all authorised firms, including
intermediaries.
The full rules and guidance relating to the handling of complaints, and on the operation of the
FOS, are contained in the FCA Handbook in the Dispute Resolution: Complaints (DISP)
Sourcebook. The FCA requires all firms to have a written complaints procedure. This
procedure must include a notification to the complainant that they have the right to take the
complaint to the FOS if they are not satisfied with the firm’s final answer.
The FOS only deals with disputes from eligible complainants. The list of eligible
complainants includes:
• consumer;
• micro-enterprise with fewer than ten employees and a turnover or balance sheet total of
no more than €2m*;
• charities with an annual income of less than £6.5m;
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• trustees of trusts with a net asset value of less than £5m;
• small businesses with an annual turnover of less than £6.5m and fewer than 50
employees or a balance sheet total of less than £5m; or
• guarantors.
*(This value is in euros as ‘micro-enterprise’ is an EU-defined term.)
Before a complainant can take their complaint to the FOS they should have exhausted the
Chapter 7
internal complaints procedures within the organisation or intermediary, and still be

dissatisfied with the outcome. Any legal proceedings that are under way must be withdrawn
prior to the complainant approaching the FOS as the FOS will not become embroiled in legal
proceedings.
The complainant can refer their complaint to the FOS within the earliest of:
• six months of the date on the firm’s letter advising the claimant of its final decision
regarding the complaint;
• six years after the event complained about; or
• three years after the complainant knew, or should have known, that they had cause for
complaint.
Once these have expired, the organisation or intermediary can object to the FOS taking on
the complaint on the grounds that it is ‘time-barred’. The FOS is able to consider complaints
outside these time limits in exceptional circumstances, such as cases involving
pension transfers and opt-outs. It can also review cases outside the time limits if the
organisation agrees.
The FOS can require the parties to the complaint to produce any necessary information or
documents and failure to do so can be treated as contempt of court. All authorised firms
must cooperate with the FOS. The FOS must investigate the complaint and aim to answer
the complaint within three months. It may give the parties an opportunity to make
representations and then hold a hearing. Most disputes handled by the FOS are resolved
through mediation or informal adjudication by a caseworker or adjudicator. However, both
parties have a right of appeal to the initial outcome, in which case one of the panel of
ombudsmen will make a final decision.
The FOS will reach a decision based on what is fair and reasonable in all the circumstances,
taking into account the law, FCA rules and guidance and good industry practice, including
relevant ABI statements and codes of practice. The FOS is not bound by the law or legal
precedent and will make a judgment on the merits of each case. The aim is to ensure that
customers are treated fairly and that the law is not used as an excuse to avoid paying fair
claims. However, the FOS does aim to be consistent in the way it deals with particular types
of complaints.
Redress can be awarded in two ways:
• A ‘money award’, telling the firm what specific sum of money it should pay the customer
to cover any financial losses they have suffered as a result of the problem they have
complained about. The maximum monetary award the FOS can require a firm to make to
a complainant is:
– £375,000 for complaints referred to the FOS on or after 1 April 2022 about acts or
omissions by firms on or after 1 April 2019; and
– £170,000 for complaints referred to the FOS on or after 1 April 2022 about acts or
omissions by firms before 1 April 2019.
The FOS may recommend a higher figure, if appropriate, but this will not be binding on
the firm. Lower figures exist for complaints arising from earlier dates.
On the Web
You can view the figures here: www.financial-ombudsman.org.uk/consumers/expect/
compensation.
• A 'directions award', telling the firm what actions it needs to take to put things right for its
customer. This could include, for example, directing the business to:
For reference only

– pay an insurance claim that had earlier been rejected;
– calculate and pay redress according to an approach or formula set by the regulator;
and/or
– apologise personally to the customer.
The decision (with reasons) must be notified in writing to the complainant and the
respondent (the firm about which the complaint is made). The complainant must then accept
Chapter 7
or reject the decision within the time limit specified by the FOS.
If the complainant accepts the decision it is binding on the respondent. If the complainant
rejects the decision it is not binding and they are free to pursue the matter in court. If the
complainant does not respond to the FOS’s decision letter it is treated as a rejection and the
respondent is not bound by the decision.
The FOS is funded by both:
• a general levy paid by all firms; and
• a case fee payable by the firm to which the complaint relates.
C4 Complaint reporting
Firms have an obligation to report complaints to the FCA. They are required to keep a
register, retaining all files for three years from the date of the complaint. Full details of the
complaints which have been investigated are required so that analysis can be conducted.
C5 Time issues
The FCA rules provide compulsory time limitations for dealing with complaints. Every
complaint must be acknowledged promptly. If a complaint cannot be satisfactorily resolved
within eight weeks of receipt, firms must provide a final or written response which the client
can either accept or take to the FOS.
D Errors and omissions (E&Os)

E&O claims occur where the broker has made a mistake that has caused their client to suffer
a loss. The client is indemnified by the insurance broker’s E&O insurance policy.
There are three good reasons for brokers to take care to avoid E&O claims:
• they are time-consuming, expensive to deal with and damaging to their reputation;
• they imply fault with the firm’s regulatory compliance standards; and
• they cost the business money:
– the policy excess,
– unrecoverable costs in defending the claim, and
– increased E&O insurance premium following the notification.
Not every complaint results in an E&O claim; however, most E&O claims come to light
following a complaint by the client, usually after a claim. There are some similarities in the
ways complaints and E&O claims are handled.
In this section we will look in more detail at:
• how E&O claims arise, providing some examples of key areas;
• how E&O claims can be prevented; and
• approaches to dealing with E&O claims.
Firstly, we should make it clear that E&O claims are rare. Generally, a mistake will come to
light before there is a loss – either it is spotted by the broker (perhaps picked up on an
internal or external file audit) or the client queries the situation (maybe in the form of a
complaint) and corrective action can be taken.
D1 How E&O claims arise
For reference only

An E&O claim is likely to follow if the broker has made a mistake which leads to a client
having an uninsured loss when they thought the loss was insured. Generally there are two
reasons for this, either:
• the policy wording does not say what the client thought; or
• the policy does not do what the broker said it would do.
Chapter 7
The insurance policy is a legal document evidencing the contract between the insured and
the insurer, and it documents the insurer’s promise to pay in the event of a claim. The
importance of this document is highlighted in ICOBS 6, where the FCA specifically refers to
the provision of product information.
Refer to
Refer back to ICOBS 6: Product information on page 5/15
The Contract Certainty Code of Practice provides a hard copy explanation of what an
insurance product will actually do and when. A problem arises if there is a loss where the
documentation has not been fully provided, or if the broker told the client that the cover
would do more than the policy wording says it would. This is why it is so essential for brokers
to document and confirm in writing, any advice about cover.
Typical examples of mistakes that have led to E&O claims include:
• Documentation failures include failing to confirm important matters in writing by letter or
email to either insurers or clients.
• The broker’s failure to inform the insurer of a material fact that was disclosed by
the client.
• The broker’s failure to appreciate the extent of cover (there may be restrictions and
limitations and these must be explained to the client fully).
• Non-compliance with warranties which were not brought to the attention of the clients,
including the repercussions of non-compliance.
• Lack, or inaccurate, explanation of the terms to the client.
• The broker’s failure to appreciate potential consequences for the insured.
• Failures in management and supervision.
• Acting beyond their powers, for example, binding insurers to risks beyond their authority.
Activity
Ask your colleagues if they know of any other examples of E&O claims in your firm or
even potential E&O claims that were avoided.
D2 Prevention of E&O claims

The occurrence of E&O claims can be reduced by effective risk management, quality
procedures (which include regular file audits) and good management. There are three key
principles for reducing the likelihood of an E&O claim and their impact when they do occur:
• Right first time. If the task is done correctly the first time, claims will not arise. The focus
should be on doing things correctly and not cutting corners, which may cause more work
later on.
• Always ask. Never be afraid to ask if a problem is beyond your knowledge or
competence. Clients and insurers will respect you more if you ask a more experienced
member of staff and give them a correct answer promptly, rather than guessing and
giving a wrong answer.
• Put it in writing. If something is not in writing, it is hard to prove and a task may be
forgotten. Always record conversations and instructions in writing and send a copy to the
client or insurer promptly. Keeping files up to date is also essential and will allow those
For reference only

checking the file to spot a mistake before a claim occurs. It is also important to ensure
that any changes in cover are fully documented.
Question 7.4
How can the occurrence of E&O claims be reduced?
□
Chapter 7
a. By moving to a paperless office.
b. By good risk management and quality procedures. □

c. By asking the insurer to produce insurance documentation. □
d. By increasing the number of face-to-face meetings. □
D3 Dealing with an E&O claim
There are four fundamental rules for brokers when dealing with an E&O claim:
1. Follow set procedures stringently. Set procedures will have been written as a result of
previous experience and should be trusted.
2. Do not conceal a problem or try to resolve it before it is discovered. You must raise the
issue immediately. The longer a problem is avoided, the higher its potential for damage.
3. Be honest and open about the situation.
4. Engage your own professional indemnity insurers at the earliest opportunity and work
with them in resolving the problem.
These rules apply to dealing with any complaint and implementing these rules can be
considered as displaying good conduct and ethical behaviour.
E Mis-selling
In March 2014, the FCA published a report on general insurance ‘add-ons’ – the peripheral
cover provided in addition to main insurance coverage, or ‘primary products’ – for example,
legal expenses cover for household insurance, or breakdown cover being sold as an ‘add-on’
with a motor policy. The report was published because the FCA sought to address the
central issue of mis-selling of products in the financial services industry and, to this end, it
focused its attention on good conduct within firms.
The provision of adequate advice to the client to allow them to make an informed decision
about an insurance product is a key principle within the FCA’s report.
Mis-selling a product means that either not enough information is provided, or perhaps more
seriously, incorrect advice is given, either deliberately or negligently, for a product not in line
with a client’s demands or needs.
It was perhaps the scandal of the mis-selling of payment protection insurance (PPI) by UK
banks in the 1990s that influenced the entire regulatory perspective on conduct risk.
According to the FCA, the PPI scandal has cost banks more than £14bn so far. This is the
money that they have had to refund to clients or have spent on legal fees and compensation.
The FCA requires companies to carefully consider the findings of the report and it has
stated that:
If there are things that firms can improve for their customers having read the
reports, then we would encourage them to act sooner rather than later.
There can be no doubt that mis-selling is a key issue for the FCA and many of the regulatory
rules that affect the way brokers do business are a result of its desire to avoid any future
scandals like the mis-selling of PPI. But what does this mean for insurance brokers?
Mis-selling goes to the very heart of the role of the insurance broker. Brokers should know
For reference only

their clients, uphold their interests and make sure they have a clear understanding of the
client’s demands and needs before sourcing appropriate cover and then providing the client
with all the information they need to make an informed decision.
Activity
Look at the financial press, the business pages and industry publications and see if you
Chapter 7
can find other examples outside general insurance of mis-selling products and services.
Key points
Good conduct
• Conduct, in an insurance broking context, refers to the way brokers carry out their
business, in every interaction they have with their clients and insurers. In order to
achieve good conduct, insurance brokers must be open, honest and transparent. They
must also meet or exceed expectations, while generating trust.
• There are a number of ways in which brokers can demonstrate good conduct when
dealing with their clients.
• A broker’s financial integrity is essential in generating their client’s trust. Being open
about earnings is an important element of this.
• It is important that brokers display good conduct in all their dealings with insurers.
Culture in an insurance broking organisation
• Corporate culture refers to the shared values, attitudes, standards and beliefs that
characterise members of an organisation and define its nature. It is rooted in an
organisation’s goals, strategies and structure, and its attitudes to staff, customers,
investors and the greater community.
Complaints
• The FCA has defined what is meant by a complaint. It does not have to be in writing.
• The FCA requires brokers to respond to complaints in specific ways to ensure the fair
treatment of customers.
For reference only

• It is good commercial practice to handle complaints efficiently and brokers will have a
complaints procedure for dealing with complaints.
Errors and omissions (E&Os)
• E&O claims occur where the broker has made a mistake that has caused their client to
suffer an uninsured loss.
Chapter 7
• E&O claims can be avoided or their impact reduced by getting things right the first
time, always asking if in doubt and by putting everything in writing.
Mis-selling
• Mis-selling a product means that either not enough information is provided, or perhaps
more seriously, incorrect advice is given, either deliberately of negligently, for a product
not in line with a client’s demands or needs.
• Mis-selling is a key issue for the FCA and the recent PPI scandal has featured
prominently in the news.
Question answers
7.1 a. Being open, honest and transparent, and meeting or exceeding expectations
while generating trust.
7.2 d. Regard monitoring activity as unimportant.
7.3 d. A simple complaint can be resolved within 24 hours.
7.4 b. By good risk management and quality procedures.
For reference only

Chapter 7
Self-test questions
1. List the key ways in which brokers can demonstrate good conduct when dealing with
their clients.
2. Identify four ways in which brokers can achieve service excellence.
3. List four characteristics that companies with a strong corporate culture are likely
to have.
4. What is the FCA's definition of a complaint?
5. What are the FCA's rules for brokers in relation to complaint handling?
6. State three reasons for brokers to take care to avoid E&O claims.
7. List four examples of mistakes that may lead to E&O claims.
8. What are the four fundamental rules for brokers when dealing with E&O claims?
For reference only
Chapter 7
For reference only
i
Chapter 1
self-test answers
1 An independent intermediary conducts insurance mediation without being
contractually tied to any other organisation. Insurance brokers are independent
intermediaries. Intermediaries who are not independent are contractually tied to one or
more organisations, such as insurers, and are authorised to conduct insurance
mediation on behalf of the organisation they are tied to. Examples include solicitors,
estate agents and travel agents.
2 Four from:
• Convenience.
• Expert knowledge.
• Independent quotation.
• Complexity of product.
• Assistance with claims.
• Existing relationship or connected business.
• Other services offered.
3 Four from:
• Global firms.
• UK-only based.
For reference only

• Consolidators.
• Niche sector.
• Wholesale.
• Reinsurance.
• Online.
• Lloyd's.
4 The three fundamental factors which distinguish Lloyd's brokers from other insurance
brokers are:
• the market in which they operate;
• their methods of transacting business; and
• many of the risks they place.
5 The purposes of reinsurance are to smooth peaks and troughs in claims experience,
to protect the portfolio of risks being insured, to improve customer service and support
insurers entering new areas of business.
6 The retail insurance broker acts directly for their clients, the insured.
7 Four methods are:
• By class.
• By trade.
• By client size.
• By premium size.
8 The traditional broking services are: reviewing client needs, selecting insurers,
negotiating terms with insurers, providing advice, negotiate renewals, advising and
assisting clients with claims, design and operation of insurance programmes.
ii I10/October 2022 Insurance broking fundamentals
9 Five from:
• Property surveys.
• Business continuity plans.
• Business interruption reviews.
• Health and safety.
• Liability surveys.
• Motor fleet risk management.
• Environmental risk surveys.
• Post-loss control surveys.
• Disaster recovery surveys.
10 Personal lines, commercial and specialties.
11 Complexity of risk, size and location of risk and availability of cover mean that some
risks are more suited to insurance brokers.
12 Four from:
• Client service.
• New business.
• Broking.
• Claims.
• Management.
• Compliance.
• Product development.
• Back office functions.
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iii
Chapter 2
self-test answers
1 The process is known as establishing a client's 'demands and needs'.
2 The broker must provide:
• an accurate specification of cover (the exact cover required, including the class of
business, commencement date, sums insured and limits of indemnity, as well as
the policy wording that is to be used); and
• all material underwriting information (this varies in complexity between risks).
3 Three factors from:
• Regulation.
• Financial security.
• Class of business.
• Administration.
4 Three objectives from:
• Convey the terms accurately and concisely.
• Ensure the client understands the cover and the terms and conditions that may
apply.
• Ensure that the client understands where the cover may not match their
requirements.
For reference only

• Provide a record of the advice to the client.
• Bring special payment or standard credit terms to the client's attention.
• Provide full details of the insurers.
5 The suitability statement needs to record the client's demands and needs, how the
recommendation addresses these needs, and the reasons behind the
recommendation.
6 Brokers can handle claims in the following ways:
• No service.
• Claims advocacy role.
• Full claims service.
• Delegated authority claims handling.
7 Four activities from:
• Advising the client as to whether the claim is insured or not.
• Giving immediate notification of losses to insurers.
• Advising the client of their rights and obligations under the policy.
• Arranging for the completion of appropriate claims forms.
• Ensuring that where necessary, adjusters are appointed and briefing the client on
the role of the adjuster.
• Assisting the client in preparing the necessary documents and information in
support of the claim in order to best present the claim to the insurer.
• Collecting claim payments from insurers.
• Attending site meetings with the adjuster and the insurer's personnel.
8 Opportunistic fraud is where the individual or firm exaggerates or inflates a genuine
claim to increase the value of a payout. In some cases an entire claim may be
fabricated.
iv I10/October 2022 Insurance broking fundamentals
9 Four issues from:

• Risk retention.
• Packages and combined policies.
• Programme term.
• Limits.
• Specialist cover.
• Insurers.
10 A hard market is where the capital markets invest less, leaving insurers less capacity
to write business and, therefore, become more selective over which risks to underwrite
and charge a higher premium for those they decide to take on.
11 The correct answer is b.
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v
Chapter 3
self-test answers
1 Risk management is the identification, analysis and economic control of those risks
which can threaten the assets or earnings capacity of an enterprise.
2 Benefits include:
• a reduction in the potential for loss by identifying and managing hazards;
• provision of greater shareholder confidence in a company's ability to manage its
risks. For companies quoted on the stock market there is a legal requirement to
identify all significant risks to which the business is exposed and to explain in the
annual report how these are being managed;
• a disciplined approach to quantifying risks; and
• a potential reduction in insurance premiums where an insurer can see that a
company is positively engaged in managing its risks.
3 Eight from:
• Property surveys.
• Business continuity planning.
• Business interruption reviews.
• Health and safety consultation.
• Liability surveys.
For reference only

• Motor fleet risk management.
• Environmental risk surveys.
• Post-loss control surveys.
• Disaster recovery services.
4 Alternative risk transfer is a generic phrase to denote various non-traditional forms of
(re)insurance and techniques where risk is transferred to the capital markets. More
broadly it refers to the convergence of (re)insurance, banking and capital markets.
5 There are five steps in the process of operating a delegated authority scheme:
• Step 1 – Agree the business case.
• Step 2 – Agree authority.
• Step 3 – Operate the agreement.
• Step 4 – Ongoing interaction.
• Step 5 – Audit and monitoring.
6 Insurers can delegate underwriting, credit control, document issuance and
management, claims and/or recoveries.
vi I10/October 2022 Insurance broking fundamentals
Chapter 4
self-test answers
1 Four from:
• Establish their client's needs.
• Negotiate with insurers on their client's behalf.
• Take instructions from their client to place insurance.
• Negotiate with an insurer in the event of a claim.
• Make a mid-term adjustment to a client's policy.
• Cancel an insurance policy on their client's instructions.
• Negotiate a renewal.
• Provide advice and make recommendations to their client.
2 The law of agency requires brokers to:
• perform all their principal's lawful instructions and do this in a timely fashion – the
duty of obedience;
• exercise reasonable skill and care in the performance of their principal's
instructions – the duty of due skill and care;
• act at all times in the best interests of their principal, to avoid conflicts of interest
and to disclose to their principal fully any circumstances which may give rise to the
appearance of a conflict – the duty of good faith; and
For reference only

• account to their principal for all monies they may have received on their principal's
behalf and keep a record – the duty of accountability.
3 Situations when a broker may need to manage a conflict of interest include:
• when operating a delegated authority agreement;
• if a broker is owned by or has close links to an insurer;
• when a broker is both the direct placing broker and the reinsurance broker;
• when accepting contingent commissions or overriders;
• when accepting inducements; and
• when acting for two or more clients with similar interests.
4 TOBAs should include:
• regulatory Information;
• the broking firm's terms of business;
• details of the services provided; and
• the broker's remuneration.
5 A risk transfer TOBA is used where the insurer has given the broker permission to
hold funds on its behalf. A non-risk transfer TOBA does not include this permission.
vii
Chapter 5
self-test answers
1 The FCA's main areas of regulatory responsibility in respect of insurance broking firms
are the authorisation of insurance brokers (prudential regulation) and conduct
regulation.
2 The FCA defines insurance mediation as the activities of introducing, proposing or
carrying out any other work preparatory to the conclusion of contracts of insurance or
of concluding such contracts, or of assisting in the administration and performance of
such contracts, in particular in the event of a claim.
3 The four main activities that are regulated in terms of insurance broking are:
• arranging the purchase of general insurance policies;
• advising on insurance purchases;
• dealing as agent; and
• assisting in the administration and performance of insurance policies.
4 When authorising firms, the FCA will focus on the firm's business model, governance
and culture.
5 Should an authorised insurance broker fall short of the regulator's expectation, the
FCA has the power to:
• withdraw that firm's authorisation;
• discipline both individuals and firms;
For reference only

• impose penalties;
• apply to the court for injunctions (a court order requiring certain action to be
stopped); and
• prosecute.
6 The main regulatory implications for insurance brokers of the current regulatory
environment are as follows:
• It is now a criminal offence to carry on regulated activities without authorisation.
• Regulated firms must establish that the insurers, other brokers or intermediaries
they deal with are properly authorised or exempt.
• Regulated firms are supervised by the FCA and must adhere to its rules and
principles to maintain their authorisation.
• Broking firms and individual approved persons who breach the rules and principles
may be subject to FCA enforcement action.
7 The FCA has established eleven Principles for Businesses, which provide the
foundation for regulation and are quite wide-ranging rather than prescriptive in nature.
They are a guide for authorised firms to achieve the strategic and operational
objectives of the regulator. These principles are loosely based on the requirements of
the law of agency.
8 ICOBS provides a means by which the FCA can reinforce its Principles through
specific areas in the general insurance market. The focus of ICOBS is on achieving
outcomes for consumers and not a list of prescriptive processes for firms to follow.
The intention is to provide as much flexibility for firms as possible, while addressing
key issues of potential consumer detriment.
9 Many firms have adopted a points-based system which rewards training and
development on an ongoing basis. At the end of a twelve-month period, continuing
professional development (CPD) points must add up to an agreed threshold relative to
the employee's role. CPD points are awarded for internal and external training
courses, professional studies and qualifications and reading for example. CPD is
something the CII supports and promotes.
viii I10/October 2022 Insurance broking fundamentals
10 In relation to financial crime, the two key issues are money laundering and bribery and
corruption. The legislation relating to money laundering is as follows:
• Criminal Justice Act 1993.
• Proceeds of Crime Act 2002.
• Serious Crime Act 2007.
• Money Laundering Regulations Act 2017.
The legislation relating to bribery and corruption is the Bribery Act 2010.
11 It considered that too many financial firms were not adequately considering their
customers' needs.
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ix
Chapter 6
self-test answers
1 The three types of fund a broker is likely to hold are:
• broker funds;
• client assets; and
• insurer funds.
2 Four from:
• A strong sales culture.
• Effective sales process.
• Good quality monitoring and management information.
• The right incentivisation of staff.
• The right staff.
• Senior management support.
For reference only

x I10/October 2022 Insurance broking fundamentals
Chapter 7
self-test answers
1 The key ways in which brokers can demonstrate good conduct when dealing with their
clients are:
• provision of service excellence;
• high quality of advice and experience;
• transparency of earnings;
• good quality of literature and documentation;
• efficient handling of complaints; and
• avoidance of E&Os.
2 Four from:
• Always doing what has been agreed by the agreed deadline.
• Returning client calls and messages promptly.
• Ensuring good communication at all times, in the manner that the client wishes to
communicate.
• Knowing your client.
• Ensuring procedures are in place to reduce mistakes (such as a 'second pair of
eyes' check).
• Contributing to a client culture where the customer's needs come first.
For reference only

3 Four from:
• Have a clear strategic goal, so that its staff and resources can focus on
achieving it.
• Have an effective method of communicating the strategy to staff.
• Be able to monitor activity and adapt processes and procedures accordingly.
• Set clear targets and goals that are related to the strategic goal.
• Reward success in relation to achieving the strategic goal.
4 The FCA defines a complaint as:
• Any oral or written expression of dissatisfaction, whether justified or not, from, or on
behalf of, a person about the provision of, or failure to provide, a financial service
or a redress determination, which alleges that the complainant has suffered (or
may suffer) financial loss, material distress or material inconvenience.
5 The FCA requires all brokers to:
• have a formal procedure for dealing with complaints;
• inform their clients of this procedure (including the address and telephone number
to write to or call). They must also inform their clients of how to complain to the
FOS; and
• manage complaints in accordance with the stated procedures, which the broker
should document in the authorised firm's compliance manual.
6 Three reasons to avoid E&O claims include:
• they are time-consuming, expensive to deal with and damaging to the broker's
reputation;
• they imply fault with the firm's regulatory compliance standards;
• they cost the business money:
– the policy excess,
– unrecoverable costs in defending the claim, and
– increased E&O insurance premium following the notification.
xi
7 Four from:
• Documentation failures.
• The broker's failure to inform the insurer of a material fact that was disclosed by the
client.
• The broker's failure to appreciate the extent of cover (there may be restrictions and
limitations and these must be explained to the client fully).
• Non-compliance with warranties which were not brought to the attention of clients.
• Insufficient, or inaccurate, explanation of the terms to the client.
• The broker's failure to appreciate potential consequences for the insured.
• Failures in management and supervision.
• Acting beyond their powers.
8 There are four fundamental rules for brokers when dealing with E&O claims:
• Follow set procedures stringently. Set procedures will have been written as a result
of previous experience and should be trusted.
• Do not conceal a problem or try to resolve it before it is discovered. You must raise
the issue immediately. The longer a problem is avoided, the higher its potential for
damage.
• Be honest and open about the situation.
• Engage their own professional indemnity insurers at the earliest opportunity and
work with them in resolving the problem.
For reference only

For reference only
xiii
Cases
N
North and South Trust Company v. Berkeley
(1970), 4A2
R
Rozanes v. Bowen (1928), 2B1
For reference only

xiv I10/October 2022 Insurance broking fundamentals
For reference only

xv
Legislation
B T
Bribery Act 2010, 5E2 Terrorist Asset Freezing etc. Act 2010, 5E3
C
Companies Act 1985, 3A3A
Consumer Duty, 5B2
Consumer Insurance (Disclosure and
Representations) Act 2012, 2B1A, 5C8
Counter-Terrorism Act 2008, 5E3
Criminal Justice Act 1993, 5E1
D
Data Protection Act 1984 (DPA 1984), 5G1
Data Protection Act 1998, 5G1
Data Protection Act 2018, 4A3, 4C2
E
EU General Data Protection Regulation (EU
GDPR), 5G2
For reference only

Financial Services Act 2012, 5A4, 5A4B
G
General Data Protection Regulation (GDPR),
5G3
I
Insurance Act 2015, 2B2, 2B2E
Insurance Brokers (Registration) Act 1977,
1A2A, 1A3A
L
Legislative Reform (Lloyd’s) Order 2008, 1B8
M
Marine Insurance Act 1906, 2B1, 2B1A, 4A3
Money Laundering Regulations 1993, 5E1
Money Laundering Regulations 2007 (MLR
2007), 5E1
Money Laundering Regulations Act 2017,
5E1
P
Proceeds of Crime Act 2002, 5E1
S
Serious Crime Act 2007, 5E1
xvi I10/October 2022 Insurance broking fundamentals
For reference only

xvii
Index
A client money, 4C2
client needs, 1C1
accountability, 4A identification of, 2A1, 5C5
added value services, 1C2, 1C2B providing suitable insurance products, 2A2
administration, 2C1, 5A1E client retention, 6C, 6C1
advice, 1C1, 5A1B client service, 1D, 7A1A
agent, 1A1, 4A, 5A1C client verification, 5E3
dealing as, 5A1C commercial business, 1A4B
relationship with principal and third party, 1A1, commission, 1C4, 1C4A, 4C1
4A contingent, 1C4A, 4B1
alternative risk transfer (ART), 3A3A communication, 5C2
application, 5C1 distance, 5C3
appointed representatives (ARs), 1A1 competence, See training and competence
arranging policies, 5A1A complaint, 7C
Association of British Insurers (ABI), 1A2C, definition of, 7C1
2E3 errors and omissions (E&Os), 7C2
authorisation, 5A handling, 5B1, 7A1D
procedures, 5A2 identification, 7C3
procedures, 7C3
regulatory requirements, 7C2
B reporting, 7C4
back office functions, 1D time issues, 7C5
binding authority, 3B complexity of risk, 1A4D
bordereau, 3B compliance, 1D
bribery and corruption, 5E2 conditions, 2A2
British Insurance Brokers’ Association (BIBA), conduct, 7A
1A3A and ethics, 7A
For reference only

broker of business, 5A
funds, 6A1 principles, 5A3
networks, 1B9 regulation, 5A
selection, 2C1 when dealing with clients, 7A1
brokerage, 1A2B, 1C4, 1C4A when dealing with insurers, 7A2
enhanced, 1C4A confidentiality, 4C1
broking firms conflicts of interest, 4B
organisation of, 1B10 delegated authority, 4B1
roles within, 1D FCA requirement to disclose, 4B2
supervision of, 5A3 identifying, 4B2
broking form, 2C2 managing, 4B2, 4C1
business continuity plans, 1C2B resolving, 4B2
business interruption plans, 1C2B situations where conflicts arise, 4B1
business model, 5A2 consolidators, 1B, 1B3, 6C
consumer protection, 5A3A, 5B1
continuing professional development (CPD),
C 5D
continuity, 2C3
cancellation rights, 5C7
contract avoidance, 2B2
capacity, 2C3
contract certainty, 1B8B, 2B4B
captive insurance company, 3A3A
Code of Practice, 2C4
catastrophic risk, 1B6
controlled functions, 5A3B
Chartered Insurance Institute (CII) Code of
convenience, 1A2C, 1A2D
Ethics, 7A
cost benefits, 1A2D
churn, 6C1
cover
civil action, 5A4B
availability of, 1A4D
claims, 1A2C, 1C1, 1D, 2C3
breadth of, 2C3
advocacy role, 2E1
coverholder, 3B
brokers’ activities when dealing with, 2E2
credit facilities, 2C1
delegated authority handling, 2E1
culture, 5A2, 7B
full claims service, 2E1
impact of, 7B1
handling, 5C8
customer, 5C2
methods of dealing with, 2E1
negotiation, 2E
classes of business, 1A4, 2C1 D
client assets, 6A2
Client Assets Sourcebook (CASS) rules, 4C2, data
6A capture, 2B3
client expectations, 7A1A controller, 5G
xviii I10/October 2022 Insurance broking fundamentals
data (continued) Financial Conduct Authority (FCA) (continued)

protection, 4C2, 5G risk-based approach, 5A3A
subject, 5G Senior Managers and Certification Regime
dealing as agent, 5A1C (SM&CR), 5A3B
delegated authority, 1B4, 1B8B, 3B, 4A2, financial control, 3A1C
5A1C financial crime, 5E
activities that can be delegated, 3B2 bribery and corruption, 5E2
agreement of authority, 3B1 money laundering, 5E1
audit and monitoring, 3B1 prevention of, 5A2
benefits of, 3B3 Financial Ombudsman Service (FOS), 4C2,
business case for, 3B1 7C1, 7C2, 7C3
challenges of, 3B3 financial penalties, 5A4B
claims handling, 2E1 financial security, 2C1
conflicts of interest, 4B1 Financial Services Compensation Scheme
ongoing interaction, 3B1 (FSCS), 4C2
operation of, 3B1 Firm Systematic Framework (FSF), 5A3A
demands and needs, 1C1, 5C5 flexibility, 2C3
statement, 2A1, 2A2 fraud, 2E3
design and operation of insurance
programmes, 1C1
disaster recovery services, 1C2B
G
discipline and enforcement, 5A4B GABRIEL, 5A3A
disclosure, 2B1 geographical spread, 2C3
distance communications, 5C3 global firms, 1B, 1B1
distribution, 6B good faith, 4A
documentation, 7A1C governance, 5A2
duty guidance and rules, 5C
breach of, 2B2
of care, 4A3
of fair presentation, 2B2 H
of warranty, 2B2
hard market, 2D3
For reference only

health and safety consultation, 1C2B
E high net worth, 1B10
ease of payment, 2C1

electronic data interchange (EDI), 1A2C I
Employers’ Liability Tracing Office (ELTO), 5F
indemnity, 4A1
end-to-end processes, 5A2
independent
environmental risk surveys, 1C2B
advice, 1A1
errors and omissions (E&Os), 7A1E, 7D
financial advisers, 1A2A
claims, 7C2, 7D, 7D1
intermediary, 1A1
dealing with, 7D3
quotation, 1A2C
prevention of claims, 7D2
inducements, 4B1
event-driven work, 5A3A
initial disclosure document (IDD), 5C4
innovation, 2C3
F insurance brokers
authority, 4C1
fair analysis, 2C2 benefits of, 1A2C, 1A2D
fair presentation, duty of, 2B2 classes of business handled by, 1A4
fair treatment of customers, 5A3A, 5B1 duties as an agent, 4A
fees, 1C4B introduction of, 5A1D
fiduciary relationship, 4A issues faced by
Financial Conduct Authority (FCA), 1B8A Lloyd’s, 1B8
approach to supervision, 5A3A monies held by, 6A
authorised procedures, 5A2 services offered by, 1C
client information requirement, 4C2 services to insurers, 1C3
conduct of business regulation principles, 5A3 supervision of, 5A3
consumer protection, 5A3A TOBA with a client, 4C2
controlled functions, 5A3B types of, 1B
discipline and enforcement, 5A4B why risks are suited to, 1A4
Handbook, 5B Insurance Conduct of Business Sourcebook
impact of regulation, 5A5 (ICOBS), 2A, 2C2, 5A1D, 5C
Insurance Conduct of Business ICOBS 1, 5C1
Sourcebook(ICOBS), 5C ICOBS 2, 5C2
intervention, 5A4A ICOBS 3, 5C3
mediation, 5A ICOBS 4, 5C4
powers, 5A4 ICOBS 5, 5C5
Principles for Business (PRIN), 5B ICOBS 6, 5C6
report on potential conflicts of interest, 4B1 ICOBS 7, 5C7
xix
Insurance Conduct of Business Sourcebook organisation and segmentation, 1B10

(ICOBS) (continued) organised fraud, 2E3
ICOBS 8, 5C8 overriders, 4B1
insurance programmes
design and operation of, 2D
global, 2D2
P
key issues in design, 2D1 packages and combining policies, 2D1
term, 2D1 payment protection insurance (PPI), 7E
insurer personal
assessment of, 2C3 data, 5G
funds, 6A3 lines insurance, 1A4A
introduction of, 5A1D performance, 4A
limiting factor, 2C1 physical control, 3A1C
panels and fair analysis, 2C2 placement, 2B
positive factors, 2C1 Placing Platform Limited (PPL), 1B8C, 2A2,
security, 4C2 2A2A
selection of, 2C, 2C1 post-loss control surveys, 1C2B
TOBA with a broker, 4C1 premium financing, 2C3
intervention, 5A4A price comparison websites, 1A2C
pricing, 2C3
L principal, 1A1
duties of, 4A1
law of agency, 1A1, 1C4, 4A, 4A3 relationship with agent, 1A1, 4A, 4A2
liability surveys, 1C2B relationship with third party, 1A1, 4A
literature and documentation, 7A1C Principles for Business (PRIN), 5B
Lloyd’s producing broker, 1B5
brokers, 1B, 1B8, 4B1 product
code of conduct, 1B8A design, 5A2, 5B1
Council of, 1B8A development, 1D
market, 1B8 governance, 5A2, 5B1
placing a risk at, 1B8B information, 5C6
For reference only

risk, 1B8D lifecycle, 5B1
syndicates, 1B6A, 1B8A, 1B8B proof of identity, 5E3
transacting business at, 1B8B, 1B8D property surveys, 1C2B
location of risk, 1A4D proposal form, 2A1, 2A2, 2B3
London and the International Insurance proprietary insurance company, 3A3A
Brokers’ Association (LIIBA), 1A3B provision of products and services, 2A
London Market Regional Committee (LMRC), prudential regulation, 5A
1A3A Prudential Regulation Authority (PRA), 1B8A
loss experience, 2B1A public censure, 5A4B
M Q
management staff, 1D quality of service, 2C3
managing general agent (MGA), 1B8A, 3B, 3B4 questionnaire
market cycle, 2D3 brokers’, 2B3
Market Reform Contract (MRC), 1B8B, 2B4A insurers’, 2B3
material circumstances, 2B2B
material facts, 1B8B, 2B1, 2B1A, 2C4
mediation, 5A, 5C1
R
mergers and acquisitions, 1B3 regulated activities, 5A
mis-selling, 7E regulation, 2C1, 4C1, 5A
money laundering, 4C2, 5E1 reinsurance brokers, 1B, 1B6, 4A2
reporting officer (MLRO), 5E1 market, 1B6A
motor fleet risk management, 1C2B purpose of, 1B6
remuneration, 1A2B, 1C4, 4A1, 7A1B
N renewal retention, 6C1
renewals, 1C1
National Crime Agency (NCA), 5E1 reputation, 2C1, 2C3
negotiation, 1C1, 2B, 2B4 retail broker, 1B5, 4A2
networks, 1B9 Retail Mediation Activities Return (RMAR),
new business, 1D, 6C2 5A3A
niche sector businesses, 1B, 1B4 retaining clients, 6C, 6C1
risk
analysis, 3A1B
O avoidance, 3A1C
online brokers, 1B, 1B7 based approach, 5A3A
opportunistic fraud, 2E3 complexity, 1A4D
control, 2C3, 3A1C, 3A2
xx I10/October 2022 Insurance broking fundamentals
risk (continued) V
identification, 3A1A, 3A2
location, 1A4D volume overriders, 1C4A
minimisation, 3A1C vulnerable customers, 5B3
prevention, 3A1C
reduction, 3A1C
retention, 2D1
W
size, 1A4D warranties, 2A2
surveys, 3A1A wholesale brokers, 1B, 1B5, 4A2
transfer, 3A1C
risk management, 1C2, 3A
benefits of, 3A X
definition, 1C2A, 3A
Xchanging, 1B8B
financial controls, 3A1C
physical controls, 3A1C
process, 3A1
role of the broker, 3A, 3A2
services, 1C2A
specialist services, 3A3
risk presentation, 2B4
and good practice, 2B4
S
sales
advice, 5B1
culture, 6C2
literature, 2C1
procedures, 5A2
sanctions, 5E3
scope of service, 5C4
For reference only

Senior Management Arrangements, Systems
and Controls (SYSC) sourcebook, 5D
Senior Managers and Certification Regime
(SM&CR), 5A3B
sensitive data, 5G
service excellence, 7A1A
signing down, 1B8B
soft market, 2D3
specialties risks, 1A4C
staff, 6C1, 6C2
standard wording, 2B4
statement of fact, 2B3
sub-broker, 1B5, 1B8B, 4A2
suitability statement, 2A2, 2C4
survey reports, 2B3, 2C3
systems and controls, 5A2
T
target markets, 5B1
terms
confirming to the client, 2C4
of business agreement (TOBA), 1B5, 1C4A,
4C, 6A1
third party, 1A1
relationship with agent and principal, 1A1
tort, 4A3
traditional broking services, 1C1
training and competence, 5D, 6C1
transaction of business, 1B8B
transparency, 7A1B
U
UK-only-based firms, 1B, 1B2
utmost good faith, 2B1, 2B1A

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Insurance

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Updates and amendments

© The Chartered Insurance Institute 2022

Author and updater

Reviewers for the first edition

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Using this study text

Activities: reinforce learning through Key points: act as a memory jogger at

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Examples: provide practical illustrations Sources/quotations: cast further light

Summary of learning outcomes Number of questions

1. Understand the insurance broking market. 12

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5. Understand the key financial issues affecting insurance brokers. 12

Published October 2022

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3. Understand contract and agency in

4. Understand the key legal and regulatory

Published October 2022 2 of 3

Reading list Post magazine. London: Incisive Financial

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Published October 2022 3 of 3

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Syllabus learning outcome Study text chapter

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2: Role of the broker in meeting client needs

3: Other roles of insurance brokers

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5: Legal and regulatory issues

6: Key financial issues facing insurance brokers

7: Conduct and culture

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Added value Agent Appointed British Insurance

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A The need for insurance brokers

A1 What is an insurance broker?

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Information flows from insured to

The main distinguishing feature of an insurance broker compared to other intermediaries is

A2 Why do insurance brokers exist?

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The UK insurance broker market

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London Market Regional Committee (LMRC)

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A4 Classes of business handled by insurance brokers

Three major classes of business

Personal lines Commercial Specialties

A4A Personal lines

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B Types of insurance broker

Reinsurance Niche sector

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B2 UK-only based firms

B4 Niche sector businesses