Chapter 1 -

Question 1

Excellent customer service in an insurance context

Answer 1

Customer service covers everything a company does to satisfy its customers. Satisfied customers will keep it in business and will speak positively about the company. It is a combination of marketing, strategic planning, processes, people, research and systems. It is about getting to know the customer and what they want, and taking steps to make sure they get it, through creating systems and training employees.

Question 2

Increasing importance of customer service

Answer 2

Customers are increasingly aware of these rights.

Question 3

Consumer awareness

Answer 3

A number of laws and regulations give customers, particularly private individuals, legal protection and rights around such things as unfair contract conditions. The FCA also imposes an obligation that the fair treatment of customers must be central to a firm’s activities. Its Consumer Duty sets high expectations on the standards of care a firm should show consumers. The Consumer Rights Act 2015 includes the need to provide a service within a reasonable time. The Enterprise Act 2016 implies a requirement into all insurance contracts that insurers must pay what they owe their customers within a reasonable time. The FCA’s key focus is on the protection of consumers. Its current approach is in line with its Strategy for 2025– 2030. The FCA sets out high expectations as to how it expects customers to be treated. The FCA’s ‘Approach to Consumers’ sets out these outcomes and what it expects of firms, including: We will also refer to the fair treatment of customers, which the FCA expects to be at the heart of everything a firm does.

Question 4

Expectations of service

Answer 4

Insurance consumers are better educated and more financially aware, with higher expectations of service. They frequently expect value-added services, such as 24-hour helplines.

Question 5

Competition

Answer 5

The insurance market is competitive and insurers and intermediaries need to work hard to remain profitable. Offering excellent customer service can help the organisation gain and keep customers.

Question 6

Customer service activities

Answer 6

In insurance, customer service is made up of a variety of activities aimed at both external and internal customers. For example, having: • agents who provide services to customers in their homes; • a free-phone number through which customers can do business with the company; • a communication network allowing customers to get information and do business 24-hours a day; • a high quality and timely turnaround on new business; and • good complaint-handling systems.

Question 7

Structure of the insurance market

Answer 7

Buyers: The buyers of insurance may be divided into two main types: • Private individuals who buy insurance in their private capacity. • Commercial organisations who buy insurance to protect their ‘business’.

Question 8

Types of insurer as defined by ownership

Answer 8

• Proprietary companies: owned by their shareholders and may be publicly listed (plc) or privately owned (Ltd). • Mutual companies: owned by their policyholders who share in the profits through reduced premiums. • Captive companies: owned by non-insurance parent companies as a tax efficient way of transferring risk.

Question 9

Types of insurer as defined by function

Answer 9

• Composite insurers: accept several types of business. • Specialist insurers: have expertise in one particular area.

Question 10

Lloyd’s

Answer 10

Lloyd’s is not an insurer, but an organisation providing facilities for the placing of risks in its own market. Syndicates provide the financial backing (i.e. carry the risks) and each employs a managing agent, who appoints the underwriter. The broker summarises the risk on a standard document called the Market Reform Contract (MRC, or ‘slip’) and this is presented to underwriters who indicate the percentage of the risk they are willing to underwrite. Once all the risk has been placed, the policy is prepared, checked and signed through Xchanging. The broker collects the premium, deducts their brokerage and pays the balance to Lloyd’s. Although traditionally business at Lloyd’s has been done face-to-face, Lloyd’s is increasingly moving towards a more digital way of doing business, with more and more risks being placed electronically.

Question 11

Intermediaries

Answer 11

An intermediary is an agent, authorised to bring their principal (usually an insurance customer) into a contractual relationship with another (usually an insurer). Under FCA rules, all ‘persons’ (which includes firms) that carry out insurance distribution activities must be either be an authorised person or exempt. To be exempt the intermediary must be either an appointed representative, an introducer appointed representative or a member of a designated professional body.

Question 12

Authorised persons

Answer 12

An intermediary that wishes to offer independent advice must be directly authorised by the FCA. It must then keep all FCA rules, in addition to the legal duty of trust it owes as agent to its principal. They act on the client’s behalf and recommend the most suitable insurer and policy for their client after analysing the market.

Question 13

Appointed representatives and introducer appointed representatives

Answer 13

These are individuals or companies appointed by an authorised person to carry out a certain role under the terms of a contract. The principal takes regulatory responsibility for them in carrying on the principal’s business. Contracts with introducer appointed representatives limit them to introductions and the distribution of non-real-time financial promotions, so the regulations are less rigorous.

Question 14

Ancillary insurance intermediaries (AII)

Answer 14

These are organisations that do not distribute insurance as their main business. They only sell insurance that sits with their main goods and services. For example, a travel agent who sells travel insurance alongside a holiday.

Question 15

Reinsurers

Answer 15

A reinsurer is an insurance firm that specialises in insuring risks originally underwritten by other insurers. The reinsurance can be for an individual risk, for an event or for a wide range of risks. Reinsurers can be specialist reinsurance companies, Lloyd’s syndicates or insurance companies. An insurer can reinsure its risks because it will lose financially if it has to make a claim. It passes some or all of the risk to another insurer, meaning it can accept more risk that its own resources would allow. The insurer is called the reinsured, the cedant or the ceding office. A reinsurer can also transfer the risks they carry to another insurer and this is called retroceding.

Question 16

London Market

Answer 16

The London Market is a distinct part of the UK insurance and reinsurance sector. It provides insurance and reinsurance on an international scale. Lloyd’s is part of the London Market.

Question 17

Distribution channels

Answer 17

The Consumer Duty requires that products and services are specifically designed to meet the needs of consumers and sold to those whose needs they meet. How an organisation decides to distribute its product will affect its price and how it looks. It also links to the Consumer Duty, which requires that products and services are specifically designed to meet the needs of consumers and sold to those whose needs they meet.

Question 18

Direct distribution channels

Answer 18

Direct: employees of the insurer (e.g. agents or call centre staff) sell the insurance products or direct mailing is used with sales coming from telephone or online enquiries.

Question 19

Indirect distribution channels

Answer 19

Indirect: intermediaries are paid by the insurer to promote products on the insurer’s behalf, or the insurer sells its products through a bank (bancassurance) or other organisation (e.g. high-street retailers).

Question 20

More complex marketing channels

Answer 20

The marketing of insurance products and the partnerships that have developed can lead to quite complex marketing models, where insurers will operate through more than one channel. For example, a company may use a bancassurance scheme, where marketing is carried out by a bank and sell direct itself. Aggregators are not actually distribution channels, but consumer-focused price comparison mechanisms. A customer answers one set of questions and receives several insurance quotations from a number of insurers. Even direct insurer’s quotations can be found on aggregator websites.

Question 21

Schemes and delegated authority

Answer 21

Many insurers delegate some authority to intermediaries to act on their behalf. The intermediary can issue insurance cover for risks that fall within agreed criteria.

Question 22

Features of good faith

Answer 22

Insurance contracts are contracts of utmost good faith and both insurer and insured must be honest and open with each other. The proposer’s duty is key: they must tell the insurer all that is relevant about the risk they wish to insure.

Question 23

Good faith

Answer 23

Good faith means that disclosure must be made in a reasonably clear and accessible manner, and material representations of fact, expectation or belief must be ‘substantially correct’.

Question 24

Duty of disclosure

Answer 24

Consumer Insurance (Disclosure and Representations) Act 2012: Under this Act, consumers must take reasonable care not to make a misrepresentation when answering the insurer’s questions. This applies before the contract is entered into, renewed or varied. A misrepresentation is a false statement of fact that persuades the other party to enter into the contract.

Question 25

Insurance Act 2015

Answer 25

Under the Act, the insured must 'make a fair presentation of the risk'. If they fail to do so, the insurer has a number of remedies, including, in certain circumstances, regarding the policy as if it had never been in force. A fair presentation is one that: • discloses every material circumstance the insured knows or ought to know, or gives enough information to alert a prudent insurer that it needs to make further enquiries; • disclosures it in a way that is reasonably clear and accessible to a prudent insurer; and • is one in which every material representation as to a matter fact is substantially correct and as to a matter of expectation or belief is made in good faith.

Question 26

What is a material circumstance?

Answer 26

The Insurance Act 2015 defines a material circumstance as: a circumstance or representation is material if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms. In non-life insurance it concerns physical or moral hazard: • Physical hazard relates to the physical characteristics of the risk and any measurable dimension of the risk. • Moral hazard relates to the attitude and behaviour of the policyholder.

Question 27

Contracting out of the Insurance Act 2015

Answer 27

The parties to an insurance contract can agree that the previous law will apply. The previous law allowed an insurer to avoid a policy and/or dismiss a claim for breaches of the duty of disclosure or a warranty, regardless of any connection to the loss.

Question 28

Facts that do not need to be disclosed

Answer 28

Some facts do not need to be disclosed. These are: • facts of law; • facts of public knowledge; • facts that lessen the risk; • facts where the insurer has waived its right to the information; • facts that a survey should reveal; • facts that the insured does not know; • facts outside the scope of specific questions; and • spent convictions.

Question 29

Consequences of a breach of the duty of disclosure

Answer 29

Consequences for consumers: • If the misrepresentation was honest and reasonable: the insurer must pay the claim. • If the misrepresentation was careless: the insurer can respond as it would have done if the customer had taken the trouble to answer the questions accurately. • If the misrepresentation was deliberate or reckless: the insurer can treat the policy as void, decline all claims and retain the premium.

Question 30

For commercial insureds, under the Insurance Act 2015

Answer 30

an insurer only has a remedy for a breach of the duty of fair presentation, if they can show that without the breach it would: • not have agreed to the insurance at all; or • only have agreed to it on different terms. Such a breach is a qualifying breach and can either be deliberate or reckless or neither deliberate nor reckless.

Question 31

Deliberate or reckless

Answer 31

if the insured knew that they were in breach of the duty of fair presentation, or didn’t care whether or not they were in breach of that duty. The insurer needs to prove this and if it can, it can avoid the contract, refuse all claims and keep the premium.

Question 32

Neither deliberate nor reckless

Answer 32

• if the insurer would not have entered into the contract it can void the policy, deny all claims and return the premium; • if the insurer would have offered different terms it can treat the contract as if the terms it would have used actually apply; and • if the insurer would have charged a higher premium it can reduce any claims paid in proportion to the amount the premium was less than it should have been.

Question 33

Compulsory insurance

Answer 33

Because compulsory insurance exists to provide compensation to innocent victims, insurers cannot avoid such contracts on the grounds of non-disclosure. However, they can recover the claims settlement from their insured.

Question 34

Limitation of an insurer’s right to information

Answer 34

The insurer must write its questions carefully in a way that draws out the information it needs. It cannot later say that it needed information that a question didn't ask for. The answers must be checked carefully too: an insurer will be considered to have waived its right to the information if, for example, it does not follow up on questions that the customer had not answered or only partially answered.

Question 35

In a non-consumer contract the duty of fair presentation

Answer 35

means that sufficient information must be provided to alert the prudent insurer to the need to make further enquiries. If it does not then make those enquiries it cannot claim nondisclosure at a later date.

Question 36

The insured is not required to disclose a circumstance that the insurer knows

Answer 36

Under the Insurance Act an insurer 'ought to know' or is presumed to know things that: • an employee or agent of the insurer knows and ought reasonably passed on to the underwriter; and • is held by the insurer and is available to the underwriter. • are common knowledge; and • an insurer offering insurance of that class, to insureds in that field of activity, would reasonably be expected to know as part of their ordinary business.

Question 37

An insurer that wants to avoid a policy on the grounds of nondisclosure

Answer 37

must not do anything to suggest that the policy is in force. If it does it has waived its right to avoid the policy on the grounds of non-disclosure.

Question 38

Effect of FCA rules on the duty of disclosure

Answer 38

The Insurance Conduct of Business Sourcebook (ICOBS) contains rules and guidance on how to respond to nondisclosure. The key requirement is that a claim must not be rejected unreasonably: it is unreasonable to reject a claim on the basis of a non-qualifying misrepresentation.

Question 39

A qualifying misrepresentation

Answer 39

is one where: • the consumer has breached the duty to take reasonable care not to make a misrepresentation; and • the insurer can show that without it, it would either not have entered into the contract at all, or only on different terms.

Question 40

Thus it is important that a customer knows what they must disclose.

Answer 40

Ways of doing this include: • explaining to a commercial customer the duty to disclose all material circumstances; • ensuring that the commercial customer is asked clear questions about anything the insurer thinks material; • explaining to a consumer that they must take reasonable care not to make a misrepresentation; and • asking the customer clear and specific questions about the information relevant to the policy being arranged or varied.

Question 41

The rules require a customer to be supplied with a statement of their demands and needs

Answer 41

clearly showing how these are met by the product offered. This implies that an extensive fact gathering exercise has been done.

Question 42

All customers must receive an insurance product information document (IPID)

Answer 42

summarising the cover given by the policy, at new business and renewal. Also, the insurer must be able to demonstrate that it is treating all its customers fairly.

Question 43

However, under the Insurance Act 2015

Answer 43

the way an insured who is not a consumer must be treated is in line with the FCA’s approach to consumers.

Question 44

The sales call

Answer 44

When a sales discussion is taking place over the telephone, organisations provide their customer consultants with scripts and call guides. These are written in such a way as to ensure regulatory compliance.

Question 45

Online sales

Answer 45

An insurer that provides quotations or sells policies online will make sure the appropriate questions are asked. Warnings will be clearly visible, explaining to the customer how important it is that they disclose all relevant information.

Question 46

Methods of obtaining material information

Answer 46

Statement of fact: A statement of fact is now used for the majority of consumer insurances and some straightforward commercial package insurance. The customer consultant gathers the information from the customer either by telephone or face to face. Online, the customer will complete a questionnaire. The information gathered is the same as that needed for

Question 47

Methods of obtaining material information

Answer 47

Statement of fact is now used for the majority of consumer insurances and some straightforward commercial package insurance. The customer consultant gathers the information from the customer either by telephone or face to face. Online, the customer will complete a questionnaire. The information gathered is the same as that needed for a proposal form. It is information about the subject-matter of the insurance, the proposer and the risk. Once the terms and the sale are agreed, the statement of fact is sent to the customer, who has the opportunity to change anything that is incorrect and who then has a copy for their records. Because the consequences of a breach of good faith can be so serious, customer consultants are given guides and scripts to follow to ensure that the right questions are asked.

Question 48

Consumer Insurance (Disclosure and Representations) Act 2012

Answer 48

The clarity and scope of the questions an insurer asks is taken into account when deciding if a consumer's response was reasonable.

Question 49

Proposal forms

Answer 49

The proposal form is now used less frequently and almost exclusively in commercial classes of insurance. It is a way for the underwriter to find out the information they need on the subject-matter of the insurance, the proposer and the risk. It will use it to decide whether to accept the risk and what premium to charge. Proposal forms should be simple to understand and easy to complete. They will contain a declaration, to be signed by the proposer, that to the best of the proposer's knowledge the answers given are true.

Question 50

Additional ways of obtaining material information

Answer 50

Surveys are often used in property insurance for larger risks. The surveyor visits the property and gives the underwriter detailed information on its construction, condition and use.

Question 51

Supplementary questionnaires

Answer 51

If an underwriter notices that aspects of a risk require further investigation, and that there a number of similar risks, they will develop a questionnaire. This is because the Insurance Act 2015 puts great responsibility on an insurer to make its own searches and enquiries to ensure that its underwriting is accurate.

Question 52

Market Reform Contract/slip presentation

Answer 52

The Market Reform Contract (MRC/slip) carries full details of the risk in an agreed and recognised format. Lloyd's is moving towards the digitalisation of this process.

Question 53

Contacting the client

Answer 53

Often underwriters and intermediaries meet commercial clients personally to discuss their risk. Intermediaries sometimes meet their personal clients too. Alternatively, to obtain further information or clarification a client can be contacted by telephone, email or letter.

Question 54

Know your customer

Answer 54

Whether or not you are meeting your customer face to face or dealing with them over the telephone, the accurate completion of the know your customer documentation will help to establish the information that may be relevant.