Brokers operate under the law of agency, the main points of which are explained below:
- broker is agent and serve a principal who is the insured
- broker can have two different principals relating to one risk. if a broker is given authority by insurer
- ‘Chinese Walls’ / ‘Ethical Walls’ - broker ensure neither principal is disadvantaged by broker acting for the other, separate people perform roles relevant to each relationship
Agents duties towards their principals:
– Follow their instructions.
– Act in good faith towards their principal.
– Not to sub-delegate without permission.
– Account for funds
– Act with all due care and skill
If an agent acts outside their authority, their principal has three options:
– ratify their actions and continue as if nothing had happened
– ratify their actions and make a claim against the agent for damages
– refuse to ratify their actions and expose agent to claims from third party that thought the agent was acting within their authority
such breaches which would harm the client include failing to do any of
the following:
- insurance was placed with suitable insurers
- insurance was placed on suitable T&C’s
- understood the client’s instructions
- explaining terms and effect on the client
Types of intermediary:
- wholesale broker
- retail broker
- producing broker
- single tied agent
- multi-tied agent
- independent intermediary
- surplus lines broker
- open market correspondent
- lloyds broker
- non-lloyds broker
what is a Producing broker
describe the broker which has contact with the client produces the work for the client.
Single tied agent
representative of the insurer, not insured. most common in a high street agency selling no. of products from a single insurer. Agent cannot advise the client on other insurers’ products but is restricted to the products offered by the principal. They don’t work in the London Market.
Multi-tied agent
principal is still an insurer. the agent doesn’t sell multiple different insurers’
products – but only one product per insurer. agent cannot offer independent advice to a client about products in the wider market and does not work in the London Market.
Open market correspondent (OMC)
intermediary but not Lloyd’s approved coverholder. They introduce business to Lloyd’s either directly or via a Lloyd’s broker on an open market. Open market means the risk is individually placed rather than being attached to any pre-existing form of delegated agreement.
placing process for the broker
- Reviewing client’s needs
- Make a MRC to obtain quotes
- Reviewing quotes with client
- Finalise placement - check for ‘signing down’ issues (written lines over 100%). Risk placed on Placing Platform Limited (PPL) or Whitespace.
- Submission on Velonetic - MRC and LPAN and splitting out tax relating to the risk.
- Requesting premium from their client.
- Submitting documentation to Velonetic
- Making changes to the risk
The tax and other charge requirements vary hugely from country to country. Therefore, the broker needs to know whether:
– tax from overseas clients should be collected by the overseas broker and paid directly in the country without coming to London
– tax coming through with premium funds for onwards payment to insurers in London
– tax paid by the insurers, not the client –not the broker’s concern.
Submitting documentation to Velonetic
recording risk data and moving premium are made electronically through Accounting and Settlement. Brokers upload documents to central market document repository (Insurers’ Market Repository: IMR) and send messages to Velonetic asking them to review documents, enter data and give the risk aka Signing Number and Date. Velonetic facilitates movement of funds from broker’s account to insurers accounts.
claims process
- First advice
- Expert instruction - loss adjusters / surveyors
- Further updates
- Negotiation
- Settlement
- Recoveries / Subrogation
TOBA’s - Terms of Business Agreements
- market agreements used to capture the T&C’s which a broker does business with various parties.
- broker has TOBAs with insurers, clients, producing brokers. In Lloyd’s theres an individual TOBA entered into by the broker with each managing agent they are doing business.
- parties to any agreement need to be sure the TOBA covers all the arrangements.
- LMA, IUA , LIIBA produced model TOBAs
Contents of an insurer’s TOBA with a broker
- regulatory status
- brokers authority - hold premium funds
- remuneration
- holding money / taxes
- compliance
- Ownership + access to data + records
- law and jurisdiction
- conflict management
- confidentiality
Contents of a broker’s TOBA with a client:
- Identity of client
- Claims notification
- Disclosure
- How the brokers are paid
- How monies are held - holds money on trust for client, for insurer have a ‘risk transfer’ TOBA. This makes clear which party retains interest made on funds
- Data protection
- Complaints
- Dispute resolution
Types of broker remuneration
- flat fee
- commission or brokerage
- other fees / commissions
flat fee
- payable by the client.
- Under ICOBS - broking firm must
provide client with details of fees that are payable before the client incurs any fees. If the actual fee can’t be stated , basis for its calculation must be provided. - further fees might be incurred during the life of a policy, broker must advise the client.
Commission or brokerage
- brokerage is paid by insurer not client.
- insurer agrees the broker can retain / hold back, part of the premium charged to the client during transfer
- premium charged to the client aka ‘gross premium’ and amount received by the insurer aka net premium.
Other fees/commissions
- brokers earn additional commission by charging ‘collecting commission’ on
claim (1% on claims value). insurer pays 101% of claim, insured receives 100% - broker acts as a coverholder of delegated authority, insurer pays commission for each risk bound and profit commission
- specialist technical advice. brokers have inhouse technical team which provide info to insured and insurer - will charge a fee for the service
when did the Insurance Distribution Directive (IDD) came into force…
in the UK on 1 October 2018, replacing the previous Insurance Mediation Directive (IMD).
IDD applies to the following:
- All sellers of insurance products
- Any person whose activities consist of administration + performance of insurance contracts
- Ancillary insurance intermediaries. an ancillary organisation will be excluded from regulation if insurance is complementary to goods/services provided.
what did the IDD lead to
- introduced stricter and more specific professional requirements
- Distributors acting honestly, fairly and professionally in accordance with the
best interest of customers. - All info provided by distributors must be fair, clear and not misleading.
FCA risk framework uses a three-pillar
risk framework looking at:
- assessment of firm’s conduct, the question ‘are the interests of consumers and market integrity at the heart of how the firm is run’
- event-driven work allows a flexible response to anything that arises
- reviewing issues and products when required
