LM2TB8 2018 (Online)

LM2
London Market
insurance
principles
and practices
2018 Study text
Liiba
London &
International
Insurance
Brokers'
Association
London Market
insurance principles
and practices
LM2 study text: 2018
This edition is based on the 2018 examination syllabus to be examined from 1 January 2018 until
31 December 2018.
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© The Chartered Insurance Institute 2017
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Print edition ISBN: 978 1 78642 282 8
Electronic edition ISBN: 978 1 78642 283 5
This revised and updated edition published in 2017
The author
Charlotte Warr, LLB (Hons) FCII, Solicitor, Chartered Insurer, Senior Associate of the Association of Average
Adjusters.
Charlotte is a highly experienced claims adjuster with significant knowledge of both the Company and
Lloyd’s Markets as well as both marine and non-marine classes of business.
Charlotte has authored articles for technical journals and has spoken on a variety of insurance, legal and
training subjects around the world.
Acknowledgements
The CII gratefully acknowledges the contributions of the following technical reviewers to the production of
this text:
John Hobbs
Simon Penaluna
Terry Webb
The CII would also like to thank the authors and reviewers of study texts IF1 and IF2, on which parts of this
text rely.
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.the-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.
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.
Typesetting, page make-up and editorial services CII Learning Solutions.
Printed and collated in Great Britain.
This paper has been manufactured using raw materials harvested from certified sources or
controlled wood sources.
3
Using this study text

Welcome to the LM2: London Market insurance principles and practices study text which is designed to
cover the LM2 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.
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The sections referred to are available for you
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absolute right or wrong answer.
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points made in the text. subject from industry sources.
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you might find helpful to revisit. The sections
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5
Examination syllabus
London Market insurance

principles and practices
Objective
To provide a broader understanding of insurance process and practice across the London Market.
Summary of learning outcomes Number of questions

in the examination*
1. Understand the business nature of the London Market 1
2. Understand the main classes of insurance written in the London Market 3
3. Understand reinsurance within the insurance market 4
4. Understand market security 2
5. Understand the regulatory and legal requirements applicable to the transaction of 6
insurance business
6. Understand insurance intermediation in the London Market 6
7. Understand the underwriting function within the context of the London Market 7
8. Understand the way that business is conducted in the London Market 14
9. Understand the purpose, benefits and operation of delegated underwriting 4
10. Know the handling of claims in the London Market 4
11. Understand the main methods of resolving complaints 4
Plus 4 case studies comprising 5 questions each covering any of the learning outcomes
*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: 55 multiple choice questions (MCQs) and 4 case studies, each comprising 5
MCQs. 2 hours are allowed for this examination.
• This syllabus will be examined from 1 January 2018 until 31 December 2018.
• Candidates will be examined on the basis of English law and practice unless otherwise stated.
• 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/updates
2. Select the appropriate qualification
3. Select your unit on the right hand side of the page
Published October 2017 LM2

Copyright ©2017 The Chartered Insurance Institute. All rights reserved.
6 LM2/October 2017 London Market insurance principles and practices
1. Understand the business nature of the 6. Understand insurance intermediation

London Market in the London Market
1.1 Examine and explain the principal parties within 6.1 Define the different categories of UK and
the London Market and their relationships with international intermediaries and the services they
each other and their clients provide
6.2 Define and explain the roles of the various types
2. Understand the main classes of of brokers within the London Market
insurance written in the London 6.3 Describe the purpose and function of a generic
Market Terms of Business Agreement (TOBA)
2.1 Explain why international and domestic clients 6.4 Explain broking remuneration including
seek insurance in the London Market commissions and fees
2.2 Examine and explain the main classes of 6.5 Describe the basic features of the law of agency
insurance written in the London Market; and the 6.6 Define the main EU and UK legislative provisions
significant features of cover given under these applicable to insurance intermediaries
2.3 Describe the losses and liabilities which may give
rise to claims under each of the main classes of 7. Understand the underwriting function
risk written for the London Market within the context of the London
Market
3. Understand reinsurance within the
7.1 Explain how underwriting is conducted in London
insurance market as opposed to elsewhere
3.1 Explain why international and domestic insurers 7.2 Explain the relationship between London Market
seek reinsurance in the London Market brokers and underwriters
3.2 Examine methods of reinsurance; treaty and 7.3 Explain lead and follow underwriters within the
facultative; proportional and non-proportional context of the subscription market
3.3 Describe the differences between the various 7.4 Describe the causes and effects of the market
methods of reinsurance cycle
3.4 Calculate amounts ceded to re-insurers and 7.5 Explain the concept of loss and exposure
claims recoverable modelling
7.6 Explain what is meant by reserving and why it is
4. Understand market security
necessary to make provision for outstanding
4.1 Explain the basic components of an insurer’s liabilities
solvency margin calculation
7.7 Explain the terms ‘open years management’ and
4.2 Explain the role of Rating Agencies ‘reinsurance to close’ within the Lloyd’s Market
5. Understand the regulatory and legal

requirements applicable to the
transaction of insurance business
5.1 Describe the reasons for compulsory insurance
and the types of insurance that are compulsory in
the UK
5.2 Explain the legal significance of quotations and
renewals
5.3 Explain the impact of the Consumer Rights Act
2015 and the Contracts (Rights of Third Parties)
Act 1999 in relation to insurance contracts
5.4 Outline the EU solvency requirements for insurers
and industry regulator risk-based capital
requirements
5.5 Explain the purpose and calculate the rates of UK
Insurance Premium Tax
Published October 2017 2 of 4

7
8. Understand the way that business is 11. Understand the main methods of
conducted in the London Market resolving complaints
8.1 Describe the purpose of the proposal form and 11.1 Examine and describe the Statements of Principle
explain the information contained within and Code of Practice for all persons approved by
8.2 Describe the duty of fair presentation and the the industry regulator
principle of good faith 11.2 Describe the industry regulator’s requirements in
8.3 Describe the consequences of non disclosure/a terms of claims handling
breach of the duty of fair presentation 11.3 Describe the services provided by the Financial
8.4 Explain the legal principles essential to a valid Ombudsman
contract 11.4 Explain the main requirements of the Financial
8.5 Explain the purpose and content of the Market Services Compensation Scheme
Reform Contract
8.6 Explain the placing process for open Market
Reform Contracts and electronic Market Reforms
Contracts
8.7 Explain the operation of the General
Underwriters’ Agreement
8.8 Explain how an underwriter will know they are on
risk
8.9 Identify and explain the various sections of an
insurance policy
8.10 Explain the purpose and effect of warranties,
conditions and exclusions
8.11 Explain what is meant by the term ‘contract
certainty’
8.12 Explain the role of the insurer and that of the
broker in the collection and processing of
premiums
8.13 Describe how contracts of insurance can be
terminated
8.14 Explain how conflicts of interest may arise and
how they may be managed
9. Understand the purpose, benefits and

operation of delegated underwriting
9.1 Examine and explain the purpose of delegated
underwriting/binding authorities
9.2 Explain the benefits and operation of delegated
9.3 Explain the controls that Lloyd’s has placed on
delegated underwriting/binding authorities
9.4 Explain the operation of Line Slips and
Consortium Underwriting
10. Know the handling of claims in the

London Market
10.1 Explain the role and responsibilities of insurers
and brokers in the processing of claims
10.2 Explain the roles of loss adjusters, surveyors and
average adjusters
10.3 Explain the application of indemnity,
subrogation, contribution and proximate cause
principles
10.4 Explain the application of excesses and
exclusions

Reading list Exam technique/study skills

There are many modestly priced guides available in
The following list provides details of various bookshops. You should choose one which suits your
publications which may assist with your studies. requirements.
Note: The examination will test the syllabus alone. The Insurance Institute of London holds a lecture on
The reading list is provided for guidance only and is revision techniques for CII exams approximately three
not in itself the subject of the examination. times a year. The slides from their most recent lectures
can be found at www.cii.co.uk/iilrevision (CII/PFS
The publications will help candidates keep up-to-date members only).
with developments and will provide a wider coverage
of syllabus topics.
CII/Personal Finance Society members can borrow
most of the additional study materials below from
Knowledge Services.
CII study texts can be consulted from within the
library. For further information on the lending service,
please go to www.cii.co.uk/knowledge.
CII study texts

London Market Insurance Principles and Practices.
London: CII. Study text LM2.
Books (and ebooks)

Bird’s modern insurance law. 10th ed. John Birds. Sweet
and Maxwell, 2016.
Insurance theory and practice. Rob Thoyts. Routledge,
2010.*
Lloyd’s: law and practice. 2nd ed. Julian Burling. Oxon:
Informa Law, 2017.*
Periodicals
The Journal. London: CII. Six issues a year. Also available
online via www.cii.co.uk/knowledge (CII/PFS members
only).
Post magazine. London: Incisive Financial Publishing.
Monthly. Also available online at www.postonline.co.uk.
Market magazine. Lloyd's of London. Quarterly.
Reference materials
Concise encyclopedia of insurance terms. Laurence S.
Silver, et al. New York: Routledge, 2010.*
Dictionary of insurance. C Bennett. 2nd ed. London:
Pearson Education, 2004.
* Also available as an ebook through Discovery via
www.cii.co.uk/discovery (CII/PFS members only).
Examination guide
An examination guide, which includes a specimen paper,
is available to purchase via www.cii.co.uk.
If you have a current study text enrolment, the current
examination guide is included and is accessible via
Revisionmate (www.revisionmate.com). Details of how to
access Revisionmate are on the first page of your study
text.
It is recommended that you only study from the most
recent version of the examination guide.

9
LM2 syllabus
quick-reference guide
Syllabus learning outcome Study text chapter and section
1. Understand the business nature of the London Market
1.1 Examine and explain the principal parties within the London 1A, 1B
Market and their relationships with each other and their clients
2. Understand the main classes of insurance written in the London Market
2.1 Explain why international and domestic clients seek insurance in 1C
the London Market
2.2 Examine and explain the main classes of insurance written in the 2A, 2B, 2C, 2D
London Market; and the significant features of cover given under
these
2.3 Describe the losses and liabilities which may give rise to claims 2A, 2B, 2C, 2D
under each of the main classes of risk written for the London
Market
3. Understand reinsurance within the insurance market
3.1 Explain why international and domestic insurers seek reinsurance 3B
in the London Market
3.2 Examine methods of reinsurance; treaty and facultative; 3C, 3D
proportional and non-proportional
3.3 Describe the differences between the various methods of 3A, 3C, 3D
reinsurance
3.4 Calculate amounts ceded to re-insurers and claims recoverable 3C, 3D
4. Understand market security
4.1 Explain the basic components of an insurer’s solvency margin 4A, 4B
calculation
4.2 Explain the role of Rating Agencies 4C, 4D
5. Understand the regulatory and legal requirements applicable to the transaction of insurance business
5.1 Describe the reasons for compulsory insurance and the types of 5A
insurance that are compulsory in the UK
5.2 Explain the legal significance of quotations and renewals 8A
5.3 Explain the impact of the Consumer Rights Act 2015 and the 5B
Contracts (Rights of Third Parties) Act 1999 in relation to
insurance contracts
5.4 Outline the EU solvency requirements for insurers and industry 4B
regulator risk-based capital requirements
5.5 Explain the purpose and calculate the rates of UK Insurance 5C
Premium Tax

6. Understand insurance intermediation in the London Market
6.1 Define the different categories of UK and international 6B
intermediaries and the services they provide
6.2 Define and explain the roles of the various types of brokers within 6C
the London Market
6.3 Describe the purpose and function of a generic Terms of 6D
Business Agreement (TOBA)
6.4 Explain broking remuneration including commissions and fees 6E
6.5 Describe the basic features of the law of agency 6A
6.6 Define the main EU and UK legislative provisions applicable to 6F
insurance intermediaries
7. Understand the underwriting function within the context of the London Market
7.1 Explain how underwriting is conducted in London as opposed to 7A
elsewhere
7.2 Explain the relationship between London Market brokers and 7B
underwriters
7.3 Explain lead and follow underwriters within the context of the 7A, 7E
subscription market
7.4 Describe the causes and effects of the market cycle 7C
7.5 Explain the concept of loss and exposure modelling 7D
7.6 Explain what is meant by reserving and why it is necessary to 7F
make provision for outstanding liabilities
7.7 Explain the terms ‘open years management’ and ‘reinsurance to 7G
close’ within the Lloyd’s Market
8. Understand the way that business is conducted in the London Market
8.1 Describe the purpose of the proposal form and explain the 8A
information contained within
8.2 Describe the duty of fair presentation and the principle of good 8A
faith
8.3 Describe the consequences of non disclosure/a breach of the 8A
duty of fair presentation
8.4 Explain the legal principles essential to a valid contract 8A
8.5 Explain the purpose and content of the Market Reform Contract 8B
8.6 Explain the placing process for open Market Reform Contracts/ 7E, 8D
slips and electronic Market Reforms Contracts/slips
8.7 Explain the operation of the General Underwriters’ Agreement 8D
8.8 Explain how an underwriter will know they are on risk 8D
8.9 Identify and explain the various sections of an insurance policy 8B
8.10 Explain the purpose and effect of warranties, conditions and 8C
exclusions
8.11 Explain what is meant by the term ‘contract certainty’ 8E
8.12 Explain the role of the insurer and that of the broker in the 7E, 8D
collection and processing of premiums
8.13 Describe how contracts of insurance can be terminated 8A
8.14 Explain how conflicts of interest may arise and how they may be 9B, 10B
managed
11

9. Understand the purpose, benefits and operation of delegated underwriting
9.1 Examine and explain the purpose of delegated underwriting/ 9A
binding authorities
9.2 Explain the benefits and operation of delegated underwriting/ 9B
binding authorities
9.3 Explain the controls that Lloyd’s has placed on delegated 9C
9.4 Explain the operation of Line Slips and Consortium Underwriting 9A
10. Know the handling of claims in the London Market
10.1 Explain the role and responsibilities of insurers and brokers in the 10A, 10B
processing of claims
10.2 Explain the roles of loss adjusters, surveyors and average 10B
adjusters
10.3 Explain the application of indemnity, subrogation, contribution 10C
and proximate cause principles
10.4 Explain the application of excesses and exclusions 10C
11. Understand the main methods of resolving complaints
11.1 Examine and describe the Statements of Principle and Code of 5D
Practice for all persons approved by the industry regulator
11.2 Describe the industry regulator’s requirements in terms of claims 10D
handling
11.3 Describe the services provided by the Financial Ombudsman 10E
11.4 Explain the main requirements of the Financial Services 10E
Compensation Scheme
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13
Introduction
LM2: London Market insurance principles and practices continues the student on their learning journey
started by LM1 – and is the second module in both the Award in London Market insurance and Certificate
in Insurance (London Market). Completion of LM1 and LM2 gains the student the qualification of Award
in London Market insurance, and additional successful completion of LM3 leads to the Certificate in
Insurance (London Market).
LM2 takes some topics introduced in LM1 and allows a more in-depth review as well as introducing some
new topics for the first time.
It begins by considering the nature of the London market overall and what might make it an appealing
location for clients to obtain their insurance, and then considers the various risks written both direct and
reinsurance in greater detail than the overview in LM1.
There is more coverage of regulatory matters in LM2 such as market security, the regulation that applies
to the market both from home regulators and overseas and also the regulation of intermediaries,
including both brokers and others such as coverholders.
The latter part of the study material considers both the business process flow in the market as well as
more detail on the underwriting process itself, including a closer look at the documentation used,
premium calculation and loss/exposure modelling.
This module also covers the reasons for and processes behind delegation (particularly of underwriting),
and finally the claims process in the market.
15
Contents
1: Business nature of the London Market
A Subscription 1/2
B International nature of the London Market 1/9
C Appeal of the London Market 1/13
2: Risks written in the London Market

A Non-marine classes of business 2/2
B Aviation classes of business 2/22
C Marine classes of business 2/27
D Motor insurance 2/35
3: Reinsurance
A Why reinsurance is purchased and sold 3/2
B London reinsurance market 3/3
C Types of reinsurance products 3/4
D Reinsurance programme construction 3/12
4: Market security
A Solvency 4/2
B Solvency II 4/3
C Lloyd’s chain of security 4/6
D Rating agencies 4/7
5: Legal and regulatory requirements

A Compulsory insurances 5/2
B Legislation relating to insurance contracts 5/6
C Insurance premium tax (IPT) 5/8
D Regulation of individuals within firms 5/9
6: Insurance intermediation
A Law of agency 6/2
B Types of intermediaries 6/3
C Role of the broker in the placing and claims processes 6/5
D Terms of Business Agreements (TOBAs) 6/8
E Broker remuneration 6/11
F Impact on brokers of EU legislation and UK regulation 6/12
7: Underwriting
A Conduct of underwriting in the London Market 7/2
B How underwriters and brokers interrelate 7/4
C Market cycles 7/7
D Loss and exposure modelling 7/8
E Premium calculation 7/10
F Reserving 7/13
G Reinsurance to close (RITC) and open years management 7/15
8: Business process
A Formation and termination of the insurance contract 8/2
B Documents used in the London Market 8/8
C Key terms and conditions used in policy wordings 8/17
D Methods of conducting business in the London Market 8/20
E Contract certainty 8/21
9: Delegated underwriting
A Purpose and types of delegated underwriting 9/2
B Operation of delegated underwriting contracts 9/4
C Controls over delegated underwriting 9/11
D Outsourcing of other activities by insurers 9/13
10: Claims handling

A Role of claims in the insurance process 10/2
B Roles and responsibilities of various parties in the claims process 10/4
C Practical claims handling 10/8
D Regulation of claims handling 10/17
E Complaints handling, the Financial Ombudsman Service (FOS) and the Financial Services 10/21
Compensation Scheme (FSCS)
Self-test answers i
Cases and statutes xi
Index xiii
Chapter 1
Business nature of the
1
London Market
Contents Syllabus learning
outcomes
Learning objectives
Introduction
Key terms
A Subscription market 1.1
B International nature of the London Market 1.1
C Appeal of the London Market 2.1
Key points
Question answers
Self-test questions
Learning objectives
After studying this chapter, you should be able to:
• explain the concept of a subscription market;
• examine the international nature of the London Market;
• explain how different parts of the London Market participate in the same risks; and
• explain the appeal of the London Market to international and domestic clients.
1/2 LM2/October 2017 London Market insurance principles and practices
Chapter 1
Introduction
In this study text we will be building further on some of the topics introduced in LM1: London Market
insurance essentials.
In this chapter we will be looking at the nature of the London Market as a whole and particularly at two
aspects. The first is the fact that the market is made up of various organisations that are at the same
time competitors and co-insurers. The second aspect is the international nature of the market itself both
in the business that is being insured and in the insurance entities providing the insurance.
Key terms
This chapter features explanations of the following ideas:
Branch office Brand Capacity Captive insurer
Geographical limitations Licensing Lloyd’s Lloyd’s service companies
Managing agent Member Mutual company Proprietary company
Reinsurance Solvency Subscription market Syndicate
A Subscription
The London insurance market is very much a subscription market. All this means is that risks are shared
The London insurance
market is very much a among a number of different insurers, rather than being insured 100% by one insurer.
subscription market
This is not to say that an insurer cannot potentially take 100% of any risk if it wishes to, but there are a
number of reasons why it might not be able to, which are listed in the table below.
Refer to chapter 4
for more on
Table 1.1: Reasons why an insurer may not take 100% of any risk
solvency
Capacity Each insurer has a limit to the amount of business that it can insure, which is stated as
its capacity. This is the total of all premiums that are written in any period, usually one
year. This capacity is created by the input from the investors which, in the case of
Lloyd’s, are the members or Names (see section A1) and in the case of an insurance
company, the shareholders. The regulator also has a part to play in that it wants to
ensure that the insurer has enough funds both to run the organisation and also to meet
its liabilities. This balance is called ‘solvency’ and will be discussed more in chapter 4.
Capacity can also be measured using the limits of the risks being written across a
period of time or within a geographic location. This is particularly important for energy
and property insurers that want to ensure they do not have too many risks or too much
exposure concentrated in one location (such as the Gulf of Mexico). Liability insurers
also use this calculation, but generally measured across a period of time rather than a
physical location.
This can also be called measuring your aggregates or aggregating the risks. See the
section below on aggregates for more discussion on this point.
Branch office controls Many insurers operating in London are part of much larger organisations operating all
over the world and careful attention must be paid to ensure that risks are not written in
multiple offices of an insurer which, when added together, present a far larger exposure
than is wanted.
We’ve already said that capital is required to generate capacity. A branch office’s capital
is influenced by its head office and hence so is its capacity.
Additionally, insurers operate strict controls to ensure that none of its branch offices find
themselves competing with each other – for example on price.
Aggregates All insurers keep careful records of the location of the risks they are insuring. The
All insurers keep
careful records of the
purpose of this is to avoid the additional risks caused by having a concentration of
location of the risks exposure in one place.
they are insuring
For example, property insurers record risks at postcode level, rig underwriters plot the
location of rigs out at sea and satellite insurers ensure that they know which launch
vehicle is being used for each satellite because more than one can be loaded on a
rocket!
For moveable risks such as ships and cargos, aggregation is more difficult to establish
as the location is not easy to monitor.
Chapter 1
Chapter 1 Business nature of the London Market 1/3
Table 1.1: Reasons why an insurer may not take 100% of any risk
Broker influence Brokers know whether the risk that they are trying to place will be popular and they
often try to share it out among a number of insurers as a way of building and
maintaining relationships and leveraging the premium. Even though an insurer might
want to accept a large percentage (or the whole 100%) the broker might not be willing
to allow them to do so.
The broker’s responsibility is to ensure the best placement for their client and should
consider this at all times.
Licensing Much of the business that flows into the London Market is international in origin. The
Much of the business
fact that the business is being presented to an insurer in London by a broker does not that flows into the
mean that the insurer is authorised to write the business. London Market is
international in origin
Many countries around the world regulate insurance for risks which are located within
their borders and they do not authorise all insurers to insure those risks.
Lloyd’s obtains permission on behalf of all syndicates and managing agents operating
within the Lloyd’s Market; however insurance companies need to obtain their own
individual permissions.
Client influence A knowledgeable and informed client might have a view on whether they prefer to
spread their risk among a number of insurers or to concentrate on building a
relationship with a single insurer which is taking the whole of any risk.
Availability of reinsurance If you studied unit LM1, you may recall that in chapter 3, section D2A we discussed
Reinsurance frees up
capacity using the analogy of the pint glass to represent the insurer’s available capacity capacity for the
to write business, as permitted by the UK regulator and the insurer’s own internal insurer to write more
controls. We said that once the glass was full (i.e. the insurer has reached its full business
capacity), it was impossible for the insurer to ‘add more water’ (write more business)
unless some of the original ‘water’ was removed. Reinsurance is one way of ‘removing
the water’, by transferring the risk to another party – being the reinsurer. This frees up
capacity for the insurer to write more business until it reaches its capacity again.
If no reinsurance is available, either at all, or for a reasonable price then this curtails the
insurer’s ability to take on risks.
Geographical limitations This limitation is not the same as the aggregation issue, but a limitation on the amount
of business that can be insured which originates in a certain part of the world. This is
usually an internal control that insurers apply to ensure that their business is well-
balanced. Therefore, an insurer might want to restrict cargo business where the insured
is located in France, even though the subject-matter of the insurance is located in
different places all over the world.
Activity
Locate the person or team in your office dealing with what is known as aggregate monitoring. Find out how they
capture information relating to risks of all types, to monitor where risks are located and to ensure not too many risks
are written in one area.
Ask them how they deal with moving risks such as ships, aircraft and cargo – do they even try to capture that data? Refer to LM1,
chapter 3,
section D2A for
Write some notes of your findings here: more on capacity
A1 Structure of the subscription market

Quite simply, the subscription market is made up of any insurer which is available to write the business
being placed. A broker operating in London has not only the London Market at their disposal within
which to place their client’s risk – they can access any market in the world that they please. There are
often compelling reasons why a risk is only partly placed in the London Market with the balance placed
with another international insurance market – see the table below.
Chapter 1
Table 1.2: Reasons why risks may be placed partly outside the London Market
Location of insured Although the London Market has a worldwide reputation as a centre of excellence,
many insureds have a loyalty to their home market and seek to have at least part of
the risk placed there. A good example of this is the Scandinavian markets where
many of the risks written there are for Scandinavian insureds.
Culture, local knowledge and The value of understanding the client, their culture and those aspects that are
relationships important to them cannot be underestimated. This concept is wider than just local
loyalty; it extends to the client’s need to know that their insurer understands what is
important to them as a client (which might not be the same as for a similar client in
another part of the world).
Also, insurers in other markets, particularly the one from which the risk originates,
usually have a superior knowledge of any specific local legislation.
Experienced insurers Coupled with the example above, the knowledge and experience of the overseas
market encourages brokers and clients to use them as an alternative to London or
in a placing alongside London insurers.
Claims service This is the fundamental practical measure of service and an area in which other
markets openly compete with London. We will discuss the importance and
meaning of a good claims service in more detail in chapter 10.
Where subscription placements are the exception

It is important to understand that in some areas of the London Market, it is actually more usual for the risks to be
written 100% and subscription writing is the exception to the rule. A good example of this is the marine liability risks
written by the mutual clubs called Protection and Indemnity Associations (known as ‘P&I Clubs’). For example,
generally they share only the very largest cruise vessel liability risks.
These insurers will be discussed in more detail in section A2.
Focusing back on London, the Market can be divided broadly into three categories of insurers:
Three divisions of the
London Market are:
those operating in • those operating in Lloyd’s;
Lloyd’s, insurance • insurance companies; and
companies and
mutual insurers • mutual insurers.
However, if we look at these categories more closely, we see that the distinctions between them are
perhaps not quite as obvious as we might have originally thought.
Study text LM1 discusses the construction of Lloyd’s insurers, as well as the differences between
syndicates, managing agents and members’ agents. It also explains that the investors in the Lloyd’s
market are called members or Names and they can be private individuals or corporate entities.
Reinforce
Ensure that you are clear about the construction of Lloyd’s insurers. If you need further information, visit:
www.lloyds.com (or if you have completed LM1, re-visit chapter 5).
Refer to LM1, We will now take a closer look at the nature and structure of some of the types of companies operating in
chapter 5
the London insurance market and explore how the distinction between Lloyd’s syndicates and
companies sometimes becomes blurred.
Chapter 1
A2 Different types of companies

Insurers may be distinguished from one another in terms of ownership and function. There are three
main categories of insurer in terms of ownership:
• proprietary companies;
• mutual companies and mutual indemnity associations; and
• captive insurers.
Most of the companies operating in the London Market fall into the first category (proprietary
companies); however, it is important to review briefly some other formations as you may come across
them in different situations. We’ll look at each in turn.
A2A Proprietary companies

Most of the insurance companies in this group are registered under the Companies Act 1985.
Most of the insurance
companies in this
These are owned by shareholders who, in buying shares, contribute to the share capital of the firm. group are registered
Therefore, company profits (after expenses and reserves) belong to the shareholders. under the Companies
Act 1985
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.
Activity
Search on the internet or in the financial pages of a daily newspaper for share price information about your employer,
or if your employer is not listed on an exchange, then look for an insurance company such as Aviva, Zurich, AXA or
Churchill.
Publicly-quoted companies have the letters ‘plc’ after their name. Even these companies may choose to
operate under a brand: for example, Aviva plc operated at one time under the ‘Norwich Union’ brand and
‘RAC’ for roadside assistance, and Royal and Sun Alliance plc continues to operate under the ‘MORE
TH>N’ banner.
However, some insurance companies are private limited companies whose shares may be owned by a
few shareholders, or sometimes by only a single shareholder. Their shares are not available to the
general public. In the UK, such companies have the designation ‘Ltd’ after their names. They are more
commonly found in the small to medium-sized insurance intermediary firms.
Consider this…
Some proprietary companies (including plcs) also operate Lloyd’s syndicates. We will discuss the reasons that they
choose to do this later in this chapter.
A2B Mutual companies

In contrast to proprietary companies, mutual companies are owned by their policyholders.
Mutual companies are
owned by their
The policyholders share in the profits of the company by way of lower premiums. In theory, the policyholders
policyholders are liable for any losses made by the company. However, in reality, mutual companies are
‘limited by guarantee’ meaning that a policyholder’s maximum liability is usually limited to their
premium. There has been a trend for insurers owned in this way to demutualise, which means they then
become proprietary companies.
Often, demutualisation is a preliminary activity to the organisation being purchased, such as the AA
being demutualised before being purchased by Centrica. All members of the AA obtained a financial
windfall arising from the purchase.
There are no mutual companies operating actively in the London Market today; however, the name
Liberty Mutual gives a hint as to the origins of this large company and syndicate.
Chapter 1
Activity
Do you know anyone who has an insurance policy with LV? The full name of this insurer is Liverpool Victoria and it
is an example of a mutual company although they do not operate in the London market but provide household and
personal lines types insurances. Look at their website to find out more about them:
www.lv.com/aboutus/welcome-to-lv/working-for-you
A2C Captive insurance companies

A captive insurer or ‘captive’ is an authorised insurance company that is owned by a non-insurance
parent company. Captive insurance is a tax-efficient method for companies to transfer risk, without using
the mainstream insurance market; it has become more common in recent years among the large national
and international companies.
Many captives operate from offshore locations such as the Republic of Ireland, the Channel Islands,
Many captives
operate from offshore Bermuda and the Isle of Man because of their favourable tax regimes.
locations
Apart from tax efficiency, there are other incentives to operating a captive which include:
• not being exposed to the general premium increases in the market that would be applied to all
insureds irrespective of loss record;
• not passing funds in the form of premiums to a commercial insurer and adding to their profits; and
• being able to invest, and hopefully benefit from returns from, premium-related funds.
Disadvantages of captives include:
• the need to set up an insurance organisation with funding and staff;
• the need to ensure that a premium appropriate for the risk is being charged to the subsidiary company
which is transferring its risk to the captive insurer;
• not having access to insurer knowledge; and
• not having any external funds to call on should a large loss occur.
Activity
Find out to which company or organisation each of these captives belongs:
Omnium; Hydra; Jupiter; SVAG; Ancon; Westel; Astro.
Write your findings here:
Refer to chapter 3 Although, by their nature, captive insurers are outside the London Market, they regularly ‘appear’ by
for more on
reinsurance purchasing reinsurance in the commercial marketplace, including London. Whilst there is no legal
requirement for captive insurers to buy reinsurance, most of them do so, in order to transfer at least part
of the often sizeable risks involved away from their business. As we will see in chapter 3 (on
reinsurance), the degree to which the reinsurers subsequently become involved in claims can vary.
A2D Mutual indemnity associations

Mutual indemnity associations – just like mutual companies – are owned by their policyholders.
Mutual indemnity
associations – just However, mutual indemnity associations have their origins in their members grouping together
like mutual essentially to self-insure. Mutual indemnity associations employ professional managers to run the
companies – are
owned by their insurer on a day-to-day basis.
policyholders
The main areas where these operate today is in marine insurance, where P&I Clubs insure certain
aspects of marine liability, and professional indemnity, where mutual such as Bar Mutual and PAMIA
exist to provide alternative sources of this type of insurance.
Useful website
Use this link to find out more about various types of marine and non marine mutual indemnity associations:
www.thomasmiller.com/companies/insurance.
Chapter 1
A2E Lloyd’s service companies

Although perhaps a contradiction in terms, there are some companies which are linked to Lloyd’s Refer to chapter 9
for delegated
syndicates. The way in which they operate, including how they obtain authority from the syndicate, will underwriting
be discussed in more detail in chapter 9 when we consider delegated underwriting.
In essence, they are set up solely to write business on behalf of the syndicate and although their legal
structure is similar to an insurance company, they obtain their capacity and authority from the syndicate
rather than via shareholders.
Reinforce
You might find it easier to think of it as a parent and child type of relationship where the syndicate is the parent and
the service company is its child!
Example of Lloyd’s service companies

Lloyd’s syndicates often write domestic motor business using this type of arrangement, as it does not make
business sense to handle what are relatively small risks via individual presentations to the syndicate.
Question 1.1
What is the name given to an insurer, where its sole source of risks is other companies within the same group?
a. Mutual. F
b. Captive. F
c. Reinsurer. F
d. Intermediary. F
A3 Insurers operating as both insurance companies and Lloyd’s

syndicates
The decision to operate as either an insurance company or a Lloyd’s syndicate or both is very much a
business decision which is made using a number of different considerations, as follows:
Brand The Lloyd’s brand is recognised and respected internationally. Any organisations that are
working within the Lloyd’s marketplace often benefit from the positive nature of the Lloyd’s
brand simply by association. Of course, insurance companies also have their own brands
which are valuable and visible but Lloyd’s remains at the forefront.
Permission As mentioned above, regulators in many overseas countries take a keen interest in where
insurance is being obtained for risks located within their borders. Many countries reserve
the right to actively grant permission to international insurers that wish to insure business
from their country.
As we will see later in this chapter, the Corporation of Lloyd’s negotiates on behalf of
Lloyd’s syndicates, rather than each managing agent having to do so individually;
however, insurance companies have to negotiate with the regulator individually. The
Lloyd’s brand and reputation plays a part in this process as well; sometimes regulators
refuse permission to insurance companies, but grant it to Lloyd’s.
Capacity An insurance organisation may decide to spread its capacity across both an insurance
company ‘platform’ and a Lloyd’s syndicate (or syndicates) and seek to obtain more
market share by taking two separate shares of risks.
Regulation Insurance companies operating in the London Market and Lloyd’s managing agents are
authorised and regulated for prudential requirements by the Prudential Regulation Authority
(PRA); they are regulated for conduct of business issues by the Financial Conduct
Authority (FCA). Managing agents are additionally subject to Lloyd’s internal regulation
and rules. Insurers must consider whether the requirement to comply with the Lloyd’s
rules is outweighed, for example, by the benefits to be gained by obtaining access to the
international permissions that Lloyd’s may offer.
Activity
Review this website report on the Lloyd’s brand:
https://www.lloyds.com/AnnualReport2016/assets/pdf/strategic_report.pdf
Chapter 1
Activity
If you work for an insurer, find out all you can about whether the firm is both an insurance company and a managing
agent – or just one or the other.
Research the organisation called QBE and find out the third type of insurer that they have operating in the London
Market.
Question 1.2
A broker has received a firm order from a client and is using a Lloyd’s syndicate as the slip leader. From which
market must they obtain the rest of the insurers?
a. Lloyd’s only. F
b. Lloyd’s and International Underwriting Association of London (IUA) companies only. F
c. London Market only. F
d. Any market – there are no restrictions. F
There is no fundamental rule that states that the insurers participating in a risk must be any combination
of Lloyd’s and companies, or even London and non-London. We will examine, however, some market
rules that set out which parties can make decisions that might bind other insurers.
A4 Governance of the Lloyd’s market

The first and most important thing to remember is that Lloyd’s is not an insurer. Instead it is a
Lloyd’s is not an
insurer but a marketplace. It is also a world-renowned insurance brand, without ever actually providing any
marketplace insurance itself.
Lloyd’s is a Society of Members, and the Corporation of Lloyd’s provides the infrastructure for the
marketplace together with a responsibility for international liaison.
Under the Lloyd’s Act 1982, the Council of Lloyd’s was created and is responsible for the management
and supervision of the Market.
The Council normally has six working, six external and six nominated members. The working and
external members are elected by Lloyd’s members. The Chairman and Deputy Chairmen are elected
annually by the Council from among its members. All members are approved by the FCA.
Definitions
A working member is one who is actively working in the Lloyd’s Market either for a broker or for a managing agent,
or did so immediately before retirement. These members also have to be members of the Society of Lloyd’s, i.e.
provide capital for the market.
An external member is one who is a member of the Society of Lloyd’s (i.e. a provider of capital) but does not fulfil
the criteria for a working member.
A nominated member is not a member of the Society and a capital provider but comes from outside the market. The
nearest equivalent would be the non-executive directors of a company who are not involved with the day-to-day
operation of the business.
The Council can discharge some of its functions directly by making decisions and issuing resolutions,
requirements, rules and byelaws. The byelaws can be described as market laws with which
organisations working within the Market, such as the managing agents, must comply. Only the Council
can make byelaws, even though it devolves authority to other bodies and committees within Lloyd’s.
The members of the Council are strategic decision-makers but do not engage in the everyday
management of the work of Lloyd’s. This is done by an executive team of the Corporation of Lloyd’s.
Activity
Go to www.lloyds.com and review the operational management structure of Lloyd’s. Consider the way in which any
of the elements impact on the organisation you work for.
Activity
Find out more about the executive team by visiting www.lloyds.com/lloyds/corporate-governance/executive-team.
Other decisions are delegated to the Lloyd’s Franchise Board and associated committees.
Chapter 1
The Franchise Board sets the market strategy and is responsible for risk management and profitability
targets across the Market as well as day-to-day management. It lays down guidelines for all managing
agents, and operates a business planning and monitoring process to safeguard high standards of
underwriting and risk management, thereby improving sustainable profitability and enhancing the
financial strength of the Market.
The functions of Council and the Franchise Board, together with the accountabilities that link the two
bodies together, are all focused on the single aim of providing a marketplace that remains flexible whilst
ensuring that the appropriate protections are in place both for the policyholders and the investors (i.e.
the members).
The Franchise Board has a significant number of members from outside the market, which is in line with
best practice in corporate governance.
Consider this…
What is the advantage of having external parties involved in an entity such as the Franchise Board?
Activity
Find out how many non-executive directors sit on the board of the organisation you work for. If possible, find out
who they are and what experience they bring to the business.
Useful website
Find out more about the Franchise Board at: www.lloyds.com/lloyds/corporate-governance/lloyds_franchise_board.
B International nature of the London Market

In this section, we will consider where the insurers operating in the market come from and where the
risks originate.
B1 Insurers
Just as the organisations operating within the London Market make a positive choice as to whether to
Insurers have a
operate as an insurance company or a Lloyd’s syndicate, insurers have a choice as to whether to enter choice as to whether
the London Market at all, or remain within their home markets. to enter the London
Market at all
A closer look at many of the organisations operating within the London Market reveals that they are in
fact companies based overseas, either because the overseas company has acquired a London Market
insurer, or because they have set up a London Market operation from scratch.
Example 1.1
Let’s consider QBE and Chubb as examples of the two models:
QBE is a large Australian insurer that bought a Lloyd’s managing agent.
Chubb is a large US insurance company that set up its own Lloyd’s syndicate from scratch.
Activity
Look at the IUA website and review the list of its members. How many of them are actually overseas insurers that
have made a positive decision to have a presence in the London Market?
www.iua.co.uk/
Think about the reasons they might have decided to open an office in London. What benefits does it provide
to them?
Write some notes here:
One key reason that many insurers decide to set up an office in London is the proximity to all the other
insurers and more importantly the brokers/intermediaries. This increases the opportunity to participate
in networking, market forums and has the benefit of what can be described as ‘passing traffic’.
Chapter 1
Many insurance companies now rent space in the Lloyd’s building – not to become a syndicate but to
take advantage of the fact that it is an open trading floor where brokers will potentially walk past them
every time they enter the Lloyd’s building and perhaps show them a risk in which they would not
otherwise have had the opportunity to participate.
Activity
What about your organisation – where is it headquartered? How many offices does it have in other places? Is the
London office the largest, the smallest, or somewhere in-between? If you are in Lloyd’s, do you have any service
companies?
B2 Source of risks
Only about 18% of the risks written in the Lloyd’s Market come from the UK – the balance comes from
Only 18% of risks
written in Lloyd’s elsewhere in the world. For the company market, the latest IUA statistics report suggests that a much
from the UK larger proportion being 48% of their gross income overall is from the UK and Ireland.
Useful websites
For more information on the source of risks coming into the Lloyd’s Market review the latest Lloyd’s Annual Report
at: www.lloyds.com/Lloyds/About-Lloyds/Publications
For the company market look at the IUA statistics report available here:
www.iua.co.uk/IUA_Member/Publications/London_Company_Market_Statistics_Report.aspx
B2A International licences

Earlier in this chapter, we discussed the permission that overseas insurance regulators give to insurers
operating in the London Market to write risks located in their countries. The proper name for this
permission is a licence; the Corporation of Lloyd’s obtains licences which apply to the whole Lloyd’s
Market whereas insurance companies have to obtain licences individually.
Lloyd’s has licences and authorisations to trade in over 200 countries and territories. This means that
Lloyd’s has licences
and authorisations to Lloyd’s is either a licensed or an eligible surplus lines insurer, or is authorised or registered as a
trade in over 200 reinsurer only. Eligible surplus lines insurers are covered in section B2B, below.
countries and
territories
Lloyd’s can also write business from other territories worldwide, subject to the rules and regulations of
that country, which can vary.
Continuing with Lloyd’s as an example, there are several basic positions that a regulator can adopt:
• No requirement for actual positive permission at all.
• No positive permission given when it is required, so risks located in that country cannot be written by
Lloyd’s syndicates at all.
• Permission to write reinsurance only, so direct risks cannot be written.
• Permission to write both direct and reinsurance business, so everything can be written and the insurer
can operate on the same basis as a local or domestic insurer.
• Permission to write business on a surplus lines basis rather than as an admitted carrier (such as
happens in most states of the USA).
• Permission only to write direct business, although this is highly improbable as permission to write
reinsurance is far more likely to be granted than permission to write direct business.
All types of permission can have restrictions around them, so a specific check on the individual country
in question is always prudent.
Reinforce
Remember that reinsurance is an insurance contract where the buyer is itself an insurer already.
Chapter 1
Consider this…
Why might a regulator grant permission to an insurer only to write reinsurance? The straightforward answer is that
the regulator wants to try to keep premium funds within the country’s borders. Many countries that have this type of
restriction also have significant natural assets such as oil and gas within their borders. The local businesses owning
these assets have to purchase insurance from local insurance companies which purchase reinsurance from the
international market (including London).
B2B US licensing
Within the USA, the licensing of insurers operates on a state by state basis. This means that Lloyd’s and
Within the USA, the
insurance companies have to negotiate for permission with each individual state regulator rather than licensing of insurers
once with the federal government. operates on a state by
state basis
This has resulted in a varying level of permissions for Lloyd’s (and potentially for individual companies
as well) depending on the state concerned:
• For reinsurance business, Lloyd’s is licensed in all US states.
• For direct business, Lloyd’s has two different statuses:
– An admitted or licensed insurer only in Illinois, Kentucky and the US Virgin Islands. In practice, this
means that Lloyd’s can operate as if it were a domestic insurer with the same rights and privileges.
It is important to understand that such rights and privileges also bring with them additional
responsibility such as the requirement to file the insurance policy wordings that are going to be
used with the regulator, as well as the premiums to be charged. This obligation is known as ‘rate
and form filing’.
– A surplus lines insurer in every state/location. A surplus lines insurer is one that essentially sits in
reserve as a market, in case the local admitted/licensed market is unable or unwilling to take on any
risk presented to it by a broker.
The key with this permission is that the admitted/licensed market must be shown the risk first in
most cases. Lloyd’s is not the only surplus lines insurer available to a broker.
Joint status
Lloyd’s has both statuses in Illinois, Kentucky and the US Virgin Islands, i.e. is both ‘admitted’ and has surplus
lines status.
Activity
Look at the Lloyd’s website to find out more about Lloyd’s licences.
www.lloyds.com/The-Market/Operating-at-Lloyds/Regulation/Lloyds-licences
Look at Papua New Guinea as an example outside the USA where Lloyd’s is licensed as a surplus lines insurer only.
Next look at the Lloyd’s website and review the Crystal system, which provides information about the status of
Lloyd’s in various countries.
www.lloyds.com/The-Market/Tools-and-Resources/Tools-E-Services/Crystal
If you work for an insurance company, see what you can find out about those countries in which your company is
authorised to write business.
One of the criteria for the permission granted by the overseas regulators is the regular provision of data
concerning risks originating in the country concerned and any claims attaching to those risks.
Additionally, in many countries, taxes and other charges are payable on risks located in those countries,
as well as a requirement in some countries that specific funds of money are held there. An example of
this is the US trust fund for Lloyd’s which has to be maintained within the borders of the USA. In
addition, individual states have guarantee funds for certain classes of business which will operate in
much the same way as the Financial Services Compensation Scheme in the UK.
Chapter 1
The data for risks written in Lloyd’s is captured by use of specific codes attributed to both the premiums
and claims as they are processed through the market databases by Xchanging, as Lloyd’s undertakes the
reporting on behalf of the syndicates and managing agents, as well as collecting and paying some of the
taxes. On the other hand, companies (as they have obtained their own permission) are individually
responsible for accurate and timely reporting to the various regulators, as well as for the payment of
taxes and charges. Companies may also have to maintain their own funds within individual countries if
required by the regulators, whereas the Corporation of Lloyd’s maintains one fund on behalf of all
syndicates operating within the local marketplace.
B2C Systems and controls to ensure compliance

Systems and controls go wider than just the reporting against regulatory requirements but underpin the
Systems and controls
go wider than just the entire business to ensure that at no time can a risk be written by an underwriter (or an activity be
reporting against undertaken by a broker) that is in contravention of the rules.
regulatory
requirements
In practice this means putting in place the safety nets to try to avoid something happening rather than
just telling people something has happened after the event.
Reinforce
It is similar to the concept of risk management. Firms can try to avoid bad things happening by using various
mechanisms such as training staff.
But what is meant by systems and controls? Is it just setting up the computers with lots of warning
messages?
Consider this…
Look at the list of items below that form part of ‘systems and controls‘. Are you surprised by any of them? Do you
think any are more powerful or useful than others:
• training and education;
• easily accessible information for staff to check;
• operating system controls, warnings and blocks;
• peer review (someone else checking your work);
• system reports to spot problems after the fact; and
• authority limits.
In fact, they are all equally valid and the most important ones are probably training and education.
Computer-based checking of processes with inbuilt blocks for certain actions is important, but it’s far
more important to ensure that staff know why certain things cannot be done, not just know that, if they
try to do so, that they can’t proceed.
Activity
If you work for an insurer or a broker, consider the ways in which updated information about aspects such as
licensing or regulation is provided to you. Do you get emails from the compliance officer or are there updates posted
on your intranet?
Within Lloyd’s the Franchise Board seeks to achieve its goals by using a Performance Framework of
Minimum Standards on which all managing agents will be measured.
Responsibility for meeting the Lloyd’s Underwriting Principles and Minimum Standards rests with each
managing agent’s board, whether their underwriting is undertaken in house, whether any underwriting
authority is delegated to a third party (or parties), or whether underwriting-related services are procured
externally.
Chapter 1
Activity
Find the latest Lloyd’s Annual Report at www.lloyds.com/Lloyds/About-Lloyds/Publications and locate the table
which shows the geographical split between various classes of business. Look how much reinsurance business is
coming from ‘Other Americas’ (essentially South America); now look at the Lloyd’s licensing data – can Lloyd’s
write direct business in South American countries?
Compare with the IUA statistics report again at:
www.iua.co.uk/IUA_Member/Publications/London_Company_Market_Statistics_Report.aspx.
Write your notes here:
Activity
Ask senior colleagues in which countries you have clients located; is there a concentration in any particular parts of
the world? Does it differ for different classes of business?
C Appeal of the London Market

As we saw in section B2, only about 18% of the business in Lloyd’s originates from UK-based clients
although the figure for the IUA company market is higher at nearly 50%. The UK insurance market as a
whole is a net exporter of insurance and creates sizeable invisible earnings for the UK economy through
the premiums that flow into the market.
With that in mind, let’s consider why clients come to the London Market to place insurance business.
Table 1.3 suggests several qualities that they might find attractive.
Table 1.3: Qualities of the London Market that attract clients

Quality of brokers Whilst many regional and overseas brokers are of the highest calibre, there
There is an unrivalled
is an unrivalled concentration of quality and knowledge among the London concentration of
Market brokers. They provide their clients with the highest level of advice quality and knowledge
and support that they could expect in both the placing and claims among the London
processes. Market brokers
Reputation The London Market has a long-standing reputation worldwide for

excellence. Clients purchase insurance ultimately to be able to make
claims if required and the ongoing ability of the market to pay claims
enhances its reputation.
Brand This is slightly different to reputation and concerns the visibility and
identification of an insurer’s name. The insured may select the insurer
purely on this basis, without necessarily knowing anything more about the
firm. Lloyd’s and the individual companies which make up the London
Market seek to have a brand that is easily identifiable and – more
importantly – trusted.
Chapter 1
Table 1.3: Qualities of the London Market that attract clients

Capacity Capacity is the ability of an insurer to accept risk. Each year, an insurer
agrees its capacity with the regulator and if they reach it too early in the
year then they either have to stop underwriting or go back to the regulator
and ask for increased capacity.
The measurement of capacity is generally in premium income rather than
The measurement of
capacity is generally
the sums insured on the policies. However, it is possible for capacity to be
in premium income measured in both the total sums insured of policies written and also in
rather than the sums geographical terms (for example an insurer not wanting to write more than
insured on the a certain number of risks in a particular town).
policies
London is a subscription market which means that risks can be shared
among several insurers. In addition, there is a large total capacity within
the market as a whole, which means that larger risks can be accepted
within the marketplace. Overseas or regional insurers/insurance markets
may not be able to offer the same amount of capacity.
Knowledge New types of risk regularly come into the market and underwriters must be
able to identify the key elements of the risk, in order to work out how to
cover it. The London Market has many years of accumulated knowledge
and experience and can use that historic knowledge, applying it to consider
new risks, regions or requirements for cover.
A successful market or insurer must anticipate the client’s developing
A successful market
or insurer must
needs to have a product available when they need it, rather than too early
anticipate the client’s or too late. An insurance market that develops a product after its
developing needs competitors will have to fight for market share rather than being ‘ahead of
the game’ by developing it early. The London Market is very focused on
research and development to ensure that its insurers remain at the
forefront of knowledge about emerging risks. Insurers and brokers work
together proactively to develop new products.
Flexibility/ The London Market is highly flexible in the types of insurance and
Competition on the
basis of price alone is
entrepreneurial spirit reinsurance that it can offer its clients as well as in terms of the way in
not a viable approach which its products can be constructed. Competition on the basis of price
in today’s insurance alone is not a viable approach in today’s insurance market. London Market
market insurers prefer to compete on product and they will generally engage in an
element of bespoke products to the client’s requirements. If they can be
flexible by amending or even rewriting standard policy wordings to better
suit the individual client, whilst maintaining control of the product this has
more value to both parties.
Licences London Market insurers have licences in many parts of the world in order
to write risks there. Lloyd’s does this through a central licensing function,
whereas IUA companies each obtain separate licences which may or may
not involve them setting up offices in those countries. Therefore, clients
can look at other options, other than in those countries where insurance
must be written by a local insurer. Some clients have operations which are
worldwide in nature and hence they are drawn to a marketplace where they
can possibly obtain one policy to cover the entire worldwide risk for a
particular peril. This may be preferable to obtaining a number of individual
policies on a per location basis which can be more of an administrative
burden and potentially more expensive.
Claims service Knowledgeable and proactive claims personnel are vitally important both
Knowledgeable and
proactive claims
for a broker and an insurer. Whilst the London Market has a good
personnel are vitally reputation for professional claims handling, the money movement process
important both for a for claims is still sometimes subject to criticism as the elapsed time in the
broker and an insurer claims cycle is generally longer than in competitor markets such as
Bermuda.
In chapter 10, we will look at claims handling in more detail and you will
see the reform work being undertaken in the Market to address these
issues.
Activity
Ask five friends outside the Market what they think when they hear the word Lloyd’s.
Did they associate it with Lloyd’s of London or did they say ‘the bank’ or ‘the chemist’? This is brand awareness.
Chapter 1
Activity
Visit the Lloyd’s website to see how it approaches various types of emerging risks:
www.lloyds.com/News-and-Insight/News-and-Features/Emerging-Risk
The next chapter examines the classes of business written in the London Market, some of the risks that Refer to chapter 3
for information on
fall within those classes, the perils that are covered and the types of claims that can arise. We will not be reinsurance
addressing reinsurance here (see chapter 3), although most of the classes we will be looking at could be
written as reinsurance as well as direct insurance.
First party and third party classes

Each of the sections that follow can be further sub-divided into ‘first party’ and ‘third party’ classes. First party
classes are those that cover physical loss or damage to the insured property and third party classes cover liability to
others because of injury to them or loss or damage to their property.
Question 1.3
Which of these is NOT one of the main reasons why clients come to the London Market for cover?
a. Knowledge of risks. F
b. Flexibility. F
c. Cheapest prices. F
d. Brand. F
Activity
If you work for an insurer, find some marketing material for your London Market operation and see what attributes of
the Market are used to promote that operation.
If you work for a broker, ask your colleagues what attributes of the London Market they advise their clients when
considering whether to use it to place a risk.
Write the notes of your findings here:
Although the London Market is an important marketplace, we should remember that it is just one option
for clients who have a large selection of international and regionally-based insurers with which they can
place their business. As we will see in later chapters, London Market insurers use tools such as service
companies to put themselves into regional or other international marketplaces to access business that
might not come through to the London Market directly from local brokers or local clients.
Chapter 1
Key points
The main ideas covered by this chapter can be summarised as follows:
Subscription market
• Subscription market means that more than one insurer can participate in any one risk.
• There are no restrictions on the combinations of Lloyd’s and companies, or London Market and overseas markets.
• Several issues can influence whether business comes into London, including broker and client loyalty, experience
and permissions.
• Several issues can influence whether insurers can write 100% of any one risk including capacity, branch office
controls, aggregates, broker/client influence and licensing.
International nature of the London Market
• The London Market is international in nature regarding both the origin of the insurers and the origin of the risks.
• UK risks make up about only 18% of the business written in Lloyd’s but nearly 50% of the IUA company market
business.
• London Market insurers often require permission to write risks in other countries.
• Lloyd’s obtains those permissions or licences centrally, whereas insurance companies have to apply individually.
Appeal of the London Market
• The London Market has a high quality of brokers together with a good reputation and brand.
• The London Market also has capacity and knowledge, particularly for unusual risks.
• It has a reputation for being flexible in its thinking and can also access business around the world, particularly by
Lloyd’s using the licensing system.
• The London Market also has a reputation for good claims service.
Chapter 1
Question answers
1.1 The correct answer is b.
1.2 The correct answer is d.
1.3 The correct answer is c.
Chapter 1
Self-test questions
1. What is meant by the term ‘subscription market’?
2. Outline two ways in which an insurer can measure its capacity.
3. State three reasons why a risk might be placed partially outside the London Market.
4. What is a captive insurer?
5. Set out three reasons why an insurer might want to have both a Lloyd’s syndicate and an insurance
company.
6. What is meant by an ‘admitted’ insurer?
7. What is unusual about the way in which the USA grants permission for insurers to operate?
8. Identify four reasons why insurance buyers come to the London Market.
You will find the answers at the back of the book

2
Chapter 2
Risks written in the
London Market
outcomes
Learning objectives
Introduction
Key terms
A Non-marine classes of business 2.2, 2.3
B Aviation classes of business 2.2, 2.3
C Marine classes of business 2.2, 2.3
D Motor insurance 2.2, 2.3
Key points
Question answers
Self-test questions
Learning objectives
• explain the main classes of business written in the London Market;
• explain the main areas of cover within each of the classes of business; and
• describe the types of losses that can arise within the various classes of business.
Introduction
In this chapter, we will examine the main classes of business written in the London Market, including
areas of cover and the types of losses that can arise.
Chapter 2
Key terms
Aviation insurance Claims made Liability Marine
Non-marine Occurrence Property/physical damage Reinsurance
A Non-marine classes of business

A1 Physical damage
A1A Agricultural crop and forestry/hail insurance
The risks written in this class include anything that is being farmed commercially as a crop, such as
wheat, fruit, tobacco and herbs. The main peril is the loss of the crop primarily due to weather or
disease.
A typical claim that would arise in this class would be loss of crop, through frost or hail damage –
common for tree fruit crops where hail at the wrong time of year destroys the buds and severely reduces
the crop.
A1B Bloodstock/livestock insurance

Bloodstock insurance specifically covers racehorses and show-jumpers, whilst livestock insurance
Bloodstock insurance
specifically covers covers all animals (including fish) that can be reared commercially.
racehorses and show-
jumpers The perils covered include sickness/injury and total loss for the racehorses as well as loss of value (see
below). For livestock, it is important to insure loss by disease.
Activity
Review this news website which has information about disease in Scottish salmon farms:
www.bbc.co.uk/news/uk-scotland-38966188
Claims for racehorses often arise because they have to be euthanised (put down) having been injured in
a race. The payout will be the insured value of the racehorse. If they survive their racing career and were
successful in that career then they will have a high value at stud to produce the next generation of
racehorses. If a stallion or mare fails to breed and turns out to be infertile, then their value drops
dramatically and a claim can be made on that basis (depreciation, in effect). A similar type of claim can
arise from the breeding of bulls, as if they prove to be infertile then a substantial amount of their
commercial value is lost as well.
A1C Contingency insurance

There are a number of sub-categories within this class that we will look at individually. You will notice
that they are generally related to entertainment or sporting events.
Concert or event cancellation/abandonment
Music events, sporting events and even exhibitions take a long time to organise and carry high costs for
the organiser in terms of the venue, artists, producing and selling tickets, arranging marketing and
security. Imagine the horror of the organiser or promoter if they discovered shortly before the event that
one of the following had occurred, for example:
• the artist has lost their voice;
• the venue’s roof has collapsed; or
• the weather forecast predicts torrential rain and it’s an outdoor event.
Chapter 2 Risks written in the London Market 2/3
Contingency insurance covers the costs of refunding tickets and rearranging the event, if possible, to try
Contingency
to recoup some of the costs. insurance covers the
costs of refunding
Chapter 2
When considering this type of risk, an underwriter looks at: tickets and
rearranging the event,
• The tour schedule for concerts – are there enough rest breaks between dates? What is the scope for if possible
adding in re-scheduled dates in case of cancellations?

• The venue for any one-off event.
• The health of the artist (and possibly that of their family which would affect the artist’s ability to
proceed with an event).
• The stated cancellation and refund policy on the tickets being sold for the event.
Typical claims that arise would include the cancellation of one day’s play at the annual Wimbledon
tennis championships, a cricket test match because of rain, or cancellation of a music concert because
the artist became too unwell to perform.
Activity
Consider the likely financial impact that the cancellation of any or all of the Olympic or Paralympic events in Rio in
2016 might have.
Activity
Use this link to find out more about this insurance: http://ind.pn/1pOlxfe
Over redemption
Have you ever clipped coupons from cereal packets or other products, and then sent them back to the
retailers in order to obtain an item (branded or otherwise)? The retailers are trying to increase sales by
using this promotional method. However, the value is outweighed by the cost if too many people claim
the free gifts, causing them to use up all the extra profits!
This risk can be insured against. To do this, insurers will consider the normal level of sales and add on a
Insurers will consider
safety margin. The insurance will be triggered, as the name suggests, if there is more redemption than the normal level of
expected. sales and add on a
safety margin
Prize indemnity
If you achieve a ‘hole in one’ at a charity golf competition, or throw six sixes on the dice at a charity
casino night, you might win a valuable prize, such as a car. The car may have been donated; if not, the
charity might have to pay for it. This insurance covers that sort of situation and covers the cost of the car.
Another example of this type of insurance for the ‘hole in one’, is where it can cover your drinks round in
the clubhouse afterwards!
This insurance is essentially statistical in nature and the underwriter will try to calculate the odds of the
The underwriter will
incident occurring. As a precaution, there will also be an independent adjudicator on site during the try to calculate the
event to ensure no cheating. odds of the incident
occurring
Contingency insurers also provide insurance for firms that offer a prize for, say, the first person to
complete a particular jigsaw puzzle. Important factors for rating include the difficulty of the puzzle and
the statistical probability of anyone claiming the prize.
Activity
Look at this website to read about a competition jigsaw called Eternity which was insured at Lloyd’s:
http://news.bbc.co.uk/1/hi/953316.stm
A1D Personal accident and health insurance

This class of business covers a number of different areas such as:
• Personal accident. This covers the insured against accidental injury, usually subject to a number of
Chapter 2
exclusions and clear disclosure about the insured’s hobbies (i.e. skydiving or stamp collecting). This is
a ‘benefits’ policy and hence pays on the basis of a pre-determined schedule of amounts for different
types of injury such as damage to fingers, hand, arm, sight and hearing.
Consider this…
There can be different levels of payout for the dominant hand (the one you write with) compared to the non-dominant
hand.
Benefits are paid weekly or monthly for an agreed period of time and if there is no improvement during
that period, lump sums are usually payable for ‘permanent total disablement’.
This insurance can be extended to cover sports disability where it can be purchased by sports teams
to cover their players.
Not surprisingly insurers are quite keen to ensure that the players insured remain fit and well and
impose certain requirements in the policy such as the players’ extra-curricular activities.
• Personal accident and illness/sickness. Some policies offer cover for illness as well as the personal
accident elements mentioned above. Underwriters are keen to ensure that they do not pick up
longstanding or chronic conditions under this policy; instead they cover ‘sudden onset’ illnesses such
as heart failure. Pre-existing conditions are a major concern for insurers of this type of risk and
generally will be excluded.
• Kidnap and ransom (K&R). The main cover under the insurance is the payment of the ransom itself if
The main cover under
the insurance is the an insured person is kidnapped, but many policies also include the costs of medical and
payment of the psychological treatment for them and the payment of their salary whilst they are being held captive.
ransom itself
The other main area of cover under most kidnap and ransom policies is payment for a team of hostage
negotiators dedicated to handle the matter on the ground, liaise with the family of the seized person
and handle any payment of ransom.
When considering this risk, the key aspects for the insurers are:
– Who is the insured and what makes them a kidnap target?
– What is the nature of their personal security? Insurers often send in security specialists before the
risk actually incepts or as part of the underwriting process to give advice to a potential insured.
– Confidentiality – even after the risk is written the identity of the insured is kept confidential even by
the insurers and brokers. It will be a condition and sometimes even a warranty in the policy that the
existence of the insurance is kept entirely confidential.
Activity
Think about why confidentiality is so important to insurers in respect of kidnap and ransom insurance? Ask your
colleagues for their views.
The claims all tend to follow a similar pattern with an insured person being kidnapped from work, home
or more often during a journey. The desired end result is the safe return of the individual even if that
means paying a ransom.
Question 2.1
What type of insurance is suitable for a concert promotion firm which is concerned about having to refund ticket
sales should the artist fall ill and be unable to perform?
a. Accident and health insurance. F
b. Liability insurance. F
c. Professional indemnity insurance. F
d. Contingency insurance. F
A1E Property insurance, including onshore energy

One of the main areas of business within the London Market is property insurance, making up 27% of
One of the main areas
Chapter 2
Lloyd’s business in 2016 and the same proportion for the IUA companies. This area of the business can of business within the
be further divided into construction insurances and ‘business as usual’ (also known as ‘operational’) London Market is
property insurance
insurances, i.e. those covering buildings that are completed and ‘in use’. Let’s consider each in turn.
Construction insurance
Many construction projects involve a number of different specialist contractors bringing their skills such
as groundwork, concrete pouring, electrical, scaffolding, etc. Whilst each one of these contractors could
take out separate insurance relating to the project, for larger projects it makes more sense for the head
contractor to take out what is known as ‘Contractors’ all risks’ (CAR) insurance. Depending on the cover
purchased, this can be a blended physical damage and liability policy.
The contractor is engaged by a party known as the employer (the entity that commissioned the contract
to undertake the construction). This entity can be party to this insurance as can banks or other funding
parties.
Being an ‘all risks’ cover, to avoid having to pay out on a claim, the insurer would have to show that any
loss that occurred fell within one of a number of exclusions (reviewed below) written into the policy
wording.
The policy period is very important for these policies and should match the contract period; for a
The policy period
construction project, this is usually from the point that the materials for the construction start moving to should match the
site and whilst they are being stored prior to use. This policy should terminate at the point of completion contract period
of the construction. There is a certification process at the point of completion and it is possible for parts
of a project to be completed and handed over. Therefore, from a claims perspective, it is important for
insurers to work out whether they are still on risk in respect of work that has not been handed over.
Some policies include a maintenance period which is generally not for longer than twelve months after
Some policies include
the handover/completion date. Insurers only cover this if the contractor has maintained any contractual a maintenance period
liability during this period.
What is covered under the policy (including during any maintenance period)?
• loss or damage to the building works;
• machinery movement (which covers machinery whilst being moved including some testing once
installed);
• business interruption (see section A1F);
• public liability and employers’ liability; and
• damage to plant (machinery) which is used for installation or construction (whether that plant is
owned by the insured or belonging to others).
There are a number of extensions to the cover that can be purchased, if required, such as the cost of
reconstructing plans, breakdown or explosion of machinery.
Reconstructing plans
Reconstructing plans is literally redrawing plans that might have been lost in a flood or an explosion. This takes time
and incurs costs.
One of the most important extensions is ‘expediting expenses’. This provides cover to pay for extra costs
such as overtime or air freight charges for obtaining parts required to ensure that any repairs or
rebuilding are done as quickly as possible following loss or damage.
The normal exclusions under this type of policy include the following (an illustrative, not exhaustive list):
• Defective design, materials or workmanship (only the defective element is excluded – any
consequential damage to other property is covered).
• Existing property (i.e. what was on the site before construction began).
• Breakdown or explosion (see the extension that can be purchased for this).
• Anything for which the contractor is not liable under contract.
• Wear and tear or deterioration.
The key aspects for an insurer to consider with this type of insurance are:
• Experience of the contractor in the type of work being undertaken.
• The contracts that have been entered into by the contractor and the employer and the contractor and
Chapter 2
their sub-contractors.
• The contract value – therefore the sums insured. These policies have scope for increases in the sums
insured during the building period (such as inflation) and it is very important that the insurer is kept
advised of these amounts; otherwise the sums insured may not be adequate to reinstate the damaged
property.
• Where and when the construction is taking place.
Activity
Consider a building project going on in your nearest town or city – think about what aspects of the risk a CAR insurer
should consider.
Read this article about a building under construction melting a car in London:
www.bbc.co.uk/news/uk-england-london-23930675
Claims can arise in many different ways, for example:

• Injury claims because personnel fall off any part of the construction.
• Part of the construction sinks into the ground because of heavy rainfall.
• Parts of the structure do not fit together properly (this may possibly be excluded, depending on the
cause of the problem).
• Collapse of equipment, such as a crane which will not only be damaged itself but can cause damage
to the construction project or people as a result of the collapse.
There is another type of insurance that fits within this category known as ‘Erection all risks’ (EAR)
EAR insurance is
often purchased by insurance. This cover can be absorbed within a CAR policy but is often purchased separately by the firms
the firms which which provide cranes and/or those which are responsible for the erection of any other steelwork, for
provide cranes
example.
EAR provides cover for loss or damage to owned equipment, as well as liability cover should the insured
or their equipment cause any incident on-site (or on a site in the vicinity).
Activity
The next time you pass a building site, look at the large construction cranes and consider the amount of damage that
one could do if it fell over.
Visit this website to see a real example of what can happen when a crane collapses:
news.bbc.co.uk/1/hi/england/merseyside/8136336.stm
Property insurance
Once the building has been completed and handed over to the owner, (other than any maintenance
period that has been agreed with the building contractor for the handling of any ‘snagging’ issues), the
owner needs to consider ordinary property insurance, which covers physical damage only.
The fundamentals of property insurance are the same; however, there are several types of cover that can
Property insurance
can be split into be purchased, depending on the use of the property. Generally, property insurance can be split into
buildings, machinery three constituent parts:
and stock
• Buildings: can vary from refineries and chemical plants through to shops and offices.
• Machinery: varies depending on the type of building but can include industrial machinery and plant,
fixtures and fittings, office equipment, computers and money.
• Stock: can include raw materials, materials in the production process and finished stock stored
on-site.
Many property insurance policies apply on an ‘all risks’ basis (subject to certain excluded perils) but it is
possible to purchase just fire insurance and add on any further perils if required. As property insurance
is not compulsory, it is up to the client to decide what works best for their requirements.
Chapter 2
The typical heads of cover in an ‘all risks’ property policy are:
• Fire (including underground fire):
– Fire is actual ignition (flames) which is accidental or a fortuity.
– Note it can include damage caused whilst trying to put out the fire and damage to property blown up
trying to stop the fire spreading, as well as theft or weather related losses following the fire.
– Fire is not a chemical reaction where there is no ignition, electrical arcing, charring or scorching
(where there is no fire). Additionally, if the fire is where it is supposed to be (for example in a
furnace) then this may not be covered.
– Underground fire must originate beneath the ground and have started naturally. In other words, fires
in basements or tunnels are not considered to be ‘underground’.
Activity
Have a look at this website and find out about coal seam fires that burn endlessly:
www.wvcoal.com
• Lightning: an electrical discharge which may or may not lead to a fire.

• Explosion: a violent release of energy which may or may not be connected to a fire. An explosion can
be caused by the release of some dusts. However, if an object bursts through steam pressure alone
this is not necessarily an explosion.
• Earthquake: there are a number of options here, i.e. pure earthquake, shake damage, earthquake
excluding any damage caused by subsequent fire, or fire damage following an earthquake.
Useful website
Read the Lloyd’s emerging risk report about earthquake risk in the Middle East:
https://www.lloyds.com/news-and-insight/risk-insight/library/natural-environment/seismicshock
• Aircraft: this includes objects dropped out of or off aircraft, but excludes any damage caused by sonic
bangs (not so regular an occurrence now that Concorde no longer operates).
• Riots/strikes: under the Public Order Act 1986 you need at least twelve people for a riot and you have
to cause at least one person who is described as having reasonable courage to fear for their personal
safety.
The importance of the definition of riot in law is that if the policy just covers riot with no further
provisions or definitions of riot, and the policy is subject to English law, if the required twelve people
and one alarmed one are not present, there is no riot and potentially no cover.
• Malicious acts: this extends the riot cover above to incidents such as football hooligans running wild
and causing damage, but it does not cover damage to empty buildings or damage due to theft.
• Storm, flood or escape of water:
– Storm; weather conditions need to be violent and extreme for a storm.
Weather conditions
– Flood; escape of water from its normal confines. Overflowing drains following heavy rainfall or need to be violent and
extreme for a storm
changes in the water table are not floods.
– Escape of water; escape from tanks or pipes. Sprinkler leakage and damage to empty buildings are
generally excluded but can be purchased separately.
• Impact damage: by third party road vehicle or even animals.
Additional heads of cover that can be purchased include:
• Sprinkler leakage: failure of the system and sudden release of water.
• Subsidence: provision of this cover is usually subject to an insurer being made aware of any work
being undertaken on adjoining land which might impact the insured’s property.
As with all insurance policies there are certain exclusions, which in property policies can be grouped into
three main categories:
• Those risks or loss or damage to property that the insurers will never cover:
Property insurers will
Chapter 2
never cover war risks – inherent vice: the normal and natural behaviour of things which would not be a fortuity but rather a
or radioactive
contamination, for certainty or inevitable such as iron rusting if not protected from the atmosphere;
example
– trade risks such as the failure of a creditor to pay their bills;
– normal settlement of new buildings;
– war risks;
– radioactive contamination;
– anything insured elsewhere; and
– any property insured for marine perils.
• Those risks that insurers may cover after consideration of the risk presented, such as inventory
shortages and empty properties against freezing, escape of water or malicious damage. Pollution
can come into this heading as insurers may cover sudden and accidental pollution following certain
named perils, and certain named perils following sudden and accidental pollution.
• Those risks that insurers usually provide as ‘buy-backs’ (i.e. the insured can pay an additional
premium to buy back elements of or the entire cover which is excluded).These include:
– fraud and employee dishonesty;
– theft;
– subsidence;
– jewellery;
– goods in transit;
– fixed glass;
– sanitary ware;
– money;
– land, bridges and civil engineering works; and
– crops and trees.
Property insurers generally have the view that certain risks (as can be seen above) should be insured on
more specialist policies. These include:
• buildings in the course of construction;
• livestock;
• consequential loss (although larger commercial companies or multi-nationals will include this cover as
a separate section as part of a package);
• computers;
• vehicles licensed for road use; and
• own steam and other pressure plant.
The claims that emanate from property insurance include damage to the buildings from storms, fires,
explosions and so on. It’s essential for an insurer to find out quickly the extent of the damage, trying to
ensure that it doesn’t get any worse and discussing with the insured their various options in relation to
indemnity under the policy.
Property insurance uses the concept of reinstatement as one of the options for indemnifying the insured
Property insurance
uses the concept of in the event of loss or damage. This is where the insurer agrees to make good the property lost or
reinstatement as one damaged and effectively takes over the property during the period of the reinstatement. They have to
of the options for
indemnifying the restore the building substantially to the pre-loss condition. Depending on the policy wording, it will not
insured be possible to apply reductions for wear and tear or betterment. The key aspect is making sure that the
sum insured is adequate to pay for the reinstatement activities which may take some time depending on
the size and complexity of the building(s) insured.
If underinsurance or average applies, there is an extension to the policy called a reinstatement
memorandum which triggers the application of the average clause only if the sum insured represents, for
example, 85% of the full reinstatement value.
An alternative way of ensuring an adequate sum insured is to use the ‘Day One Average Memorandum’ or
‘Day One Reinstatement’. The main purpose here is to try to counteract the impact of inflation given that
reinstatement of a building may take several years. Let’s look at how this works in practice.
The policy shows a sum insured in two parts:

• The cost of reinstating as new everything covered under the policy at prices on the first day of the
Chapter 2
policy: this is known as Base/Day One or Declared Value.
• An agreed percentage uplift on that declared value (which is designed to take into account the
likelihood of inflation).
The final result is a sum insured which is intended to be adequate to meet reinstatement costs that
might be incurred finally, many years after the damage first occurred.
Average or underinsurance can still be applied if the calculations were incorrect.
Question 2.2
Why do property insurers generally NOT cover road vehicle risks?
a. They believe that they should be insured on more specialist policies. F
b. They do not have the specialist knowledge required to do so. F
c. They are not licensed to write motor risks. F
d. This class of business is generally unprofitable. F
Activity
If your organisation handles property risks, have a look at some of them. Identify their sums insured and see how
they have been calculated.
Onshore energy insurance

Onshore energy risks can be written within a property account and sometimes within their own specific
account depending on the size of the insurer. An onshore energy risk is essentially a property risk where
the subject-matter insured is specific to the energy industry. The insureds still require the same basic
elements of cover and the same exclusions might apply.
Activity
If you organisation handles onshore energy risks either as an insurer or a broker, look at some of the risks and
contrast them with property risks. Are the same types of risks being covered? Are any of the terms and conditions
different from those used for property risks; if so think why do you think this might be?
Write some notes of your findings here:
The underwriting considerations for onshore energy risk are much the same as for any other property-
related risk and include:
• Location – proximity to towns or cities.
• The activity – for example, is it a petrochemical plant, a power station, an oil refinery or a
biofuel plant?
• The risks being created by the nature of the activity – is the process being undertaken potentially
explosive? What is the raw material and how is it stored?
Again, the claims that arise are similar to other property risks, such as fire or explosion.
There are a number of other types of insurance which can be grouped within the ‘general’ property
heading so we will deal with them here:
Glass insurance. As the name suggests this covers fixed glass and will provide all risks cover for
Glass insurance can
boarding up, replacing inbuilt alarm systems, lettering and window frames. The availability, however, be purchased on a
of a stand-alone product helps those clients who might not require a full property insurance policy. standalone basis
Stock insurance. This covers raw materials, materials being used in production and the finished stock in
Stock insurance is a
physical damage storage ready for distribution. This is a physical damage insurance and the policy is set up in such a way
policy that there is an agreed sum insured (which should represent the maximum exposure that the insured
faces); however, they do not have to pay premium based on maximum exposures for the whole policy
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period. Rather more logically, they pay for the insurance they need by paying a deposit of premium at the
start of the insurance, making regular declarations to their insurer during the policy period with
balancing payments based on the average declarations during the year.
The claims for this type of insurance include theft or damage to raw materials. This can include fire or
water damage, materials being damaged during any work (perhaps because a factory had to shut down
quickly) and then finally when the stock is completed and awaiting distribution, the policy includes
cover for fire, theft and water damage.
Consider this…
Importantly, at the end of the process the finished products usually have a higher value than the raw materials used,
which should be taken into account when considering the sum insured.
Another matter that insurers and clients have to consider is ‘stockpiling’ of either raw materials or
finished products. This leads to vastly increased exposures and if not advised to insurers could lead to
an underinsurance/average issue.
Crime-related insurances:
• Theft insurance. Theft is defined under English law as ‘dishonestly appropriating property belonging to
another with the intention of permanently depriving them of it’. However, insurers take the definition
of theft a little further to include the requirement for ‘forcible entry or exit of the premises’.
Activity
Why do you think insurers extend the definition in this way? When you’ve given it some thought, ask some
colleagues for their thoughts.
Certain perils are excluded from a theft policy, such as fire, money, or war – usually because they
Fire, money and war
are excluded from a should be covered elsewhere. However, there are certain specific and policy-related exclusions as
theft policy follows:
– Collusion – the concept of the ‘inside job’ where the thief has assistance from someone employed
within the insured organisation.
– Entry gained by using tricks or keys – this could mean an employee being careless with their keys
and leaving them somewhere from which they could be stolen. Additionally, it could include
someone making a copy of a key. An example of the use of a trick would be fooling a security guard
who was not paying attention, by using a forged entry pass.
Refer to section C The types of claims that arise are perhaps predictable – something has been stolen and it is important
for other policies
with theft cover for insurers to ensure that the claim is fully investigated to exclude any possibility of something that is
excluded having happened. There are other policies which we will review in section C (‘Marine classes
of business’) which have an element of theft cover within them and there is some crossover with this
type of policy. The crossover is not unusual, and is more a function of the fact that different products
have been developed for different clients in different markets.
• Pecuniary insurances. Pecuniary losses are where the loss suffered is monetary or financial in its
original nature rather than being the financial cost of replacing a physical thing or being compensated
for an injury.
• Money insurance. This policy covers all risks of loss to money, which is the responsibility of (i.e. not
Money insurance
covers all risks of loss necessarily owned by) the insured. Responsibility means that the insured may have a role in
to money transportation, storage or distribution of the items being insured.
Money in the context of this type of policy is not just cash; it includes cheques, stamps, gift vouchers,
lottery tickets and travel tickets. The risk associated with these items is measured by their
negotiability.
Negotiability
Negotiability is the concept of ease of transfer. Cash can be passed from one person to another with relative ease. If
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someone purchases a gift voucher or gift card, then they can give it as a gift without the need to go through any
complicated transfer process. This makes the item ‘freely negotiable’.
In contrast, cheques are not usually freely negotiable. If you receive a cheque made out to you, then you have to pay
it into your bank account and you cannot freely give it to someone else to pay into their bank account.
Consider this…
When you travel by train or another form of transport, in what form do you receive your ticket or contract to travel?
Is it electronic, or do you have to print off a paper version even if emailed to you in order to travel?
If printed off, it is still negotiable as you can give it to someone else and they can travel on it, but if you have not got
your printout, the ticket inspector might give you a fine if you then try and travel! Contrast this with airlines who are
now promoting boarding passes that are just on your smartphone and which have a code which can be scanned at
the airport. The boarding pass is not negotiable as it will have your name on it and the idea is that it is checked
against your ID.
If non-negotiable documents such as cheques are stolen they are more difficult to transfer, so the
insurer needs to know, in detail, the types of money being handled by the insured so as to measure
the relative risks.
Money insurance cover

The basic cover under the policy is ‘all risks’, i.e. whilst the money is on the insured’s premises, or any other insured
sites during business hours, in transit, in a bank night safe or at the private residence of the insured (in a safe).
Certain general exclusions (such as war) apply but there are some policy specific exclusions such as
loss from unattended vehicles, any loss which appears to arise from the use of keys or a code for an
entry system and any dishonesty of the employees or directors.
Activity
Consider what the issue might be with unattended vehicles. What does ‘unattended’ mean in your view? Ask some
colleagues – particularly those who offer this type of insurance (or similar ones like cash in transit).
From a claims perspective one of the issues is whether any stolen documents can be reconstructed –
this will include chequebooks, for example. The insurance pays the cost of reprinting documents
rather than the value of the paper on which they were originally printed. For items such as vouchers,
the insurer covers cancellation costs to try to minimise the opportunity for the stolen items to be used.
• Fidelity guarantee insurance. This insurance covers the loss of property as a direct result of a
fraudulent act committed during the period of the insurance (although it might be discovered after the
policy has expired).
Anyone physically handling money or with the ability to divert cash (such as computer operators)
might engage in behaviour which could lead to a claim under this policy. Additionally, an employee
could steal assets from their employer whilst working on the shop-floor or in a factory. Insureds can
purchase this insurance on one of three different bases:
– blanket cover for all employees;
– named employees only; and
– named roles only (irrespective of who occupies them).
Given that a loss may take some time to surface, most policies provide cover even if the employee has
since left the insured’s employment (for up to 24 months after they left). The insurer will want to see
that the employee concerned is prosecuted by their former employer (the insured). If it has paid a
claim, the insurer will consider any subrogation opportunities against the individual concerned.
When considering this type of risk, an insurer looks at the internal processes and controls that the
insured has in place and some types of business will naturally carry more risk than others.
Activity
Think about which types of business might be naturally more risky than others from a fidelity guarantee point of
view.
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Typical examples of the internal risk management activities that an insurer offering fidelity guarantee
Insurers look at
insureds’ internal risk insurance will require the insured to undertake are:
management
activities here – obtaining and checking references for employees;
– correct signing procedures for cheques and other types of money movement;
– regular checking of any cash held on the premises;
– daily banking of any cash or cheques coming into the business;
– reconciliation of all bank accounts;
– procedures for stocktaking; and
– full audit at least once a year using professional auditors.
Activity
Consider the relative risk levels of writing fidelity guarantee insurance for a supermarket, a jeweller and an insurer.
A1F Business interruption insurance

As we saw in the previous section, insurance is available to help you rebuild your property, whatever it
might be, after a loss. We have also looked at the fact that it might take some time to rebuild.
What if that building was the only one you had? Your business might grind to a halt whilst the repairs or
rebuilding works were taking place. How are you going to pay your bills, your staff and keep all your
clients happy so they don’t go to your competitors while you’re not operating?
To be clear, insurance cannot stop any of the bad things happening here, but it can provide a financial
‘blanket’ to try to relieve the worst of the financial result of a physical loss or damage.
The point of business interruption (BI) insurance is to assist with replacing the income that would have
been received had the physical loss to your property not occurred and your business not been
interrupted.
As with most types of insurance, it is important to work out the correct sum insured so that when a bad
thing happens, the amount paid by the insurer reflects (to a greater or lesser degree) the amount that
was lost. Here, the insurer and the insured work out an amount for each day/week/month which
represents the maximum indemnity payment during the interruption period.
The deductible or excess which, for this type of insurance, is known as a waiting period is expressed
in days.
Waiting period
This means that if your policy includes a waiting period set at 14 days and your business is up and running again in
seven days, you have no claim.
As well as a waiting period, the insurer sets a maximum payout time – in days or months (possibly years
BI insurance includes
a waiting period although rare). The insurer must bear in mind how long it might realistically take either to rebuild the
(days) and a business premises or move it to another suitable location.
maximum payout time
(days or months)
When a claim arises, insurers often use accountants to investigate the loss that the insured has
suffered – with the intention of not automatically paying out the daily maximum, as that might put the
insured in the position of having benefited from the loss (which goes against the concept of indemnity,
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which is putting the insured back in the position they were in before the loss occurred).
Standard BI requires some physical loss or damage to have occurred to the insured’s property and many
standard BI policies require there to have been a recoverable claim on their property insurance – which
means that if the property loss is declined, the BI insurance might be impacted.
We will now consider the situation in which an insured’s business has been interrupted but their own
property has not suffered any physical damage. Two examples which often give rise to claims are as
follows:
• The insured’s supplier of raw materials has suffered a loss and cannot supply them for at least the
next month. The insured has enough stock of the material to work only for one week.
• The insured’s power supply is cut off, perhaps by a loss at their local power station. Alternatively, this
could happen when nearby road-works result in an electric cable being accidentally severed. The
insured does not have the ability to generate enough power internally to keep working.
The important factor for insurers writing this business (known as contingent business interruption or CBI
insurance) is to work out the various possible scenarios which could possibly give rise to a claim. The
ability to include indirect losses due to loss or damage at third party premises makes it more challenging
for the insurer to predict what might give rise to a loss.
However, having said that, CBI policies are put together in much the same way as normal BI, with waiting
periods and finite days or months of coverage.
Activity
Visit this website which discusses a loss in Australia called Varanus Island. You will get some idea of the knock-on
effect to businesses from this explosion and fire:
peakenergy.blogspot.co.uk/2008/07/gas-supply-disruption-case-study.html
Find out if your company was involved as an insurer/reinsurer or broker. Unfortunately, there were plenty of claims
into the London Market on this loss for you to choose from.
Research whether your company had any CBI losses arising from Hurricane Matthew which hit the Caribbean in
2016, or the Fort McMurray wildfire in Canada, also in 2016.
A variation on the concept of CBI is ‘supply chain’ insurance. Again, this insurance is designed to cover
the situation where the insured’s business is interrupted because another party lets them down. The
insured can nominate specific suppliers and supplies to be covered.
Activity
Visit this website to find out more about one insurer’s offering of supply chain insurance:
www.zurich.com/en/products/large-and-multinational/supply-chain-insurance
Question 2.3
If a factory owner found that their business could not operate because of a failure of one of their suppliers, under
which policy could they make a claim?
a. Liability. F
b. Business interruption. F
c. Contingent Business Interruption. F
d. Property. F
A1G Homeowners’ insurance

These are still property risks but are rarely written directly into the London market. They are generally
written via forms of delegated underwriting, such as binding authorities or service companies. They
cover the same types of risks as commercial property insurance, including damage to buildings caused
by various perils and the cost of rebuilding or reinstating the property after loss.
A2 Non-marine liability classes

A2A Directors’ and officers’ (D&O) liability insurance
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This insurance is purchased by firms to protect their directors and officers (generally senior personnel
who may or may not be board directors) from claims made by shareholders and other investors because
the behaviour of the directors and officers has caused them financial loss.
When a London Market insurer writes D&O business, it categorises it as either US or non-US business,
London Market
insurers categorise also making the distinction between financial institutions and non-financial institutions.
D&O business as US
or non-US Typical coverage under a D&O policy is financial loss (which also covers damages and legal costs but not
necessarily the punitive damages that may be awarded by US courts) arising from or in consequence of a
claim due to any action (such as breach of duty, breach of trust, neglect, misleading statement, wrongful
trading) during the period of the insurance. As you might expect, there are a number of exclusions and
possible extensions under the policy. The main exclusions are as follows:
• fraud;
• insured persons (i.e. the director or officer) making a financial gain;
• anything that was already being investigated by authorities prior to inception or any ongoing litigation;
• anything which has already been notified to a prior insurer;
• pollution/radiation/war;
• anything done by an insured person prior to a firm becoming a subsidiary of the insured firm; and
• bodily injury/emotional distress (unless relating to an employment claim).
D&O policies can include various extensions, for example:
D&O policies can
include employment
claims as an • Automatically adding in any companies acquired after the inception date, as long as prior notice given
extension to the insurer.
• Employment claims – e.g. wrongful dismissal or employee discrimination.
• Extension of the policy if not renewed – this is known as an extended reporting period. This is usually
for no longer than twelve months and covers claims that arise after non-renewal provided they
originated from an act committed prior to non-renewal. The relevance of this extension will become
clearer when we discuss claims.
• Representation costs for insured persons being asked to appear before investigators even though
there might not yet be a claim that triggers the policy.
D&O claims generally arise where a shareholder or other investor alleges that wrongdoing by the
directors has reduced the value of their investment. However, claims can also arise from directors and
officers being litigated against following possible breaches of legislation such as corporate
manslaughter or health and safety legislation. A D&O policy includes the costs of defending a director or
officer for breaches of such legislation (but will not pay where such director or officer is found guilty
under such legislation).
These policies are generally written on a ‘claims made’ basis which means that the policy that is
D&O policies are
usually written on a triggered is the one in force when the shareholder/investor makes the claim on the directors, rather than
‘claims made’ basis the one in force at the time when the alleged wrongdoing took place.
The extended reporting period allows the insured firm to advise the claim to the policy that has not
renewed even though the shareholder’s claim might not have been received by them until after the
normal expiry date. As long as the alleged wrongdoing took place before the expiry date, it will be
acceptable. This extended period will generally be no longer than twelve months but could be extended
subject to the insured paying an appropriate additional premium.
Example 2.1
A firm has a D&O policy which is due to expire on 20 October 2016, but it purchased an extended reporting period to
run until 19 October 2017 – even though the risk was not renewed with the same insurer.
Any claims that come in before 19 October 2017 can be advised to the original insurer as long as the alleged
wrongdoing happened before 20 October 2016.
If the alleged wrongdoing occurred after 20 October 2016 or the claim was in fact made by the disgruntled investor
after 19 October 2017 then this policy cannot be triggered.
‘Losses occurring’/‘claims made’ policy

A ‘losses occurring’ policy, like most property or first party policies, is triggered by losses that happen during the
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policy period. A ‘claims made’ policy (which is generally a liability or third party policy) is triggered by claims being
made on the insured, which may be some time after the alleged incident occurred). Some liability policies can be
‘losses occurring’ – it is important to read the wordings carefully.
A2B Errors and omissions (E&O)/professional indemnity/professional negligence and

medical malpractice
Professional indemnity, professional negligence and E&O insurance are interchangeable terms and cover
professionals of all types against claims being made them against for breach of their professional duty
of care, negligence, errors and omissions in the performance of their professional obligations.
Professional indemnity (PI) insurance is compulsory in the UK for certain professionals such as lawyers
Professional
and accountants (for example under the Solicitors Act 1974); the aim is the protection of innocent indemnity (PI)
victims who may incur a financial loss or, in the case of medical malpractice, an injury. insurance is
compulsory in the UK
for certain
As there are many different types of PI wordings specifically tailored for different professions, we will professionals such as
choose one for consideration here: accountants. lawyers and
accountants
A typical PI policy for an accountant, used in the London Market, provides coverage as described below.
If someone brings a claim during the period of insurance as a result of business activity against the
insured for one of the following items, the policy covers both the damages that might have to be paid,
but also the legal costs in defending the insured against any claims being made against them:
• negligence or breach of a duty of care;
• negligent misstatement or negligent misrepresentation;
• infringement of intellectual property rights including copyright, patent, trademark or moral rights or
any act of passing-off;
• breach of confidence or misuse of any information, which is either confidential or subject to statutory
restrictions on its use;
• defamation;
• dishonesty of individual partners, directors, employees or self-employed freelancers directly
contracted to you and under your supervision; or
• any other civil liability unless excluded.
Professionals are often caught in a situation where their client owes them money for fees but is refusing
to pay because of complaint about the work completed. Some PI policies also provide coverage for any
fees that the professional waives to try to put a stop to the bigger claim. As with all policies there are
certain exclusions which can include losses caused directly or indirectly by:
• investment or giving advice on the investment of client funds;
• operation of, or dealing with, pensions or employee benefit schemes;
• sale or purchase/dealing with any stocks or shares, or misuse of information related to them;
Consider this…
An example of ‘misuse of information’ is an accountant in possession of confidential market information concerning
a company takeover who uses that information to their own benefit by selling their shares in the company before any
market announcements, which might cause the price to fall.
• breach of any tax or competition legislation or any regulation relative to the insured’s business;
• pollution/war/nuclear risks;
• cyber risks such as computer viruses or hackers;
• any liability assumed under contract which is greater than non-contractual liability would have been
(in other words the insurer will pay for legal liability – i.e. tort liability only);
• anything that can be insured elsewhere, such as employee discrimination, property, products liability
and motor;
• deliberate, reckless or dishonest acts; and
• fines and penalties.
Professional indemnity is also a ‘claims made’ policy where the trigger for a claim is the notification
Professional
indemnity is a ‘claims received by the professional from an aggrieved party advising that they are making a claim against them.
made’ policy
For cases of medical malpractice, if the claim is in relation to a problem that arose during childbirth or
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later, then the claimant can be the child as well as a parent. These types of claims can arise a long time
after the alleged negligence, as the law does not impose any time limits for children to make legal claims
until they reach adulthood (although they are often made beforehand to obtain access to funds to
provide for medical treatment and support for the child).
Limitation
Most legal systems have a concept of limitation which is the idea that after a certain period of time your right to
recover in law disappears. In English law, the time for making claims under most contracts is six years from the
alleged breach and for tort claims (a claim of professional negligence falls into this category) the basic rule is six
years, which is reduced to three years for personal injury claims.
In some cases, there might be a number of different professionals who trigger their insurance policies
having had claims made on them, where the underlying origin of each claim may be the same event.
Example 2.2
If a business collapses and loses money for its investors, a claim may be made under a D&O policy. The investors
may also sue their bankers, lawyers, accountants, tax advisers and financial advisers – all of whom would trigger
their own insurance.
In practice, this means that London Market insurers might see a number of different claims originating from the
same trigger incident, which can give rise to conflicts of interest. Therefore, claims adjusters should handle only one
insured’s claims as each insured has their own position on the situation and they might be blaming each other for
the trigger incident. It would not be appropriate for the claims adjusters to be privy to confidential information about
one insured’s strategy for defending a claim as they might use it to the advantage of another insured when they
handle that claim.
Question 2.4
In 2016, a lawyer gives advice to a firm that has been their client since 2012. The lawyer receives a claim from the
client claiming bad advice; this claim is received by letter in 2015. Presuming the lawyer has a standard professional
indemnity policy, which policy year will be triggered?
a. 2009 only. F
b. 2013 only. F
c. 2014 only. F
d. 2009, 2013 and 2014. F
A2C Public liability insurance

Each time you walk down the street, through a shop or restaurant do you think about whether you might
fall over on some spilt liquid, or be hit on the head by a piece of flying masonry? Hopefully you will never
be unfortunate enough to suffer such an injury, but if you are, then this type of insurance will be there to
assist the party against which you make a claim. It also covers organisations against claims being made
against them for damage caused by their employees anywhere else, for example in a client’s office.
Coverage provided under a public liability policy is for legal liability for damages in respect of:
• accidental injury to any person (the third party);
• accidental loss of or damage to property (belonging to a third party); or
• nuisance, trespass to land or goods or interference with any third party’s right to air, light or water.
Legal costs are paid for defending the insured against the claims being made against them. The
Legal costs are paid
for defending the exclusions usually found on these policies include:
insured against the
claims being made • Liability arising out of the use of mechanical vehicles, other than those used as a tool of trade on site
against them
or during loading or unloading. However, if the motor insurer will pay for any losses, the claim is
usually referred to them.
• Liability out of ownership possession or use of aircraft or other aerial device, hovercraft, or other
waterborne craft.
• Anything that would be covered under an employers’ liability policy.
• Any damage to property which is owned by the insured or in their care, custody or control.
• War/radioactive contamination.
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• Product defects or recall (note that separate insurance can be bought for this – see section A3C).
• Professional risks.
Professional risks are
• Any liability assumed under contract that is wider than non contractual liability. usually excluded from
public liability
• Asbestos – a very good fire retardant material but very bad for the lungs if the fibres are breathed in. insurance
• Pollution.
Claims under public liability policies can range from an individual who slips over on a grape in the fruit See section A3C for
separate insurance
aisle of the supermarket, to larger claims from people who are injured because a train comes off the rails for product defects
or catches fire. With any one of these claims, in common with all liability policies, the issue is whether
the insured is actually liable and if so, to what extent. The extent is determined by whether another party
shares the blame and therefore the cost of the claim.
This concept of sharing the blame extends to the claimant (the injured party themselves) and these
claims need careful investigating to see whether the injured party was in any way to blame for their
injury.
Example 2.3
Assume you work for a public liability insurer. You have received a claim on a public liability policy – below is some
of the information that you have received from the broker and the loss adjuster:
• A businessman has slipped and fallen over on the concourse level outside Minster Court, in the City of London.
This office building has a large open concourse with some steps down to the road and three very large statues of
bronze horses at the top of the steps. It appears that he slipped on some liquid on the ground as he was walking
across the concourse towards the steps. He fell down several steps. (If you are not familiar with the Minster Court
concourse, click on the link below for pictures of the scene of this fictional incident.)
• Your firm provides public liability insurance to the management company that runs Minster Court. The policy runs
for twelve months from 1 January 2017 and has policy limits and a deductible of £5 million and £10,000
respectively – both on an each and every claim basis. The information provided to underwriters indicates that the
insured does not contract out any element of maintenance work.
• The loss adjuster advises that it appears that Minster Court management company has in fact started to sub-
contract the cleaning work to another company.
• There is no report anywhere in any accident book concerning the incident.
• The loss adjuster has located some witnesses who suggest that the claimant was running across the concourse
whilst appearing to check his phone. One of the witnesses knows the man and says that this is his normal
behaviour.
• It is, however, unclear where the liquid that the claimant allegedly slipped on came from, and the area concerned
is used by various people to eat and drink during the day.
The big question is how much of the blame can be shared with the cleaning company and the injured person
himself. The answer depends on the facts of the case, how much solid information can be obtained and whether
your negotiation skills result in the other parties accepting a share of the responsibility and financial exposure.
The injured person’s share of the blame is known as ‘contributory negligence’ – an important concept in all types of
liability-related insurance.
A2D Products liability insurance

When you pick up your shopping in the supermarket, having carefully avoided slipping on the grape in
the fruit aisle as discussed in the last section, do you ever consider whether any of the items you buy
(whether it be food, beauty products or cat food) might harm you or your family? When you drive your
car, do you consider whether the wheels might fall off?
Hopefully, even if these things enter your mind, they will never happen to you but, if they did, what
would you do? Well, you might decide to sue someone, but who might that someone be?
Perhaps you would sue the entity from where you bought the product, such as a supermarket chain – or
would you approach the manufacturer instead? How about suing both, to be safe and to make sure you
get some compensation from someone?
Activity
Choose one food and one non-food item that you have recently purchased and think about how many different
organisations and pairs of hands it has been through until it ended up with you. Think about product testing,
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packaging, distribution and display processes and the opportunities for something to go wrong.
A typical products liability policy can be purchased by any entity which has the potential to be sued as
part of a manufacturing, distribution, wholesale or retail chain, or if they are involved in repairing,
servicing or maintaining items.
The coverage is usually quite wide to start with, along the lines of ‘indemnity for injury or damage
occurring during the period of insurance but only against liability arising out of or in connection with any
product’. As you might imagine there are exclusions which include:
• Damage to the products themselves.
Products liability
insurance excludes • Any liability arising out of the recall of a product.
damage to the
products themselves • Any liability for repair or replacement of the product.
• Liability arising out of faulty design.
• Anything that would be covered under an employers’ liability policy.
• Any liability incurred under contract if the wording of the contract makes a party liable for matters for
which the law would not automatically make them liable.
• Anything arising out of a deliberate act.
• Fines or penalties.
• War/terrorism/radioactive contamination.
• Liability to owned property – i.e. this insurance only covers the insured’s liability to damage others’
property, not that which they own themselves.
As with the public liability insurance, one of the main issues with any claims made on a products liability
The insurer will want
to establish whether policy is working out whether the insured or any other party is likely to share any of the blame.
the insured or any
other party shares the Taking a practical example of a faulty car, whilst we all know the main manufacturer, it is important to
blame
realise that the main manufacturer does not make all the component parts itself. It might buy pre-
assembled parts such as brakes from another specialist manufacturer. However, the trail does not end
there as the brake manufacturer usually buys components from other companies. Perhaps the fault can
even be traced back to faulty raw materials provided by a steel mill or rubber plant.
In reality, careful investigation of the item that failed, or caused injury or loss or damage is very
important to try to establish exactly what happened and which party – in what could be quite a long
chain – might be responsible. Often, in practice, all the involved parties (if they cannot prove that they
have no liability) will try to negotiate ‘deals’ amongst themselves to provide a combined offer to any
claimant. Sometimes the claimant does not even know the breakdown of the combined offer in terms of
amounts or defendants.
Activity
Research a tyre manufacturer, such as Bridgestone, Continental, Dunlop or Goodyear to see if you can discover any
products liability issues that they’ve had in recent years.
If you handle product liability insurance in your firm, find out a bit more about the various different insureds you
might have.
A2E Employers’ liability insurance

Although not generally written in the London Market, employers’ liability (EL) insurance is written in the
Employers’ liability
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wider UK composite market and so for completeness we will consider it here. Remember that in the UK, insurance is written in
this is a compulsory form of insurance. the wider UK
composite market
The basic coverage is the legal liability of the insured firm for injuries to employees/persons employed
EL is a ‘causation’
caused during any period of insurance (in contrast with PI above, this is generally not a ‘claims made’ insurance
but a ‘causation’ type of insurance). Legal costs of defending any claims will also be covered. There are
certain exclusions that are normally found in this type of policy, namely radioactive contamination and
anything which would be covered under a motor policy.
Definition of employee/persons employed

Under an employers’ liability policy, ‘employee/persons employed’ includes apprentices, sub-contractors, borrowed
staff and someone on work experience. Injury covers bodily injury, death, disease or illness.
Types of claims that could arise include employees being injured falling over equipment left out by
colleagues, crushed by equipment being used carelessly by colleagues, electrocuted, or suffering chest
disease through breathing in fibres of asbestos or other products during the course of their employment.
This last category has led to some employers’ liability claims being made on policies dating back many
years. This is because the illnesses take a long time to become evident, but the underlying cause could
be the inhalation of damaging fibres many years before. Here, any employers that might have exposed
the claimant to the asbestos will all be sued, even if the employees’ employment ended many years ago.
The need to trace the insurance applying to an employer from many years ago, when that employer may
no longer exist led originally to a voluntary record keeping scheme for EL business and now today to the
Employers’ Liability Tracing office (ELTO). This organisation has been in existence since April 2011 and
aims to have records of all new and renewed EL policies since then, together with any older policies on
which there have been claims and any policies voluntarily reported by insurers. This will ensure that
claimants can more easily find the insurers for any particular previous employer.
Employers’ liability is also compulsory in the USA, where it is known as ‘workers’ compensation’. As in
Employers’ liability is
the UK, an employer is legally liable if an employee becomes injured in the workplace. There is no also compulsory in
equivalent to the UK National Health Service in the USA and other than government schemes that pay the USA, where it is
known as ‘workers’
some medical expenses for certain categories of individual, all medical costs must be paid by the compensation’
individual (even for a visit to the equivalent of Accident and Emergency).
Workers’ compensation insurance varies slightly between each state in the USA; however the following
generally apply:
• It is compulsory for the employer to purchase the insurance or contribute to a state scheme.
• It is a strict liability, which means that the injured party does not need to show any negligence on the
part of their employer, just that they became injured or ill during their employment.
• There is a short waiting period (usually three to seven days but it can vary between states) before the
insurance triggers.
• Either the employee or employer chooses the doctor to treat the injured employee (this also differs
between states).
• The insurance covers medical expenses and a form of income replacement as a percentage of the
employee’s wages for the period they are unable to work due to the injury. If the employee is killed,
the workers’ compensation insurance pays a percentage of the wages to their family.
• If an employee cannot go back to their previous job following the injury, they will be re-trained into
another role and the insurance pays those costs of re-training.
A2F General liability/comprehensive general liability insurance

We have looked at a number of specific types of liability insurance here, but many insureds will buy a
combined or comprehensive liability insurance policy (also known as a commercial general liability
policy), thus combining most of the classes mentioned and adding in some others such as advertising
liability (liability arising out of the acts of defaming or slandering an individual or firm). These combined
or commercial policies are often abbreviated to CGL or GL.
A3 Non-marine ‘other’ insurances

In this section we will complete the review of non-marine insurances by looking at a couple of other
classes which do not fall neatly into property damage or liability.
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A3A Financial guarantee insurance

You will be aware that insurance cannot be purchased for anything that might result in a gain – as that
would be considered gambling. Financial guarantee (FG) insurance can be written in the Lloyd’s Market if
the risk falls within certain exempted classes or the contract is subject to specific permission from the
Underwriting Performance department within Lloyd’s. So, what is FG and why does it cause such
nervousness in the Market?
FG is defined by Lloyd’s as being any contract of insurance, where the insurer agrees on the occurrence
of an event specified in the contract that it will pay out as agreed in the insurance contract. Specified
events include:
• financial failures of companies;
• lack of response or support from financial supporters;
• changes in interest rates;
• changes in rates of exchange; and
• changes in property values.
With all of these events, look at the underlying activity that the insured is wishing to protect – they have
‘Financial guarantee’
is perceived as ‘on the potential to make a substantial gain, as well as a loss. Property values could rise and companies
the edge of gambling’ could make good profits and be very successful. It is this element of potential gain as opposed to loss
that causes FG to be perceived as being ‘on the edge of gambling’; this leads to the need for individual
risks to be agreed by Lloyd’s Underwriting Performance department.
A3B Extortion/malicious product tamper/contamination insurance

Unfortunately, people sometimes try to obtain money from companies by threatening them (called
People sometimes try
to obtain money from extortion). One way to threaten a company is to allege that some of their products have been tampered
companies by with – such as glass in cereal boxes, or in the pockets of clothes they sell. However, the main targets
threatening them
(called extortion) here would be food and drink retailers or pharmaceutical manufacturers.
Consider this…
Consider any sealed food item you have recently bought. How would you be able to tell if it had been interfered with?
Does it have some sort of tamper-proof seal?
If a retailer receives such a threat, it has a number of things to consider:

• Checking and removing potentially unsafe goods as soon as possible.
• Maintaining brand image.
• Making sure that alternative goods are available for clients.
• Maintaining client confidence (which helps its brand image as well).
Malicious product tamper insurance exists to assist the insured with the financial impact of having to
address all these issues, as well as providing experienced assistance (in the same way that the kidnap
and ransom insurer does) to work on the problem immediately and assist the insured with a resolution.
It is possible that products can be accidentally contaminated or mislabelled perhaps by a failure in a
It is possible that
products can be pipeline in a factory – thus mixing the mayonnaise with the pickle! Maybe the machine that labels tins
accidentally malfunctioned and instead of labelling tins as dog food, they were accidentally labelled as stewed steak!
contaminated or
mislabelled
The insurance for accidental contamination is generally triggered only by illness in a person within a set
amount of days of having used or ingested the product, or if physical damage has been or would be
caused to property. Therefore, if the only expense of the mayonnaise/pickle problem was the cost of
cleaning the mayonnaise out of the pickle pipes and disposing of the resultant ‘product’, then an
accidental contamination policy may not pay. This is because there has been no physical damage, nor
necessarily would there ever have been.
A3C Product recall insurance

This class of business can be linked with the contamination insurance above but it can exist as a stand-
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alone product and many of the clients who use it are not dealing with a contamination issue but a
product that is dangerous for another reason.
If a manufacturer discovers that one of its products has a fault, they could simply keep quiet and risk a
large liability claim in the future which will only be made larger if it is ever discovered that the
manufacturer knew of the fault and did not say anything to the consumer.
It’s far more prudent for the manufacturer to own up and declare a product recall. This entails locating
Product recall
the affected products, issuing the recall notice and dealing with the recalled product when it is involves locating the
presented under the recall. Typical recall insurance pays for: affected products,
issuing the recall
notice and dealing
• advertising to publicise the recall as widely as possible in a number of different media; with the recalled
• any additional employee costs incurred by the insured in hiring extra staff to deal with the recall and product
any overtime that might be paid;

• rental costs on additional space hired by the insured to deal with the recall;
• shipping in the affected products;
• disposing of the products if specific methods other than normal waste removal are used; and
• redistribution costs of sending back any recalled products once any remediation work has taken place
if that is possible.
There are exclusions of course and these include:
• liability claims made concerning the product (injury/damage);
• products which are in fact part of somebody else’s finished product;
• loss of income;
• financial loss incurred because a competitor has recalled a similar product but there is no fault with
the insured’s product;
• redesign or re-engineering costs;
• anything that could have been reasonably foreseen by the insured; and
• failure to adhere to recognised standards for development and testing of products.
A3D War insurance

In April 2011, Lloyd’s revised the market guidance for the writing of war, civil war and related perils,
particularly with relation to the monitoring of aggregate losses that could arise from these exposures.
Lloyd’s syndicates may not write any war or related perils risks (whether on land or not) without having
Lloyd’s permission. This is obtained through the business planning process rather than on an individual
risk basis.
In addition Lloyd’s syndicates have to provide realistic disaster scenario returns showing fixed property
exposures to war and related perils by territory. Since 2012, they have also had to start providing returns
in relation to moveable risks, such as those which are aviation or marine in nature.
Realistic disaster scenarios are discussed further in chapter 7, section D, but in essence they are See chapter 7,
section D for
calculations as to which risks would be exposed by any particular loss event and what the financial realistic disaster
impact on the syndicate would be. scenarios
A3E Terrorism insurance

In the aftermath of events like the City of London bombings in 1992 and 1993 and the World Trade Center See chapter 3 for
government
attacks in New York in 1993 and 2001, the property insurance market became understandably reluctant reinsurance
to provide cover for damage to property arising out of terrorist attacks. However, the governments of programmes
various countries were keen to ensure that insureds in their countries had the opportunity to obtain
terrorism insurance.
Therefore, government-backed schemes have been set up in a number of countries such as the USA, UK,
Government-backed
Australia and France which work, in effect, as a reinsurance programme should there ever be an attack schemes have been
that falls within the required criteria. This means that commercial insurers can continue to offer terrorism set up in a number of
countries
insurance to their clients (who are not necessarily required to buy it).
These government reinsurance programmes will be reviewed in more detail in chapter 3, as they are
important to London Market insurers that write terrorism business.
A3F Cyber insurance

All businesses as well as individuals rely today, to a greater or lesser degree, on information technology
(IT) of various types. In doing so, you are exposed to the risks of your business not being able to operate,
Chapter 2
your income being compromised and your reputation badly damaged should something go wrong.
Existing property policies and some professional indemnity policies will cover some elements of cyber-
related risk, but specific standalone insurance products have now been developed to specifically deal
with these.
Cyber insurance can cover the loss relating to the damage to, or loss of information from IT systems and
networks, and include cover to pay for the costs of the immediate aftermath of the incident, which might
include contacting all your customers to tell them their data has been compromised.
A first party cyber policy will cover your own assets which includes property, digital assets, extortion and
reputational damage whilst a third party policy will cover the risks of security breaches which lead to
loss of others data, and the legal costs linked to that etc.
Activity
Use this link to read more about a data breach suffered by Talk Talk in 2015: http://bbc.in/1C3ozRV.
Use this link to read about the attack on the NHS in 2017: http://ind.pn/2z5GxEb.
Read this emerging risks report commissioned by Lloyd’s: http://bit.ly/1dLDUfb.
B Aviation classes of business

As with non-marine insurance we can divide aviation insurance up into broad categories of physical
damage, liability and ‘other’. There are a number of insurances that companies in the aviation sector
should purchase which fall into the category of non-marine insurances, as covered in section A. Where
these are mentioned, references to the appropriate section will be provided.
Refer to section B2 The main London Market aviation insurance policy is divided into three sections: damage to aircraft and
two separate liability sections – one for passengers and one for other third parties, as will be seen in
section B2.
B1 Physical damage
B1A Physical damage to aircraft insurance
The physical damage insurance available for aircraft can be purchased for all types of flying machines,
powered and not. The types of ‘aircraft’ that can be insured are:
• commercial fixed wing aircraft of all sizes;
• commercial rotary aircraft (helicopters and similar);
• private aircraft (which can be of all sizes and rotary or fixed wing);
• microlights; and
• hot air balloons.
The insurance essentially covers accidental damage to the aircraft whilst in one of three aspects of flight,
Physical damage
insurance covers namely in the air (in flight), on the ground (not moving) or taxiing (i.e. moving around an airfield).
accidental damage
whilst in the air, on Generally, insurers pay for the repair or replacement of either parts of or the whole aircraft. Given the
the ground or taxiing
comfort factor of knowing that the aircraft you are in is going to stay in the air (and the brand impact if it
does not because one of the engines failed), engine manufacturers in particular are very cautious about
repaired equipment being put back into service – however well the repair might have been done.
Therefore, aviation insurers are mindful of that view when considering the risk and the size of any likely
claims (i.e. total loss rather than modest repair cost).
If the aircraft disappears (i.e. is stolen or disappears from radio contact and cannot be found) and is
missing for a set number of days, many aviation policies (certainly the main London Market policy) treat
that as a total loss. However, the normal rules apply and if the aircraft is subsequently found, it belongs
to the insurer if it has already paid the total loss.
There are a number of exclusions under this policy which include ‘wear and tear, and breakdown’ as well
as foreign object damage unless proven to be from a single incident.
Insurers do not pay for gradual damage to the aircraft or engines caused by regular slight impacts by
airborne debris. They do, however, pay for the damage caused when a bird (or flock of birds) flies into an
engine which can clearly be catastrophic.
Chapter 2
Activity
Visit this website and read more about the plane that had to land in the Hudson River after a double bird strike:
news.bbc.co.uk/1/hi/7832439.stm
When it comes to the claims, the insurers usually require that they have the chance to be present when
the plane or engines are being dismantled or repairs are being undertaken. This gives them the
opportunity to check that the repairs are being done only to damaged material and that no additional
work is being undertaken and charged to the insurer.
The insurer pays for the reasonable cost of repairs; however, as mentioned above, it knows the position
that manufacturers adopt with regard to protecting their brand and will negotiate claims accordingly. If
the insurer pays out a total loss they have the right to sell any remaining parts of the aircraft for salvage
to recoup some of their losses. In fact, the insured might want to keep the parts and in effect buys them
back from the insurer.
In practice, this leads to a negotiated settlement, with the insured receiving the sum insured under the
policy for the total loss, less the value of the parts they are keeping. The valuation can be carried out by
an independent valuer or the loss adjuster, to minimise disagreements between the parties.
Deductibles are usually applied in aviation insurance although not generally for total losses and the
Concepts of
concept of betterment is also applied. Here, if the insured receives a replacement part which is newer betterment is applied
than the one that was lost or damaged, their claim will be reduced accordingly. in aviation insurance
B1B Property insurance for airport buildings

Standard property insurance policies are used, with the insurers considering any particular aspects that
might affect the risk exposure, such as terrorism.
B2 Liability
B2A Airline liability insurance
Third parties other than passengers
In common with the liability policies already discussed, this insurance indemnifies the insured for any
amounts they have to pay as damages for property damage or personal injury caused by aircraft or
persons or objects falling from them. There are a number of exclusions to this cover, some of which
apply because they should be insured elsewhere:
• Employees – a standard EL policy should be purchased.
• Operational crew – they might not be employees but contractors.
• Passengers – insured under a different policy (see below).
• Owned property – a property policy should be purchased.
• Noise/pollution – this is not generally insurable.
The types of losses that might occur would include a collision between two aircraft either in the air or on
the ground, or causing injury to ground crew who might be loading cargo, baggage or just directing the
aircraft. As with previous liability claims we have looked at, the investigation will look at the extent to
which the insured was liable and whether there are any other parties (including any injured party
themselves) who might share the blame.
Passenger liability
This covers the liability to passengers for accidental bodily injury whilst entering, on board or leaving the
plane and for any loss or damage to their cargo or baggage which has been caused by an accident to the
aircraft.
The airline’s liability to passengers is governed by international laws called conventions which set out
The airline’s liability
how much has to be paid out should passengers be injured or killed during an international journey. to passengers is
Whilst these rules do not apply to every journey, the vast majority of international plane flights are governed by
international laws
governed by them. The insurer expects the airline to issue tickets which make it clear that the called conventions
conventions apply and govern any liability to passengers or their families. As above, this section also
excludes employees and operational crew.
As well as the section-specific exclusions, there are some general exclusions that apply to the insurance
purchased by an airline:
• Geographical operating limits.
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• No use of aircraft for illegal purposes.

• Only listed individuals or those satisfying agreed experience level requirements can be used (other
than for ground movements where only competence is required – so, for example an experienced flight
engineer could perform this function quite acceptably).
• Any transportation of the aircraft by another method (sea or truck for example).
• Landing and take-off areas that do not meet certain criteria.
• Taking on any contractual liability wider than the legal liability would have been.
• Carrying more than the maximum number of passengers.
• War/nuclear/hijacking.
Airport operator’s liabilities
These liabilities fall into three main categories, namely premises, hangar-keepers’ and products. As the
Airport operator’s
liabilities are concepts of liability insurance have been covered already, we will just look at the specific elements of
premises, hangar- these policies.
keepers’ and products
• Premises. Essentially public liability insurance, the premises must be specified and the bodily injury
or property damage must have been caused by the fault or negligence of the insured or their
employees or from some defect in the premises or machinery. The insurance extends to cover any work
done by the insured or their employees other than at the specific premises, as long as the damage
was caused by the fault or negligence of the insured or their employees or by some defect in premises
or machinery.
Exclusions (most of which have been seen before) from this section of the policy include:
– Owned property.
– Losses arising out of construction work unless prior agreement by insurers has been obtained.
– Anything that should be covered under a motor policy.
– Any product-related loss where product has already left the possession or control of the insured
(this does not cover sale of food or drink).
– Losses caused by aircraft owned or operated by or for the insured.
– Losses arising from air shows or similar events. This is a much larger risk, with a large concentration
of people in one space; however, this cover can be bought back, possibly subject to an additional
premium.
• Hangar-keepers’ liability. Despite the name, the insured does not need an aircraft hangar to be able
The insured does not
need an aircraft to buy this insurance. This insurance covers the insured’s liability for loss of damage to non-owned
hangar to be able to aircraft whilst on ground and in the care custody or control or whilst being serviced, handled or
buy this insurance
maintained by the insured. There are some exclusions to this section:
– Clothes, personal effects and merchandise.
– Loss to aircraft or equipment hired, leased or loaned to the insured.
– Loss of aircraft whilst in flight.
• Products liability. In the same way as any other products liability policy, this insurance covers the
Products liability
insurance applies insured’s liability for bodily injury or property damage arising out of the possession, use, consumption
only to items in or handling of any goods or products manufactured, altered, repaired, serviced, sold, supplied or
conjunction with the
aircraft distributed by the insured or their employees. It applies only to items which are used in conjunction
with the aircraft and once they have left the possession or control of the insured.
The typical exclusions to this section of cover are:
– Damage to insured’s own property or property within their care, custody or control.
– Repairing any defective goods/products.
– Loss arising from inadequate design (but any resultant bodily injury or property damage is covered).
– Loss of use of any aircraft not lost or damaged in an accident (this is dealing with wholesale
grounding situations).
Wholesale grounding
This means that if an aircraft manufacturer discovers a problem with one aircraft, there might be an order from the
Chapter 2
Government aviation authorities that all aircraft of the same type are grounded pending completion of any
investigations. Clearly this would cause huge financial losses to the affected airlines; the London Market provides
grounding cover under separate insurance which also include coverage akin to product recall insurance.
Some general exclusions apply to the standard London Market airport operator’s policy:
• employers’ liability;
• making good any faulty workmanship (but the policy covers any consequential loss);
• contractual liability that is wider than the normal legal liability (i.e. where the insured has voluntarily
accepted a wider responsibility than the law would normally impose on them);
• liability arising out of the operation of a control tower (unless insurers have previously agreed); and
• war/nuclear.
Question 2.5
If a passenger falls over in the tax-free shopping area of an airport and injures themselves, which insurer is most
likely to respond to the claim?
a. Premises liability. F
b. Airline liability. F
c. Airline physical damage. F
d. Hangar-keepers’ liability. F
B3 Other aviation insurances

B3A Aviation war insurance
War insurance is not freely underwritten and in some cases permission has to be sought before it can be
offered. (See section A3D.) This is not the case with aviation war risks (and marine war risks).
Aviation war insurance is freely obtainable and the standard London Market aviation war policy has two
Aviation war
main sections: Section 1 applies to loss or damage to the aircraft and Section 2 to extortion or hijack. insurance is freely
Extortion has the same meaning here as it does in the non-marine section and hijacking is seizing assets obtainable
belonging to another and demanding money for their return (similar to kidnapping a person). Perhaps
not unexpectedly there are some exclusions:
• War breaking out between the five permanent members of the UN Security Council: the UK, USA,
Russia, China and France.
• Confiscation or nationalisation of assets.
• Use of chemical, biological, radioactive or electromagnetic pulses.
• Debts and repossession of the aircraft.
• Delay and loss of use.
B3B Loss of licence insurance

This insurance covers a member of aircrew for the loss of their licence to fly because they have been
Loss of licence
injured or suffered illness and have failed a medical examination. It does not cover losing their licence insurance serves as
because of other actions such as drinking on duty. It serves as an income replacement insurance, paying an income
replacement policy
out agreed benefits in a similar fashion to a personal accident policy.
Air traffic controllers also have medical fitness requirements and insurance can be obtained to cover
them as well.
B3C Loss of use insurance

This is similar in nature to business interruption insurance as the aircraft cannot earn money if it is
damaged and being repaired.
B3D Aviation repossession insurance

Sometimes other parties, such as banks, have an interest in an aircraft because they have lent money
using the aircraft as security. In other situations where an aircraft has been leased, the owner has been
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concerned about retrieving their asset if the lease payments are not made on time.
If the loan or lease payments are not met, the party who is not being paid might want to take control of
This insurance covers
the costs of the aircraft, perhaps to sell it in order to get some of their money back. However, problems can occur if
repossessing the the aircraft is located in a hostile country because the owner has leased it out to another airline and the
aircraft and of
reconstructing any authorities in that hostile country will not let it leave. This insurance covers the costs of repossessing the
technical records for aircraft and of reconstructing any technical records for the aircraft, because even if it can be recovered, it
the aircraft
is worthless without the various technical records (for example: documents relating to ownership,
maintenance and records of regular inspections).
B3E Contingent hull, liability or war insurance

Often, banks which lend money for the purchase of aircraft have their interests noted on the various
insurances and the policy wording provides that claims will be paid to the bank rather than to the
insured. This does not make the bank the insured, just the loss payee. If the aircraft is lost or damaged
and the insurance does not pay out for a particular reason, the bank loses its security for the loan.
Examples of reasons why the policy might not pay out are non-payment of premium, breach of a warranty
and cancellation of the policy by the insurer for any reason.
The bank is usually innocent in these cases so it can purchase insurance which will respond only if the
main policy does not do so for a reason outside the control of the bank.
B3F Space insurance

Interestingly, this type of insurance extends into marine insurance as well as the aviation/space market.
It covers launch vehicles and satellites from their manufacture to the end of their useful life in space.
Activity
Look at this floating rocket launch vehicle which is, in fact, insured in the marine hull market.
www.sea-launch.com/
Insurance for satellites for the period known as ‘pre-launch’ is actually covered in the cargo market,
Insurance for
satellites for the because the risk is the movement of an object from one place to another (albeit very carefully), as the
period known as ‘pre- values involved are rather large. The insurance extends to the loading of the satellite onto the launch
launch’ is actually
covered in the cargo vehicle.
market
Space insurers get involved in the risk when the rocket engines intentionally ignite. Various policies
differ slightly as to the handover point between pre-launch and launch insurers; of course, both insurers
need to understand what they have agreed to and when their liability ends.
There are a number of different parties involved in the satellite business, from the manufacturer to the
launch service provider and the final satellite operator. The satellite operator, which might be a global
telecommunications company takes over the risk and hence has an insurable interest only at the point of
launch.
The risks covered for satellites and launch vehicles can be divided into property damage and liability, as
The risks covered for
satellites and launch with other classes. For property damage, there is ‘total loss’ which is usually obvious through something
vehicles can be like a catastrophic explosion or a failure of a vital part which impacts on the operation of the rest of the
divided into property
damage and liability satellite; there is also partial loss which can become more technical in nature.
A partial loss could be the loss of one communication channel out of a number, one solar panel out of a
number or one fuel cell. The key here is the calculation in relation to the financial value of the partial
loss. Usually it is defined as degradation or reduction in the satellite’s expected performance and/or life
expectancy. The satellite will have been built to a set specification from the operator and it is the
reduction from that specification and possible usage of any back-up cells, channels or solar panels that
the claims adjusters will consider, together with the viability of trying to repair either via remote means
or possibly astronaut power (and with the additional costs that would incur).
Launch vehicles such as the Sea Launch floating platform and land-based alternatives also are exposed
to loss or damage in terms of physical damage and liability. If a satellite is damaged when being loaded
onto the launch vehicle, the pre-launch insurer is still on risk and will be looking for another party
against which to subrogate. That party might be the owner of the launch vehicle if it caused the
damage – or other parties if they were responsible.
Liability risks for satellites

After a satellite has been launched, liability continues and its owners cannot simply forget about it!
Satellite liability
International law makes the state that launches an object into space responsible for any injury or
Chapter 2
continues after launch
damage it causes to third parties or third party property.
Consider this…
Are there crashes in space? Yes, in February 2009 two satellites collided in space. It does appear to be the first
incident in over 50 years of objects being launched into space. However, the US air force admits to tracking at least
19,000 orbital objects of various sizes.
C Marine classes of business

In this section, we will look at the marine classes, breaking cover into physical damage, liability and
‘other’. We will also include offshore energy, since onshore energy was included within property
insurance. Note that where a type of insurance (such as employers’ liability) that has been discussed in
an earlier section can also be bought by a marine client, we have not covered it again here.
C1 Physical damage
There are many different objects that can be insured in the marine insurance market for physical damage
but we will concentrate on ships, cargos and oil rigs. Marine-related property is still ‘property’ (albeit
generally near water); therefore, the risks are fundamentally the same as for other property, so will not
be considered any further here.
C1A Vessels
There are many different types of vessel, commercial and privately owned, powered by different types of
engine as well as sails and of a variety of sizes. Despite the differences, the physical damage insurance
available for them is generally the same in terms of the perils covered and the exclusions.
Construction
Just like buildings, ships have to be built and there is specific insurance available for this which works in
The shipbuilder and
much the same way as a non-marine construction policy. The shipbuilder and the eventual owner can be the eventual owner
covered under the policy; the important aspects are to ensure that the values at risks under the policy can both be covered
under a construction
are kept up-to-date with insurers so that there is no danger of underinsurance should a claim be made policy
for a loss during the construction period.
The coverage under the standard construction all risks policy for vessels can be split into four elements:
• All risks of physical loss or damage. Note that there is no cover for the costs of defects in design,
material, workmanship or latent defect but consequential damage is covered. This exclusion can be
bought back.
• Collision liabilities and marine liability (known as protection and indemnity).
• War.
• Strikes, terrorism, malicious acts and political motives.
The types of claims that can arise under a construction or builder’s risks policy are, for example, for fires
in the shipyard whilst the vessel is being built. Depending on the stage of completion a large fire could
delay the delivery of the vessel to her new owner quite considerably.
When the construction is completed, with the tests and trials satisfactorily passed, the vessel is
delivered to her owner and insurance to cover ‘business as usual’ (or operational risks) for the vessel is
required.
Physical damage to vessel
The coverage provided generally specifies named perils, as contrasted with some other insurances
The main London
which cover all risks subject to exclusions. There are all risks hull insurance policies but the main Market wordings are
London Market wordings are named perils. The perils covered include physical damage to the insured named perils
vessel caused by:

• Perils of the seas (this does not include the normal action of the wind and waves).
• Fire.
• Explosion.
• Violent theft from outside the vessel (so not by the crew, for example).
• Jettison (damage to the ship caused by goods being thrown overboard or by its equipment being
thrown overboard for stability reasons).
• Piracy.
Chapter 2
• Breakdown or accident to nuclear reactors (used for power).

• Contact with aircraft, objects falling from an aircraft, a dock or land vehicle.
• Earthquake, volcano or lightning (which can include tsunami).
There are additional physical damage perils which are covered subject to a requirement of due diligence
on the part of the insured. These are:
• Accidents in loading, unloading or moving cargo or fuel.
• Bursting (i.e. explosion) of boilers or breakage of shafts or latent defects. It is important to appreciate
that this insurance only pays for the consequential damage not damage to the part itself.
• Negligence of masters, officers, crew or pilots (pilots are specialists who will help the ship navigate in
crowded waterways such as ports using local knowledge of winds and tides).
• Negligence of any repairers or charterers, unless they are the insured. A charterer is someone who
does not own the vessel but has, usually, hired it from the owner.
• Barratry – when the master and crew turn against the owner of the ship and steal the ship (and often
its cargo) or expose the ship owner to legal problems because perhaps they are engaged in smuggling.
There are very few exclusions within the standard market hull wording, all of which except the last one
There are very few
exclusions within the can be bought back from insurers:
standard market hull
wording • war;
• strikes and terrorism;
• malicious damage; and
• radioactive contamination.
In addition to covering the physical damage to the insured vessel, the hull insurer also covers some
other aspects. These centre on the legal obligations of the shipowner under international maritime law.
The obligations would exist whether or not insurance was purchased but insurance is available to cover
all of them, although not necessarily from the same insurer.
• Collision liability. Although we are considering a physical damage policy, there is some liability
coverage contained within it. Collision liability is the liability to pay for damage to another vessel or
her cargo should the insured vessel collide with it, and have any share of the blame.
The standard hull policy however does not cover 100% of the liability but only 75% of it (which is more
The standard hull
policy however does commonly known in this context as three/fourths). The shipowner has to look elsewhere for the
not cover 100% of the remaining 25% and they will use a specific liability insurance policy that we will consider in a moment.
liability but only 75%
of it • General average. There is a principle in maritime law whereby if someone makes a sacrifice to save
everybody else, then everybody else will chip in to pay them back their sacrifice. This concept is
known as General Average and the hull insurer will pay the ship’s contribution to the party that was
kind enough to make the sacrifice.
• Salvage. Salvage is someone coming to rescue you when you are out at sea in trouble. Not
Salvage is someone
coming to rescue you unsurprisingly perhaps, your rescuers (or to give them their proper title: the salvors) have earned a
when you are out at reward by saving you (as long as they were successful in their efforts). The hull insurer will pay the
sea in trouble
ship’s share of any reward.
• Sue and labour. Whichever type of insurance they are writing, insurers are very keen that their
insureds make best efforts to try to avert or minimise losses that might otherwise be claimed from the
policy. Insurers feel so strongly about this that they will often pay the reasonable costs incurred in
addition to any total loss under the policy. Most marine insurance policies include this provision.
C1B Cargo insurance

Cargo can be anything carried by any form of transportation, not just by sea. Aviation cargo can fall into
Cargo can be anything
carried by any form of this category as can goods carried by road or rail. The main London Market wordings provide a choice
transportation, not between three levels of cover: one being all risks and the other two offering combinations of named
just by sea
perils.
The easiest way to explain the perils is to review the table below. The A-C refers to the various Institute
Cargo clauses which are the main London Market wordings.
Table 2.1: Cargo perils

A B C
Chapter 2
All risks of loss or damage Fire/explosion Fire/explosion
Stranding/grounding/sinking Stranding/grounding/sinking
Overturning Overturning
Collision Collision
Discharge at a port of distress Discharge at a port of distress
Earthquake/volcano/lightning General Average
General Average Jettison
Jettison/washing overboard
Entry of sea/lake or river water
Total loss of any package overboard
Unlike hull insurance, cargo policies have far more exclusions in them which are less likely to be able to
be bought back. These are as follows:
• Wilful misconduct of the insured.
• Inherent vice (such as food products becoming overripe), wear and tear, natural loss in weight or
volume (not fortuities).
• Insufficiency of packing to withstand the journey (subject to some caveats).
• Delay even though it might be caused by an insured peril.
• Insolvency or financial default where the assured knew or should have known prior to the loading of
the goods (subject to certain exceptions).
• Use of atomic weapons or devices.
• Deliberate damage or destruction of goods by wrongful act of any person (this does not appear in the
A clauses).
• Unseaworthiness of the vessel/unfitness of the container where insured knew about it (subject to
certain requirements).
• War.
• Strikes/terrorism.
• Radioactive contamination.
Claims can arise for loss or damage to the cargo and the claims adjuster must consider where the
A container ship could
damage might have occurred, whether the goods were actually the responsibility or the property of the have up to 19,000
insured at the time and whether any of the exclusions may apply. There may be many claims coming into metal boxes on board
the same insurer for damage arising out of one incident as there may be many different types of cargo on
one ship – particularly a container ship which could have up to 19,000 metal boxes on board, each filled
with a different cargo, or maybe multiple cargoes owned by different people.
In addition to physical damage insurance, cargo insurers cover the cargo share of any contributions in See section C2 for
information on
general average or salvage as well as sue and labour expenses. However, cargo insurance does not marine liability
provide any liability cover in cases where, for example, the cargo damages the container, ship, truck or
other vehicle in which it is being carried. This cover can be obtained from liability insurers.
C1C Offshore energy insurance

Offshore energy business developed out of the marine market, although it is now a freestanding class of
Offshore energy
business. However, many of the same concepts apply and the common factor of the maritime business developed
environment perhaps still makes it more akin to marine than non-marine. out of the marine
market, although it is
now a freestanding
Exploration class of business
Put simply, the first actions of an offshore energy business are to go and find some natural resources (be
they oil, gas or wave power). Having located the natural resources (for example, oil or gas), they then
need to extract it out of the ground (or, in this instance, the seabed). In most cases, it will hire a rig from
a rig-owner rather than construct one specially. The rig will be insured for physical damage, typically on
an all risks form with a number of exclusions such as delay, wear and tear, other equipment used in the
drilling process etc.
When looking for oil or gas in particular, other than the physical damage to the rig, there are three main
risks that concern the potential insured:
• A blowout where the oil/gas comes to the surface in an uncontrolled manner.
Chapter 2
• The costs of re-drilling the well (hole in the ground) should that happen.
• Any seepage, pollution and contamination costs arising from this.
Activity
Search this website concerning the loss of the Deepwater Horizon rig and Macondo well (Gulf of Mexico).
www.bp.com
Ask colleagues if your firm is involved with this loss.
There is a policy which covers exploration and helpfully consists of three sections to cover those risks
mentioned above.
A client can buy any combination of the three sections, which actually include elements of liability
insurance. We will discuss each section in turn shortly.
As we saw with the construction policy in the non-marine section above, there are often a number of
The various parties
involved in an parties involved in the project and they can all be insured on the policy, with their respective shares in
exploration are known the project set out. These various parties are often known as co-venturers or joint venturers.
as co-venturers or
joint venturers
The main London Market exploration policy covers any well:
• when being drilled or otherwise worked on until it is completed;
• while producing – i.e. oil/gas is coming out in a normal controlled way;
• while shut-in (i.e. closed off) – sometimes the well has to be closed temporarily because of a problem
(the well is still insured even if the problem may not be covered by the insurance) and
• while plugged and abandoned – the operators of a well stop extracting it when it appears to have run
low (they must also leave it tidy and safe and the concept of plugging is that responsibility).
If a well is started during the policy period, the well attaches to that policy. The process of starting the
drilling of a well is known as ‘spudding’. If a well is already in production or perhaps has been
abandoned then it attaches to each new policy year for damage occurring during that policy year.
The three areas of coverage under an exploration policy are as follows:
Control of well (COW). This covers the costs of regaining or attempting to regain control of the well once
out of control including costs of putting out fires. There is a definition of an out of control well which
must be satisfied for the coverage to be triggered which involves flow above the surface which cannot be
captured and put into production or stopped using the usual methods (refer back to the Deepwater
Horizon website to find out more about blowout preventers).
COW does not cover loss or damage to equipment, loss to the well or any loss caused by delay.
COW does not cover
loss or damage to
equipment, loss to the Re-drilling. This covers the cost of creating a new well, generally to the point it was before the incident.
well or any loss The insured must be mindful that the insurer will not necessarily pay all the costs of a re-drill – only
caused by delay
those costs which are deemed to be prudent. To determine what is prudent, the insurer normally relies
on expert advice from loss adjusters, for example.
Re-drilling cover does not include:
• Loss or damage to drilling equipment.
• Loss or damage caused by delay.
• Any costs incurred with drilling a relief well – which is one drilled in order to try to release any
pressure that has built up.
• Any re-drilling in relation to a well that was already plugged and abandoned when it went out of
control.
• Any losses where the blowout happened because of corrosion, erosion or wear and tear.
Seepage and contamination/pollution. This cover deals with costs of any remedial measures and/or
damages payable for bodily injury and/or loss of or damage to property caused directly by seepage and
contamination/pollution during the policy period. It also covers the costs of removing and containing the
substances (including preventing them reaching the shore) and defence costs regarding any litigation in
relation to claims made arising from the incident.
Seepage and contamination/pollution coverage does not include:

• Loss of or damage to equipment.
Chapter 2
• Anything if the seepage or contamination/pollution was deliberate on the part of the insured or any
entity or person acting for them.
• Anything which is in violation of any governmental regulations, or rules.
• Any claims for mental injury or shock unless this is a consequence of physical injury.
As with most policies there are a number of additional areas of coverage that the insured can purchase
to extend their cover:
• Making the well safe. For example, if there has been a storm, but there has yet not been a blowout
An extension can be
situation, this extension covers the insured’s expenses in preventing a loss that would otherwise be purchased for making
covered. This is in effect the same concept as sue and labour. the well safe, for
example
• Underground control of well. Sometimes the oil/gas breaks out through the well and escapes into the
rock rather than bursting out of the top of the well. This additional coverage widens the COW coverage
to include this scenario.
• Removal of wreck. After a loss, the local authorities may require (or it may be a contractual
requirement) the insured to remove the wreck and this extension covers those reasonable costs.
• Care, custody and control. This covers loss of equipment that the insured has rented from others or is
just in the insured’s care, custody and control – i.e. it is not owned equipment.
Question 2.6
If an oil well suffers a blowout, what type of policy coverage will respond to the immediate problem?
a. Control of well. F
b. Re-drilling. F
c. Construction. F
d. Sue and labour. F
Construction
Once a firm has found its oil/gas, it is time to construct a permanent rig to go on site. This insurance is
required to cover the construction of the rig and it shares many common elements with the non-marine
construction policy discussed earlier in the chapter. The key points are:
• Building the rig: how long, by whom and where? Rigs are often built in various parts around the world.
• Getting it on site: how and when? Given the point above, choosing the right weather window to deliver
the parts on site, out at sea.
• Putting it together – without dropping any parts into the sea.
There is a specific energy related CAR policy used in the London Market which covers the whole
construction period including various locations for parts, transportation, installation and testing/trials.
This has two sections.
Section 1: physical damage and all elements being covered should be advised to insurers. Removal of
Removal of wreck is
wreck is also covered but the following items are not: covered under
Section 1
• Renewal of faulty welds or the loss or damage to faulty parts (unless the damage was caused by some
external peril and the fault was a coincidence).
• Vessels or aircraft.
• Placing the rig in the wrong place or dumping rocks to protect pipelines in the wrong place.
• Delay.
• Wear and tear.
• Any temporary works unless specifically agreed.
Section 2: liability – bodily injury or property damage arising out of the project, either by law or because
of a contract.
Reinforce
Chapter 2
Some of the liability policies reviewed earlier in this chapter specifically excluded contractual liability – this one
specifically includes it.
There are many exclusions under this section, some of which are:
• Intentional violation of any law.
• Injury to the insured’s employees or their family/dependants (the insured should purchase an
employers’ liability policy).
• Directors’ and officers’ liability (the insured should buy a D&O policy).
• Loss or damage to wells which are being drilled by the insured.
• Any costs in relation to COW.
• Any liability arising out of seepage and pollution (limited coverage can be provided if it can be proven
that pollution is sudden and accidental in nature and swift discovery and notification is given to
insurers).
• Fines.
There are also extensions that can be added to this policy such as coverage for expediting expenses
Expediting expenses
can be added as a (overtime or air freighting parts to get the repairs done more quickly).
policy extension
Operational
This is the equivalent of the ordinary property policy for the ‘business as usual’ area of the risk, once the
construction has been completed and the project handed over. The same basic policy as was used for
the exploration phase can be used as the basis for this insurance with additional elements added on for
business interruption, kidnap, war and political risks. Alternately, there are other market forms that can
be used, such as the London Standard Platform form, if preferred.
C2 Marine liability
We have already looked at liabilities in relation to rig policies in section C1C; therefore, we will
concentrate on other marine-related liabilities in this section.
C2A Shipowners’ liability insurance

A shipowner has many liabilities that they might incur for causing bodily injury or damage to other
people’s property. We have seen that some liabilities are covered under the hull physical damage policy
but the vast majority are covered under a specialist marine liability policy.
Many of these policies are issued by a type of insurer called a ‘mutual’ which means that the insurer and
the insured are in fact the same. Shipowners have set up clubs called Protection and Indemnity Clubs (P
& I Clubs) to insure each other, which are run by professional managers.
Useful website
The International Group is the collective body for 13 of the biggest P & I Clubs in the market. Look at their website
for more information about these insurers and the types of risk they cover:
www.igpandi.org
The risks that are covered by marine liability insurers are shown in the table below.
Table 2.2: Risks covered by marine liability insurers
Chapter 2
Cargo Claims for short delivery, loss or damage.
Crew Medical expenses, repatriation and arranging replacements.
Compensation for death and injury.
Collision The 25% of the damage to the other vessel and her cargo not covered by the hull insurer.
Wreck removal.
Any personal injury/death claims.
Liability for collision with anything other than a ship (not covered at all by the hull insurer).
Third party liability Passengers, dockworkers, pilots, stowaways.
Pollution Sudden and accidental only – not long-term dripping – gradual pollution is not covered.
Wreck removal Not necessarily after a collision.
Fines Not criminal fines, just administrative-types fines (for example to resolve problems at
customs).
You will see from this list that crew appear to be included, when you may have expected to see that the
Maritime EL covers
shipowner should buy an EL policy. There is such a thing as a maritime EL policy but it aims to cover those employees who
those employees who cannot get access to the various laws that provide enhanced protection for ships’ work in the marine
world but who would
crew if they become ill or are injured in the course of their work. This insurance tends to remain with not be categorised as
marine liability insurers due to the nature of the protection that ships’ crew have around the world. ships’ crew
Maritime EL covers those employees who work in the marine world but who would not be categorised as
ships’ crew.
C2B Professional negligence insurance

Many maritime-related professions run the risk of having claims made against them for professional
negligence. This insurance operates in the same way as for any other professionals; however, it is
usually provided by specialist insurers which focus on certain professions only.
Useful website
Review this website to find out more about the specialist insurers that write this business:
www.itic-insure.com/
C2C Ports liability insurance

A port has property insurance in the same way as any other owner of building and equipment. It also
A port has property
purchases very similar liability insurances for public and employers’ liability. The only slightly unusual insurance in the same
risk which requires careful consideration is the liability to those vessels and personnel using the water way as any other
owner of building and
areas for which a port authority is responsible. equipment
C3 Other types of cover in the marine insurance market

Within the marine insurance market, there are a number of apparently disparate types of insurance
which are habitually linked into marine because that is where they originated.
C3A Loss of hire/loss of earnings insurance

This works like BI insurance, but for ships. If the ship is damaged and cannot work, this policy pays out
after a waiting period.
C3B Specie/jeweller’s block insurance

This is insurance which covers physical damage and liability risks specific to the trade of dealing in
Covers physical
gems, precious metals, valuable documents and manufactured jewellery. Some elements overlap with damage and liability
money, theft and fidelity guarantee policies within the non-marine market. Insurers are particularly risks
concerned about the security aspects of the risk as the goods are covered not only in bank vaults but
also whilst being transported, sent by couriers and whilst entrusted to others in the same business.
There are a number of general exclusions under this type of policy such as unattended vehicles, theft,
fire or goods being found missing only when stocktaking. Additionally, there are more specialist
exclusions such as for loss arising out of non-compliance with what is known as the ‘Kimberly process’
which seeks to ensure that diamonds being traded are not what are known as ‘conflict’ or ‘blood’
Chapter 2
diamonds.
C3C Fine art insurance

This insurance covers artwork held in private and public collections, museums and at exhibitions. It also
Fine art insurance
covers artwork held in covers dealers, restorers and similar professions. With art-related losses the coverage is not only for the
public and private costs of repair but extends to include the depreciation in the value of the item after the repair or
collections, museums
and exhibitions restoration has been undertaken.
As with specie and jewellers’ block business, fine art insurance covers the goods being moved around as
well as when they are static in shops, exhibitions or private collections – so security, knowledgeable
handling and storage arrangements are key underwriting considerations. Standard exclusions include:
• Inherent vice and vermin.
• Anything undergoing re-framing or repair.
• Anything climate-related.
• Unattended vehicles, unless certain criteria are met.
• War/terrorism/radioactive.
• Cyber issues.
• Consequential loss.
Activity
Read this online article concerning damage caused to some Ming vases when someone tripped downstairs:
news.bbc.co.uk/1/hi/england/cambridgeshire/7087084.stm
C3D Cash in transit insurance

This covers money being moved either between banks, a bank and an automated teller machine (ATM)
The key element in
‘cash in transit’ and even a customer and the bank if they are depositing takings for the day. The key element again (as
insurance is security was the case with specie/Jewellers’ Block and fine art insurance) is security. Just as for non-marine
money policies, this insurance does not cover anything which involves collusion or the apparent use of a
key or combination.
C3E Political risks insurance

There are a number of different sub-classes of insurance that fall within the generic definition of political
risk and we will take a brief look at a number of them.
These insurances involve risks where the insureds often deal with businesses and political figures in
other countries and where they might have expended large amounts of effort, resource, intellectual
capital and financial investment into various business opportunities.
Confiscation, expropriation or deprivation of assets insurance
An insured may have diligently complied with all the requirements made of them in the overseas territory
but for some reason they suddenly find their assets being seized by local, regional or national
government authorities, their joint venture partnerships with local entities being transferred over in total
to the local entity and essentially being evicted from the country.
This risk to a company’s investments can be further divided into:
• The investment risk culminating in the forced abandonment of the project and assets attached to it.
• Fixed asset risks which can be ‘bolted onto’ a property policy.
• Mobile asset risks (for example: plant and equipment or raw materials).
• Trade-related risks.
Embargoes and sanctions are a fact of life and companies (including insurers) have to take particular
Certain products, for
example arms and care not to break sanctions laid down by the likes of the UN, the UK and US governments and in some
ammunition, require cases the EU. Certain products, for example arms and ammunition, also require licences before they are
licences before they
are shipped shipped. Situations can change rapidly and this insurance can cover the costs and expenses incurred
should a shipment that started out as legal become not so.
This insurance can also deal with practical issues like not getting paid for the goods you have shipped,
not receiving the goods you have paid for or being paid in a currency that cannot be moved out of a
country into somewhere more accessible or converted into something more useful.
Chapter 2
C3F Contract frustration or trade credit insurance
These insurances cover situations where the performance of a contract is frustrated (i.e. cannot be
fulfilled). These types of policies can include cover for losses arising from the unilateral (one-sided
cancellation) of a contract by the other party for no legitimate reason. Contract frustration insurance is
used when the counterparty to the underlying contract is a governmental type of organisation, whereas
trade credit insurance is used when it is a commercial organisation.
C3G Bond risks insurance

As a pre-cursor to entering into a contract, the insured may have been asked to post a bond which is
meant to protect the other party should the insured default on their contract. There is always a chance
that the other party might try to call the bond completely outside any terms of the contract. Any bank
being asked to provide such a bond will usually ask for this type of cover to be obtained.
As we’ve seen in this chapter, the London Market is one where a huge variety of different insurances are
dealt with and yet new insurances are always being investigated and developed to assist clients.
In the next chapter, we will review the concept of reinsurance. Any of these risks mentioned in this
chapter can be potentially written as reinsurance and we will be considering how an insurer uses
reinsurance to protect itself in relation to the risks it has written on a direct basis.
D Motor insurance
Although most standard motor insurance is written by the composite insurers and specialist insurers
who offer few other lines, some motor insurance is written in the London Market. In addition to UK motor
insurance (which can be split into private car and fleet insurance), overseas motor insurance is also
written. For Lloyd’s at least, in order to satisfy reporting requirements, this has to be split into:
• EU/EEA (excluding the UK);
• USA and Canada; and
• rest of the world.
The insurance written can be for both physical damage and liability. As we have already seen with motor
insurance in the UK, insurers find that their ability to rely on certain aspects of insurance law is reduced
as the innocent victim must always be protected.
Therefore, given that motor insurance is also compulsory in some overseas countries, it is important that
insurers understand fully the nature of the risk before agreeing to cover it.
London Market insurers use ‘delegated underwriting’ contracts to access knowledgeable parties in other Refer to chapter 9
for delegated
parts of the world to write risks on their behalf. Motor insurance is a good example of a type of business underwriting
written that way.
Activity
Look up a specialist motor syndicate such as Equity Red Star:
www.ers.com
Key points
Chapter 2
Non-marine classes of business

• These include first party and third party risks.
• Only a small amount of motor insurance business is written in the London Market, other than specialist areas such
as classic cars. Most motor insurance is written under delegated underwriting contracts.
• Non-marine can include elements of energy business as well.
• Non-marine risks can include construction as well as operational cover.
Aviation classes of business
• These include first and third party risks.
• Aviation insureds should also purchase non-marine insurance such as property, and employers’ liability as required.
• Aviation insurance mainly covers physical damage to the aircraft and liability to passengers/third parties, including
products liability.
Marine classes of business
• These include first and third party risks.
• Marine insureds should purchase non-marine policies such as property or products liability if required – no need for
particularly specialist policies.
• Vessels and goods carried in vessels are covered under marine policies.
• Satellites prior to launch are covered in the cargo market.
• Fine art, Jeweller’s Block and general specie risks can be covered in both the marine and non-marine markets but
the coverage will generally be the same.
• Political type risks are generally written in the marine market but could also be in the non-marine market.
Question answers
Chapter 2
2.2 The correct answer is a.
Self-test questions
1. Distinguish between first party and third party insurance.
Chapter 2
2. Why is personal accident insurance said to be a ‘benefits’ policy?

3. Explain the concept of a maintenance period in a construction policy.
4. What responsibility do insurers take on when they agree to reinstate a property?
5. What extensions to the legal definition of theft are normally required by insurers for a claim to be met?
6. What is the basic risk covered by directors’ and officers’ (D&O) insurance?
7. Explain the concept of contributory negligence.
8. During which parts of the journey will an aviation passenger liability policy respond to injury claims?
9. What type of insurance covers the loss of income of a pilot who fails their medical and is no longer
permitted to fly?
10. Identify two of the standard exclusions in a marine hull policy.
11. What is the name for the special type of business interruption insurance that can be purchased in the marine
market?

Reinsurance
3
Chapter 3
outcomes
Learning objectives
Introduction
Key terms
A Why reinsurance is purchased and sold 3.3
B London reinsurance market 3.1
C Types of reinsurance products 3.2, 3.3, 3.4
D Reinsurance programme construction 3.2, 3.3, 3.4
Key points
Question answers
Self-test questions
Learning objectives
• explain the reasons why London is used as a reinsurance market;
• explain the various different types of reinsurance; and
• perform premium and other calculations in relation to different types of reinsurance.
Introduction
Having spent some time looking at the various classes of business within the London Market in the
previous chapter, we are now going to concentrate on reinsurance. We will consider why reinsurance is
such a major component of the business written in the London Market. We will also look at the nature
and operation of the various types of reinsurance. Finally, we will examine premium calculation in the
context of reinsurance.
Key terms
Chapter 3

Alternative risk transfer Claims Control Clause Claims Co-operation Clause Excess of loss
Facultative obligatory Facultative reinsurance Full Follow Clause Proportional reinsurance
reinsurance
Quota share treaty Reinsurance Reinsurance programme Retained line
construction
Retention Surplus treaty or surplus
line treaty
A Why reinsurance is purchased and sold

Reinsurance is the same as insurance, except for the fact that the buyer is an insurer or reinsurer. In fact
Reinsurance is
sometimes called reinsurance is sometimes called ‘insurance of insurance’.
‘insurance of
insurance’ Insurers may want to transfer some of their own risk that they have themselves underwritten to other
insurers (known as reinsurers) to reduce their exposure to losses. Reinsurers can be organisations that
also operate as insurers (i.e. they ‘write insurance’) or they can be organisations that specialise in
writing reinsurance, with perhaps a very small portfolio of insurance on the side.
The deal can best be summarised in the form of an equation:
Insurer paying Reinsurer accepting

premium to reinsurer
to transfer risk = transfer of risk from
the insurer along with
the premium
There are various ways to in which to arrange this deal which we’ll examine in section C.
A1 Why insurers buy reinsurance

The reasons for buying reinsurance are much the same as the reasons for buying insurance in the first
place, supplemented with some additional business-related motives, as follows:
• Risk transfer. In this case, the ‘bad thing’ that might happen is a claim on the original insurance that
Reasons for buying
reinsurance are risk is substantially larger than expected.
transfer, peace of
mind, evening out • Peace of mind. For an insurer, this is protection against catastrophe-type losses that would be very
peaks and troughs damaging financially to its business.
and releasing
capacity • Balancing out peaks and troughs. For example, an insurer might have a number of different
underwriters all writing different classes of business. Some classes of business may be profitable
every year and some may be more volatile and make money one year and large losses the next.
• Releasing capacity. Every insurer has an agreed limit to the amount of business it can underwrite in a
year, which is called its capacity. The measurement of this capacity is premium income, but it can also
be based on the capital invested in the business. For the purposes of this example we will use the
measure of premium income.
Refer to chapter 1 As we said in chapter 1, think of capacity as a glass of water. Once the glass is full (i.e. the capacity has
been used up), no more water can be added to the glass. For the insurer, this means that it cannot
accept any more risks.
Chapter 3 Reinsurance 3/3
If capacity is used up before the end of the year, an insurer might miss out on some good risks
presented to it later in the year. Returning to the glass analogy, what if you had another glass that you
could pour some of the water into – making room in the original glass for more water? This is what
reinsurance can do, by transferring some of the risk from the insurer to the reinsurer; it allows more risk
to be taken on by the direct insurer. This makes the insurer a buyer of reinsurance.
A2 Why firms sell reinsurance

The reasons why firms sell reinsurance can be summarised as follows:
Chapter 3
Accessing business not otherwise available
Insurers often need permission, in the form of a licence, from overseas insurance regulators to insure
risks coming out of certain countries. A regulator can refuse to issue a licence or they might agree to a
licence only for reinsurance business, not direct business coming out of their country.
Consider this…
Think why an overseas regulator might decide to do this.
In many cases this decision from a regulator comes from a desire to prevent premium leaving the
country, by requiring that the original (or direct risk) for a local business is insured by a local insurance
company. Often, the risks insured in this way are too large for the local insurer or insurance market to
keep themselves – i.e. they do not have the capacity. In these circumstances, the local insurer seeks
reinsurance in the international markets, of which London is one.
By writing this reinsurance, London Market reinsurers obtain access to business that they cannot write
By writing this
directly. reinsurance, London
Market reinsurers
Becoming involved in a class of business on a trial basis obtain access to
business that they
If an insurer wants to investigate writing a new class of business, one approach might be to hire an cannot write directly
underwriter, or team of underwriters and start trying to win some market share. However, what if the
underwriters fail to perform and the experiment is not very successful? The insurer probably had to
incentivise the underwriters heavily to lure them to join the firm and their contracts will be equally
expensive to terminate.
A much safer way to try out a new class of business is to write some reinsurance for another insurer that
already writes the business. There is not the same capital investment in a team of underwriters and the
obligation lasts only for the period of the reinsurance contract (and any claims that arise). If the trial is
not successful, then the insurer has the choice not to renew the reinsurance.
Pure business preference
The business of some organisations almost totally consists of reinsurance and they actively prefer that
type of business as opposed to the original or direct business.
Question 3.1
How can an insurer easily access business in another part of the world without opening an office, employing new
underwriters or setting up a delegated authority arrangement there?
a. By writing reinsurance. F
b. By changing its licences. F
c. By requesting permission from the local regulator. F
d. By opening a Lloyd’s syndicate. F
B London reinsurance market

As we have discussed before, London is not the only insurance market in the world and it is certainly not
the only reinsurance market. Just as the original insured clients have a choice, so do reinsurance buyers;
therefore, in this section we will think about some of the reasons that reinsurance buyers might choose
the London Market.
According to A M Best magazine, Lloyd’s was the third largest reinsurance provider in the world in 2015
Lloyd’s was the third
based on premium – with Swiss Re and Munich Re ahead of it. The top five reinsurers have stayed the largest reinsurance
same for a number of years with their individual positions changing within that group; for example, provider in the world
in 2014, based on
Lloyd’s was fifth in 2010 and 2011. premium
In addition, the London Company Market is made up of many reinsurance companies including offices of
organisations such as Swiss Re and Munich Re as mentioned earlier.
Interestingly, many of the reasons for a buyer to choose London for its reinsurance cover are the same as
those that draw direct clients to the London Market.
Currently (according to the Lloyd’s annual report for 2016), 31% of the business written in Lloyd’s is
Currently, 34% of the
business written in reinsurance in some form, which makes this class of business the largest single type of insurance
Lloyd’s is reinsurance written in the Lloyd’s Market – dwarfing the next largest: property insurance, which made up 27% of the
in some form
market in 2016.
As well as the specialist European reinsurers such as Munich Re and Swiss Re already seen, the main
Chapter 3
competitors to the London Market are the specialist reinsurance entities based in markets such as
Bermuda.
London still has the reputation for having capacity (i.e. the supply of insurance available to meet
London still has the
reputation for having demand), always paying valid claims, the stability of insurers and the willingness to consider and invent
capacity new products to assist its clients.
Largest single marine reinsurance placement

The largest single marine reinsurance placement in the world is still placed partially within the Lloyd’s Market and it
has a top limit of over $3billion.
C Types of reinsurance products

In this section we are going to look at the various types of reinsurance that can be purchased. We will be
concentrating on what might be called ‘traditional’ reinsurance products which still have their place in
the Market. Looking at each type in turn, we’ll explain how they work, consider practical examples for the
payment of premium and finish with the allocation and payment of any claims. As you consider each
type of reinsurance, remember that the possibilities for varying these policies to tailor them for an
individual client’s requirements are endless.
When considering reinsurance we must always be mindful of the amount of the original risk that the
The amount of the
original risk that the insurer is retaining, which is known as their retention or retained line. The maximum size of this line (i.e.
insurer retains in their how much of any one risk the insurer can keep) is important when working out how much reinsurance is
‘retention’ or ‘retained
line’ needed in relation to any individual risk being written.
Although we are focusing on traditional reinsurance products, it is important to note that reinsurance as
a risk transfer mechanism continues to develop into a myriad of financial products such as ‘sidecars’
and various forms of alternative risk transfer. (We will not look at the workings of any of the financial
instrument product types such as sidecars as they are outside the scope of this syllabus.)
Activity
Visit these websites to find out about a type of financial instrument called a catastrophe bond which is becoming
more popular as a new form of reinsurance protection.
moneyterms.co.uk/catastrophe-bonds/
https://bloom.bg/2zkSsic
It is appropriate at this point to consider the important question of decision-making in relation to claims
where there is reinsurance involved. Do the reinsurers make all the decisions or do they leave the
decision-making to the original insurers and then just pay up their share on request?
The answer to this question is it depends on the reinsurance contract wording. For facultative
reinsurance (explained shortly) where there is only one risk being covered under the original insurance
and the reinsurance, it is perhaps more straightforward to involve the reinsurer in decision-making.
Needless to say, it is not always that simple.
Irrespective of the type of reinsurance, the majority of the solutions used by insurers regarding the
involvement of a reinsurer in decision-making for claims tend to fall in the middle of an extremely broad
spectrum of approaches. Here, we’ll examine the three main options: those which fall at either end of
the spectrum and one in the middle ground:
Option 1: Full Follow Clause. This is one end of the spectrum and is intended (at least by the insurer
With a Full Follow
buying the reinsurance) to operate exactly as it sounds. The insurer makes all the claims decisions, it Clause, the insurer
does not even have to tell the reinsurer that a claim is in progress – it just presents the reinsurer with makes all the claims
decisions
the bill! Needless to say, this option is unpopular with reinsurers and more popular with original
insurers.
Chapter 3
This option may seem to give the insurer a licence to spend the reinsurer’s money, but there are some
caveats.
If there is any suggestion that the original insurer has not behaved in a proper and businesslike way, the
reinsurer has the right to ask questions to ensure that the original settlement was made within the terms
and conditions of the original policy.
A reinsurer would want to avoid a situation where the original insurer has paid an ex gratia or
commercial settlement to maintain goodwill with the client and/or the broker, where in fact the claim
was not covered under the policy. Unless the reinsurance contract specifically includes these types of
settlements, then the reinsurer will not pay them.
Option 2: Claims Co-operation Clause. This is the middle ground, where the original insurer has to
advise the reinsurer of the loss and keep them advised during their handling of the claim. However, the
reinsurer does not necessarily have any rights to interfere with the insurer’s claims handling strategy and
decision-making. It is important to read the specific clause in each case, as a number of different ones
are used in practice.
Option 3: Claims Control Clause. The other end of the spectrum from option 1 and probably the
With a Claims Control
reinsurer’s preferred option. This option allows the reinsurer to have full decision-making control and Clause, the reinsurer
failure by the original insurer to allow this will, at best, delay any reinsurance recovery and at worst has full decision-
making control in
adversely impact its ability to recover at all under the policy. claims
When thinking about these three options and looking at the different types of reinsurance that are
There is a lot of trust
discussed below, it is important to remember that there is a lot of trust involved in a reinsurance involved in a
contract. You might be surprised to discover this in the context of a highly regulated business reinsurance contract
environment but to a greater or lesser degree relationships built on trust ‘oil the wheels of the business’.
However, trust is built on knowledge – both in relation to the business and the individuals with whom
the business is being transacted.
Consider this…
As we will see in chapter 9, underwriters delegate underwriting authority to third parties. Although the delegation is
controlled, there has to be an element of trust between the parties otherwise every risk would have to be re-
evaluated by the underwriters in London and the market would grind to a halt very quickly.
Activity
If you work for an insurer, find someone in your reinsurance buying team and ask them what claims provisions form
part of your reinsurances. Can you find any claims control?
We will now move on to look at the basic individual types of reinsurance. We will start with some
terminology to clarify those words that are used in the context of reinsurance:
To cede The act of sharing the risk with reinsurers.

Cedant Another word for the original insurer who is passing the risk to reinsurers.
Cession The share of the risk passed to reinsurers.
Collecting note The document used to present the claim to reinsurers.
Facultative Reinsurance purchased for an individual risk, generally because it would not fit within any
reinsurance other part of the reinsurance already available. Will only respond to claims arising out of that
one risk.
Non-proportional Reinsurance where the premium and claims do not have a direct correlation. The premium will
Non-proportional
reinsurance is where
reinsurance be set more in line with a direct insurance, and the claims will be dealt with on a purely
the premium and financial basis, rather than on a shared basis. Excess of loss and stop loss are examples of
claims have no direct this type. Claims will be paid out in excess of a pre-agreed amount.
correlation
Proportional Reinsurance where the premium and claims are shared between insurer and reinsurer in
reinsurance pre-agreed proportions, such as 30%. In the simplest form of contract there will be no
financial limitations, the reference will only be made to proportions but in more complex
contracts there will be limits expressed in financial terms relating to the size of the risks that
can be shared with the reinsurers. Quota share and surplus treaty reinsurance are examples of
this type.
Retrocedant A reinsurer obtaining reinsurance for itself.
Chapter 3
Retrocession A cession where the entity ceding is already a reinsurer.

Retrocessionaire A reinsurer accepting reinsurance from an entity that is itself a reinsurer.
Treaty reinsurance Reinsurance that can be purchased to cover a wider portfolio of risks, either a class of
Treaty reinsurance
can be purchased to
business or even an insurer’s whole book of business.
cover a wider
portfolio of risks
Question 3.2
If a reinsurer wanted to ensure that they were closely involved with all claims being handled by the insurer, which
clause should they put into the contract?
a. Full Follow Clause. F
b. Claims Co-operation Clause. F
c. Warranty Clause. F
d. Claims Control Clause. F
C1 Facultative reinsurance
The word facultative can be interpreted as meaning ‘optional’ or ‘not compulsory’. This meaning helps us
Facultative can be
interpreted as understand better how this type of reinsurance works. Firstly, the insurer has a choice as to whether or
meaning ‘optional’ or not to buy it. In reality it has a choice as to whether to buy reinsurance at all, but the concept of choice
‘not compulsory’
will make more sense when we compare this type with other types of reinsurance later in this section.
This type of reinsurance is generally shorted to ‘Fac’, which is how we will refer to it in the rest of this
section. This is a reinsurance which an insurer buys to transfer its risk, or protect itself in relation to one
risk only. This means that the reinsurance will only respond to situations where the original insurer has a
claim on the risk in question.
Why might this type of insurance be bought? As we will see later in this section, the other types of
reinsurances work more on a ‘grouped’ basis, whereby they protect whole sections of the insurer’s book
or portfolio of business, such as the hull account or the property account.
Accounts
An account (such as ‘hull account’ or ‘property account’) in this context, is all of those risks that the insurer codes
or allocates to a particular class of business.
The reinsurances that protect accounts generally have some restrictions as to the individual risks that
can make up the group. If the insurer wants to protect a risk that falls outside the group definition, it will
probably buy a Fac reinsurance. It is particularly relevant for any unusual risk that does not fit inside the
definition of any of the group-type reinsurances. This individual policy can be any form of reinsurance
but the key factor that distinguishes it from any other form of reinsurance is that it only responds to one
risk. We will look at some forms of reinsurance later in the group reinsurances text.
Let’s illustrate this with an example.
Example 3.1
Insurer A writes the following risks and allocates them into its property account:
Hotel Group B
Shopping Centre C
Theatre D
Chapter 3
It decides that the only reinsurance it will purchase is a Fac policy protecting the Hotel Group B risk.
It receives a large claim on the Theatre policy. Unfortunately, it has no other reinsurance and the Fac reinsurance
policy will respond only to Hotel Group claims and no others.
Why would an insurer buy this type of reinsurance? Often because it is the only reinsurance that it might
Fac reinsurance is
be able to obtain on a slightly unusual risk that it has written. Reinsurance is not compulsory in the often bought for
same way that, say, employers’ liability is, so it is a business decision as to whether to purchase it at all. slightly unusual risks
written by the insurer
Fac reinsurance is inherently more time-consuming administratively because risks are placed
individually. Therefore, it has the potential to be more expensive than other types of reinsurance.
Therefore, the original insurer has to consider carefully the balance between the ‘safety net ‘of the
reinsurance, the price it has to pay for it and the price it can charge for the business in the first place.
If the reinsurance is too expensive, the risk loses money even before any claims are made.
From a practical perspective Fac reinsurance is treated much like direct insurance with a premium paid
at the beginning of the contract and the claim presented to the reinsurer much as a direct claim would
be, supported by claims information.
This type of reinsurance can also be used to transfer only some of the perils being insured, for example,
an insurer provides property insurance on an all risks basis, but then reinsures themselves against just
the earthquake element of the risk.
C1A Facultative obligatory reinsurance

This is a variation on the theme of facultative reinsurance. In the case of facultative obligatory
reinsurance, the insurer makes an agreement with a reinsurer (or group of reinsurers) that for all risks
that it writes which fall within a certain pre-agreed set of criteria; the original insurer has the choice to
cede that individual risk to the reinsurer(s).
In practice, this means each time a risk is written by the insurer it can consider whether it wants to take
With facultative
up the reinsurance available. It is optional for the insurer. However, if it decides to cede the risk, the obligatory
reinsurer has to accept it – that is the ‘obligatory’ element in the title. reinsurance, the
reinsurer involved has
to accept all risks
On the face of it, there are some oddities with this type of contract which feels unbalanced between the ceded to it
parties. It is a fact of life that original insurers write some risks which are of a better quality than others.
‘Better’ in this context means ‘less likely to have claims’ (although even the best risks can have them).
Therefore, there is the potential for anti-selection against the reinsurer in that the insurer can cede the
less good risks to the reinsurance contract (which of course will involve the payment of a reinsurance
premium) but can keep all the good risks to itself. The likelihood of the reinsurer having to pay a claim
from the portfolio of risks that it receives under the contract becomes potentially higher than if all of the
risks that the insurer wrote are ceded to the reinsurer.
This type of contract is a good example of one which operates best when there is a strong element of
trust between the insurer and reinsurer. Perhaps, this type of contract would be one to think about
writing as a reinsurer only if you knew – and had done business with – the insurer for a long time.
In reality, this type of contract is not seen very much anymore, with more emphasis now on the more
equally balanced treaty types which will be discussed further on in this chapter.
Question 3.3
In a facultative obligatory contract, on which of the parties – if any – is the ‘obligation’?
a. The insurer. F
b. The reinsurer. F
c. Both the insurer and the reinsurer. F
d. Neither the insurer nor the reinsurer. F
C2 Excess of loss (XL) reinsurance

Excess of loss (XL) reinsurance is ‘non-proportional’ reinsurance. The contract is non-proportional
Excess of loss (XL)
reinsurance is ‘non- because there is no concept of sharing the premium and the claims in proportions or percentages.
proportional’
reinsurance Here, the coverage is bought/sold in layers which can be of any size, to build a reinsurance programme.
The number and size of individual layers purchased is a business decision. As you will see in example
3.2, the layers extend upwards (or vertically); therefore the original insurer has to consider potential
claim size to help it to decide how many layers it wants to buy to protect itself. To help them to decide,
an insurer should make a careful analysis of previous years’ claims histories and give consideration to
the following questions:
Chapter 3
• Were there any ‘spikes’ in the claims data – particularly large claims that were unusual and unlikely to
happen again?
• If there were any spikes, should they be ignored when working out the right level of reinsurance to buy
for the coming year? If so, what does the previous claims history show the general highest point to be?
• What is the optimum combination of layers and sizes of layers?
Let’s illustrate this with an example – remember this is only an illustration: infinite variations are
possible.
Example 3.2
Insurer A has reviewed its claims history and can see that it has had a number of claims at the £5 million level and
one spike of a claim which ended up at £10 million, but that was in one year only and has not been repeated. Insurer
A decides to buy XL reinsurance to a top level of £6 million which gives some room for manoeuvre above the level of
its usual highest claims. It acknowledges that it is at a lower level than the spike claim of £10 million. Having worked
that out, the reinsurance could be constructed in layers that look like one of options A, B or C (or infinite other
combinations):
Option A Option B Option C
Fourth layer
£2 million xs
£4 million
Third layer Second layer

£5 million xs Third layer £5.5 million xs
£1 million £1 million xs £500,000
£3 million
Second layer
£2 million xs
£1 million
Second layer
£750,000 xs £250,000
First layer First layer
First layer £1 million
£250,000 £500,000
Note, the first layer can always be retained by the cedant rather than being reinsured, and would be called the
retention rather than the first layer in this case.
Let’s look more closely at the information presented in this example:

• Each reinsurance is made up of layers, which could be underwritten by different reinsurers and
through different brokers.
• The reinsurance starts from zero at the bottom. The cedant can opt to retain as much or as little of
the risk as they choose. In this example, under option A they could retain the first £250,000 of each
claim and only buy reinsurance above this level. Whatever they retain is known as their retention or
retained line.
• In option A, you can see that the first layer is only £250,000 in size. This means that the policy limit is
£250,000. If a claim is received which is less that £250,000 then this is the only layer that would
respond (or if the cedant had chosen to retain this layer, there would be no claim on the RI at all). The
next layers in each reinsurance will only respond if the claim is over a certain size. In Option A, this is
£250,000, Option B: £1 million and in Option C: £500,000. Each of these second layers is of a different
size which again represents their policy limit. Therefore, in Option A, if a claim was made for
£500,000, then the whole of the first layer would be used up (either as retention or a first real layer)
and the second layer would have to pay the balance of £250,000.
• If any claims are received in excess of £6 million, there is no reinsurance for the excess above £6
Chapter 3
million in this reinsurance programme.
When determining the premium payable, the reinsurer considers the policy limit (i.e. size of the layer)
When determining the
and also how often the layer might have to pay claims. Not surprisingly the lower layers are more likely premium payable, the
to have claims than the higher layers, as larger claims are less frequent than smaller claims. The lower reinsurer considers
the policy limit and
layers in a reinsurance programme are often called the ‘working layers’ and the higher ones ‘catastrophe also how often the
layers’. The higher layers will usually charge less premium for the same amount of policy limit (i.e. same layer might have to
pay claims
layer size) than the lower layers because the likelihood of a claim is theoretically less. The basic
premium is calculated using the same concepts as direct insurance and does not particularly relate to The basic premium is
the amount of inwards premium that the insurer receives. calculated using the
same concepts as
When considering reinsurance protection, an insurer is concerned not only with buying enough to ensure direct insurance
that the large claims are covered, but that the reinsurance will be available to respond to multiple claims
throughout a year (the normal reinsurance policy period).
Consider this…
Imagine the challenges faced by an US or global insurer that has run out of reinsurance protection halfway through
the year, with the North Atlantic hurricane season still to come!
This is a particular danger with this type of reinsurance because if an insurer has a large claim it can
If the insurer is very
‘burn through’ all its layers from zero (‘from the ground up’) and leave it exposed. Therefore, it can agree fortunate, reinsurers
with its reinsurers that they will ‘bring its policy back to life’ (called reinstatement) a number of times might reinstate its
policy without charge,
within the year to allow it to collect more than one total loss during any one year. If the insurer is very but generally they
fortunate, reinsurers might reinstate its policy without charge, but generally they charge a proportion of charge a proportion of
the original premium
the original premium.
In practice, when the claim is presented to the reinsurers for settlement, a calculation is made of the
additional reinstatement premium that is due and the payments are made at the same time.
There are very few policies which allow for what is known as unlimited reinstatements (tantamount to an
everlasting policy although it would probably be very expensive). Most are capped at, say, four
reinstatements, which means that together with the original ‘life’ that a maximum of five total losses can
be paid. This is great news for the insurer, unless this year happens to be one where it has six total
losses.
Activity
See if your company is involved in XL contracts and have a look at some Market Reform Contracts (MRCs)/slips/
policies to see the various combinations of layers. Look for the reinstatement provisions – how many times can the
policies be brought back to life and how much will it cost?
Question 3.4
In the context of reinsurance, what are ‘reinstatements’?
a. Extra layers of coverage which can be purchased for additional premium. F
b. Reductions in the coverage if the premium is not paid. F
c. Triggers to bring the policy layers back to life after a loss usually for the payment of additional premium. F
d. Cancellation provisions. F
C2A Claims under excess of loss

An XL contract can be purchased as a Fac reinsurance, just to cover one risk but it is more usual to set
them up as reinsurance contracts that cover more than one risk (and in fact a whole portfolio of risks)
that the insurer has written. There are various ways in which this grouping can be set up – the most
common of which are:
• single classes of business (e.g. property account and hull account, where claims can only be grouped
coming out of the protected classed of business);
• single risk (known as per risk or risk excess contracts, where claims can only be grouped coming out of
one risk written, even though a whole portfolio might be protected);
Chapter 3
• all marine accounts or all non-marine accounts; and

• whole account (which means every risk that the insurer writes).
When handling claims on any reinsurance policy, the insured has to consider whether a number of
Usually, reinsurance
policy wordings claims coming out of any one incident can be grouped together for presentation to reinsurers. Usually,
indicate that claims reinsurance policy wordings indicate that claims arising out of any one event can be grouped together.
arising out of any one
event can be grouped
together If the insurer can group claims together, it can make a larger claim on the reinsurers; if it is keeping the
first layer as an excess, it only has to pay that once. Clearly, reinsurers are very watchful for abuses of
the grouping or possible adverse aggregations of claims and question any that do not appear to be part
of the same original cause or event.
Example 3.3
Property reinsurances often ring fence storm-related reinsurance claims to those losses which occurred within a 72-
hour period. Therefore, if there is a protracted storm that exceeds the 72-hour period, the insurer might have to
group the claims into two separate presentations and bear a second excess.
In terms of presenting the claims to the XL reinsurers, the insurer uses a document called a ‘collecting
note’ which sets out details of the event (e.g. ship sinking, factory burning or a solicitor’s professional
indemnity claim) and indicate its financial loss. It does not necessarily split out every constituent part of
its claim on the reinsurers although it might need to if the reinsurers are concerned that a ‘rogue claim’
has been added to the collecting note, i.e. one that would not fall within the terms of the reinsurance.
C2B Stop loss reinsurance

Stop loss reinsurance is a variation on the concept of the excess of loss policy. Layers are still used but
Stop loss reinsurance
is a variation on the in this case, the policy is linked to an insurer’s combined ratio. A combined ratio is the percentage of
concept of the excess premium income represented by claims and operating costs (including the cost of reinsurance). In
of loss policy
comparison, a loss ratio is the pure comparison of claims versus premium.
So, for example, if an insurer receives £1 million of premium and its claims plus operating costs are
£800,000 then it has a combined ratio of 80%. As long as the combined ratio is lower than 100%, the
insurer is in profit and the lower the ratio, the happier its investors.
This means that if the combined ratio is higher than 100%, it means that its claims and operating
expenses exceed its premium income and the insurer is in a loss situation.
Insurers can purchase stop loss cover to protect them in the event of a loss. It works along the lines of
an excess of loss policy as it provides a layer of reinsurance protection and can be any size as long a
reinsurer is prepared to sell it. The difference is that it is triggered when an insurer’s combined ratio
exceeds a stated point. For example, an insurer might purchase a stop loss reinsurance contract that’s
triggered when its combined ratio hits, say, 105%. The policy limit of this layer is also measured by
reference to the insurer’s combined ratio, so it might pay out until the combined ratio hits, say, 130%
and then stop.
Example 3.4
Between 105% and 130%
combined ratio:
stop loss triggered
Up to 105% combined ratio:

stop loss not triggered
Chapter 3
A stop loss contract is not only for circumstances in which combined ratios exceed 100%. Less usually, it
is purchased to respond when the insurer’s combined ratio is below 100%.
C3 Proportional reinsurances
Proportional reinsurances show a clear relationship between the premium that the original insurer
receives and the amount passed to reinsurers: hence the term ‘proportional’. There are two standard
proportional reinsurance contracts in use, which are the quota share treaty and the surplus treaty and
we will consider these in turn.
C3A Quota share treaty

A quota share treaty (or agreement) is set up between an insurer and reinsurer (or reinsurers) at the
beginning of a year and provides that for every risk that the insurer accepts, it will cede it to the treaty
and pay an agreed proportion of the premium to the reinsurer. Agreed within the contract is the line or
share of the risk that the insurer will retain itself (such as 70%). In this example, if the original insurer
accepts a 10% line on a risk, it can transfer 30% of that 10% to its reinsurer.
In contrast to the facultative obligatory contract that we reviewed earlier, the reinsurer receives every risk
that falls within the criteria; the insurer has no opportunity to keep the good ones for itself!
In the most basic form of the quota share treaty, each risk is shared with the reinsurer in the agreed
In the most basic
percentage (e.g. 30%). Here, the reinsurance is called a 30% quota share, which means that for each form of the quota
risk written that falls within the treaty terms, the reinsurer receives 30% of the premium (irrespective of share treaty, each risk
is shared with the
the financial value of that premium) and pays 30% of any claims (again irrespective of the financial reinsurer in the
value of the claims). agreed percentage
There is no limit as to the extent of the percentage that can be shared with the reinsurer. It is possible to
There is no limit as to
find a 100% quota share, but these are in fact ‘fronting’ arrangements where the insurer is acting as a the extent of the
local face in a market, perhaps to satisfy regulatory requirements but in fact keeps none of the risk itself. percentage that can
be shared with the
reinsurer
Finally, it is also possible to restrict the size of risk being ceded under the contract.
Example 3.5
In this example, the reinsurance is 30% quota share up to a maximum risk size of £5 million.
The insurer writes an inward risk of £6 million with a premium of £600.
The risk is too big for the reinsurance. To calculate how much it can cede to the reinsurance, divide the inward risk
of £6 million into two elements: £5 million that can go to the reinsurance and the other £1 million which cannot.
The premium has to be divided in the same way: £500 and £100.
Of the £5 million share of the risk that is eligible for the reinsurance, 30% can be ceded to the reinsurers and 70% is
the retained line to be kept by the original insurers. Of the £500 premium which represents the £5 million part of the
risk that can be ceded, the reinsurer wants 30% which is £150 and the insurer can keep the other £350.
The insurer also keeps the £100 premium in respect of the £1 million that could not be ceded. The insurer therefore
keeps £450 retained premium of the £600 original premium.
C3B Surplus treaty or surplus line treaty

In this type of reinsurance, the original insurer buys reinsurance in what are known as ‘lines’ which are
the same as the maximum lines or shares that it can accept on any one risk on its own.
Every underwriter working within an insurer has what is known as a ‘maximum retained line’ and as an
organisation, the insurer puts in place controls around how large a share of any risk it can accept.
It might be that for a very good risk, a larger than permitted share might make good business sense so
this type of reinsurance allows the underwriter’s permitted line to be increased in multipliers of the
original line.
Example 3.6
An underwriter is permitted to write a maximum line of £5 million (their maximum retained line).
They decide to buy a surplus line treaty and have to consider how many extra lines to buy; this is the measure of the
policy limit under this type of reinsurance. They decide that the maximum they might ever want to write would be
£30 million.
Chapter 3
So, to write a £30 million risk with their £5 million retained line, they need an additional £25 million of reinsurance,
which is five times their original line. Therefore, they need what is called a five-line surplus treaty (five lines of £5
million each added to their retained line, to reach £30 million in total).
Having bought this reinsurance, the underwriter in example 3.6 has a maximum of five times more than
their original line but they do not have to use them all each time. This contract gives them the flexibility
to write any line up to £30 million and as much of the reinsurance as is needed will be triggered.
When the underwriter writes risks that are eligible for cession to this treaty, they have to share out their
premium with the reinsurers in proportions. In example 3.7, the underwriter has decided to write a risk
where they take a line of £15 million.
Example 3.7
The underwriter has a five-line surplus treaty but writes a risk where they take only a £15 million line. The
underwriter can take £5 million retained line on their own so they have to use two of their five extra lines taking £5
million each totalling £10 million. Therefore they have to share out their premium in the same proportions.
If the underwriter receives £15,000 in premium, they can keep £5,000 themselves, but they must pay £5,000 to
each of the two reinsurers on the lines they have used.
If there are two claims on the original policy totalling £30 million, the underwriter will have to bear £10 million and
each of the two surplus lines will bear £10 million – i.e. the same proportions as the original risk was shared.
As with quota share treaties, there are no restrictions on the amount of lines that can be bought, if a reinsurer is
willing to sell and the original insurer is prepared to pay the price.
D Reinsurance programme construction

Constructing a reinsurance programme for an insurer is a combination of art and science! The ideal
programme gives neither too little nor too much reinsurance and of course at the right price, with
reinsurers that will still be there to pay claims should they occur.
There is no right or wrong solution to reinsurance programme construction, but there are a few basic
There is no right or
wrong solution to principles which always apply, as follows:
reinsurance
programme 1. The insurer should start by thinking about whether any individual risks are unusual enough not to fit
construction
into any of the proportional or non-proportional treaty contracts. Those risks should perhaps have
some Fac reinsurance purchased for them.
2. Next, the insurer should think about individual classes of business and reinsurance for all risks that
fall into those classes. Generally, proportional contracts are considered first, followed by non-
proportional (XL) contracts.
3. The insurer could then think about some XL protection for, say all the marine classes together, or all
the non-marine classes. Perhaps they could purchase a specific risk excess?
4. Perhaps it could consider some XL protection for the whole account (i.e. every risk that the insurer
writes).
5. Above this might sit catastrophe XL protection, again for the whole account.
Be aware
There is no reason why an insurer has to action points 1–3 above; it can just start with XL protection for the whole
account. However, reinsurers involved in contracts described in points 4 and 5 above will want to know at the time of
placing the contracts, what reinsurance is being purchased under arrangements in points 1–4 or 1–3 as appropriate.
The reason for this is that there’s a fundamental rule that the most specific (or relevant) reinsurance contract will
respond first to any loss. Therefore, reinsurers will want to know whether they are the first port of call in any loss, or
are likely to be picking up the balance of any claim not paid by other reinsurers.
Chapter 3
Example 3.8
An insurer has provided a standard property policy for a well known online retailer covering all of its warehouses.
This risk is one that the insurer has written for a number of years and is completely within its normal book of
business.
A large warehouse fire has been reported to the insurer. Its net claim is £5 million. Let’s consider the key questions
about the operation of reinsurance in this case:
1. Does the insurer have any Fac reinsurance on this risk? This is unlikely to be the case, as this type of risk would
appear to be quite standard and fits neatly into any proportional or non-proportional treaties available to the
insurer. Therefore, the first level of reinsurance which should be considered is the proportional treaties, but the
existence of Fac RI should always be checked out too just in case it has been bought.
2. Does the insurer have any proportional treaty on the property account? Yes it does: it ceded 25% of this risk
with no upper cap on the exposure.
That means that the proportional treaty reinsurers will pay £1.25 million, so the insurer has £3.75 million left to
pay itself. Are there any other reinsurers from which the insurer can claim this balance?
3. Is there any XL reinsurance? Yes, there is no specific risk excess but there is a property XL. However, it is only
for £2 million xs £1 million. The insurer declares the claims it has made on the proportional treaty and shows
the reinsurer its workings. Fortunately, the insurer can claim £2 million from that reinsurer which leaves them
with £1.75 million.
4. Finally, there is a whole account XL for £5 million xs £250,000. Applying the excess of £250,000, the insurer
can claim £1.5 million from that reinsurance, once it shows that reinsurer all the other underlying reinsurances
from which it has already claimed. That leaves the insurer with a net balance of £250,000 which it cannot claim
back from any reinsurers. This is much more tolerable for the business than the original claim of £5 million.
There are also government-based reinsurance programmes that focus on providing terrorism-related
There are
reinsurance cover for the commercial insurance market. The reason for this is the global insurance government-based
market’s concern about terrorism losses following the City of London bombings in 1992 and 1993 reinsurance
programmes that
together with the World Trade Center attacks in New York in 1993 and 2001. focus on providing
terrorism-related
For example, the US government wants commercial insurers to continue to provide terrorism insurance reinsurance cover for
the commercial
for property and has put in place a scheme whereby, should a loss ever occur, that the commercial insurance market
market had to pay out for, claims could be made on the US government scheme. This scheme is known
as TRIA (which stands for the Terrorism Risk Insurance Act). Similar systems also exist in the UK (Pool
Re), France (Gareat) and Australia (ARPC) as well as some other countries.
Activity
If you work for an insurer or reinsurer, find the person responsible for providing returns to Gareat or Pool Re and find
out what that involves. Visit these websites to find out more about the schemes:
www.gareat.com/
www.poolre.co.uk/
www.treasury.gov
Key points
Why reinsurance is purchased and sold
• Reinsurance is risk transfer from an insurer to a reinsurer.
• Reinsurance provides peace of mind and evens out peaks and troughs in an insurer’s results.
• Reinsurance releases capacity for the insurer to write more direct business.
• Some firms specialise in reinsurance.
Chapter 3
• Some firms write reinsurance to access types of business or parts of the world that they either cannot or do not
want to access directly.
London reinsurance market
• London is a major reinsurance market but not the largest in the world.
Types of reinsurance products
• There are many different types of reinsurance. Some are more akin to financial instruments than traditional
reinsurance products.
• Main reinsurance products include facultative, proportional treaty and non-proportional treaty.
• Reinsurance contracts usually contain provisions concerning the amount of input that the reinsurer can have in the
original claims.
• ‘Retrocession’ is the term used for a reinsurance contract where the buyer is already a reinsurer.
• Facultative reinsurance is purchased to protect individual, usually unusual risks.
• Proportional reinsurance involves the insurer and the reinsurer sharing risks in equal proportions subject to any cap
on the reinsurance.
• There are two main sorts of proportional treaty: quota share and surplus lines.
• Excess of loss reinsurance is non-proportional and is purchased in layers.
• Stop loss reinsurance is purchased to protect an insurer’s loss ratio.
• The amount of any risk that the insurer has to bear itself, without reinsurance, is called its retention or retained line.
Reinsurance programme construction
• There are no set rules for construction.
• The insurer must consider its exposures and balance need for protection with the amount it is prepared to pay.
• Individual risks can be protected with facultative reinsurance.
• Classes of business can be protected with proportional and non-proportional treaties.
• The insurer’s entire account can be protected, generally with a non-proportional treaty.
• If more than one reinsurance policy is available for any claim then they are triggered in a certain order: facultative
first, then proportional and finally non-proportional.
Question answers
Chapter 3
Self-test questions
1. List three reasons why an insurer might purchase reinsurance.
2. Identify two reasons why a company might write reinsurance business.
3. Distinguish between claims control and claims co-operation in a reinsurance contract.
4. Why might an insurer purchase facultative reinsurance?
5. In a facultative obligatory contract, what choice does the insurer have in respect of ceding the risk?
6. What is the term used for the amount of any risk that the insurer keeps for itself?
Chapter 3
7. What is a collecting note used for?

8. What is the maximum number, if any, of lines that can be purchased as surplus lines reinsurance?
9. If a facultative reinsurance and excess of loss reinsurance both apply to a particular risk, which one will
respond first?
10. Which part of an insurer’s account does a catastrophe excess of loss generally protect?

Market security
4
outcomes
Chapter 4
Learning objectives
Introduction
Key terms
A Solvency 4.1
B Solvency II 4.1, 5.4
C Lloyd’s chain of security 4.2
D Rating agencies 4.2
Key points
Question answers
Self-test questions
Learning objectives
• describe the concept of solvency and explain the basic components of an insurer’s solvency margin
calculation;
• outline the EU solvency requirements and the industry regulator’s risk-based capital requirements for
insurers; and
• explain the role of the rating agencies.
Introduction
In this chapter, we will be looking at the way in which insurers and reinsurers ensure that they are robust
enough to carry on doing business. We will also examine the way in which they satisfy various external
requirements and measurements of their robustness; finally we’ll consider how measuring or rating tools
are used to give other parties an indication of their robustness.
Key terms
Assets Central assets Central Fund Credit rating
Credit risk Disclosure European Insurance and Group and capital risk
Occupational Pensions
Authority (EIOPA)
Incurred but not reported Liabilities Liquidity risk Lloyd’s chain of security
(IBNR)
Chapter 4
Market risk Members’ Funds at Lloyd’s Minimum capital Operational risk

(FAL) requirement (MCR)
Own risk and solvency Quantitative requirements Rating agency Solvency capital
assessment (ORSA) requirement (SCR)
A Solvency
Solvency means having more assets than liabilities. Within the insurance market, liabilities are not only
Solvency means
having more assets the claims that have been paid, but also those which are unpaid – together with the costs of running the
than liabilities business such as reinsurance costs or staff salaries for example. Assets represent ownership of value
that can be converted into cash (although cash itself is also considered an asset). They comprise items
such as premiums, investment income and buildings.
This can be shown as an equation:
Assets ≥ Paid
claims + Unpaid
claims + Operating
costs
This means that for a solvent firm, assets are greater or equal to the sum of paid claims, unpaid claims
and operating costs.
A solvency margin is the amount by which assets exceed liabilities. As might be expected, it would be
A solvency margin is
the amount by which dangerous for an insurer to try to set the level of its assets to be just equal to its calculated liabilities
assets exceed (with no margin for error). Insurers need to build in a further amount to keep assets above liabilities and
liabilities
therefore improve their ability to pay future claims.
One of the challenges for any insurer is knowing what value to place on its unpaid claims (i.e. calculating
its reserves). Unpaid claims can fall into two categories: those that are known about and those that are
not. To ensure that enough funds are put aside for the unknown, unpaid claims, insurers use various
statistical tools to identify an additional amount to be reserved known as the ‘incurred but not reported’
(IBNR) figure.
Refer to chapter 2 As we saw in chapter 2, there are many classes of business written in the London Market and some of
them have been viewed by the regulators as being more volatile in nature than others (which translates
as having the potential for large claims). These include aviation liability, marine liability and general
liability. In these classes the traditional starting calculation involves increasing the premium and claims
figures by 50%.
Activity
Find out what proportion of your business as an insurer falls into one or all of these classes. What impact has it had
on your firm’s solvency margin?
Chapter 4 Market security 4/3
Question 4.1
Which three items comprise the right-hand side of the simple solvency calculation, opposite premiums?
a. Claims, experts’ fees and reinsurance costs. F
b. Claims, operating costs and reinsurance costs. F
c. Reinsurance costs, insolvency risks and claims. F
d. Operating costs, salaries and PRA levies. F
B Solvency II
Solvency II is a new pan-European solvency regime which came into force on 1 January 2016 and
Solvency II came
operates across all 28 EU Member States, including the UK. into force on
1 January 2016
It replaced what was known as Solvency I, which was also based on EU legislation but had been handled
Chapter 4
in different ways across Europe.
Be aware
The Solvency II rules apply to all insurers, reinsurers, captives, mutuals, with their head office in the EU. Lloyd’s is
treated as a single entity under the new regime.
The main aim of Solvency II is no different from that of the historic regime in place in the UK, which was
to ensure that insurers are there to pay their policyholders’ claims when needed. The stated objectives
of Solvency II are:
• better regulation;
• deeper integration of the EU insurance market;
• enhanced policyholder protection; and
• improved competitiveness of EU insurers.
The key principles of Solvency II are described as being in ‘three pillars’ (or elements) as outlined in
table 4.1:
Table 4.1: Examination of the three ‘pillars’ of Solvency II

Pillar name What it means in practice for insurers
Quantitative As with previous solvency rules, this requires insurers to demonstrate that they have
The three ‘pillars’ of
requirements adequate financial resources available to cover exposure to risks. Solvency II are
The key difference with Solvency II is the consideration of business risk over and above quantitative
requirements,
the insurance-related risks. Insurers now have to engage in a far more wide-ranging supervisory review
analysis of business risk (e.g. the risk of reinsurers failing, or the building being and disclosure
destroyed, or the risk of finding out that it is insuring every entity involved in a major
disaster and had not realised it before the disaster happened!). Table 4.2 discusses the
various business risks in more detail.
In terms of the financial requirements, the insurer must keep a certain amount of assets
available in excess of its liabilities; this amount is referred to as the solvency capital
requirement (SCR). If it is breached (i.e. the insurer does not have enough assets to
balance its liabilities), this will be an early warning to the regulators of potential problems.
There is also a lower amount known as the minimum capital requirement (MCR). If this
level of capital is breached, regulatory intervention is likely.
Table 4.1: Examination of the three ‘pillars’ of Solvency II

Supervisory review This follows on from the previous ‘pillar’ and requires that every insurer has an effective
risk management system that considers all risks to which it is exposed. The risk
management and risk assessment process must be owned and implemented by the
senior management even though other personnel may in fact carry out their day-to-day
operation.
Having worked out the levels of various risks and measured the financial requirements in
accordance with the calculations set out in the Solvency II rules, the insurer must ensure
that it holds sufficient capital against those risks.
The own risk and solvency assessment (ORSA) is the name given to the internal review
undertaken by insurers. This covers the entirety of the processes and procedures
employed by an insurer to identify, assess, monitor, manage and report the short- and
long-term risks it faces or may face, and to determine the capital necessary for its overall
solvency needs to be met at all times. Insurers should carry out this review on an
ongoing basis as the risks can change, both through improvements and deteriorations.
Disclosure The EU is aiming for harmonised supervisory reporting and disclosure across all EU
Member States. As a general note, insurers have to disclose publicly more information
Chapter 4
than they have generally done previously.
Within an insurer, the burden of work surrounding compliance with Solvency II does not just fall to the
compliance officer. Senior management, especially risk managers, finance personnel, actuaries and of
course the underwriting team all have a role to play.
Examples of risks that an insurer faces and must consider as part of its Solvency II work, other than
those which it is accepting as an insurer, are listed in table 4.2:
Table 4.2: Examples of business risks faced by an insurer

Credit/counterparty • Premiums not being paid.
risk • Reinsurance claims not being recoverable because the reinsurer is insolvent.
Operational risk • Underwriters writing risks or claims personnel settling claims outside their authority.
• The business being unable to operate because the building has been damaged or access
prevented.
• Market systems not being available for use.
Market risk • Investments failing.
• Exchange rate losses when dealing in multiple currencies.
Liquidity risk • Not being able to release investments quickly enough (cash flow issues).
Group and capital risk • Large organisations (e.g. those that are both syndicates and companies) need to monitor
the activity of each division: such as writing lines on the same risk. Risks also exist from
sharing one reinsurance programme if the syndicate finds that there is no cover left
because it has had a series of claims, or alternatively the company finds that the syndicate
has used up all the available reinsurance cover.
Enterprise risk • Many risks do not just have an impact on one area of the business. Enterprise Risk
Management (ERM) encompasses the wider ranging management of risks that can impact
the entire business.
Question 4.2
What are the three pillars of Solvency II?
a. Quantitative requirements, supervisory review and disclosure. F
b. Solvency capital requirement, minimum capital requirement and own risk and solvency assessment. F
c. Qualitative requirements, supervisory review and disclosure. F
d. Supervisory review, solvency capital requirement and reserving. F
B1 Role of the regulators in Solvency II

The European Insurance and Occupational Pensions Authority (EIOPA) is the overarching EU supervisory
EIOPA is the
body of Solvency II. Its main goals are to: overarching EU
supervisory body of
• provide better protection for consumers and rebuild their trust in the financial system; Solvency II
• ensure a high, effective and consistent level of regulation and supervision, which takes into account
the varying interests of all Member States and the different natures of financial institutions;
• ensure greater harmonisation and coherent application of rules for financial institutions and markets
across the EU;
• strengthen oversight of cross-border groups; and
• promote a coordinated EU supervisory response.
EIOPA’s core responsibilities are to increase the stability of the financial system and the transparency of
markets and financial products, as well as the protection of policyholders.
Chapter 4
National markets across Europe are all different and have varying degrees of sophistication. To account
for this, there is an integrated network of national and European supervisory authorities which link the
high and low levels (or macro and micro levels) of supervision. The success or otherwise of Solvency II
almost entirely depends on the various national insurance supervisors implementing it in a consistent
manner.
The UK regulators play very important roles under Solvency II as the insurance supervisors in the UK.
In particular, the Prudential Regulation Authority (PRA) carries out the day-to-day supervision of
Solvency II.
In late 2015, a key step towards Solvency II implementation was taken when it was announced that a
number of London Market insurers, including Lloyd’s, had received regulatory approval from the PRA for
their internal models. These are a key element of Solvency II and are linked to the ability of an insurer to
calculate its SCR in accordance with Solvency II rules.
B2 Solvency II and Lloyd’s

For the purposes of solvency, the EU treats Lloyd’s as a single entity. This means that the solvency
measurements applied under Solvency II by the regulators apply to the Lloyd’s Market as a whole.
Lloyd’s has an element of internal regulatory control permitted by the regulators and the intention is that
this will continue. The PRA’s recent approval of the central Lloyd’s internal model suggests that, so far,
the regulators are pleased with Lloyd’s central involvement in this area.
Useful website
Review this website for more information about Solvency II:
www.lloyds.com/The-Market/Operating-at-Lloyds/Solvency-II
Activity
Consider any two of the non-insurance risk elements that an insurer needs to consider as part of its Solvency II
work. Think about practical steps that insurers can take to minimise those risks.
Talk about your ideas with colleagues and write some notes here:
EU referendum
On 23 June 2016, the UK voted to leave the European Union (EU).
The UK Government invoked ‘Article 50’ of the Lisbon Treaty on 29 March 2017. In doing so, the two-year
negotiation period which will result in Britain leaving the EU began. This means that, at the time of publication,
the UK’s membership of the EU will cease on 29 March 2019.
Until this final ‘withdrawal agreement’ is entered into, the UK will continue to be a full member of the EU, compliant
with all current rules and regulations, and firms must continue to abide by their obligations under UK law, including
those derived from the EU, and continue with the implementation of all legislation that is still to come into effect.
The longer term impact of the decision to leave the EU on the UK’s overall regulatory framework will depend, in part,
on the relationship agreed between the UK Government and the EU to replace the UK’s current membership at the
end of the ‘Article 50’ negotiation period.
Please note: The UK decision to leave the European Union will have no impact on the 2018 CII syllabuses or exams.
Changes that may affect future exam syllabuses will be announced as they arise.
Chapter 4
C Lloyd’s chain of security

For Lloyd’s as a marketplace, the demonstration of solvency is assisted by the existence of the
The Central Fund
operates what is Central Fund, which is a ‘pot of money’ held centrally by Lloyd’s. The Central Fund operates what is
known as the final link known as the final link in the Lloyd’s chain of security. The links in the chain of security are outlined in
in the Lloyd’s chain of
security the table below.
Table 4.3: Links in the Lloyd’s chain of security

Link Description
Syndicate level The chain of security starts with this first link: the premiums received for the business written
assets which are all held in trust funds. These funds are the first source of money to pay any claims
which are made on the syndicate. The funds must be held in ways that can be released
quickly (or liquidated) in order to pay claims.
Members’ Funds at Should the above funds be inadequate (i.e. the premiums are not large enough to pay all the
Lloyd’s (FAL) claims) there is a second line of available funds that forms the next link in the chain. These
funds have been deposited at Lloyd’s by the members of the syndicate (whether individual or
corporate) as a condition of becoming an investor in the Market.
Once these funds are exhausted, then the members can be asked for more funds to the limit
of their liability. (Remember that most investors at Lloyd’s now have limited liability and there
are very few long-standing unlimited liability Names left, who must have been in the Market
since before 2001.)
Central assets What happens once the members’ funds have been depleted? By this time, an insurance
company would potentially have gone into liquidation with limited recourse for any
policyholders who had outstanding valid claims. However, the Lloyd’s Market has the Central
Fund available as a last resort for use in case all other sources of funds for the payment of
any valid claims are exhausted.
It is fed by contributions from all the written premium in the market and the basic rate of
contribution for all existing members is 0.35% for 2017.
Lloyd’s can set the levy for Central Fund as it deems appropriate. New corporate members in
2017 have to pay 1.4% for the first three years of their involvement in the market. ‘New’
means that they are supporting new syndicates starting to trade in 2015, 2016 or 2017.
Example 4.1
If a member had written premiums of £500,000 in a year, the contribution that it would make to the Central Fund
would be £1,750 (i.e. 0.35% × £500,000).
The member does not need to pay this as a separate levy but it is taken from the premiums as an administrative
charge payable via the managing agent.
Question 4.3
Which of these combinations of funds must be exhausted before the Central Fund can be accessed to pay claims?
a. Premiums and Members’ Funds at Lloyd’s. F
b. Members’ Funds at Lloyd’s and available reinsurance. F
c. Premiums and available reinsurance. F
d. Members’ Funds at Lloyd’s and PRA levies. F
D Rating agencies
As we’ve seen, insurance and reinsurance are bought by individuals, firms and insurers in order to
transfer the financial burden of something bad happening. However, this only works if the insurer or
reinsurer to which the risk is transferred is still in business at the time the claim is made and in a
Chapter 4
financial position to pay. If they are not, even a valid insurance or reinsurance claim would not be able to
be recovered.
How does a buyer ascertain which insurers are the most stable? They could pore through various
companies’ balance sheets and annual reports, but this isn’t the most practical approach and it requires
certain financial and analytical skills. How much easier it would be if someone did the hard work for the
buyer and gave them a rating system that showed, at a glance, the difference between each insurer/
reinsurer.
Fortunately, this system is already available to buyers. There are a number of organisations which rate
There are a number of
insurers (and reinsurers), publishing their results for public consumption. These are independent organisations which
opinions of an insurer’s strength and are not influenced in any way by the insurer itself. Currently, there rate insurers (and
reinsurers),
are three main organisations that conduct this rating process, namely: publishing their
results for public
• Standard & Poor’s consumption
• Fitch
• A. M. Best
Rating agencies
Standard & Poor’s has been in business for 150 years, A. M. Best for over 100 years and Fitch was founded nearly
100 years ago.
In addition to providing insurer ratings, these organisations are providers of wider financial market
Rating agencies are
intelligence. They provide risk evaluations, investment research and credit ratings to their clients who providers of wider
can be individuals as well as organisations. market intelligence
When rating an insurer, the rating agency looks not only at an insurer’s ability to pay claims; it also
considers:
• operating performance (which includes factors such as the quality of the management of the business,
and past profitability); and
• business profile.
Ratings are indicated by the use of scores such as A, A+ and AAA; different combinations are used by
each rating agency for each level.
Insurance companies are rated individually; however, Lloyd’s is rated as a single marketplace. This
marketplace rating might be different from the individual rating that might be held by a syndicate
working within that marketplace if it has been individually rated.
Activity
If you work for an insurer find out your firm’s credit rating from all three agencies listed. If your organisation
comprises more than one insurance entity, see if there is a difference between their ratings.
D1 Use of ratings
All buyers of insurance or reinsurance use these ratings to consider the best market to use.
All buyers of
insurance or
reinsurance should Brokers and insurers have security committees; smaller organisations employ someone who assumes
use these ratings to responsibility for checking all the security that it is proposed is used. These parties should also use the
consider the best
market to use ratings.
For a broker, this means that for every client whose risk they are placing, one of their considerations is
the rating of the insurers with which the risk is placed. The broker considers the rating alongside other
commercial considerations, such as any terms and conditions offered. If a broker does not consider
whether the insurer will still be there to pay the claims and the worst happens, the broker could be
exposed to a claim for professional negligence from their client.
When they are considering the purchase of reinsurance, insurers also use the ratings and have security
committees to consider which potential reinsurers are acceptable and which are not.
Reinforce
Chapter 4
Review what you have read about the various risks that an insurer has to consider (other than any insurance it’s
writing). It’s important that the insurer considers the risk of its reinsurance not paying out in the future. The use of
ratings and security committees helps the insurer to assess this risk and to evidence to the PRA that it has factored
the risk into its internal risk management approach.
D2 Impact of a decrease in an insurer’s rating

Decreases in ratings can occur; for example, it could happen if a rating agency concludes that the
If an insurer’s rating
falls, it might find that business is not being run in accordance with acceptable standards (perhaps failure to comply with the
it’s considered requirements of Solvency II). If an insurer’s rating falls, it might find that it’s considered unacceptable as
unacceptable as a
market a market and will lose business.
However, if there is a general downgrading across the Market and its peers (i.e. competitors) have also
had their ratings reduced, the impact of the reduced rating is essentially neutralised. It remains at the
same level as its peers, but they are all rated lower than previously.
Activity
Find out who in your organisation is responsible for security ratings. Depending on the size of your company, it may
be a committee or an individual. Ask them to tell you a little about what they do and whether it is their full time role.
Write some notes about what you find out here:
Question 4.4
An insurer’s rating has recently been downgraded; however, a broker still recommends it to a client as they have
placed risks with that insurer for many years. Unfortunately, the insurer fails and cannot pay future claims. In what
circumstances, if any, might the broker suffer a professional negligence claim from their client?
a. None, since ratings are only one indicator of an insurer’s stability and the broker was familiar with the insurer
when they placed the risk. F
b. If the rest of the market was downgraded at the same time as the insurer’s individual downgrade. F
c. If the rest of the market was NOT downgraded at the same time as the insurer’s individual downgrade. F
d. If the policy was placed on a subscription basis. F
Key points
Solvency
• Solvency is maintaining the balance between assets and liabilities.
• Assets include cash but also include any items of value that can be converted into cash such as buildings or
investments.
• Liabilities include the claims both paid and unpaid, together with operating costs such as reinsurance or staff costs.
Solvency II
• Solvency II is a new pan-European solvency regime which came into force on 1 January 2016 and operates across
all 28 Member States of the European Union, including the UK.
• Solvency II has four main objectives which are better regulation, deeper integration, enhanced policyholder
protection and improved competitiveness.
Chapter 4
• The three pillars of Solvency II are quantitative requirements, supervisory review and disclosure.
• Businesses face a number of risks such as market risk, credit risk, liquidity risk, operational risk and group/capital
risk.
• The European Insurance and Occupational Pensions Authority (EIOPA) is the overarching EU supervisory body of
Solvency II.
• EIOPA’s core responsibilities are to increase the stability of the financial system and the transparency of markets
and financial products, as well as the protection of policyholders.
• The Prudential Regulatory Authority (PRA) carries out the day-to-day supervision of Solvency II in the UK.
• For the purposes of solvency, the EU treats Lloyd’s as a single entity.
Lloyd’s chain of security
• Lloyd’s has a three-part chain of security:
– First link is the premium funds.
– Second link is the funds that members/Names have deposited centrally to permit them to participate in the
market, together with additional funds to the limit of their liability.
– Third link is the Central Fund which is topped up with a contribution from every premium written in the market.
Rating agencies
• Rating agencies provide published gradings for insurers and reinsurers.
• Ratings are awarded based on a number of factors such as operational management and business profile.
• Ratings can rise and fall and this will have an impact on an insurer’s business.
• The Lloyd’s marketplace has a market rating.
Question answers
Chapter 4
Self-test questions
1. What is the equation that best expresses solvency?
2. What is meant by the concept of IBNR?
3. What is meant by counterparty risk?
4. What are the four objectives of Solvency II?
5. What are the three pillars of Solvency II?
6. List four risks faced by an insurer (other than insurance risks).
7. What is the final link in Lloyd’s chain of security?
8. What might happen if an insurer’s rating is downgraded but their peers’ ratings remain the same?
Chapter 4
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Legal and regulatory
5
requirements
outcomes
Learning objectives
Introduction
Key terms
Chapter 5
A Compulsory insurances 5.1
B Legislation relating to insurance contracts 5.3
C Insurance premium tax (IPT) 5.5
D Regulation of individuals within firms 11.1
Key points
Question answers
Self-test questions
Learning objectives
• describe the reasons for compulsory insurances and the types of insurance that are compulsory in
the UK;
• explain the impact of the Consumer Rights Act 2015 and the Contracts (Rights of Third Parties) Act
1999 on insurance contracts in the UK;
• explain the concept of insurance premium tax; and
• describe the role of approved persons in London Market organisations.
Introduction
In this chapter, we will review several legal and regulatory aspects of insurance. We will also be looking
at some aspects of compulsory insurance in some other countries as a comparison to England and
Wales, bearing in mind that a very large proportion of the business written in the London Market
emanates from overseas, and is therefore likely to be subject to overseas regulation.
Key terms
Approved person Breach of warranty Compensation Compliance officer
Compulsory insurances Consumer contract Controlled function Damages
Employers’ liability Injunction Insurance premium Liability insurance: nuclear
insurance tax (IPT) reactors
Marine pollution liability Money Laundering Non-consumer contract Professional negligence/
insurance Reporting Officer (MLRO) indemnity insurance
Public liability insurance Specific performance Unfair contract terms
A Compulsory insurances
Chapter 5
There are certain types of insurances that are compulsory in England and Wales. In this section we are
going to refresh what we covered in LM1 on the subject and also consider some insurances that are
compulsory in other jurisdictions.
Refer to LM1 Those who are required to purchase compulsory insurance can be divided into two categories: ‘private
individuals’ and ‘professions and businesses’. As follows:
• Private individuals. Third party motor insurance and public liability insurance in respect of the
ownership of dangerous wild animals and/or dangerous dogs are compulsory for private individuals.
• Professions and businesses. Motor insurance and employers’ liability insurance are both compulsory
Public liability
insurance is also for every business which uses motor vehicles on a road and has employees respectively.
compulsory for
specific trades and The main reasons why certain forms of insurance are compulsory in particular cases are as follows:
professions
• to provide funds for compensation; and
• in response to national concerns.
Key objective is to
provide persons
injured, or suffering Refresh yourself on the reasons for and benefits of compulsory insurance by reviewing LM1 chapter 5,
loss, through the fault section A.
of others with
compensation
Activity
If you work for an intermediary or broker, ask a colleague which insurer provides your professional indemnity
insurance.
If you work for an insurer, find out if you write any of the UK compulsory insurances and how much of your firm’s
total business they represent.
Chapter 5 Legal and regulatory requirements 5/3
A1 Types of compulsory insurance

We will now look at the insurances that are compulsory within the UK, examining the rules they
introduce.
• Motor third party – the most basic level of motor insurance is a legal requirement under the Road
Traffic Act 1988 (as amended). The Act provides that it is illegal to cause or permit the use of a vehicle
on a public road (extended now to include ‘any other public place’) unless an insurance policy is in
force, covering third party property damage and third party bodily injury or death.
Alternative option
The Road Traffic Act provides that if an amount of £500,000 is deposited and remains deposited that the insurance
is not required. Consider this amount compared to the average car insurance premium – it sounds like an option not
many would consider!
• Employers’ liability. Under the Employers’ Liability (Compulsory Insurance) Act 1969 as updated by
regulations issued in 1998, 2004, 2008 and 2011, employers are required to hold employers’ liability
insurance. This insures them against their liability to pay compensation to employees who sustain
bodily injury or disease, arising out of and in the course of their employment.
There is a list of exemptions from this requirement, mainly relating to employees who are also family
members, employees not ordinarily resident in Great Britain and Government agencies. In practical
terms, however, most employers have to insure this risk.
Chapter 5
The minimum required limit of indemnity has been increased over the years and now stands at
Minimum required
£5 million, though the insurance market provides £10 million as standard. There is also a requirement limit of EL indemnity
for employers to display their insurance certificates (provided by insurers) at each place of work. Note is now £5 million
that the requirement is no longer restricted to paper form, as long as employees can easily get access
to a digital certificate.
Employers’ liability insurance is a very onerous insurance obligation both for employers and insurers Refer to chapter 2,
section A2
as the records of organisations’ historic EL coverage must be maintained. Claimants can also use the
Employers Liability Tracing Office to try and identify insurers that provided cover to their employers.
Activity
Why do you think record keeping is so important in this area? Refresh your knowledge about liability business and
the concept of long-tail risks – covered in chapter 2, section A2.
To help you to formulate your answer, review this link to a news article about Asbestosis:
www.newstatesman.com/health/2008/08/asbestos-victims-company
A relatively small amount of this business is written in the London Market, with far more being written
by the UK composite Company Market insurers.
• Public liability. Certain operations such as riding schools are required to hold public liability
insurance under the provisions of the Riding Establishments Act 1970. This type of insurance
indemnifies the insured against claims arising from the use the insured’s horses. This includes
injuries sustained both by persons riding the horses and members of the public. The insurance must
also indemnify the horse riders themselves against any liability they may incur for injury to members
of the public, arising out of the hire or use of the riding school proprietor’s horses.
• Liability for dangerous wild animals and dangerous dogs. Apart from motor insurance, the other forms
of liability insurance which are compulsory for private individuals are in respect of the ownership of
dangerous wild animals or dangerous dogs. This is not generally a free-standing insurance but likely to
take the form of an extension to another insurance such as home insurance, where it usually falls
under the public liability section.
Question 5.1
If Mavis Mare, the owner of a riding school runs over one of her employees when she drives her car into the stable
yard, which of her insurances might she have to advise?
a. Employers’ liability and riding school liability only. F
b. Employers’ liability and motor insurance only. F
c. Riding school liability and motor insurance only. F
d. Employers’ liability, riding school liability and motor insurance. F
• Professional negligence/professional indemnity. Certain professionals such as solicitors,

accountants, doctors and dentists are required to hold professional indemnity insurance as a
condition of having a licence to practice.
Useful website
Access this link to see the professional indemnity requirements for accountants practicing in England and Wales:
http://bit.ly/2i8VDoU
A2 Why compulsory insurances are required

Refer to chapter 2, As we have already mentioned, the common link between all the compulsory insurances in England and
section A2 for more
Wales is that they are liability insurances rather than property insurances. This means that they do not
Chapter 5
liability insurance
cover loss or damage to the property of the insured, but rather the financial impacts of situations in
which the insured is found to be legally responsible or liable for injury to people or loss or damage to
their property.
From a historical perspective, compulsory insurances are not that modern an invention. The motor
insurance requirements came into effect during the 1930s and employers’ liability insurance in the UK
dates back to the Employers’ Liability Act 1880. The Employers’ Liability Assurance Corporation was
specifically set up in 1880 to deal with the new requirement for insurance created by the legislation.
The compulsory insurances that exist today are also there for a purpose which is wider than the
Liability insurance is
known as ‘long-tail’ fundamental purposes and benefits of insurance. As we saw in chapter 2, section A2, liability insurance
business is known as ‘long-tail’ business which means that the losses can take time to be notified and the claims
can take some time to develop and be resolved. Defending a claim made against you as a driver, or as
an accountant or doctor, even if the claims are spurious, costs money; the costs of defending yourself in
court can bankrupt you even before any final judgment is made against you.
Most of the insurances also provide that the insurers will defend claims made against the insureds.
Most of the
insurances also This removes the financial burden of the legal fees at least in part (as most policies have a deductible
provide that the or excess which often applies to fees).
insurers will defend
claims made against
the insureds Many of the compulsory insurances also include the requirement for the insured to purchase them for a
period of time even after their business ceases to operate. The reason for this is to attempt to protect the
consumer (for example of legal services) should the expert have ceased trading between the time the
advice is provided and the point at which the client realises that the advice was bad and they have
incurred a financial loss as a result.
Consider this…
You obtain advice from a solicitor in your local high street about a particular matter and take some action in
accordance with their advice. Months later you discover that the advice was incorrect and go back to complain as
you have lost some money as a direct result. You find that the office is closed and the firm appears to have gone out
of business. There is no longer a phone number listed in the telephone book.
In this situation your view may quite reasonably be that not only is this solicitor a disaster but that the whole legal
profession cannot be trusted.
By requiring all solicitors to purchase professional negligence insurance that remains in force after they go out of
business, not only are innocent victims protected but also the wider reputation of the profession. The one proviso is
that the advice about which the complaint is being made must have been given before the solicitor went out of
business.
Reinforce
These insurances are designed to protect those not actually involved directly with the insurance contract itself.
Remember the underlying concept of compensation is for the victim – whether they have been in a road accident or
in receipt of bad legal advice.
A3 Variations in operation of compulsory insurances

All the compulsory insurances in the UK are of a liability nature. Therefore, they protect the insured
All the compulsory
should they be found legally liable for injury to a third party or loss or damage to third party property not insurances in the UK
otherwise connected with the insurance. This idea that the insurance ‘protects’ a third party affects the are of a liability
nature
insurer’s ability to apply otherwise ‘normal’ insurance concepts to some of these compulsory
insurances.
The most obvious of these is in relation to breaches of: Refer to LM1,
chapter 2 for a
reminder of these
• warranty; or concepts
• the duties of good faith and fair presentation.
Reinforce
A warranty is a promise made by the insured to the insurer. The duties of good faith and fair presentation exist
between the insured and the insurer and relate to the need for disclosure of material information in relation to the risk
and the cover being provided.
Chapter 5
A breach of warranty suspends the insurance contract for the period of the breach and a breach of the
duty of good faith can in certain circumstances permit an insurer to ‘come off’ risk. However, this does
not apply in relation to, for example, motor third party or employers’ liability insurance. In fact, quite the
reverse is true and the insurer has very few options where there has been a breach or bad faith.
The Employers’ Liability (Compulsory Insurance) Regulations 1998, s.2 provides the following:
There is prohibited in any contract of insurance any condition which provides that no liability…shall arise under the
policy or that any such liability so arising shall cease, if:
• some specified thing is done or omitted to be done (i.e. a warranty);
• the insured does not take care to protect employees against the risk of injury or disease in the workplace (another
area where a warranty might be applied);
• the insured fails to comply with any legal requirements for the protection of employees against risk of injury or
disease in the course of their employment; or
• the insured does not keep records or fails to provide information to the insurers.
The reason behind this is the desire to protect the innocent third party who has been injured in an
accident. Notwithstanding any fair presentation or warranty issues with the policy, arising out of the
insured’s actions, the insurer cannot refuse to deal with the third party claims. However, having dealt
with them, the insurer can proceed against their insured for repayment of sums should any issues have
arisen, such as those quoted above.
Activity
Consider how these requirements impact on the insurer’s ability to control the risk in the normal way by use of
warranties and other conditions in the policy.
Does it make it a more difficult risk to insure? Speak to some colleagues and see what they think.
Question 5.2
Under the Employers’ Liability (Compulsory Insurance) Regulations 1998, what will the impact be if the insured
breaches a policy warranty?
a. No impact on the policy at all. F
b. All claims can be declined. F
c. Underwriters will come off risk. F
d. Underwriters will still have to settle claims but can take action against the insured. F
A4 Compulsory insurance in other countries

In the USA, workers’ compensation (also called employers’ liability insurance) provides coverage for
In the USA, workers’
compensation (also employees who are injured or become ill at work. This insurance provides coverage for medical
called employers’ expenses, death benefits, lost wages and rehabilitation. In exchange for coverage, employees relinquish
liability insurance)
provides coverage for the right to sue the employer for damages unless the employer intentionally harmed the employee or
employees who are failed to carry the required coverage for the relevant state. Each state regulates its own workers’
injured or become ill
at work compensation programme rather than it being a countrywide (or federal) system.
Every state in the USA also has compulsory motor insurance for commercial vehicle owners – but
interestingly not for private vehicle owners.
Some US states have a requirement that employers buy short-term disability insurance for their
Chapter 5
employees. This insurance covers illnesses and disabilities not directly related to the employment and
pays out a weekly benefit related to earnings for a set period of time.
Turkey has a requirement for property-owners to purchase insurance against earthquake risks, and some
compulsory motor insurance.
Australia has a similar level of compulsory third party motor insurance to the UK. Interestingly, in all but
two of the states in Australia there is only one provider of this basic insurance.
In Germany the requirement for third party liability insurance is broader in scope than just motor
insurance. It is compulsory to have third party liability insurance in relation to any event for which a
German court might consider you negligent.
Activity
If your company has offices in other countries or US states, find out what insurances are compulsory there.
B Legislation relating to insurance contracts

In this section, we will review two pieces of insurance law which impact on business written in the
London Market as much as any other type of insurance written in the UK:
• Consumer Rights Act 2015.
• Contracts (Rights of Third Parties) Act 1999.
B1 Consumer Rights Act 2015

Under this new piece of English law, which came into force on 1 October 2015, terms and notices in
consumer contracts have to be fair. This concept is not new, as unfair contracts legislation has been in
force for many years.
The Act states that an ‘unfair term’ in a consumer contract will not be binding on that consumer.
The Act states that an
‘unfair term’ in a However, if the consumer chooses to rely on that term then they may do so.
consumer contract
will not be binding
A term is defined as unfair if:
contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and
obligations under the contract to the detriment of the consumer.
When considering whether a term is unfair, the subject matter of the contract will be taken into account,
as will all circumstances which existed when the contract was agreed, all other terms of the contract and
any other contracts on which it depends.
To avoid being measured as unfair, a term should be transparent and prominent, expressed in plain and
To avoid being
intelligible language, and, if written, be legible. measured as unfair, a
term should be
A practical example of a potentially unfair term listed in the schedule to the Act is one which ‘makes the transparent and
prominent
traders’ commitments subject to compliance with a particular formality’. An example of this might be the
claims notification provisions.
Commercial contracts: claims

You will, however, find that the majority of commercial contracts contain very strict claims reporting requirements.
Activity
Given that the Consumer Rights Act 2015 applies to consumer contracts only, do you think that insurers should be
able to insert any terms into a non-consumer contract that might be considered ‘unfair’ in a consumer contract?
Discuss this with your colleagues and write some notes here:
Chapter 5
Question 5.3
Marcus Monart, the Chief Executive Officer (CEO) of a London Market insurer decides to display his private art
collection in the offices as he spends more time there than at home. If he is buying the insurance himself to protect
this artwork, how will the regulator define him and why?
a. A retail consumer because he is buying insurance for his own use or benefit. F
b. A wholesale consumer because he is an insurance professional. F
c. A wholesale consumer because the artwork is being held in an office building. F
d. A retail consumer because he is paying the premium personally. F
B2 Contracts (Rights of Third Parties) Act 1999

In basic terms, a contract is an agreement between two or more parties. Only those persons who are
In basic terms, a
actually a party to the contract can enforce the terms of the contract. The legal term used for this is contract is an
‘privity of contract’. agreement between
two or more parties
Consequently, even if a contract is made with the purpose of benefiting someone who is not a party to it,
that person (the ‘third party’) has no right to sue for breach of contract.
Historically this meant that in relation to various types of contract such as construction contracts where
the main contracting parties might have sub-contracted work to third parties or themselves be operating
on behalf of another party, there was a complicated set of side agreements in place around the main
contract linking all the various interested parties together.
The Contracts (Rights of Third Parties) Act 1999 reformed the privity rule and set out the circumstances in
which a third party will have a right to enforce a term of the contract.
Broadly speaking, either the contract must make express provision for the enforcement, or the third
party must be expressly identified in the contract by name, class or description. The remedies allowed
are those usually permitted (damages, injunction or specific performance).
Injunctions and specific performance

An injunction is a remedy that the court can award which is an order to prevent a party from doing something.
An order for specific performance is the opposite of an injunction, whereby the court orders that the party performs
a particular act; for example, it could order a party to comply with a contract that they have tried to breach.
Insurers do not generally want to extend their liability. However, as it is permissible to contract out of the
provisions of the Act, this is what insurers tend to do.
Practical operation of the Act

Cargo insurers receive many claims from parties who are not the original buyers of the insurance; the parties are
often persons to whom the insurance has been sold on (together with the goods).
The insurers didn’t always act in a way that was anticipated by this Act by dealing with parties who were not privy to
the original insurance contract. Cargo insurance is freely assignable, which means that the person presenting the
claim on the insurance policy might not be the person who bought the policy in the first place.
As long as the insurer can see the chain of sales of both goods and the associated insurance policy that leads back
to the original insured, and the person presenting the claim had a provable insurable interest at the time of the loss,
the claim will be paid (subject of course to the terms and conditions of the insurance).
It was therefore decided that the status quo should be maintained and the following exclusion was introduced to
make clear that insurers were not prepared to go any wider than they already did.
Contracts (Rights of Third Parties) Act 1999 Exclusion Clause (Cargo)

The Provisions of the Contracts (Rights of Third Parties) Act 1999 do not apply to this insurance or to any
certificate(s) of insurance issued hereunder. Neither this insurance nor any certificates issued hereunder confer any
benefits on any third parties. No third party may enforce any term of this insurance or of any certificate issued
hereunder. This clause shall not affect the rights of the assured (as assignee or otherwise) or the rights of any loss
payee.
Chapter 5
Activity
Review any Market Reform Contracts (‘slips’) to which you have access, or speak to colleagues and see if similar
exclusions are appearing in any other classes with which your firm is involved.
Question 5.4
What was the main change made to the law of contract under the Contracts (Rights of Third Parties) Act 1999?
a. It permitted more than two parties to make a contract. F
b. It allowed certain parties, not involved in the contract, to claim on the contract. F
c. It allowed different parties to pay insurance premium. F
d. It allowed certain external parties rights under the contract as long as they contributed to the premium. F
C Insurance premium tax (IPT)

In this section we will review one of the main taxes imposed by the UK Government on risks written in
the UK. Insurance premium tax (IPT) is a tax levied by the UK Government on general insurance
premiums in the UK. There are two rates: standard and higher.
The standard rate increased from 10% to 12%, with effect from 1 June 2017. The higher rate remains at
20% for travel insurance and some insurances, such as those sold in conjunction with the purchase of
vehicles and electrical appliances (and are sold as part of the wider deal, such as extended warranty).
Most long-term insurances, together with reinsurance and insurance on ships, aircraft and international
goods in transit are exempt from IPT, as are most risks located outside the UK. These risks, however,
may be liable for similar taxes imposed by other countries.
Consider this…
With the exception of being at different rates, IPT operates in a similar way to value added tax (VAT) that we pay on
the purchase of many day-to-day items.
Activity
Look at Crystal (www.lloyds.com/Crystal) and investigate the various rates of premium tax in the following
countries. Are the requirements the same in each country?
• Australia.
• Germany.
• Hong Kong.
The insurer is responsible for collecting the premium tax from the insured together with the premium and
The insurer is
paying it onto the tax authorities in the UK. In practice, this means that the broker collects this sum from responsible for
the insured together with the premium and pays both to the insurer. collecting the
premium tax from the
insured together with
It must be shown on all the documentation (separately from the premium amount) when the risk is the premium
processed through the central market databases by Xchanging. The IPT amount having been paid via the
broker to the insurer is held by the insurer in an account from which they can pay the funds onwards to
Her Majesty’s Revenue and Customs (HMRC) generally on a quarterly basis.
Activity
If you work for an insurer, find out who in your organisation is responsible for reporting to HMRC and how they
gather the data.
If you work for a broker, find out how you ensure that the correct amount of IPT is collected from your client and paid
to the insurer.
Chapter 5
D Regulation of individuals within firms

In this final section, we will be looking at another aspect of financial services regulation – where the Refer to LM1,
chapters 6 and 8,
regulator seeks to ensure that appropriate personnel are involved in the running of authorised firms, concerning the
such as insurers and intermediaries. regulation of
insurers and
intermediaries
D1 Senior Managers and Certification Regime (SM&CR)

The Senior Managers and Certification Regime (SM&CR) started on 7 March 2016. This new regime, first
put forward in consultations launched in November 2014, is the result of changes required by Solvency II
and the regulators’ intention to bring insurance into line with new banking supervision rules.
The SM&CR introduced a new regulatory framework for individual accountability to replace the Approved
Persons regime (APER). It focuses on the most senior individuals in firms who hold key roles or have
overall responsibility for whole areas of relevant firms. Firms are required to:
• ensure each senior manager has a statement of responsibilities, setting out the areas for which they
are personally accountable;
• produce a ‘firm responsibilities map’ that knits these together; and
• ensure that all senior managers are pre-approved by the regulators before carrying out their roles.
The Government also introduced a ‘duty of responsibility’, which means senior managers are required to
take the steps that it is reasonable for a person in that position to take, to prevent a regulatory breach
from occurring. This formed part of the Bank of England and Financial Services Act 2016. SM&CR is likely
to result in greater disciplinary action on individuals should governance controls be lacking in the
business area for which they are responsible.
Be aware
SM&CR has been in force for banking firms and insurers who fall within the scope of Solvency II from March 2016
and will be extended to other financial services firms in 2018. APER will continue to apply to these firms until then.
SM&CR has three parts:

• Senior Managers Regime.
• Certification Regime.
• Rules of Conduct.
D1A Senior Managers Regime

The Senior Managers Regime applies to persons performing the senior roles in a firm. These roles,
known as senior management functions (SMFs), have been specified in rules made by the PRA and FCA.
Any firms planning a new senior manager appointment, or a material change in role for currently
approved individuals, must prepare and submit an application to the regulators for approval.
The Senior Managers Regime extends beyond the scope of APER. New roles are covered by the
regulations, including:
• Head of key business area – this relates to individuals managing a business area so large (relative to
the size of the firm) that it could jeopardise the safety and soundness of the firm, and so substantial in
absolute terms that it would warrant a separate SMF – even though the individual performing it may
report to the CEO or another SMF.
• Group entity senior manager – individuals employed in another group entity or parent company who
can exercise significant influence over the firm’s affairs.
• Significant responsibility function – senior executives responsible for certain functions or business
areas where key risks exist, but not currently categorised under a significant management function.
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The list of SMFs prescribed by the PRA for authorised firms is:
Executive
• Chief executive function.
• Chief finance function.
• Chief risk function.
• Head of internal audit.
• Head of key business area.
• Group entity senior manager.
Non-executive
• Chairman.
• Chair of the risk committee.
• Chair of the audit committee.
• Chair of the remuneration committee.
• Senior independent director.
The PRA’s list of SMFs:
Executive
• Executive director.
• Significant responsibility senior manager.
• Money laundering reporting officer or nominated officer.
• Compliance oversight.
Non-executive
• Non-executive director.
• Chairman of the nominations committee.
A statement of responsibilities should be prepared for each senior manager, setting out their
responsibilities in managing the firm’s affairs. It should be complemented by the individual’s CV,
personal development plan, job description, organisation chart showing reporting lines and the firm’s
responsibilities map.
A responsibilities map sets out the firm’s management and governance arrangements, including
reporting lines and responsibilities. Extending the principle of proportionality, the FCA distinguishes
between large and small firms, and acknowledges that in the latter the map will be a simple document.
D1B Certification Regime

The Certification Regime will apply to individuals who are not carrying out SMFs, but whose roles have
been deemed capable of causing significant harm to the firm or its customers by the regulators. The
Regime requires firms themselves to assess the fitness and propriety of persons performing other key
roles, and to formally certify this at least annually. These ‘significant harm function’ roles are also
specified by the regulators in rules but the appointments are not subject to prior regulatory approval.
D1C Rules of Conduct

Under SM&CR, the regulators will have the power to make Rules of Conduct, which will apply to senior
managers, certified persons and other employees. For senior managers (and other approved persons),
these rules replace the Statements of Principle made under APER.
Anyone in the business who holds either an SIF or a key function has to be approved by the PRA.
The higher level of SIFs are those persons who perform a ‘significant influence function’. These are
regulated by the FCA, in addition to the PRA, and are defined as including:
• directors not otherwise PRA approved;
• compliance officers;
• anti-money laundering officers;
• apportionment and oversight;
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• customer functions;
• significant management functions not otherwise approved by the PRA; and
• CASS operational oversight function.
Be aware
CASS is the FCA client money rules.
Firms will have to allocate a number of prescribed responsibilities between those who hold regulated
roles and, in some cases, non-executive directors. These responsibilities include:
• ensuring that the firm has complied with the obligation to satisfy itself that persons performing a key
function are fit and proper;
• leading the development of the firm’s culture and standards; and
• embedding such culture and standards in the day-to-day management.
Anyone who holds a key function or has significant influence must follow all the standards, whereas
those only performing a key function must follow standards 1 to 3.
PRA conduct standards
1. You must act with integrity.
2. You must act with due skill, care and diligence.
3. You must be open and cooperative with the FCA, the PRA and other regulators.
4. You must take reasonable steps to ensure that the business of the firm for which you are
responsible is controlled effectively.
5. You must take reasonable steps to ensure that the business of the firm for which you are
responsible complies with the relevant requirements and standards of the regulatory system.
6. You must take reasonable steps to ensure that any delegation of your responsibilities is to an
appropriate person and that you oversee the discharge of the delegated responsibility effectively.
7. You must disclose appropriately any information of which the FCA or PRA would reasonably expect
notice.
8. When exercising your responsibilities, you must pay due regard to the interests of current and
potential future policyholders in ensuring the provision by the firm of an appropriate degree of
protection for their insured benefits.
Each firm is responsible for considering whether individuals have followed the standards, as part of its
analysis as to whether individuals are fit and proper.
The FCA also has standards, of which some are very similar to the previous regime for those performing
controlled functions. As with the PRA standards, a number of these standards have to be followed by all
PRA/FCA approved persons and some (the second tier) are only for those who hold a significant
influence function.
First tier – individual conduct rules

1. You must act with integrity.
2. You must act with due skill, care and diligence.
3. You must be open and cooperative with the FCA, the PRA and other regulators.
4. You must pay due regard to the interests of customers and treat them fairly.
5. You must observe proper standards of market conduct.
Second tier – significant influence function holder conduct rules
1. You must take reasonable steps to ensure that the business of the film for which you are
responsible is controlled effectively.
2. You must take responsible steps to ensure that the business of the firm for which you are
responsible complies with the relevant requirements and standards of the regulatory system.
3. You must take reasonable steps to ensure that any delegation of your responsibilities is to an
appropriate person and that you oversee the discharge of the delegated responsibility effectively.
4. You must disclose appropriately any information of which the FCA or PRA would reasonably expect
notice.
The FSA historically gave examples of the kinds of behaviour that would not support their previous
principles. Whilst these do not cover all the new conduct rules, they still offer some helpful guidance as
to what the regulators are keen to avoid within the market. See the table below, where ‘approved
person’ has been abbreviated to AP:
Chapter 5
Table 5.1: Controlled functions: historic examples of unacceptable behaviour

Principle Behaviour that is not acceptable
Acting with integrity Deliberately misleading or attempting to mislead a customer, firm or the regulator.
Deliberately recommending a product for a customer where the AP knows they cannot
justify its suitability for the customer.
Deliberately failing to inform a customer, firm or the regulator that their understanding of
a material issue is incorrect.
Deliberately preparing inaccurate or inappropriate records or returns.
Deliberately misusing the assets or confidential information of a customer or firm.
Acting with due skill, care Failing to inform a customer or the firm of material information when the AP was aware
and diligence or ought to have been aware of the information and the need to provide it.
Recommending an investment for a customer without reasonable grounds to believe it
is suitable.
Providing advice on transactions without a reasonable understanding of the risk
exposure of the transaction to the customer.
Failing to disclose a conflict of interest.
Failure to provide control over a customer’s assets – this includes failure to make timely
payments!
Observing proper standards Insider dealing.
of market conduct
Misusing market information.
Dealing with regulators in Failing to answer regulators’ questions or attend meetings/provide documents.
open and cooperative way
Not reporting information internally or directly to the regulator where it is reasonable to
assume it would be of material interest, whether they have asked questions or not.
Taking reasonable steps to Failing to apportion responsibilities for all areas under your control as an AP.
ensure that the business is
organised in such a way as Failure to apportion responsibilities clearly.
to be able to be controlled Failure to share load appropriately among all directors and senior managers.
effectively
Exercising due skill care Failing to ensure that you are adequately informed about the affairs of the business.
and diligence in the
management of the firm Delegating authority without reasonable grounds for believing that those to whom it is
delegated are capable.
If something is delegated, failing to maintain an appropriate level of understanding about
that area.
Table 5.1: Controlled functions: historic examples of unacceptable behaviour

Ensuring compliance with Failing to take reasonable steps to implement (either personally or through a compliance
the relevant requirements function) adequate systems of control to comply with relevant requirements of
and standards of the regulators.
regulatory regime
Failing to take reasonable steps to monitor.
Failure to take reasonable steps to inform themselves as to why significant breaches
(suspected or actual) of regulatory requirements may have arisen.
Failure to take action, in terms of a review, after breaches are identified.
The testing and verification of individuals as fit and proper persons is even more important than it was
under previous regulatory regimes, with the new focus being very much on personal responsibility.
Individuals will need to show that they:
• possess the necessary levels of competence, knowledge and experience;
• hold the necessary qualifications; and
• can demonstrate integrity.
Firms must ensure that they perform checks before presentation of any application to the regulators.
This could include taking references from previous employers.
‘Grandfathering’ will apply to all approved persons who are performing the corresponding role under the
Chapter 5
existing regime immediately prior to 7 September 2016, and who have complied with the notification
requirements.
Activity
If you were putting together a test to measure someone’s competence to hold a ‘key function’ in your organisation,
what elements of their character would you consider important?
Write your thoughts here and see if they agree with the points made below:
D1D Approved persons regime for intermediaries

For those regulated firms that are not insurers, i.e. intermediaries and brokers, their current approved
persons regime will become SM&CR during 2018 as the roll out of this new regime comes into force for
all areas of the financial services industry.
Useful website
For more information about SM&CR access the CII resource hub: http://bit.ly/2yw82d2.
D2 Compliance officer
In regulating the insurance and financial services sector, the regulators prescribe a number of key roles
that must be performed by a director or senior manager in financial services firms (including insurers
and those involved in insurance mediation or broking). One such role is carrying out the compliance
oversight function. The person performing this job is known as a compliance officer and must report to
the governing body (usually the board of directors) of the firm. A compliance officer is still considered to
have a central role under the new regulatory framework and holds a significant influence function so is
regulated by both the PRA and FCA.
Meaning of the word compliance

Compliance has the same meaning in this context as it does in general English, being the concept of ensuring that
rules are followed.
The exact scope of the duties of a compliance officer varies from one firm to another. However, their
main role is to ensure that their firm abides by UK law and the rules and regulations set down by the
regulator. The FCA and PRA have taken over many areas of the old FSA Handbook and Sourcebooks.
The compliance officer role is vital to insurers and intermediaries because there are serious
consequences of failing to abide by the regulatory rules. The range of functions undertaken by a
compliance officer usually includes:
• communication of the company’s policies including the organisation of any associated training;
• completion of regulatory returns such as governance, finance and complaints;
• reviewing company procedures to ensure they are appropriate and compliant;
• maintaining the company’s compliance manual; and
• checking that all stages of the business process are being conducted in accordance with the
compliance manual.
Depending upon the size of the company, the compliance officer’s role may be a ‘hands on’ role or it
may involve oversight of some of the functions, with the work being carried out by other individuals. It is
permissible for the tasks themselves to be carried out by an external compliance consultant. However,
the responsibility and accountability of the compliance officer within the company cannot be delegated.
Activity
Identify the compliance officer in your firm and try to find out how many of the functions listed above fall into their
remit.
Chapter 5
D3 Money Laundering Reporting Officer (MLRO)

Money laundering is a serious issue within the financial services sector and the London Market is no
exception. All organisations have to ensure that they have money laundering checks and procedures in
place and an individual nominated as the Money Laundering Reporting Officer (MLRO). This is also a
significant influence function within the UK regulatory framework and so is regulated by both the PRA
and FCA.
Activity
Have you been asked to attend money laundering training in the last two years?
Do you know who the MLRO is in your organisation?
Question 5.5
A key function in a regulated firm is one that:
a. is part of the effective system of governance. F
b. handles the relationship with the regulator. F
c. contributes to its profits. F
d. has to be a director. F
Key points
Compulsory insurances
• Almost all compulsory insurances are liability in nature.
• Some are required by private individuals and some by companies.
• The basic concept is compensation for injured parties.
• Insurers cannot rely on normal insurance concepts such as warranties with compulsory insurances.
Legislation relating to insurance contracts
• Some laws, such as the Consumer Rights Act 2015, only apply to consumer contracts rather than to contracts with
commercial customers.
• The Consumer Rights Act 2015 seeks to prevent insurers penalising consumers through the application of harsh
terms in contracts (for example around claims notifications).
• The Contracts (Rights of Third Parties) Act 1999 allows certain persons who are not party to the insurance contract
to have some rights under the contract.
• Insurers can contract out of the Contracts (Rights of Third Parties) Act 1999 and exclusions have been introduced
in the London Market to do this.
• The definition of consumer is wider under the current regulatory regime than under the FSA rules.
Chapter 5
• There are two rates of insurance premium tax and some types of insurance are exempt altogether.
• Other countries have similar concepts and risks written out of those countries may need to have those taxes
applied.
• Tax is paid by the insured and collected by the insurer that is responsible for payment onto HMRC.
Approved persons
• The regulators require certain authorised persons to be responsible for the business of a regulated firm.
• Insurance mediation/broking firms, insurers, managing agents and members’ agents all fall under the regulations.
• Approved persons are performing controlled functions and have to comply with seven principles.
• Compliance officers and Money Laundering Reporting Officers (MLROs) are two examples of controlled functions.
Question answers

Chapter 5
Self-test questions
1. Identify three types of compulsory insurances.
2. Why are compulsory insurances required?
3. How is the operation of the concept of good faith and the duty of fair presentation affected in relation to
compulsory insurances?
4. What are the two categories of consumer under the FCA rules?
5. How does the law define an unfair term in a consumer insurance contract?
6. Who is the third party in relation to any contract of insurance?
7. Who is responsible to HMRC for the payment of the insurance premium tax?
8. Identify three roles within an organisation that are PRA control functions.
9. Give an example of a significant influence function.
Chapter 5
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Insurance intermediation
6
outcomes
Learning objectives
Introduction
Key terms
A Law of agency 6.5
B Types of intermediaries 6.1
C Role of the broker in the placing and claims processes 6.2
D Terms of Business Agreements (TOBAs) 6.3
E Broker remuneration 6.4
F Impact on brokers of EU legislation and UK regulation 6.6
Chapter 6
Key points
Question answers
Self-test questions
Learning objectives
• describe the basic features of the law of agency;
• define and describe the various types of intermediary;
• explain the role of the intermediary in the London Market;
• describe the purpose and function of a Terms of Business Agreement (TOBA);
• explain how intermediaries are paid; and
• explain the impact of the EU and FCA on London Market intermediaries.
Introduction
In this chapter, we will consider the role of the ‘middle-man’ in insurance: the intermediary – more
commonly known as the broker. We will review the parties for which brokers generally work, the terms
under which they operate, how they get paid, what tasks they undertake and how they are regulated.
Key terms
Agency by agreement Agency by necessity Agency by ratification Broker remuneration
Claims process Client money rules Collecting commission Conflict of interest
Duty of care Independent intermediary Insurance Mediation Lloyd’s broker
Directive
Multi-tied agent Non-statutory trust account Open market correspondent Placing process
Principal Producing broker Retail broker Single tied agent
Statutory trust account Surplus lines broker Terms of Business Wholesale broker
Agreement (TOBA)
A Law of agency
There can be a long chain of middle-men between the eventual insured and the insurers; the length of
There can be a long
chain of middle-men the chain depending upon on a number of factors including the geographical location of the parties or
between the eventual whether the business is highly specialist or unique.
insured and the
insurers
As middle-men or intermediaries in the insurance market are generally known as ‘brokers’, we will use
this term throughout the chapter, unless the context requires other specific terms. Their activities will be
Chapter 6
referred to as ‘broking’, although the formal term is insurance intermediation (or insurance mediation).
Refer to chapters 8 Brokers operate under the law of agency, the main points of which are explained below:
and 9 for more on
conflict of interest
• The broker is the agent and they serve a principal who, in English law, is generally the insured. In the
case of reinsurance (reviewed in chapter 3), the re(insured) is an insurer buying reinsurance and a
broker may act on its behalf.
• It is possible for a broker to have two different principals relating to just one risk (or piece of insurance
It is possible for a
broker to have two business). This might happen if a broker is given some authority by the insurer (perhaps to settle
different principals claims or to underwrite business under a binding authority). We will discuss this more in chapters 8
relating to just one
risk and 9 but this situation can give rise to what is known as a ‘conflict of interest’, where one person or
organisation has two principals that have views/positions which are not necessary aligned.
In this case, the broker must engage in sensible business practice to ensure that neither principal is
disadvantaged by the broker acting for the other, such as having separate people perform the roles
relevant to each relationship. This process is known as putting up ‘Chinese Walls’ or ‘Ethical Walls’.
• Generally an agency agreement is agreed expressly and ideally in writing; however, it can be inferred
by behaviour. There are three ways in which an agency agreement can be created in law:
– By agreement. (As discussed above).
– By ratification. Where some behaviour is accepted or condoned after the fact and the principal is
prepared to stand by their agent.
– By necessity. Usually in an emergency situation where someone has to make a decision, as no-one
with actual authority to do so is present.
Agents have several duties towards their principals:
Agents have several
duties towards their – Follow their instructions.
principals
– Act in good faith towards their principal. (See the point above about conflict of interest).
– Not to sub-delegate without permission. (I.e. if one broker has some work for a client, the broker
should not give it to another broker without the client’s permission).
– Account for funds. (I.e. other people’s money – for example their clients’). See section F2B.
– Act with all due care and skill. See chapter 2, section A2B on professional negligence business.
Chapter 6 Insurance intermediation 6/3
If an agent acts outside their authority, their principal has three options:
– ratify their actions and continue as if nothing untoward had happened;
– ratify their actions and then make a claim against the agent which would probably be for damages;
or
– refuse to ratify their actions and expose the agent to claims from the third party that thought the
agent was acting within their authority.
The principal has to be careful here not to give the impression to others that the agent has more
authority than they really have. If this situation arises, the principal may find that they are bound by
the actions taken by the agent on the basis of the impression given to others by the principal, rather
than as a result of action taken by the agent.
Question 6.1
Which of these is NOT a method of creating an agency agreement?
a. By necessity. F
b. By warranty. F
c. By agreement. F
d. By ratification. F
There is another area of law which is important when considering a broker’s conduct. The broker owes a
The broker owes a
‘duty of care’ to their client (and arguably to the insurer as well) to behave in accordance with the ‘duty of care’ to their
standard of a reasonably able or competent broker in the relevant area of the Market. client
If the broker fails to behave in accordance with that standard, they breach their duty of care and have an
obligation under the law of tort (or civil wrongs) to the person who has been harmed by this breach of
the duty of care. Examples of such breaches which would harm the client include failing to do any of the
following:
Chapter 6
• ensuring that the insurance was placed with suitable insurers;
• ensuring that the insurance was placed on suitable terms and conditions;
• ensuring that they understood the client’s instructions;
• explaining terms (such as warranties) and their effect on the client.
These breaches of the duty of care are likely to lead to claims of professional negligence against
brokers/intermediaries.
B Types of intermediaries
There are many different types of intermediary, albeit all performing the same basic role. Table 6.1 lists
the types of intermediary and provides an overview of their specific roles. As you will see, not all types of
intermediary operate in the London Market.
Table 6.1: Types of intermediary

Type of intermediary Role
Wholesale broker This broker has direct contact with the insurer. There is no reason why they
Wholesale brokers
cannot also have contact with the client if they are the only broker in the chain, have direct contact
but where there are several brokers, this term is used for the one closest to the with the insurer
insurer.
Retail broker This is the other end of the chain and as with the wholesale broker; there is
nothing to prevent this broker being the only broker in the chain.
However, in a longer chain, the retail broker has the contact with the ultimate
client.
The retail and wholesale brokers could be two entirely separate broking firms, or
two firms which have a business relationship/alliance or they could be two offices
of the same broker.
Producing broker This term is used to describe the broker (individual or organisation) which has the
contact with the client and creates or produces the work for the client.
Table 6.1: Types of intermediary

Single tied agent A single tied agent is a representative of the insurer, not the insured.
A single tied agent is
a representative of Single tied agents are most common in a high street agency selling a number of
the insurer, not the products from a single insurer. In this situation, the agent cannot advise the client
insured
on other insurers’ products but is restricted to the products offered by their
principal.
These agents do not work in the London Market.
Multi-tied agent This is similar to the single tied agent in that the principal is still an insurer. In this
case however, the agent is selling a number of different insurers’ products – but
only one product per insurer. For example, they might be tied to Insurer A for their
house insurance product and to Insurer B for their car insurance product.
As with the single tied agent, this agent cannot offer independent advice to a client
about products in the wider market and does not work in the London Market.
Independent intermediary This is the traditional London Market broker, which is not tied into any insurer and
The traditional London
Market broker is an
works for their ultimate client who is the insured or reinsured.
independent This agent can take an unbiased view of the entire market (London and
intermediary
elsewhere) and advise the client on the best options for their particular needs.
Surplus lines broker For much of the business emanating from the USA, the London Market is what is
known as a ‘surplus lines market’ which means that it can only be used if the
local or ‘admitted’ market has been shown the risk but is not able or willing to take
it on.
If the London Market is used, then a licensed surplus lines broker must be used in
the intermediary chain and the details of that broker form part of the data captured
about the risk on the Market Reform Contract (MRC).
Open market correspondent An open market correspondent (OMC) is an intermediary but is not a Lloyd’s
An open market
correspondent (OMC)
approved coverholder (a party holding delegated authority from a Lloyd’s
is an intermediary but syndicate to write insurance business on its behalf). However, they introduce
is not a Lloyd’s business to Lloyd’s either directly or via a Lloyd’s broker on an open market
Chapter 6
approved coverholder basis.

Open market means that the risk is individually placed rather than being attached
to any pre-existing form of delegated underwriting agreement such as a binding
authority or a line slip. For more about delegated underwriting, see chapter 9.
There are certain territories where brokers/intermediaries that want to introduce
business into Lloyd’s need to have this additional level of approval by Lloyd’s and
need to be sponsored in this approval by a managing agent or Lloyd’s broker.
The list of territories where this is required is not particularly large but it does
include areas such as Canada and Italy which are sizeable sources of business
into the market.
Lloyd’s broker Although it is not a requirement of placing business in the Lloyd’s market, a
broker who is already approved by their own regulator can apply to Lloyd’s to go
through a separate accreditation process. If successful they can then call
themselves a Lloyd’s broker.
Non-Lloyd’s broker This is a broker regulated either by the UK regulator or their own home state
regulator (if overseas) but which has not obtained Lloyd’s accreditation.
Useful website
For more information about this and a full list of the countries involved in open market correspondents, refer to:
www.lloyds.com/The-Market/I-am-a/Open-Market-Correspondents
Question 6.2
What, if anything, is the key difference between a wholesale broker and a retail broker?
a. A retail broker conducts only personal lines business. F
b. A wholesale broker has links to the client and a retail broker has links to the insurers. F
c. A retail broker has links to the client and a wholesale broker has links to the insurers. F
d. There is no difference – the terms are interchangeable. F
C Role of the broker in the placing and claims processes

The broker has a key role to play in both the placing and the claims processes and, as we will see in
The broker has a key
chapter 9, they can also have some of the insurer’s roles delegated to them. role to play in both
the placing and the
For the purposes of this section, we will concentrate on the broker’s usual roles in the two processes. claims processes
Refer to chapter 9
C1 Placing process
The broker’s role in the placing process usually involves:
• Reviewing the client’s needs. Ahead of the placing process, the broker must review the client’s
requirements carefully with them and provide professional advice. Only then can the broker make
recommendations as to the various insurance options available.
In order to recommend insurance options, the broker must consider which of the markets to approach
in order to obtain quotations/‘quotes’ for the business. The broker will review any internal guidelines
from their firm’s security committee (or person(s) responsible for this information in a smaller
organisation) to identify unacceptable markets or insurers. Once they have completed this process
they will then put together a presentation to make to the insurers which they plan to visit.
Market security/solvency
As we saw in chapter 4, market security/solvency is a major consideration here because if the insurers are not there
to pay claims in the future, the broker may find themselves in receipt of a claim for professional negligence.
• Putting together a Market Reform Contract (MRC) to obtain quotes. The MRC is the main document
The MRC is the main
used to submit information to insurers in the Market; however, it is not always the only document document used to
presented. Depending on the type of business (particularly yacht insurance and professional/financial submit information to
insurers in the Market
risks), proposal forms may also be used. Insurers also require supplementary information, such as
surveys and loss records, to be submitted. The broker needs to ensure that they have all the relevant
Chapter 6
and material information from their client before approaching any potential leading underwriters to
commence the negotiation process.
Activity
If you work for a broker, ask a colleague to show you a submission that has been made to underwriters on a large
account.
If you work for an insurer, ask an underwriter to show you a submission made by a broker on a large account.
Write some notes here about the types of information included in the submission:
Reinforce
Do you remember the concept of material information? This is information that would influence the judgment of a
prudent underwriter in their consideration of the risk.
• Reviewing quotes with the client. Once the quotes have been received from insurers, the broker needs
Once the quotes have
to review them with the client. They will need to advise the client on any differences between the been received from
quotes to enable the client to make their final decision and select the insurer that best suits them and insurers, the broker
needs to review them
their circumstances. with the client
• Finalising the placement. Once the client has chosen the quote they prefer, the broker must re-visit
the insurers concerned (both leading and following market) to confirm (or accept) their lines. It is at
this point the underwriters will usually ink their stamps and proportions on the MRC. For the quotation
process, they may have written their offered lines in pencil, although that practice is rather old-
fashioned. More usually, the quotation is provided on a separate document and the MRC is only
finalised once the quotation is accepted.
The broker checks whether there are any ‘signing down’ issues (i.e. where the written lines total more
than 100%). If there are, then the broker will perform the necessary calculations to bring the total back
to 100%.
It is possible to place business in the London Market using electronic methods rather than a paper
MRC and physically obtaining the insurers’ agreement to their line.
Activity
Research whether any business in your company is placed by electronic methods. Find out which methods are used
and whether it is concentrated in one particular class of business.
Written and signed lines

The written line is the share or proportion that the underwriter writes on the MRC. Their signed line (when the risk is
finally entered on the market databases) might be less than the written line as the total cannot be more than 100%,
or the share of the risk that the broker has to place – whichever is less. The broker can reduce an underwriter’s
written line without asking, unless the underwriter has indicated that no reduction is acceptable to it, by stating ‘line
to stand’ next to their stamp.
Activity
Whether you work for a broker or an insurer, ask colleagues how often underwriters use ‘line to stand’ and why they
think it is used.
Write some notes of your findings here. Compare your notes with a market colleague (someone who works for a
broker if you work for an insurer or vice versa).
Chapter 6
Question 6.3
What is the most important reason for a broker to consider market security?
a. To avoid being asked to pay part of the claim if the insurers do not pay. F
b. To avoid the client refusing to pay their fees. F
c. To avoid a professional negligence claim from the client if the insurers cannot pay. F
d. To comply with market regulations. F
Refer to chapters 7 • Compiling paperwork for submission to Xchanging. This generally includes the MRC and London
and 8
Premium Advice Note (LPAN) which sets out the premium information. It also involves the splitting out
of any tax relating to the risk, payable by the insured to the insurers, for onwards payment to the
relevant tax authority in whichever country is concerned.
The tax and other charge requirements vary hugely from country to country. Therefore, the broker
Tax and other charge
requirements vary needs to know whether:
from country to
country – tax from overseas clients should be collected by the overseas broker and paid directly in the country
concerned without coming into London;
– tax will be coming through with the premium funds for onwards payment to the insurers in London;
– tax will be paid by the insurers, not the client – so not the broker’s concern.
• Requesting premium from their client. In most MRCs, the insurers give the insured some time to pay
the premium. In fact, it may not have to be paid in one amount, but rather in instalments.
The broker needs to relay the insurers’ payment requirements to their client so that they can remit
funds to the broker in good time for them to make the payments to the insurers. The broker should
warn their client of the dangers of not paying premium in accordance with the insurers’ requirements
(such as premium payment conditions). In chapter 8, section B2, we will see that the insurers can
indicate in the MRC any particular terms that they wish to apply relating to premium payment.
Most important here is the risk that the insurance may in fact be cancelled by the insurers for non
payment of premium.
• Submitting paperwork to Xchanging. In the London Market, the vast majority of submissions to
The Signing Number
Xchanging for recording the risk data and moving the premium do not use paper, but are made and Date is a unique
electronically via a system called Accounting and Settlement. This system allows brokers to upload reference which
relates to that risk
electronic versions of documents to the central market document repository (the Insurers’ Market
Repository: IMR) and send electronic messages to Xchanging asking them to review the documents,
enter the data onto the central databases and give the risk what is known as a Signing Number and
Date. The Signing Number and Date is a unique reference which relates to that risk and allows for easy
identification within the market systems.
If the premium is being moved at the same time, Xchanging the movement of funds from the broker’s
bank account into the appropriate insurer bank accounts. This process applies for both Lloyd’s and
Company Market insurers.
If the premium is not due for a while, the data is still set up into the system and the money moves at
the appropriate time from the broker to the insurers.
Consider this…
If the broker has chosen to use an insurer which does not participate in the central data and money movement
systems in London, then they need to submit information and funds independently to that insurer.
• Making changes to the risk. Should there be any changes to the risk, the broker should take their
client’s instructions and promptly advise insurers accordingly. This is done by creating endorsement
paperwork or electronic endorsements and visiting (or sending to) either the lead insurer, a set
combination of insurers, (or all insurers on risk, as required) to obtain agreement to such an
endorsement.
The reasons why different combinations of insurers might need to be seen for different changes, along
with information on the endorsement process generally, can be found in chapters 7 and 8.
C2 Claims process
Chapter 6
The broker’s role in the claims process is as follows:
• First advice. Although the insurer might agree to first advice being made to an expert particularly if
time is crucial, generally speaking the first notification of a loss is made by the insured to their broker.
The broker then has a very important role to play in assisting their client in putting together the
necessary information for presentation to the insurers. Of course, this also assists the insurers since a
complete presentation helps them in the consideration of the claim.
• Expert instructions. Although insurers instruct experts (for example, to attend the location of the loss
Although insurers
and investigate), the instruction is often made through the broker. This is simply a traditional instruct experts, the
communication path, rather than being indicative of any agency role that the broker has suddenly instruction is often
made through the
taken on for the insurers. In most situations, the experts’ (e.g. surveyors or loss adjusters) reports are broker
shared with the client as well, since there are no confidentiality issues between the insured and the
insurers. Both the original instructions and the reports can be sent through the broker with no
breaches of confidence on either side. In those cases where the insurers are instructing experts for
advice on whether the claim is covered, the insurers will issue those instructions directly (i.e. not
through the broker); receiving advice and information directly from the experts.
Experts’ fees
Experts’ fees can also be collected from the insurers by the broker, although many brokers choose not to provide
that service – leaving it to the experts either to collect their fees directly from the insurers or to use one of the fee
collection agencies operating in the Market.
• Further updates. As the claim progresses, the broker provides further updates, as received from their
client and any experts, to the insurers and receives the insurers’ further comments.
• Negotiation. Some claims are straightforward and some are not. When they are not straightforward,
the broker comes into their own: negotiating on behalf of their client with the insurers to try to obtain
the best result. Sometimes they also have to explain to their client why the insurers’ position is correct
and perhaps why a claim will not be paid or will be paid only in part.
As we will see in later chapters, the processes used in the London Market have become increasingly
The processes used in
electronic – including in the presentation of claims. However, this does not relieve the broker of their the London Market
role of negotiating their client’s claim with the insurers; rather it just means that they do not need to have become
increasingly
carry mountains of paper around with them. electronic
• Settlement. Generally, the insurers pay claims funds to the broker for onward transmission to the
insured, or other destination as required in relation to the individual claim being finalised. The
broker’s role is to receive the money and forward it to their client (or other appropriate destination) in
a timely fashion. Their role with regard to the claim only concludes when the money is safely
deposited where it is supposed to be.
• Recoveries/subrogation. Insurers have the right to subrogate once they have indemnified the insured.
The subrogation is exercised in the name of the insured and hence the broker should always ensure
that their client appreciates the need to co-operate with the insurers in this regard.
As there are often uninsured losses coming out of the incident which lead to the claim (or at least the
insured has had to bear a deductible or excess), the broker can also make the insurers aware of any
additional amounts that might be added into the claim against any third party so that a combined
claim can be made.
Reinforce
Subrogation is the right of an insurer following payment of a claim, to take over the insured’s rights to recover
payment from a third party responsible for the loss.
D Terms of Business Agreements (TOBAs)

Terms of Business Agreements (TOBAs) are the market agreements used to capture the terms and
TOBAs are the market
agreements used to conditions under which a broker does business with various parties.
capture the terms and
conditions under A broker has TOBAs with insurers, clients and possibly also with ‘producing brokers’. In the case of
which a broker does
business with various Lloyd’s there would be an individual TOBA entered into by the broker with each managing agent with
parties which they are doing business.
There is no standard template that has to be used as long as the agreement has been reduced to writing,
but the parties to any agreement need to be sure that the agreement covers the fundamentals of their
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arrangements.
The LMA, IUA and LIIBA have produced model TOBAs which assist with this process, although all parties
are free to amend them by agreement.
D1 Insurer TOBA with a broker

See the table below for the items found in an insurer’s TOBA with a broker.
Table 6.2: Contents of an insurer’s TOBA with a broker

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 what is called ‘insurance mediation activities’ (i.e. broking) and (in
the case of the insurer) insurance business and that they will tell each other should that
authorisation be suspended for any reason or they become insolvent.
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
comfortable, as the broker will be holding funds on the insurer’s behalf.
If the insurer is unsure about the broker (perhaps they are in the early stages of dealing with
them or they do not meet financial security criteria for the insurer) then a non-risk transfer
TOBA is more appropriate; this does not allow the broker to hold any funds on the insurer’s
behalf.
The UK regulator (FCA) also has a number of rules relating to client money with which any
The regulators also
have a number of
broker regulated in the UK must comply. It is important that a broker that is not regulated in the
rules relating to client UK (for example because they are not UK-based) complies with their own regulator’s rules in
money with which any this regard.
broker regulated in
the UK must comply. The UK regulator’s rules about client money will be discussed in section F2B.
Table 6.2: Contents of an insurer’s TOBA with a broker

Ownership and The traditional paper-based process in the London Market relied on the broker maintaining the
access to data and master placing and claims information – and updating insurers as required. Insurers could take
records copies of documentation as they wished (for example they might copy the MRC/slip when they
agreed their written line) but rarely maintained a full copy of any claims file or kept copies of
every document that they might have reviewed during the placing process.
In the case of any disputes between the insured and insurers, the issue of access to
documentation sometimes arose where certain documents were held by the broker. This was a
particular issue if allegations were made that some documents were not shown to insurers at
the time of placing.
If the matter of ownership and access to data and records is clarified in the TOBA, there is less
chance of a dispute later.
Law and In any contract it makes sense to agree where – and under what rules – any dispute between
jurisdiction the insured and insurers will be heard.
Commission This section deals with any payments of commission from the insurer to the broker (more
usually known as brokerage).
Conflict Each party agrees to adopt procedures to ensure that conflicts are identified and managed.
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.
Activity
If you work for a broker find out if you have any risk transfer TOBAs in place with insurers.
If you work for an insurer find out if you have any brokers with which you do not have risk transfer TOBAs.
If you work for another type of organisation, find out if it has fixed terms and conditions under which it does
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business with clients.
Activity
Access this online bulletin to see more about a court case dealing with this point before TOBAs were introduced in
2000/2001. This is the Court of Appeal decision in Goshawk v. Tyser that was handed down in 2006:
www.mondaq.com/article.asp?articleid=37702
Question 6.4
What does a risk transfer TOBA allow the broker to do on behalf of the insurer?
a. Bind risks. F
b. Hold funds. F
c. Agree claims. F
d. Pay experts’ fees. F
D2 Broker’s TOBA with a client

See the table below for the items found in a broker’s TOBA with a client.
Table 6.3: Contents of a broker’s TOBA with a client

Identity of client This clarifies for the insured’s client that the broker is working for them.
Claims notification This allows the broker to give guidance to the clients as to the requirements in the event
of a claim.
Disclosure This allows the broker to put the client on notice as to their duty of disclosure during the
placing process.
How the brokers are paid This sets out the various options for the broker to be paid and makes it clear that, in
addition to the fee that the insured pays the broker for their services, the insurer may
also allow the broker to retain a commission (the brokerage) which will usually be a
percentage of the premium.
How monies are held This makes clear that the broker holds money on trust mainly for the client, but also
occasionally for the insurer if they have a ‘risk transfer’ TOBA with them.
The TOBA with the client should also make clear which party may retain any interest
made on funds (for example the premium) being held by the broker.
Data protection This states that the broker will comply with the requirements of the Data Protection Act
1998.
Complaints This sets out the broker’s complaints process and also lets the client know that they
can also refer their complaint to the Financial Ombudsman Service (subject to the
restrictions of that service).
Dispute resolution As with the ‘insurer TOBA’, it is good practice in contracts to have dispute resolution
provisions agreed at the outset.
Be aware
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The General Data Protection Regulation (GDPR) will come into effect on 25 May 2018 and replace all existing data
protection legislation, including the Data Protection Act 1998. This will occur regardless of decisions taken by the UK
concerning membership of the EU.
The GDPR aims to ensure that the regulation of data is simplified and that gaps in existing legislation, such as those
pertaining to electronic data, are addressed. Key components of the GDPR include:
• The right of individuals to have their personal data erased and to transfer it from one organisation to another
(data portability).
• A mandatory requirement to report a breach within 72 hours of it becoming known, and to inform the individual
concerned ‘without undue delay’, if their rights are likely to be at risk.
• The introduction of a statutory role of data protection officer (DPO).
• Tougher fines for non-compliance with the legislation.
• Application of the GDPR to companies outside the EU processing the personal data of EU citizens.
For further information, see: www.eugdpr.org/key-changes.html.
E Broker remuneration
As with all professional service providers, a broker expects to be remunerated for their services, but
rather unusually it is not always their clients that pay them.
There are two payment methods by which a broker can be remunerated for their services: flat fee and
commission. Table 6.4 examines the common variations of these in turn.
Table 6.4: Types of broker remuneration

Flat fee This is payable by the client.
Flat fees are payable
Under the FCA Insurance: Conduct of Business rules (ICOBS) any broking firm must by the client to their
provide a client with details of any fees that will be payable before the client incurs any broker
fees. If, for any reason, the actual fee cannot be stated beforehand, the basis for its
calculation must be provided.
If any further fees might be incurred during the life of a policy for other activities, the
broker must also advise the client up front about them.
Commission or brokerage The broker may earn a commission (or ‘brokerage’, as it is better known in the London
Brokerage is paid by
Market) for placing the business. Unlike the flat fee payment, brokerage is paid by the the insurer rather
insurer rather than the insured client. than the insured client
In arranging brokerage, the insurer agrees that the broker can retain, or hold back, part
of the premium charged to the client when transferring it to the insurer.
The premium charged to the client is what is known as the ‘gross premium’ and the
amount received by the insurer (which is the gross premium less the brokerage retained
by the broker) is called the net premium.
If a commercial client asks the broker, they must tell them what commission/brokerage
they are receiving from the insurer. However, the broker does not have to volunteer the
information to a commercial client.
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Other fees/commissions Some brokers earn additional commissions by charging a ‘collecting commission’ on
Some brokers earn
claims (usually around 1% of the claims value). This means that the insurer pays 101% additional
of the value of the claim, but the insured receives only the 100% component. commissions by
charging a ‘collecting
If a broker is acting as a coverholder under a contract of delegated underwriting commission’
authority, the insurer may pay a profit commission should the business be successful.
Another example of a fee or commission that can be earned by a broker is for specialist
technical advice such as on engineering matters. Some brokers have in-house technical
teams which can provide information both to the insured and to the insurer and will
charge a fee for the service.
Reinforce
If you are unclear about the difference between a commercial client and a consumer client in the eyes of the FCA,
you can visit www.handbook.fca.org.uk/handbook/ICOBS/2/1.html. The Financial Services Act 2012 contains a
wider definition of the consumer than has previously been used, therefore the disclosure rules apply more widely,
going forward.
Activity
If you work for a broker, find out which method is the most popular one used for your firm to be paid. If you work for
an insurer find out whether your firm pays collecting commissions on claims, to brokers. Finally, try to find the slip
with the highest brokerage.
F Impact on brokers of EU legislation and UK regulation

Insurance brokers operating in the London Market are subject to EU legislation as well as regulation by
the Financial Conduct Authority.
F1 EU legislation
The relevant EU legislation here is the Insurance Mediation Directive (IMD) which was adopted by the EU
Brokers are subject to
the Insurance in 2002. The main objectives of this legislation are consumer protection and progress towards a single
Mediation Directive market for insurance intermediation. The activities covered by the IMD include:
(IMD), adopted in
2002
• introducing, proposing or carrying out work before the conclusion of insurance contracts;
• concluding such contracts; and
• assisting in the administration and performance of those contracts (in particular in the event of
a claim).
The IMD requires that all individuals or companies carrying out work within the definition of insurance or
reinsurance intermediation be registered in their home state. It uses these basic requirements:
• Possession of appropriate knowledge and ability – relevant professional qualifications are helpful
here; additionally, the management and staff within the business should have experience in the
business.
• Having good standing in the market/being of good repute.
• Having professional negligence insurance in place.
• Sufficient financial capacity to protect any clients against any failure of the broker to transfer funds
either from the client to the insurer or vice versa. The concept of financial capacity also goes wider
than just the funds, to ensuring that there are appropriate processes and procedures in place to
prevent any potential problems occurring in the first place.
The IMD allows the home state regulator (e.g. the FCA in the UK) to adopt stricter rules if they so choose,
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but only for those brokers/intermediaries registered in their territory. This means that if the FCA chose
stricter rules than the financial services regulator in France, the FCA could not prevent a broker regulated
in France from doing business in the London Market as long as they satisfied their home state regulator
(in France).
The IMD also imposes what are known as ‘transparency requirements’, i.e. the broker needs to give their
The IMD also imposes
‘transparency client clear, comprehensible explanations in respect of issues such as:
requirements’
• Why they have recommended various products in light of the client’s individual requirements. The
broker would need to explain how they have taken these into account in coming up with their
recommendations.
• Whether their advice is based on a fair analysis of the Market or whether the broker has contractual
obligations with any one insurer (for example the binding authority but more obviously for the single
or multi-tied agents referred to in section B).
Refer to section B The EU has now updated the IMD because the Directive is actually applied differently in each EU country.
regarding single and
multi-tied agents This has led to fragmented insurance markets in the EU, with significant gaps and inconsistencies, in
particular regarding the information requirements imposed on sellers of insurance products.
This has increased the problem of customers having a poor understanding of the risks, costs and
features of insurance products. The collapse in consumer confidence during the financial crisis has also
given new prominence to level-playing field and consumer protection issues.
Insurance Distribution Directive (IDD)
On 22 February 2016, the Insurance Distribution Directive (IDD) came into force. EU member states have
two years from that date to bring the provisions into their national law before the IMD will be repealed.
Whilst some of the areas of scope remain the same, the IDD applies to a wider range of entities. This is
because it uses the term, ‘insurance distributor’, as opposed to ‘insurance intermediary’.
As a result, the IDD now applies to the following:

• All sellers of insurance products, including those who sell directly to customers.
• Any person whose activities consist of assisting with the administration and performance of insurance
contracts. This includes those acting for insurers, for example, by performing claims management
activities.
• Ancillary insurance intermediaries. However, the regime for these organisations has a lighter touch.
Furthermore, an ancillary organisation will be excluded from the regulation completely if the insurance
is complementary to the goods or services provided. This is provided that the insurance covers, for
example, breakdown, loss or damage to goods or other risks linked to travel booked with the provider,
and where the premium is less than €600.
There are a number of ‘carve-outs’ within the definition of ‘insurance distribution’, two of which were
already present in the previous IMD. These are:
• the mere provision of information on an incidental basis to a customer in the context of another
professional activity, if no further steps are taken to assist the customer in concluding an insurance
contract;
• the management of claims as an insurer on a professional basis and the provision of loss adjusting
services; and
• the mere provision of data and information on potential policyholders to insurance intermediaries or
insurers, if no further steps are taken to assist a customer in concluding an insurance contract.
It is anticipated that the new regime will ease the procedure for cross-border entry to markets within the
EU, but, in turn, it introduces stricter and more specific professional requirements. These will be linked
to the ability of the regulator to control and assess the knowledge and the competence of employees in
regulated organisations.
Under the IDD, there are two general principles:
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• Distributers must always act honestly, fairly and professionally in accordance with the best interest of
customers.
• All information provided by distributers must be fair, clear and not misleading.
Furthermore, in relation to any remuneration received, distributors must disclose:
• the nature of the remuneration; and
• the basis for that remuneration (fee/brokerage, etc.).
In the UK, intermediaries are already obliged to provide information of this nature to both consumers
and commercial customers. However, the IDD is more detailed in its requirements surrounding the
nature of the disclosure and the basis of remuneration.
As with many other areas of regulation coming from the EU, the impact of BREXIT in this area is not clear
and so students should be aware of this in relation to their future career – but not the examinations.
EU referendum
On 23 June 2016, the UK voted to leave the European Union (EU).
The UK Government invoked ‘Article 50’ of the Lisbon Treaty on 29 March 2017. In doing so, the two-year
negotiation period which will result in Britain leaving the EU began. This means that, at the time of publication,
the UK’s membership of the EU will cease on 29 March 2019.
Until this final ‘withdrawal agreement’ is entered into, the UK will continue to be a full member of the EU, compliant
with all current rules and regulations, and firms must continue to abide by their obligations under UK law, including
those derived from the EU, and continue with the implementation of all legislation that is still to come into effect.
The longer term impact of the decision to leave the EU on the UK’s overall regulatory framework will depend, in part,
on the relationship agreed between the UK Government and the EU to replace the UK’s current membership at the
end of the ‘Article 50’ negotiation period.
Please note: The UK decision to leave the European Union will have no impact on the 2018 CII syllabuses or exams.
Changes that may affect future exam syllabuses will be announced as they arise.
F2 FCA regulation
The PRA’s and FCA’s Handbooks both contain a number of Principles for Businesses which apply to all
regulated businesses, including intermediaries.
F2A Risk framework

The FCA, which now regulates brokers for all aspects of their business, uses a three-pillar risk framework
looking at:
• assessment of the firm’s conduct, using the question ‘are the interests of consumers and market
integrity at the heart of how the firm is run?’;
• event-driven work which allows a flexible response to anything that arises; and
• reviewing issues and products when required.
F2B Client money rules

In relation to the broker/client TOBAs, a broker must be clear about their provisions for holding their
client’s money and, for example, indicate whether they will also be holding insurer money and who will
receive any interest earned on these funds.
The FCA handbook contains some specific rules concerning client money, which are known as the Client
The FCA handbook
contains some Assets rules (or CASS for short). The basic concept is that the broker must arrange adequate protection
specific rules in respect of all client assets for which they are responsible. Client assets could be premium funds on
concerning client
money, which are their way to the insurer (if the broker does not hold a risk transfer TOBA for the insurer), or they could be
known as the Client claims funds on their way from the insurer to the client.
Assets rules
Adequate protection includes being able to hold and account for the funds properly: for example
Adequate protection
includes being able to keeping them in segregated accounts. The FCA rules require that the broker keeps the client’s money
hold and account for separate from the broking firm’s own money. This is very important, in case the firm should fail for any
the funds properly
reason. By keeping the client’s funds in segregated accounts away from the money used by the firm on a
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day-to-day basis, the client’s money does not become eligible for use to pay the firm’s own debts.
Brokers can keep client funds in one of two types of segregated account: a statutory trust account and a
non-statutory trust account. The main difference between them is the broker’s ability to fund payments
(such as the premium) out of the accounts ahead of receiving funds into the account.
Statutory trust account
A broker must not fund payments out of accounts in which they hold the client money, if those accounts
are statutory trusts. The trust in this case exists only for client money which the broker has actually
received.
Non-statutory trust account
A broker may only fund payments out of accounts in which they hold the client money, if they are defined
as non-statutory trusts. In this case, the trust is not set up by operation of any particular law but by the
broker declaring the account to be a trust account into which client money will be placed. For this type of
account, if the broker wants to extend credit to the client then they are at liberty to do so, but should
have systems and processes in place to ensure that the client pays them eventually.
If they use non-statutory trust accounts, a broker could pay the claim to their client before the insurer
pays the money to the broker.
Activity
If you work for a broker find out which type of client money accounts you have. If you have the non-statutory trust
account, find out if you ever fund premiums or claims for your clients.
The CASS rules expect that – generally speaking – client money should be paid out to clients one
business day after receipt by the broker. In this case, it also covers the payments that are made by a
wholesale broker in London to a retail broker elsewhere.
Activity
If you work for a broker and a risk is placed in a number of markets, find out whether your firm pays the claims
funds to the client as they are received from the different insurers, or whether it waits until all funds are received,
paying them to the client as a lump sum.
Chapter 6
Key points
Law of agency
• A broker is generally the agent of the insured/reinsured. They can also be the agent of the insurer (for example if
they hold a delegated underwriting agreement).
• An agency agreement can be created in a number of different ways including by agreement and by ratification.
• Brokers have duties towards their clients such as acting professionally and in good faith.
Types of intermediaries
• A wholesale broker has the contact with insurers, a retail broker with the client. They can be the same broker.
• The producing broker is one which produces the work/business from the client.
• Tied agents are usually agents of insurers. A single tied agent works for one insurer only and a multi-tied agent
works for a number of insurers, but can only offer one product from each of them.
• A surplus lines broker is involved on business from the USA where London can write business only as a surplus
lines insurer.
• An open market correspondent introduces business to Lloyd’s but is not a coverholder.
• A Lloyd’s broker is one that is not only approved by the UK regulator but also approved by Lloyd’s.
Role of the broker in the placing and claims processes
• The broker has to consider the client’s needs before they make a presentation to insurers to obtain quotations.
• They will consider quotations received from insurers with their client.
• Once the placement is finalised, the broker organises the payment of premium and submits the paperwork to
Xchanging for signing and recording on market databases.
• They organise any necessary changes to the insurance for their client through endorsements to the policy.
• They generally receive first notification of claims and advise the insurers.
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• They are usually the conduit of communication between insurers and any experts.
• They negotiate with the insurers if required and receive claims payments for onwards transmission.
• They assist with any recovery or subrogation work as required.
Terms of Business Agreements (TOBAs)
• These are agreements between brokers and insurers, as well as brokers and producers and brokers and clients.
• They set out the terms under which business is conducted.
• Some (risk transfer TOBAs) permit brokers to hold funds on the underwriter’s behalf.
Broker remuneration
• Brokers can be paid in a number of different ways, such as via commissions or flat fees.
• Insurers pay the broker’s commission known as brokerage which is a deduction from the gross premium payable
by the client.
• Brokers can earn additional monies by providing further technical services such as engineering advice.
Impact on brokers of EU legislation and UK regulation
• The Insurance Mediation Directive (IMD) is the main piece of EU legislation impacting brokers, but is being replaced
by the Insurance Distribution Directive (IDD) in 2018.
– All brokers are required to be registered in their home state.
– Brokers are required to be transparent concerning their recommendations and any loyalties to an insurer.
• The FCA has rules about client money which apply to brokers. They impact on how funds can be held and what can
be done to fund premiums and claims if not received from clients and insurers respectively.
Question answers
Chapter 6
Self-test questions
1. Give an example of a scenario in which a broker might have a conflict of interest.
2. Distinguish between retail, wholesale and producing brokers.
3. What are the three ways that an agency agreement can be created in law?
4. At what point in the claims process does the broker’s role end?
5. What is the difference between a risk transfer TOBA and a non-risk transfer TOBA?
6. With which parties might a broker have a TOBA?
7. Identify three ways in which a broker can be remunerated.
8. What are the basic requirements for a broker under the Insurance Distribution Directive (IDD)?
9. What flexibility is given to a broker with non-statutory trust accounts?
10. Which regulator has become responsible for brokers since April 2013?

Chapter 6
Underwriting
7
outcomes
Learning objectives
Introduction
Key terms
A Conduct of underwriting in the London Market 7.1, 7.3
B How underwriters and brokers interrelate 7.2
C Market cycles 7.4
D Loss and exposure modelling 7.5
E Premium calculation 7.3, 8.6, 8.12
F Reserving 7.6
G Reinsurance to close (RITC) and open years management 7.7
Key points
Question answers
Self-test questions
Chapter 7
Learning objectives
• explain how underwriting is conducted in the London Market;
• explain the relationship between the various parties;
• describe the operation of the market cycle;
• explain loss and exposure modelling;
• explain the concept and use of reserving; and
• explain the concept of reinsurance to close (RITC) and open years management in Lloyd’s.
Introduction
In this chapter, we will be looking at the underwriting process, how underwriters calculate or assess
premium and how Lloyd’s, in particular, conducts the process for closing each year of account.
Key terms
Aggregation Appetite for risk Capacity
Delegated underwriting Modelling Leader/follower Incurred but not reported
(IBNR)
Long-tail business Premium calculation Probable maximum loss Reinsurance to close
(PML) (RITC)/open years
management
Reserving Short-tail business Situs/trust funds Subscription market
A Conduct of underwriting in the London Market

A1 Subscription market
The London Market is what is known as a ‘subscription market’. This means that more than one insurer
The London Market is
what is known as a can participate in any single risk, rather than risks being written by only one insurer. That is not to say
‘subscription market’ that a single insurer cannot take 100% of any one risk.
There are various reasons why an insurer would take less than 100% of any risk. We shall consider some
examples of these in turn. (Note that this is not an exhaustive list.)
• Capacity. Each insurer has a stated capacity which is the maximum amount of business that it can
insure in any one year. This capacity is agreed by the regulator and should not be exceeded without
the necessary permissions.
Consider this…
If a glass can only hold one pint of water and it is full, then no more can be poured in. Apply this analogy to capacity
in a calendar year: if you have filled your glass by the end of February, then you cannot pour in any more water (or
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write any more risks) for the rest of the year.
By taking 100% of risks, the insurer ‘fills its pint glass’ far more quickly than if it takes smaller shares
of the risks.
The concept of capacity also exists within an individual insurer where it applies its own limits to
individual classes of business or types of insurance. This means that even though an insurer has
available capacity it may impose its own limits to underwriters and not use that capacity for certain
classes of business or types of insurance for the rest of the year.
If an insurer purchases reinsurance, it can transfer some of the ‘water in its glass’ to the reinsurer thus
making more room in its ‘glass’ to write more risks. This is the way in which reinsurance can create
more capacity for original risks to be written by the insurer, whether it then decides to take 100%
shares or smaller ones through participating in a subscription market and working with co-insurers.
• Appetite. An insurer has to consider the risks it accepts in terms of its whole portfolio. Spreading its
exposures over a number of different risks enables an insurer to protect its investors better against the
risk of loss.
• Aggregation. Insurers monitor very carefully the potential of accepting risks that would be exposed to
one event, such as a fire or earthquake. Too many risks located in one place will lead to a far higher
loss to an insurer should such an event occur; therefore, they protect their position by accepting
smaller shares in each risk as well as plotting the locations for each risk.
• Broker influence. As we will see later in this section, the broker has an important role to play in
choosing the insurers that will subscribe to the risk. A broker can choose to spread risks quite thinly
among a number of different insurers with each one taking a smaller share; alternatively, they can
choose to approach a smaller number of insurers with each taking a larger share.
Chapter 7 Underwriting 7/3
• Insured’s influence. The insured may have a view about the choice of insurers for their risk. They may
The insured may have
indicate a preference for a single insurer with which a relationship can be built – rather than a number a view about the
of different insurers. Of course, the insured’s influence can also be only for their preference of a choice of insurers for
their risk
particular lead insurer rather than a requirement to place the risk totally with that one insurer.
A2 Leaders and followers

In a subscription market, where there is more than one insurer involved in the risk, insurers can be
divided into two categories: leaders and followers. As we will see in section B, the leaders and followers
assume different roles and responsibilities in both the underwriting and claims processes in the London
Market.
A3 London as part of an international placement

The London insurance market is not the only subscription market. Just as the insured or broker might
choose one or more insurers in London, they might also choose to support not only the London Market
but also to choose insurers from outside London as either the leaders of the risk, or as participants in
the placement as followers.
Consider this…
Why might other markets be used?
• Lack of capacity in London. The very largest risks might be too large to be placed in one market alone.
• Loyalty of brokers or insured. A broker or insured might wish to support their home market as well as the
London Market. This means that a part of the risk will be placed in another market, for example Scandinavia, and
part in the London Market.
Reinforce
Do you remember how much business comes into the London Market from overseas? If not, re-visit the Lloyd’s
Annual Report which is available at www.lloyds.com/lloyds/investor-relations/financial-performance/financial-results
Question 7.1
What do we mean when we say that the London insurance market is known as a ‘subscription market’?
Chapter 7
a. Every insurer has to subscribe to the market rules. F
b. Risks can be shared with a number of insurers each taking a proportion. F
c. Insurers use a ‘slip’ for indicating their agreement. F
d. All risks must be written entirely in London. F
A4 Electronic placing
The negotiation and presentation of the risk by the broker to the underwriter has traditionally been a
The negotiation and
face-to-face process. In line with the rest of the business world, there is an increasing use of electronic presentation of the
methods not only to distribute data and information, but also to support the negotiation and agreement risk by the broker to
the underwriter has
stages of the process. traditionally been a
face-to-face process
The London Market Group (LMG) is working to develop electronic processes to support the placement of
business within the London Market.
The LMG Placing Steering Group which manages the process on behalf of the London Market Group has the
following vision:
The use of electronic processes, compliant with ACORD international data standards, for the submission of risk
details, the agreement of terms, and contract formation for all risk placements and contract amendments in the
London market, enabling the selective use of negotiation outside the electronic process where required by trading
partners.
Who’s who?
The London Market Group (LMG) is a market-wide body made up of the chief executive officers (CEOs) of market
participants, CEOs of the trade associations and representatives of Lloyd’s.
The Placing Steering Group is run through the Lloyd’s Market Association on behalf of the LMG.
ACORD stands for the Association for Co-operative Operations Research and Development. It is a global non-profit
standard development organisation.
It is important to understand that electronic placing is not intended to remove the need for face-to-face
negotiation of risks; however, it offers the opportunity to remove the face-to-face element when it adds
no real value to the transaction – resulting in a more efficient process. Submitting documentation
electronically also allows both parties (brokers and underwriters) to maximise the use of their working
days by smoothing out traditional peaks and troughs.
Activity
Review the Lloyd’s Market Association (LMA) website for more information about the electronic placing projects and
London market modernisation activity:
www.lmalloyds.com/ and search for ‘Bluffer’s Guide’.
Find out what involvement your organisation has with electronic placing and consider the benefits that you think it
brings to your organisation.
The market is also working on direct communications through systems such as the Exchange where
broker and carriers can send each other formatted ACORD standard messages which can then ideally
flow directly into each parties systems to update data.
Activity
Research more about the Exchange using this link:
https://www.londonmarketgroup.co.uk/five-million-messages-now-passed-by-message-exchange
Chapter 7
If you work for an insurer or a broker find out whether you are currently using this system, perhaps to receive
endorsement information.
B How underwriters and brokers interrelate

In this section, we will explore the roles played by the underwriter and the broker in the placing/
underwriting process. Further discussion of the business process itself is provided in chapter 8.
Refer to LM1, Presuming that a broker is involved in the placing process, the activity starts with the broker taking
chapter 8 for more
on agency instructions from their client. As a general rule, the broker in the London Market is the agent of the
insured. In the Lloyd’s Market, a broker has to be used, but in other areas of the London Market this is
not the case.
Reinforce
An agent is someone who works on your behalf – you are known as the principal.
B1 Consideration of markets and use of rating agencies

The broker offers advice to their clients regarding the type of insurance to purchase but also the market
One of the
determining factors and insurers to be used. One of the determining factors for selecting an insurer is its security or ability to
for selecting an pay any claims in the future. (This is one of the main reasons for buying insurance in the first place and
insurer is its security
or ability to pay any also why regulation of the insurers is important).
claims in the future
Brokers have committees or individuals (depending on the relative size of the broking organisation)
whose responsibility it is to consider and analyse the relative security of various insurers. These security
committees are not required to consider and analyse each insurer individually, as they can utilise
publicly available gradings created by a number of different bodies called rating agencies.
Rating agencies give grading both to individual insurers and also separately to Lloyd’s as an entire
marketplace. As well as London Company Market insurers, they also rate overseas insurers.
Rating agencies
The three best-known rating agencies are A. M. Best, Fitch and Standard & Poors.
B1A Basis on which they rate

Rating agencies do not only consider the financial position of any insurer; they also look at the
Rating agencies also
management and operation of the business as a whole. In addition, an insurer is compared to its peer look at the
group in the market (i.e. insurers of a similar size and structure). management and
operation of the
business as a whole
The top level of grading varies among the various agencies. However, a good rating from one or more of
the agencies is very important to an insurer because the higher the grading the more secure the insurer
appears to potential clients. Grades are changed where circumstances require and, as you might expect,
a drop in grading presents potential problems in terms of acceptability to brokers – and hence to
business being obtained.
Activity
Look at the A. M. Best website and research the methodology it uses to review insurers.
www.ambest.com/ratings/methodology.asp
B1B When a drop in rating might not concern an insurer

If one insurer has their rating reduced where all of its peers remain at the same level, this has the
potential to cause a problem for the insurer, since the new rating level may not be one that brokers are
prepared to accept. However, when all insurers have their ratings reduced, then no one member of that
group should suffer individually by reason of that reduction.
Question 7.2
Chapter 7
When would a reduction in rating from a rating agency be least likely to cause any business issues for an insurer?
a. When the insurer’s peers in the market were also downgraded. F
b. When the insurer was not in the London Market. F
c. When the insurer is a new start-up business. F
d. When the insurer writes only aviation business. F
B1C Why brokers are so concerned about ratings

Remember that the broker is the agent of the insured, who will be relying on the broker to exercise due Refer back to
chapter 4, section D
care to place their business with robust insurers that will also be there in the future to pay claims. for more on the role
Should an insurer be unable to pay a future claim then the broker may face a claim of negligence from of rating agencies
their client. Therefore, to avoid that possibility, the broker will consider only those insurers with high
ratings which, whilst it is not an absolute guarantee of survival, at least provides some level of
assurance.
Activity
Investigate the security ratings given to your organisation and see if they have ever changed.
Review the Lloyd’s website and see how the rating agents review the Lloyd’s Market as a whole:
www.lloyds.com/Lloyds/Investor-Relations/Ratings
Refer back to chapter 4, section D to refresh yourself on the role that the rating agencies play in the
market.
B2 Choice of leader
The broker applies their professional knowledge and experience to decide which insurer (or insurers) to
approach first with their client’s risk.
The choice of a leader is important as they should:
A leader should set
good terms and
conditions for the • set good terms and conditions for the client; and
client and be credible • be credible to other insurers so that a following market will support the leader, should the leader
to other insurers
decide to not take 100% of the risk.
The broker can approach a number of potential leaders to provide a quotation for the risk. They then
review the quotations with the client to consider the best option for the risk to be placed. The best
option is not necessarily the least expensive and hence the broker must explain clearly the differences
between the various options, such as variations in deductibles and scope/levels of coverage being
granted.
Within the London Market, a number of leaders may appear to exist, as there will be a Lloyd’s lead and a
company market lead if the placement is mixed (known as bureau leads.) In addition, if part of the risk is
placed in another market, there may be an overall lead overseas.
In relation to the MRC, a slip lead and bureau leads will be identified in the document. The slip lead will
normally be one of the two bureau leaders, unless the slip is being led in London by an insurer that does
not operate through the central data and money movement bureau operated by Xchanging.
B3 Presentation of the risk

Refer to LM1, Having identified some possible leaders, the broker has to put together a presentation of the client’s
chapter 2, for more
information on the risk. The standard document used in the London Market for this purpose is the Market Reform Contract
duty of disclosure (more usually known by its historic name of a ‘slip’) or MRC. This document, together with relevant
supporting information, is presented to the potential leaders to allow them to consider the risk. The
importance of a full and frank presentation cannot be underestimated and the broker has the
responsibility of ensuring that their client realises the extent of information that needs to be disclosed.
Question 7.3
If the leader of a risk is a London company insurer, where can the broker go to source the rest of the insurers of
a risk?
Chapter 7
a. London companies only. F

b. Lloyd’s and London companies only – in equal share. F
c. Overseas insurers only. F
d. Anywhere – there are no restrictions. F
B4 Duties of underwriters and brokers to each other and their principals

Refer to chapter 9 The broker’s fundamental duty is to their principal (or as they are better known: their client), which is
for more information
on delegated usually the insured; however, care must be taken if there is a situation where the broker also owes a
underwriting duty of care to the insurer as their principal. This can occur if the insurer delegates any authority either
for underwriting or settling claims on any account to the broker.
In addition, all parties should be mindful that under the terms of the Insurance Act 2015 knowledge held
by the brokers about a risk is deemed to be held by their client and should be considered for disclosure;
although in practical terms it is hoped that brokers will engage with their clients should they have any
information that they believe to be material, which they have not actually received from their clients.
An insurer owes a duty to its investors (whether they are Names in Lloyd’s or shareholders in an
insurance company) to produce a return on their investment. A key means of doing so is by engaging in
sensible underwriting at the right price. We will explore the question of the ‘right price’ later in this
chapter.
C Market cycles
The concept of supply and demand operates in business. In study text LM1, this was illustrated using the Refer to LM1
example of an ice cream seller and the fortunes of their business. The concept of supply and demand
also applies to the insurance business and we can use the same types of examples to illustrate what is
known as the market cycle.
A reminder of the example of the ice cream seller follows, together with a comparison between the
features of that fictional market and the insurance market in table 7.1.
Example 7.1
Imagine a marketplace with one trader selling vanilla ice creams. They are the sole provider in the area and have
many customers. Queues often form and by mid-afternoon they have sold out. Other business people see their
success and set up market stalls in the same area selling the same ice cream at the same price. Some of the original
trader’s customers go to the new traders, although there is no obvious price-cutting taking place.
• More market traders come in and are all selling the same ice cream in the marketplace.
• The demand is then split equally between them. However, at the end of the day, one of them has ice cream left
over so reduces their price to get rid of it.
• As the other market traders see what they are doing, a couple of them start to get aggressive in their pricing to try
to get a larger share of the demand. This means that unless the others can come up with other ways to attract
customers, they too will have to reduce their prices to remain competitive.
• Then due to completely unforeseeable circumstances, the vanilla crop fails and supply stops overnight. The
commodity price goes up ten-fold and there is insufficient supply of vanilla to meet the demands of ice cream
manufacturers.
• Total ice cream supply is reduced, whilst demand remains unchanged. This shortage of supply forces prices up.
At the same time due to higher than anticipated production costs, manufacturers and sellers leave the market
because they believe that they will not be able to sell at the price required to cover their new increased production/
purchase costs. The ice cream market is in turmoil and totally out of equilibrium.
• Some of the traders cannot afford to remain in the market as they have to sell ice creams at a price lower than
they obtain from their suppliers – thus making a loss.
Table 7.1: Comparison of market features
Chapter 7
Fictional ice cream market Insurance market
One ice cream seller. Very few insurers in any class of business.
Ice cream seller increases prices with no impact on Insurers increase premium with no loss of business.
demand.
Ice cream seller is making good profits. Insurance market is making a profit.
Other ice cream sellers are opening up to try to share the New insurers are coming into the market.
good market.
Other ice cream sellers reducing their prices to try to get New insurers are reducing their premiums to try to
more customers. capture market share.
Failure of the vanilla crop so ice cream becomes very A large catastrophe loss occurs which causes large
expensive to buy. Sellers are having to buy stock for more losses for many insurers that do not have large reserves
money than they are selling it and have no money put as they have not been charging enough premium.
aside.
Some ice cream sellers leave the market as they go out of Some insurers leave the market altogether or at least the
business. particular class of business.
The remaining ice cream sellers can increase their prices The remaining insurers can raise premiums to more
to more realistic levels. reasonable levels as there is less competition for the
business.
As you might expect with a cycle, the pattern repeats itself on a regular basis – although not necessarily
the same way, or over the same period of time, in each class of business or market.
Example 7.2
A good example of a recent impact of a catastrophe on the market participants is the US hurricanes in 2005. Those
hurricanes (Katrina, Rita and Wilma) took an unexpected path and caused significant damage to oil installations in
the Gulf of Mexico. Following the large losses incurred, the number of insurers participating in offshore energy
business decreased. Additionally, the number of insurers offering windstorm cover in the Gulf of Mexico as a
standard part of the insurance also radically reduced.
Activity
If you work for an insurer, find out if any of your underwriting teams have changed the coverage they provide or left
certain classes of business following large losses.
If you work for a broker, ask your colleagues if there has been any difference in the markets you use for any risks
following insurers leaving classes of business after large losses.
Question 7.4
If more insurers come into the market what is the most likely impact on premium rates?
a. They will increase. F
b. They will decrease. F
c. They will stay stable. F
d. They will become more volatile. F
D Loss and exposure modelling

Refer to chapter 4 Whilst seeing into the future is not a skill generally possessed by underwriters or claims professionals,
common sense and good business dictates that historical information, together with technical tools can
be used by insurers to try to form some degree of prediction of what might happen in future. The most
Chapter 7
obvious reason for insurers to try to work out what losses they might suffer is to assist them to calculate
the amount of reinsurance they might wish to buy. Reinsurance costs money and the costs of
reinsurance are added to the general costs of the business, together with claims on one side of the
solvency equation that we reviewed in chapter 4.
D1 Exposure modelling
Exposure modelling looks at the way in which different risks that an insurer writes (or is planning to
write) combine to create a concentration of risk in one area. Examples of this concept are shown in
table 7.2.
Table 7.2: Exposure questions for different types of insurance business

Type of business Exposure question
Property • Are there a number of separate properties in close geographical proximity?
• What is the total sum insured of any combination of properties in a set area?
• Are the same perils being covered for all properties?
Stock throughput • Are different clients all storing goods in the same warehouses?
Satellites • Are several satellites being launched using the same vehicle at the same time?
So how does an insurer ensure that it knows the full extent of its exposures? The starting point is
detailed data capture which for a property risk means down to postcode or zip code level.
By capturing and mapping this data using specialist software, it is possible to calculate the exact
exposures in any location or region and ascertain whether there is any more capacity in that area to
accept more risks.
Another calculation that is used is probable maximum loss (PML). Here, the insurer is trying to work
out – not what the total of all the sums insured are – but the realistic likely maximum.
Example 7.3
Let’s consider why the PML might be lower than the total sum insured.
A property risk may be spread over a very wide area, and although the sum insured is very high, the likelihood of
any loss (be it a fire, a storm or any other type of loss) totally destroying everything is very slight. Insurers try to
work out what might happen if a fire started in any one area – could it spread to all the other areas, some of the
other areas or perhaps be completely contained in the original area?
The PML calculation is very important, for example to calculate how much reinsurance should be
purchased.
Activity
If you work for an insurer, find a colleague who is responsible for capturing data for exposure modelling. Ask them to
explain what they do and if possible show you the system that they use.
If you work for a broker, talk to colleagues to find out the types of information that has to be provided to insurers to
allow them to capture exposures.
Mobile risks
It is far more difficult to undertake effective exposure mapping on risks that are constantly moving, such as ships or
containers. However, the exposure issues for marine risks can be as significant as those for non-marine risks. For
example, a large container vessel can carry up to 14,000 containers and one insurer may (without knowing it) be
insuring the contents of each of them.
D2 Loss modelling
As well as working out the exposures on various combinations of risks, an insurer should work out the
financial impact of certain events occurring. Whilst a prudent insurer could create their own ‘horror
Chapter 7
stories’, certainly for those insurers working in the Lloyd’s Market, they are given some guidance using
Realistic Disaster Scenarios (RDSs).
Lloyd’s sets out a list of specific scenarios that all managing agents must analyse, together with some
syndicate-specific options that each insurer chooses depending on its individual portfolio. The analysis
at its heart is quite simple:
• For each of the scenarios, the managing agent works out which of the risks they have written might be
exposed and their maximum claim on each one.
• Next, they work out whether they have any reinsurance to cover those risks.
• Finally they work out how much the reinsurance cost and how much of the original claims they would
cover.
• Having done those calculations, the final result is firstly the gross financial exposure to the insurer of
the RDS (i.e. without the impact of any reinsurance) and secondly the net result (taking the applicable
reinsurance into consideration as well as any reinsurance reinstatement costs).
The general scenarios that all managing agents have to consider are:
• two consecutive Atlantic seaboard windstorms;
• Florida windstorm;
• Gulf of Mexico windstorm;
• European windstorm;
• Japanese windstorm;
• California earthquake;
• New Madrid earthquake (see ‘New Madrid’ box below);
• Japanese earthquake;
• UK flood; and
• terrorism.
New Madrid
New Madrid is in fact a fault line (i.e. a place where sections of the earth’s crust meet). It runs Southwest from New
Madrid in Missouri and an earthquake along this fault line has the potential to impact seven different states in the
USA, namely Illinois, Indiana, Missouri, Arkansas, Kentucky, Tennessee and Mississippi.
Activity
Review this website and research the current RDS instructions issued by Lloyd’s. Note in particular the detail in
which the instructions are given.
www.lloyds.com/The-Market/Tools-and-Resources/Research/Exposure-Management/Realistic-Disaster-Scenarios
If you work for an insurer find out who is responsible for loss modelling or RDS reporting and find out more about
what they do.
Lloyd’s has also issued a new RDS scenario for all syndicates to complete, based on the Deepwater
Horizon incident which occurred in April 2010.
It is important to remember that although Lloyd’s sends out specific instructions to the syndicates for
the Realistic Disaster Scenario work, loss and exposure modelling is equally important for the Company
Market to:
• monitor their business; and
• assist with the consideration around reinsurance purchasing (as mentioned earlier).
D2A Catastrophe modelling

Clearly, the purpose of RDS is to calculate the likely financial losses that might be suffered in certain
predetermined catastrophe situations.
Catastrophe modelling also helps to ensure that an insurer is aware of the non-financial impact of
Catastrophe
modelling also helps catastrophes occurring. For example, should a catastrophe occur, claims volumes will increase greatly
to ensure that an and the insurer has to be ready to deal with them. In the London Market that means that those insurers
Chapter 7
insurer is aware of
the non-financial which know they are leaders and therefore will be handling the claims have to be ready when they arrive
impact of with sufficient numbers of skilled personnel to handle them.
catastrophes
occurring
Refer to chapter 3 Modellers consider the frequency and severity of any particular type of event which helps them to
determine which combination and levels of the various types of reinsurance (that we examined in
chapter 3) are required.
Additionally, it is up to the insurer to decide whether it should perform a similar exercise using any
additional scenarios, based on its own underwriting portfolios.
E Premium calculation
One of the tasks of the leader is to calculate a suitable premium. The premium that an insured pays
One of the tasks of the
leader is to calculate represents that insured’s contribution to the ‘common pool’. This contribution must be fair and must
a suitable premium reflect the degree of risk which that insured brings to the pool.
Different members of the pool present different levels of risk to the pool. Broadly, these are measured
in terms of frequency of loss and severity of loss. When frequency and severity are combined, the
underwriter decides the appropriate level of ‘loading’ or ‘discounting’ of the rate for a normal risk of
its type.
Insurers find pricing most straightforward when dealing with a large number of exposures to risk, which
might be houses, factories, cars, ships, etc.
The operation of the law of large numbers where insurers have a significant amount of data enables
them to determine a more accurate premium chargeable to the insured than would be the case if their
experience were limited to a few risks.
However, the types of risks written in the London Market are not often capable of having the law of large
numbers applied and have to be considered on past experience of similar although not identical risks, or
even sometimes on the basis of no prior experience because the risk is so new.
Premiums are usually arrived at by applying a premium rate to a premium base, as follows:
Premiums are usually
arrived at by applying
• Premium rate – the hazards that are being faced with a particular risk or particular insured. a premium rate to a
• Premium base – a measure of the exposure. premium base
As an example, an oil rig valued at millions of pounds would cost substantially more to insure than a
private house valued at thousands of pounds. The sum to be insured for the oil rig would, quite clearly,
be higher and the hazard would also be much greater. Consequently, a higher rate would apply to a
higher value.
When calculating the premium, both the insured (or, at this stage, the proposer) and the insurer
contribute something to the calculation. The insured/proposer advises the amount or value that they
want to have insured and the insurer provides the rate that they are prepared to charge.
The premium rate can be expressed generally as a rate per cent which is a price per £100 insured, or as it
sometimes seen as a rate per mille which is a rate per £1,000 insured.
Example 7.4
A vessel is valued at £10 million. If the insurer wants to charge £2.00 per £100 of cover (2%) then the premium
calculation would be:
£10 million ÷ £100 = £100,000 × £2.00 = £200,000.
Therefore, at £2.00 per £100 of cover (2%), the premium for this vessel would be £200,000.
If, however, the insurer proposes a premium rate of £2.00 per £1,000 of cover (2‰) then the premium calculation
would be:
£10 million ÷ £1,000 = £10,000 × £2.00 = £20,000.
Therefore, at £2.00 per £1,000 of cover (2‰), the premium for this vessel would be only £20,000.
Premium base
While the sum insured is a suitable premium base for many property insurances, it would not be
appropriate for liability insurance, which operates as follows:
Chapter 7
• Employers’ liability insurance. The payroll of the insured is used as a basis for premium calculation,
often broken down into different categories of work undertaken.
• Products liability insurance. This is often rated on turnover.
• Professional indemnity insurance. This is rated on fees earned.
In such cases, although it is the measure of exposure that is used to determine the premium, this is not
the figure used to establish the amount of cover provided by the policy.
In certain cases, the premium base is not a factual figure at the start of the period of insurance. It is only
In certain cases, the
possible to provide an estimate of what the premium base might be. This would be the case in, for premium base is not a
example, employers’ liability insurance. The insured is able to estimate the total salary cost for the factual figure at the
start of the period of
coming year. The rate is applied to the estimated figure and at the end of the year the insured submits a insurance
declaration showing the actual salaries paid. At this point, the premium is adjusted up or down,
depending on whether the actual salary cost is higher or lower than the estimated figure. This also
applies to products liability risks where the premium is usually related to turnover (i.e. the value of
income the business receives, which bears a relationship to the amount of products manufactured). Any
of these figures are subject to fluctuation from any estimate provided up front.
Marine cargo insurance premium is also often paid in stages, as and when goods are actually shipped.
This is done by regular declarations to the insurer under a type of insurance contract called an ‘open
cover’. Stock throughput insurance covering goods in a warehouse is also done this way, because the
value of goods stored could fluctuate through a policy year and it prevents the insured paying too much
premium and the insurer receiving too little!
E1 Premium and following market insurers

Although the practice in the London Market is for the leading insurer to set a premium, there is no
There is no obligation
on any member of the obligation on any member of the following market to accept the premium rate that the leader has set and
following market to they can choose to request a different rate (usually higher). If they do so, the broker cannot return to the
accept the premium
rate that the leader underwriters from whom they have already obtained commitments to ask if they want to alter their
has set agreement to the higher premium figure. The broker’s obligations in this regard are set out quite clearly
in the European Federation of Insurance Intermediaries (BIPAR) principles which were looked at briefly
in LM1:
Refer to LM1 for 1. The intermediary shall, based on information provided, specify the demands and needs of the client
more on BIPAR
as well as the underlying reasons for any advice.
2. Before placing a risk, an intermediary will review and advise a client on market structures available
to meet its needs and, in particular, the relative merits of a single insurer or a multiple insurer
placement.
3. If the client, on advice of the intermediary, instructs the latter to place the risk with multiple
insurers, the intermediary will review, explain the relative merits and advise the client on a range of
options for multiple insurer placement.
Intermediaries will expect insurers to give careful independent consideration to the option
requested.
4. In the case of a placement of a risk with a lead insurer and following insurers on the same terms and
conditions, the previously agreed premiums of the lead insurer and any following insurers will not
be aligned upwards should an additional follower require a higher premium to complete the risk
placement. Indeed, the intermediary should not accept any condition whereby an insurer seeks to
reserve to itself the right to increase the premium charged in such circumstances.
5. During the placement of the risk, the intermediary will keep the client informed of progress.
Activity
If you work for a broker find out if you have risks placed in your organisation where the commercial terms, such as
the premium, vary between the insurers on risk.
Chapter 7
E2 Other components of premium calculations

It would be naïve of an insurer simply to calculate the final premium for any risk based solely on the
It would be naïve of
an insurer to exposure that the risk brings to the pool. There are a number of other general expenses which should
calculate the final also be considered; whether a premium is weighted with a proportion of one or more of these expenses
premium solely on the
exposure that the risk is a business decision made by the insurer.
brings to the pool
• Operational costs. The costs of doing business, employing underwriters, claims staff, etc.
• Reinsurance costs. These include both specific costs if reinsurance is being purchased solely to cover
this risk (facultative reinsurance), or a share of the insurer’s general reinsurance costs.
• Profit margin. The insurer should consider business not just as a way of obtaining premium income
but as a way of making a profit on the risk, taking into account all the additional expenses that there
are in writing the risk in the first place, such as reinsurance costs, operating costs and any taxes
payable.
• Contribution to claims reserves. Whilst the premiums are the first line of funds for any claims
payments, all insurers should concentrate on building up reserves in case of the catastrophe losses
that may occur.
• Taxes. Depending on the area of the world from which the risk emanates, certain taxes are payable by
the insurer. Whilst the pure cost of the tax cannot be passed directly on to the insured, the insurer
should take its tax expenses into account. In other words, the insurer should consider its ‘bottom line
net income position’. If an insurer ignores the impact of these costs, it might find that a substantial
proportion of what it thought was net income is disappearing as tax payable!
Consider this…
Fire brigade charges in Germany are a type of tax and are charged to insurers as a deduction from their premium. If
an insurer’s premium is already low and it loses another 8-10% on various taxes, it might make the difference
between profit and loss.
Question 7.5
Which of these factors would not be considered by an insurer when calculating a premium?
a. Operating costs of the business. F
b. Reinsurance costs. F
c. Entertaining costs for clients. F
d. Creating claims reserves. F
F Reserving
In this section, we will review the importance of reserving. Put simply, reserving means making sure that
Reserving means
there are sufficient funds available and allocated for the payment of any claims that arise at any time in making sure that
the future. This is not necessarily as straightforward as it might appear at first glance and so the process sufficient funds are
allocated for any
will be reviewed in stages. claims that arise
F1 How insurers reserve

As the reserve has to represent the likely cost of the claim, it is important to ascertain as soon as
possible what that is going to be, by reviewing claims data and using expert input as well as the claims
adjuster’s knowledge and experience. For the larger types of claims that arise on the business written in
the London Market, claims are reviewed and reserved individually. ‘Individually’ means that that each
claim is reviewed on a case by case basis, rather than on a group or aggregated basis. For the smaller
value and higher volume claims such as household and motor, it is quite usual for the insurer to use
statistical data to create a ‘blanket reserve’ across an entire book of business. The techniques for this
are outside the syllabus for this unit.
As well as the cost of the claim indemnity, whether it be the cost of repairs of a building, the liability
Chapter 7
payment to an injured person or anything else, the costs of any experts that the insurer is using on the
claim must also be estimated and added to the amount put aside as the reserve. It is very important to
consider this amount as these costs can add up very quickly and when deciding whether to settle a
claim at any point, the saving on future costs for experts should be taken into account.
F2 What other information should the claims adjuster use?

There are a number of areas which the adjuster should take into account when considering an
appropriate reserve for a claim, such as the country (or jurisdiction) in which any legal proceedings
might be held and whether the likely amount awarded in those courts might be higher than the courts
would award in the UK.
A good example of this is personal injury claims. Personal injury awards have traditionally been lower in
the UK courts than in the US courts although they have been coming closer together in recent years.
In 2017 however the UK Government changed the basis on which insurers paid out personal injury
compensation. Historically the damages payout could be discounted on the basis that it was expected
that the claimant would be able to earn interest over time which would build the ‘pot’ back up again.
With interest rates having dropped, it was decided by the Government to change the so-called ‘discount
rate’ from 2.5% to –0.75%.
So what impact would that have on reserves? If a personal injury claim was considered to be worth GBP
1,000,000 then with the old discount rate the insurers could reserve GBP 975,000 being 97.5% of the
value as that would be what would be paid out.
Now they have to reserve GBP 1,007,500 being 100.75% of the actual value.
Activity
If you work for an insurer, find out if your company had to amend its reserves following this change.
Use this link for an article about the impact on an insurers figures: http://xlgroup.com/press/xl-group-ltd-announces-
estimated-ogden-rate-change-impact.
F3 Is it safer simply to reserve the full policy limits?

Although this sounds like a very good idea, it is not. The reason for this is that all reserves held by an
The higher the
reserves the more insurer form part of the solvency calculation that we looked at in chapter 4, section A. The higher the
capital the insurer reserves (the liabilities side of the equation) the more capital the insurer must have available to balance
must have available
to balance the the solvency equation. Hence, by appearing to be very conservative in its reserving, the insurer has to tie
solvency equation up additional capital – which could be used for other business purposes – to satisfy the regulators.
Refer to chapter 4, Having said that, it is equally dangerous to hold insufficient reserves (known as ‘under-reserving’). If an
section A for more
on the solvency insurer under-reserves, when claims are ready to be paid, the insurer will need to spend funds from
calculation outside the reserve – which have not been specifically set aside for that purpose. The insurer also has a
false picture of its profitability (as reserves fall within the company’s liabilities, which reduce profit); this
could mislead investors.
F4 Short-tail and long-tail business

Certain classes of business are called short-tail because the claims are generally reported and settled
either within the policy year or very shortly afterwards. The opposite is true for long-tail classes (mainly
liability) where the claims can take a long time to report as well as a long time to be settled. This
presents its own challenges around reserving practices.
If the claim is known about but is expected to take a long time to settle, then both the operation of
inflation and changes in the law might make the final settlement far higher than anticipated when the
claim was first advised.
F5 What about those claims that are not known about?

Insurers, both in Lloyd’s and the Company Market, treat each twelve-month cycle as a separate year of
Insurers treat each
twelve-month cycle account. For Lloyd’s, this always starts on 1 January, so that if a syndicate starts up mid-year, their first
as a separate year of year of account will be less than one calendar year.
Chapter 7
account
This means that all of the risks written in that year of account are considered together, in terms of
ensuring that all premiums are in and accounted for and that all claims are reserved for. It is the nature
of some classes of business that at the end of the twelve-month period, not all the claims have yet been
advised to insurers. This does not necessarily mean that they will not be in the future. So what does the
insurer do?
F5A Incurred but not reported (IBNR)/incurred but not enough reported (IBNER)
Essentially, the insurer applies some uplift to the known reserves to provide for those losses which have
happened but which have not yet been advised to them. The uplift should not be an arbitrary amount but
a calculated figure based on previous experience of how claims, in relation to any particular class of
business, have developed.
What do we mean by ‘developed’?
For every underwriting account, the premium will come into the business in stages not only during the
twelve months of the year of account, but also after the end of that year. The same is true as we have
already discussed for claims; some claims will be advised and paid during the year, some will be
advised but not paid in the year and some will not even be advised during the year. Actuaries can review
previous years and see how they developed and then consider whether the year under consideration will
perform the same way.
An actuary might present the data in a table, showing the year of account, months from beginning of
year of account and claims (paid and reserved) at each intersection. See table 7.3 for an example of how
this might look.
Table 7.3: IBNR and IBNER in practice

Year of account 12 months 24 months 36 months 48 months
2013 3,000 3,500 3,750 3,800
2014 4,000 4,500 4,950 ?
By seeing how previous years have developed, the actuaries can estimate how current years will
develop, presuming there are no material changes in the types of business being written which would
impact the pattern.
Consideration of what is known as IBNR is very important for all insurers if they are to be sure that their
reserve figures are as comprehensive as they can be.
The key difference between IBNR and IBNER is that for the former, the estimates relate to claims which
have not been reported at all to the insurer, whereas the latter relates to claims which are known about
but for which the currently posted reserve may not be adequate.
Question 7.6
What is IBNR?
a. Making provision for claims payments where the claims are not known about yet. F
b. Putting money aside in case premiums have to be paid back. F
c. Setting aside money for reinsurance payments. F
d. Correcting reserving mistakes. F
F6 Trust funds
As a condition of permission from some overseas regulators, the insurer is required to maintain physical
funds or reserves within the particular country’s borders in relation to risks written that are located
inside that country. These are called situs funds or trust funds. The amount that has to be held in these
funds is calculated using the reserves that are held on open claims within the market systems.
Therefore, as we saw in section F3, accuracy in the claim reserves is of great importance as over-
reserving on claims will tie up additional money to maintain these trust funds at the required level.
Chapter 7
G Reinsurance to close (RITC) and open years
management
We have already discussed the fact that insurers group their business into years of account. At the end
of each year of account, all the premiums and claims might not have been received so it is not always
easy to ascertain whether the year has been profitable.
Lloyd’s syndicates give the business three years to develop and at the end of that period the premiums
Lloyd’s syndicates
and claims are reviewed. The purpose of the review is to try to ‘close’ the year which essentially means give the business
declaring a profit or loss for the year. If it declares a profit, the insurer releases some funds to the three years to develop
Names. Once this is done, then the ‘door is closed’ on that year and the investors (Names) are not liable
for any more claims.
But what about those claims that are still outstanding or possibly still to be reported? How can the door
be closed on them?
The door cannot be closed on those claims and in practice, the syndicate that wants to close a particular
year of account purchases reinsurance from the next year of account to cover those potential claims.
Example 7.5
Syndicate 1234, 2013 year of account, would purchase a reinsurance from Syndicate 1234, 2014 year of account.
This process is called reinsurance to close (RITC) and is performed with the same robust controls as any other form
of external reinsurance purchase.
The first thing that the syndicate wanting to buy the RITC has to do is to calculate the remaining future
The syndicate wanting
RITC has to calculate liabilities as it is on this basis that the syndicate offering the RITC will work out the premium that it will
the remaining future charge to take on those liabilities. This calculation should also contain an element of IBNR in the same
liabilities
way as any other reserve calculations.
Once a suitable premium has been agreed then the reinsurance can be put into place and that is the
final step in the process of ‘closing a year’ and being able to declare a profit or loss. Once the year is
closed, the syndicate’s investors in that year have no further liabilities.
G1 Circumstances in which the liabilities cannot be calculated by

actuaries
There are some cases where the liabilities of the syndicate trying to purchase the reinsurance cannot be
calculated – even with the use of actuaries – to a level with which the other syndicate is happy, or
perhaps the premium that is being quoted for the reinsurance is unacceptable. In this case the RITC
cannot be finalised and the year has to remain ‘open’.
In practice, the investors cannot be released from their liabilities at that point in time and the syndicate
year of account carries on as an ‘open year’ and the claims are managed to their ultimate conclusion.
Given that the reason for the inability to calculate the future liabilities or the size of the reinsurance
premium is often that the outstanding claims are large or difficult, proactive management of those
claims will take place to ensure that they are resolved as efficiently and effectively as possible whilst not
making the financial position any worse than it is already.
As we saw in chapter 4, section C, Lloyd’s has a chain of security which starts with the premium funds
Lloyd’s chain of
security starts with and ends with the Central Fund. Lloyd’s pays very close attention to any situation which puts pressure on
the premium funds the Central Fund. A syndicate which cannot close a year of account because of large claims outstanding
and ends with the
Central Fund may well use up the premium funds and the members’ funds – thus exposing the Central Fund to having
to pay claims. Whilst that is of course what the Central Fund is there for, it should not be treated as a
bottomless pit of money.
Refer to chapter 4, Given the involvement of the Central Fund in this issue, Lloyd’s has the Open Years Management
section C for more
on Lloyd’s chain of department which works with the managing agents that have open years of account for syndicates under
security their control.
The prospect of obtaining a RITC sometime in the future is not out of the question and the challenge will
be trying at points in the future to effect an acceptable RITC agreement, as the claims develop further.
Chapter 7
G2 Does RITC always have to be with the next syndicate year of account?
No, not necessarily as there is a market for what is known as commercial RITC whereby organisations
that do not necessarily have any historic link with the syndicate take over its future liabilities – again for
a suitable price.
Names have invested for a single year, whereas insurance companies do not have the concept of the
Insurance companies
do not need to annual venture. Therefore, they do not need to transfer liabilities formally from one year to the next.
transfer liabilities
formally from one However, it is important to understand that there are circumstances in which insurance companies stop
year to the next
writing business and go into a state which is known as ‘run-off’. Insurance companies in run-off do not
write any new risks but remain prepared to deal with all outstanding claims that arise on the business
already on the books. Commercial organisations also exist to manage as a business (of course for a
price) the run-off of an insurance company.
Key points
Conduct of underwriting in the London Market
• London is a subscription market with more than one insurer participating in risks.
• The insurer’s share of a risk will depend on a number of factors such as capacity and appetite.
• London may not be the only market used for any one risk.
• Placing has traditionally been done face-to-face but is starting to be done electronically as well.
How underwriters and brokers interrelate
• Brokers consider the markets to use for their clients’ risks.
• Brokers use rating agencies for guidance in their consideration of which insurers to use.
• Brokers will face claims for professional negligence from their clients if they recommend insurers that are not
financially secure.
• The broker considers which insurer might be an appropriate leader for the risk.
• There will often be more than one leader: one for the overall risk, one for the London placement, one for Lloyd’s and
one for the Company Market.
• The broker presents their clients’ risk to the underwriters.
Market cycles
• Market cycles repeat regularly, however different classes of business will have different cycle times.
• When profits are high, new insurers enter the market.
• When losses are made, insurers leave the market.
• Following significant losses, insurers withdraw from that market and premiums generally increase due to less
competition.
Loss and exposure modelling
• Loss and exposure modelling helps the insurer to know exactly where the concentration of its risks are.
• It allows analysis for reinsurance purchase and to inform the regulators.
• Calculating probable maximum losses for certain risks allows a more realistic analysis of potential losses than just
Chapter 7
using the sum insured.
• Realistic Disaster Scenarios (RDSs) allow insurers to see their exposure to certain combinations of events.
Premium calculation
• The premium should represent the exposure being presented to the common pool by the particular risk.
• Premiums are generally calculated using a premium rate and a premium base.
• Premium rate deals with the hazards being faced.
• Premium base is the sum insured or other measure of the exposure.
• Some classes have estimated premium bases which are balanced at the end of the year (for example, employers’
liability insurance, which is balanced on actual wages paid across the year).
• ‘Following’ market underwriters are not obliged to accept the same premium as the leader.
• The premium also needs to factor in a contribution to the operating costs of the business, such as general
reinsurance.
Reserving
• Reserving is putting aside funds to pay claims in the future.
• Under-reserving and over-reserving are equally incorrect.
• Incorrect reserving has an impact on an insurer’s solvency calculations.
• Incorrect reserving can also impact on trust funds that have to be held overseas to satisfy local regulators.
• Reserves should also include an element for claims that are not yet known about but which might be reported some
time later.
Reinsurance to close (RITC) and open years management

• Reinsurance to close (RITC) is reinsuring one syndicate’s year of account into another.
• RITC allows the closing year to calculate its profit or loss and report to the investors (the Names).
• It does not necessarily have to be done with a successor year of the same syndicate; it can be done as a
commercial reinsurance with a different provider.
• A reinsurance premium has to be calculated for the transaction.
• If a premium cannot be agreed, the year has to remain open.
• A year often remains open because the claims are too large or difficult to quantify accurately.
• As this potentially exposes the Lloyd’s Central Fund, the Lloyd’s Open Years Management team becomes involved
to try to manage the claims to closure.
• It is possible to try at a later date to obtain a RITC once the claims have developed further.
Chapter 7
Question answers

Chapter 7
Self-test questions
1. Identify three reasons why an insurer would not choose to accept 100% of any particular risk.
2. Explain what is meant by ‘leaders’ and ‘followers’ in the London Market.
3. Why does a broker review an insurer’s rating before placing a risk with it?
4. Why might a drop in ratings for the whole market not cause any issues for insurers?
5. What are the two main considerations for a broker when selecting a leader?
6. Explain what will happen next in the market cycle if insurers are seen to be making profits in a particular
class of business.
7. Give two examples of exposure modelling in a property insurance account.
8. What is the reason for conducting Realistic Disaster Scenarios?
9. What are the two basic elements of a premium calculation?
10. In addition to the two basic items of a premium calculation, what other items should an insurer factor into a
premium calculation?
11. List two downsides of reserving every claim at the full sum insured.
12. Describe what is meant by reinsurance to close (RITC).

Chapter 7
Business process
8
outcomes
Learning objectives
Introduction
Key terms
A Formation and termination of the insurance contract 5.2, 8.1, 8.2, 8.3, 8.4,
8.13
B Documents used in the London Market 8.5, 8.9
C Key terms and conditions used in policy wordings 8.10
D Methods of conducting business in the London Market 8.6, 8.7, 8.8, 8.12
E Contract certainty 8.11
Key points
Question answers
Self-test questions
Learning objectives
• explain the requirements for the formation and termination of a valid contract;
• describe the nature, role and purpose of the various documents used in the London Market;
• explain the use and effect of warranties, conditions and exclusions;
• explain the placing process: both paper and electronic, including the transfer of premium; and
Chapter 8
• explain the purpose and operation of contract certainty.
Introduction
In this chapter we will be looking at the practicalities of placing business in the London Market, the
documents used and the different ways in which insurers can operate.
Key terms
Brokerage Cancellation Condition precedent Contract certainty
Contract formation/ Delegated underwriting Duty of fair presentation Endorsement
termination
Exclusion Fraud General Underwriters’ Proposal form
Agreement (GUA)
Quotation Wholesale/retail broker Service company Warranty
A Formation and termination of the insurance contract

In chapter 7, we looked at the roles of the underwriter and the broker in the underwriting process and the
concepts of leaders and followers. In this section, we will develop some of these concepts a little further
to ensure understanding of the complete process for the formation of the insurance contract.
A1 Quotations
When the broker is considering a potential leader, they may visit a number of underwriters and request a
A quotation is a
proposal from the quotation from each of them for their client to consider. A quotation is a proposal or indication from the
insurer as to the insurer as to the terms and conditions (including premium) that it is suggesting for the risk put forward
terms and conditions
it is suggesting for the by the broker.
risk
Obtaining a number of quotations makes sense in that it allows the client to compare the various
options available to them and weigh up the various merits of balancing cover and premium cost.
Reinforce
‘Aggregators’ in the insurance marketplace, such as confused.com and comparethemarket.com also present clients
with a number of quotations based on the information provided.
Refer to LM1 for Irrespective of whether the insurer is being asked only to provide a quotation, the broker and client still
more on aggregators
have the same responsibilities in terms of the disclosure of material facts, as we’ll see later in this
section.
What are the legal implications of an insurer providing a quotation?
Quotations do not
Chapter 8
remain valid
indefinitely • They do not remain valid indefinitely. The insurer can indicate on the quotation the period of validity
(i.e. the time within which the broker must confirm whether they want to proceed, otherwise the
quotation will lapse and should the broker wish to proceed, the insurer can reconsider the risk and
quote again, not being bound by the previous quotation).
• If the client tries to accept the quotation after the expiry date, the insurer can agree if it wishes, but it
is not obliged to do so.
• If the insurer does not specify on the quotation the time period for which it remains open for
acceptance, then the concept of ‘reasonable time’ applies. This is the standard rule in contract law.
• The insurer is not on risk if a client has received its quotation only and not yet accepted it.
• If the client accepts the quotation on the terms provided in the time period, the insurer cannot back
out of the agreement. However, should the client seek to change the terms, the offer and acceptance
process starts again.
If further information which is material to the contract is produced after the initial quotation, the insurer
can either vary or withdraw the quotation.
Reinforce
Do you recall the concept of material information from earlier studies? This is information that would influence the
judgment of a prudent insurer in accepting the risk or the terms and conditions on which it would be written, as well
as influence the actual underwriter who wrote the risk.
Chapter 8 Business process 8/3
Insurance contracts have the same basic ‘ingredients’ as any other insurance contracts; in addition, they
have some specific requirements such as the duty of utmost good faith.
Reinforce
If you cannot recall the ingredients required for a valid contract then refer back to earlier studies (e.g. chapter 2 of
study text LM1).
Question 8.1
If an insurer issues a quotation and the client agrees but wants to change some of the terms, what is the position for
the insurer?
a. It must accept the client’s changes and honour the quotation. F
b. The quotation must be accepted exactly as issued, so the insurer is not bound to accept the client’s
changes. F
c. The insurer is obliged to reissue the quotation, including the client’s changes. F
d. The insurer must reissue the original quotation and the broker must persuade the client to accept it. F
A2 Formation of the contract

Having considered quotations if provided, the client (with the help of their broker) selects their preferred Refer to chapter 7
option and the broker starts the formal placement process. In the next section, we will review the
documents that the broker uses to present their client’s risk for consideration by insurers.
The broker visits each insurer separately and obtains their underwriters’ agreement to take a share of the
risk which, as we saw in chapter 7, could be 100%, but as London is a subscription market it is likely to
be less.
Each insurer’s underwriter indicates its agreement to taking the share using a rubber stamp which shows
Each underwriter
its company or syndicate, together with the name. The underwriter then ‘scratches’ the slip (which indicates its
means that they sign either their initials or the initials of the insurer) and adds the date. Finally, they agreement to taking
the share using a
indicate the share of the risk that they are taking. Each insurer will also state the specific underwriting stamp
reference that it is applying to this risk. This reference is specific to the insurer and might contain data
that’s internal to the insurer, such as a class of business code or an indicator as to whether reinsurance
is being purchased.
It is also possible for a risk to be placed electronically and for the insurers to agree their line
electronically which of course will not involve any rubber stamps or ink.
Activity
Find out if your organisation either as broker or insurer places or accepts business electronically.
Chapter 8
Find out what percentage of your business, either as a broker or insurer, is placed electronically and how much it has
increased over the last year.
Find out if you are using PPL – find out more here about PPL and the wider London market Target Operating Model
work https://tomsupports.london/placing-platform-limited
The line that the insurer has agreed to here is known as their ‘written line’. It might be that the risk is
The line that the
very popular and hence the total of all the written lines adds up to more than 100%. We will discuss insurer has agreed to
what happens in this situation shortly. here is known as their
‘written line’, whether
written in ink or
The broker might not have been asked to place the whole risk. They may only have a share of the risk electronically
to place. Maybe another share is in a different market or perhaps the client has asked another broker
in London to place part of the risk – perhaps to encourage competition between the brokers to get the
best deal.
The share is called the ‘order’ – so a broker will say they have, for example, a ‘50% order to place’.
When they are going around the market, the broker must make sure that they know the order they have
to place and that the underwriters they visit are clear about the proportions or shares of the risk that
they are accepting.
Why is this a potential problem? If the underwriters are not clear about the share of the risk being
placed, they might write a line twice as large or half as large as they wanted (using the example of a
50% order).
Example 8.1
A broker has a 50% order to place. They visit an underwriter and the underwriter writes a 10% line on the MRC/slip.
If it is not made clear, the underwriter could think it is written either one of the following:
Refer to section B2 • 10% of the original 100% risk which means that the broker only has to find another 40% to make up their 50%
for more on the MRC
share of the risk; or
• 10% of the order that the broker has to place (which is treated as a nominal 100%) thus meaning that the broker
has to place another 90% of the order.
It is therefore very important that everyone is clear on what basis the lines are being accepted. If the first option is
being used, then the lines are called ‘lines of whole’ and if the second is being used then ‘lines of order’ is used. This
information is inserted into the MRC as we will see in section B2.
A2A At what point are the insurers on risk?

The contract between the insured and the individual company or syndicate is concluded at the point at
which the underwriter puts their line down on the broker’s slip (Market Reform Contract). This can be
done either physically or by agreeing his written line via an electronic system, which will in fact not only
date but time stamp the response. However, the extent of their liability under the contract is not
necessarily clear at that point.
The point at which the underwriters are actually on risk depends on the inception date of the policy.
The point at which the
underwriters are However, their precise share of the risk may even at that point, not be entirely clear.
actually on risk
depends on the One practical problem relating to this point is the fact that the risk may be oversubscribed – i.e. as
inception date of the
policy mentioned above, the total of the written lines taken by the underwriters exceeds 100%. Obviously you
cannot have more than 100% shares of anything including an insurance risk, so something has to be
done to reduce the shares to a total of 100%.
A2B Signing down

The process in which shares of a risk are reduced to 100% is known as ‘signing down’, which means that
The process in which
shares of a risk are later in the process (when the risk is entered into the market central databases at Xchanging, for
reduced to 100% is example) each insurer’s written line is reduced proportionately so that the total lines add up to 100%.
known as ‘signing
down’ This reduced line size is known as the ‘signed line’.
Example 8.2
Chapter 8
Calculation of signed lines

For example, if all of the written lines add up to 150%, then the easiest way to reduce them to the right size to add up
to 100% is to divide each line by 150 and then multiply by 100.
For example, if an insurer’s written line is for 50% of the risk in this scenario, the signed line is calculated as follows:
50 divided by 150 = 0.33333.
Multiply that figure by 100 to give you 33.333% which is the insurer’s signed line.
As with all calculations, apply the common sense approach: 150 is 50% greater than 100 so you should reduce the
written line to two thirds (approximately 66.7%) of the original value.
Consider this…
What if an insurer does not want to have its line reduced? Maybe the insurer feels very strongly that it wants to keep
its written share of a particularly good risk.
In this case, the underwriter for the insurer can indicate when they put their stamp down that they wish their ‘line to
stand’. In practice, this means that if the total of the written lines add up to more than 100% then this underwriter can
keep their line as originally written and all remaining subscribing insurers have their line reduced on a more than
proportionate basis to accommodate.
Example 8.3
Calculation of signed lines where there are some ‘to stand’
Firstly, identify what percentage is to stand and take that away from 100. For example if 25% was to stand then you
have 75% left to fill.
Then do the calculation above for signed lines, substituting in that example 75% for the 100%, and using the balance
as the 150%.
So, using different figures to illustrate, if there were written lines of 110% of which 25% was to stand, you would
have to reduce 85% remaining written lines to fit into the space of 75%.
For each individual line, divide by 85 and multiply by 75 to get the signed lines.
Activity
Calculate the signed lines in both of these examples:
Risk 1 Risk 2
Syndicate 1 writes 25% Syndicate 1 writes 25% but wants its line to stand
Syndicate 2 writes 50% Syndicate 2 writes 50%
Syndicate 3 writes 50% Syndicate 3 writes 50%
Company A writes 10% Company A writes 10%
Write your answers here:
You will find the answers at the end of the chapter.
Given that there is a time lag between writing the risk and receiving notification of the signed lines
through Xchanging, the broker should give underwriters some indication of whether there will be any
signing down, at the time of placing.
The signing down process can be performed by the broker without any reference to the underwriters;
however, if a broker is finding it difficult to place a risk, they cannot increase underwriters’ lines without
their express permission.
Activity
Consider why underwriters might not be willing to have their lines increased without permission? What controls do
underwriters have concerning line sizes?
Chapter 8
Question 8.2
A broker has an order of 20% of the risk and the slip says that lines are of whole. The broker obtains total written
lines of 60% and no insurers have indicated that their lines are to stand. What is the signed line that the broker has to
obtain for an insurer that has a written line of 18%?
a. 12% F
b. 6% F
c. 18% F
d. 54% F
A3 Termination of an insurance contract

Insurance contracts can terminate naturally. Unfortunately, they can also terminate unexpectedly –
usually because one of the parties has behaved in a particular way. In this section we will consider
natural termination, followed by unexpected termination.
A3A Reasons for natural termination

Reasons for natural termination are:
• Cancellation by the insured. Whilst buyers of commercial insurance do not generally have the same
rights as consumers to cancel during the first 14 days or so (what is known as the cooling-off period)
most contracts allow some concept of cancellation. In these circumstances, the insurers usually
require some payment of premium to represent the time that they were on risk unless the cancellation
is effective from the start of the contract.
If the whole premium was paid up front, then the insurer will return all (or at least a substantial part)
of it on cancellation by the insured – subject to any specific wording in the policy on this issue.
• Cancellation by the insurer. Some insurance policies have clear provisions which state that the
policies will terminate should certain things happen. An example of this is in marine hull insurance
where a policy will terminate should the vessel be sold. The reason for this is that insurers consider
the ownership and management of a vessel as a key factor in its risk evaluation.
• Fulfilment. If a single vehicle is insured, it suffers a total loss and the policy pays out in full, then the
subject-matter of the insurance does not exist and the policy is effectively terminated.
• Expiry of the policy period. Most, although not all, commercial insurance policies are for a period of
twelve months (some can be shorter and some longer). The contract is for the period of the policy and
will terminate at the end of that period. However, it is important to remember that insurers’ obligations
to deal with valid claims being advised after the expiry of the policy remain until the obligations under
the policy have been satisfied.
Reinforce
Do you remember the concept of long-tail and short-tail as discussed in chapters 2 and 7? Long-tail risks will take
longer for the claims to be advised and finalised than short-tail risks.
A3B Reasons for unexpected termination

Under the Insurance Act 2015, reasons for unexpected termination (caused by the behaviour of the
parties) are:
• Breach of the duty of fair presentation. There is no longer just one remedy provided for the offended
party. If the breach falls into the category of deliberate or reckless, the insurer may avoid the contract
and retain the premium. If the breach was neither deliberate or reckless, the insurer may only avoid
the contract if they can show that they would not have written the contract had the full information
been given. However, they must return the premium.
• Breach of warranty. Rather than the insurer being automatically discharged from liability under the
The contract is now
suspended just for the contract, the contract is now suspended just for the period of the breach. If the insurer wants to rely on
period of the breach the breach to refuse a claim, they will not be able to do so if the insured can show that the breach did
not increase the risk of the loss that actually occurred in the circumstances in which it occurred.
• Fraud. It is very difficult for an insurer to prove fraud and, within the claims context, is made more
Chapter 8
complicated by an insured using what are known as ‘fraudulent devices’. This means that a legitimate
claim might be exaggerated by fraudulent means. If an insurer can prove fraud in relation to a breach
of the duty of fair presentation, it can not only be discharged from liability but it may also keep the
premium.
A4 Renewals
Refer to chapter 7 It is important to remember that although an individual policy period may be twelve months, it is quite
likely that the risk will be renewed a number of times after that. In this section, we will review the
aspects of the steps discussed above that apply to the renewal process and what additional matters,
if any, are relevant.
Although a risk may be being renewed, the broker does not necessarily have to approach only the
The broker does not
necessarily have to current insurers for renewal terms. Whilst speaking to them and requesting a renewal quote is a matter
approach only the of market courtesy, the broker must try to obtain the best options for their client. For example, it is
current insurers for
renewal terms possible that the market has changed over the last twelve months, with some new insurers becoming
involved in this class of business (remember the ice cream sellers in chapter 7, section C?).
Therefore the broker essentially starts the quotation process again for the renewal; where they and
their client have all the same duties of disclosure that they had under the original placement process.
A renewal quote has the same legal significance as any other type of quotation.
The existing insurers may not want to quote for the renewal for either or both of the following reasons:
• The contract has been loss-making.
• They are exiting that class of business.
However, they might wish to keep as much business as possible for two practical reasons:
• It costs less to renew business than to write it from scratch. This is because the risk is already known
It costs less to renew
to the insurer. Therefore, its analysis of the risk is likely to be less time-consuming (and hence less business than to write
costly) than if it had never seen the risk before. it from scratch
• The more stable the portfolio of clients, the more reliable the statistical data. Refer back to chapter 7,
section F5 where we discussed how insurers tried to predict the way in which claims might develop
over time, using historic data.
Question 8.3
Which of these is not a valid reason for an insurer to refuse to renew an insurance contract?
a. It is no longer authorised to write that class of business. F
b. It does not have sufficient capacity. F
c. The broker has approached other insurers looking for competing quotes which has offended the insurer. F
d. The risk was loss-making this year. F
In the London Market, the renewal process is effectively the creation of a new contract of insurance with
all the associated paperwork that we will discuss later.
Change to FCA rules on renewal transparency for retail general insurances

From April 2017, new regulatory rules were introduced by the FCA 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 have been 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.
A4A ‘Days of grace’
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‘Days of grace’ can best be described as a perceived ‘elastic’ end to the previous policy which allows the
‘Days of grace’ can be
insured some scope should they be late in renewing their insurance. Unless the policies specifically described as a
make provision, then they do not exist. They are in fact an ‘urban myth’ which can cause problems if a perceived ‘elastic’
end to the previous
client is led to believe that they have them and they think they can delay renewing a policy. policy
Activity
Consider why there might be a delay in renewing a policy.
If you work for a broker, ask your colleagues what steps are taken to ensure there are no gaps in cover for your
clients.
If you work for an insurer, see what you can find out about whether any risks you renew are in fact renewed late.
A5 Writing a risk after the risk has incepted

Whether renewing a policy or otherwise, it is possible for an underwriter to be shown a risk where in fact
It is possible for an
underwriter to be the risk has already incepted. This might be because the placement process has been very drawn-out, or
shown a risk where in it could be that the renewal process has not been quite as efficient as it might have been – perhaps
fact the risk has
already incepted because the client has been slow in giving instructions.
Whatever the reason, the underwriter must be very careful in these cases, as of course they do not
want to pick up losses which might have already occurred by the time they confirm their participation
in the risk.
Underwriters on risk post-inception

If you are presented with a risk on 20 March which incepted on 1 February and you write your line on 20 March, you
are liable for any valid claims coming out of losses on or after 1 February.
So how do underwriters make sure that they do not have to pay for any losses before they actually write
their line? Whilst the broker and the client still have their duty of disclosure which would include any
losses that had already occurred, the underwriters use a specific warranty which is ‘Warranted no known
or reported losses’ (generally written as WNKORL). Underwriters note this on the Market Reform Contract
(see section B2) so that all parties are clear about their position.
We will discuss warranties further in section C3.
B Documents used in the London Market

In section A, we reviewed some of the processes used in the London Market, as a follow-on from
chapter 7. In this section we are going to look in more detail at the documents used in the London
Market.
B1 Proposal forms
Proposal forms are not widely used in the London Market but have a place in certain classes of business
Proposal forms are
not widely used in the such as yacht and professional indemnity insurance. Particularly in the case of yacht insurance, the use
London Market of a proposal form plays a part in this class of business being treated essentially as personal lines in
nature. As a result, the regulator places a greater burden on a yacht insurer to ask all the questions that
it wants answered (rather than expecting the insured to know what the insurer considers to be important
information about the risk).
The proposal form is completed by the insured or jointly by the insured and the broker and is used, in
conjunction with the MRC/slip in many cases, to present the risk to the insurer both for a quotation and
a formal agreement to accept the risk.
As the proposal form is created by the insurer or sometimes the broker then it allows them to include
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questions about those matters which they consider to be material and it serves to reduce (although it
does not completely eradicate) the risk of matters not being disclosed during the placing process.
Refer to LM1, Proposal forms include general questions such as:
chapter 2 for a
reminder of the
duties relating to the
• name, address, nature of business;
sharing of • information about past insurance history, including previous losses and claims;
information during
the placing process • turnover and other information relating to the size of the exposure (for example, the number of fee-
earners for a professional liability risk);
• geographical spread of the risk; and
• the amount of insurance being requested.
At the end of the proposal form there is a declaration that the proposer (prospective insured) must sign
which declares that to the best of their knowledge and belief the answers given on the proposal form are
true.
Activity
Find out if your organisation handles business that uses proposal forms. If so, look at some forms and see the
information that is requested.
What about the situation where the insured has not completed the form properly, or failed to answer
certain questions? If insurers accept the form without following up on any missing information, it will be
very difficult for them to argue non-disclosure on the basis of that information at a later date in the
process.
Activity
If you located proposal forms within your organisation, see if any of them have not been completely filled in. Has the
missing information been requested from the proposer?
Speak to your underwriting colleagues to find out what they do in practice when information is missing.
B2 Market Reform Contract (MRC)

Although proposal forms are used in certain areas of the London Market, the most often used document
The most often used
is one which we’ve mentioned a number of times in this study text: the ‘slip’. This term has been document is the slip
replaced by Market Reform Contract or MRC, but they are in fact the same thing and perform the same
task. For the rest of this chapter, we will refer to the document as the MRC.
The MRC has several distinct roles:
• It is a document which the broker puts together that summarises their client’s risk into a standardised
format for presentation to the underwriters.
• It is also the document on which the underwriters formally indicate their written lines.
• It can be the document which is sent to the client as their copy of the insurance contract.
Historically in the market, there was no standardisation in the structure of brokers’ slips so as long ago
as the late 1990s significant work was undertaken to try to standardise the document. The culmination
of that work is the MRC which is a structured document that captures all the basic information about the
risk. It is important to understand that it is not the only information presented to underwriters, as the
broker can support their presentation with additional information such as surveys and other data, as
necessary and relevant to the risk.
There are some clear benefits to this work, i.e. it is easier:
• for insurers to find information in a standardised document;
• to perform other processes, such as the creation of contract documentation;
• to comply with contract certainty requirements – more about this later in this chapter;
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• to work towards electronic submission of information if it is already in a standard form.
A standard MRC has been produced for each of: open market business, line slips and binders. The
A standard MRC has
reason for three slightly different documents is quite simply that the information required by been produced for
underwriters is subtly different and hence different fields are required in the template. Further each of: open market
business, line slips
information about these three ways of writing business can be found later in this chapter. Meanwhile, a and binders
quick definition of each is provided below:
• Open Market MRC. Where the broker places each risk individually one by one, and visits each
underwriter separately.
• Line slip MRC. A preset group of underwriters arranged by the broker, with an in-built agreement that
as long as the nominated one or two of them agree to the attachment of a particular individual risk to
that contract, the remainder will be bound to the risk as well.
• Binder MRC. Where underwriters have given delegated underwriting authority to an external third party
that operates within strict parameters. The third party operates within a preset limit of authority and
reports back the risks that they have written each month.
As the MRC is central to everything we do within the London Market, we are going to review the contents
of this document in some detail. We will use the Open Market MRC as our template for study.
This document must be used for all placements of open market business for insurance and reinsurance
undertaken by London Market brokers.
The document is split into six sections:

• Risk details.
• Information.
• Security details.
• Subscription agreement.
• Fiscal and regulatory.
• Broker remuneration and deductions.
We will now review the contents of each section in a typical open market MRC for direct (i.e. non-
reinsurance business).
Risk details
Name of the field Contents
The UMR is a unique reference generated by the broker for each risk.
The UMR is a unique
reference generated B/Broker code/Broker policy number
by the broker for
each risk B/1054/ABC123456
Type What type of insurance is it? For example all risks of physical loss or damage or hull
and machinery.
Insured Name of the insured.
Insured address Head office, rather than necessarily the location of the risk although in some cases it
might be the same place.
Policy period Dates, times and time zones, which can be stated as the time at the insured’s head
office.
Interest What is being insured? For example, a building or a liability.
Limits of liability Policy limits, plus any sub-limits for different sections of the policy.
Insured’s retention Any amount the insured is keeping, including deductibles/excesses.
Situation Are there any territorial limitations? The policy could be worldwide in scope or it could
be restricted to just certain areas such as Europe.
Conditions The terms and conditions on which the insurance is being written. These terms must be
clearly identified so that the underwriter can see what they are agreeing to. Standard
market clauses are usually identified using their market codes such as LSW 1234.
If a non-standard wording is being proposed then it should be attached for the
underwriter to review.
Loss Payee Another party to whom insurance proceeds might be paid – such as a bank which has
lent funds under a mortgage.
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Subjectivities Provisions required by insurers before they come on risk, for example, a survey. This
section must clearly state who has to obtain the survey, by when, and the penalty for
non-performance.
Law and jurisdiction Law is the rules and jurisdiction means where the court will be located for any dispute
between the insured and their insurers. This section could also include other forms of
agreed dispute resolution, such as arbitration.
Premium The consideration for the contract of insurance. The premium may be different for each
underwriter, but this information should appear on individual pages on the placing
documents (and separate MRC can be used).
Premium payment terms Often the underwriters give the client a number of days to pay the premium and may
also allow the premium to be paid in instalments.
Tax payable by insured and An example of this in the UK is insurance premium tax (IPT), which has to be added to
administered by insurers premium for certain insurances such as travel insurance. The client pays it to the
insurer, which then has to pay it on to Her Majesty’s Revenue and Customs (HMRC).
There are many taxes of a similar nature in other countries around the world where risks
coming into the London Market originate and these have to be identified here as well.
Recording, transmitting and This field is not mandatory and is used mainly where there are data protection issues.
storing information
Risk details
Insurer contract The insurer has to decide whether a formal policy will be issued and whether a copy of
documentation the MRC will be sent to the client. A broker can also issue a Broker Insurance Document
(BID) to the client.
The BID does not have any specific template but needs to capture the salient
information about the risk for sending to the client.
Activity
If you work for a broker find a copy of a BID that is used in your organisation and review the information that is sent
out. Ask a colleague if they remember documents called ‘cover notes’ and whether they are ever still used in your
organisation.
Information
This section can include further information provided to insurers at the time of placing or make reference to external
information, such as surveys or reports.
Security details
Insurers’ liability If more than one insurer is participating on the risk, it is necessary to insert a several
liability wording which sets out that each insurer will only be liable to the extent of their
proportion of the risk.
Order This is the share of the risk that the broker is placing on this MRC. It could be that the
broker only has to place 50% of the risk (known as having a 50% order) and so it is
important to have this order (or broker share) shown so that the actual size of the
underwriters’ written and signed lines can be calculated.
Basis of written lines Percentage of whole: this means is that if the underwriter has taken a 10% line and the
100% claim is for £100 then they have a claim of £10.
Percentage of order: if the broker has only 50% of the risk to place then the
underwriter’s line of 10% will be half the size of the one above (in the case of the
‘percentage of whole’). For example, an underwriter has taken a 10% line on a policy
with a 50% order where it is clear that the lines are percentage of order. If the 100%
claim is £100, then the share to this policy is £50. The underwriter’s 10% share of that
£50 is £5.
Chapter 8
Part of whole: this is used where the underwriters show their shares not in percentages
but in financial terms. Therefore, if the sum insured is shown as £100 million and an
underwriter takes a line of £10 million, it will be expressed as such but it is the same as
taking a 10% line.
Basis of signed lines Used if the basis is different to written lines (not expected for open market business).
Signing provision Details how any signing down will be done, and how lines to stand will be applied.
Written lines The space on the MRC where the underwriters put their stamps and write their lines and
references. Underwriters can only put two notations next to their stamps: one being ‘line
to stand’ and the other relating to reinsurance business (which we are not considering
here).
Subscription agreement Refer to chapter 10

for more on
standard market
Slip leader Can be anywhere in the London Market. It also possible to identify an overall leader in claims agreement
the slip who in fact might be outside the London Market. practices
Bureau leader The bureau is the old name for the central processing functions provided by Xchanging.
If the slip leader is not part of Lloyd’s or the International Underwriting Association of
London (IUA) then it is necessary to identify the leaders of those sections of the market.
Subscription agreement
Basis of agreement to This sets out the combination of insurers that can agree changes to the insurance (not
contract changes claims) after inception.
The General Underwriters’ Agreement (GUA) has been created together with specific
schedules for most classes of business which will be reviewed later in this section. The
aviation market uses a similar agreement called AVS 100B.
The idea is to streamline the process of agreement to changes and the different
schedules for each class of business allow some degree of flexibility for market
variations in practice.
It is possible for an underwriter to indicate that they want to agree any changes for their
proportion only if required.
This has two other sections which are:
• Other agreement parties for contract changes relating to Part 2 of the GUA.
• Agreement parties for contract changes for their proportion only – for those insurers
who want to agree absolutely everything.
Basis of claims agreement/ There are standard market claims agreement practices which will be reviewed in chapter
claims agreement parties 10. These provide for a set combination of insurers to be the decision-makers for
claims, irrespective of the number of individual insurers involved in the risk.
Those decision-makers must be identified in this section of the MRC. As with agreement
to contract changes there are set combinations of insurers that will be involved in the
claims handling. Unlike contract changes the market claims practices do not allow for
variation in the claims agreement parties outside the combinations allowed for in the
rules.
Claims administration This section can deal with any claims related information not captured above, for
example if all claims are to be advised in a particular way.
Delegated claims It is very important that the broker knows which underwriters to visit for claims
It is important the
broker knows which
agreement handling. Therefore, if any of the agreement parties have delegated to another party,
underwriters to visit such as Xchanging or another provider, this must be set out here.
for claims handling
Experts’ fee collection There are a number of choices in respect of the collection of experts’ fees. For example,
the broker may do it all, or another provider will collect for some or all of the market.
Settlement due date The date by which the premium should be paid.
Bureaux arrangements If the policy is going to be signed on a de-linked basis, this should be captured here.
De-linking is where the risk is sent into Xchanging to be entered into the market
database as early as possible – and the premium paid some time later, depending on
what underwriters have allowed as the credit period. Early data entry has many benefits
including getting data to the underwriters and giving the risk central references known
as signing numbers and dates.
Fiscal and regulatory

Chapter 8
The word ‘fiscal’ means something relating to public money, for example taxes in this case. Regulatory does not just
The word ‘fiscal’
means something
mean relating to the UK regulator but to any regulatory authority. As we saw in chapter 2, the business being written in
relating to public the London Market comes from many different countries and hence many different regulators might have an interest in
money the operation of London Market insurers.
Tax payable by insurers In many countries, an insurer writing a risk located in or linked with that country has to
pay tax on the premium it earns. It is different in each country and insurers need to pay
careful attention to the requirements in each country.
Some countries have more than one charge that may be levied on insurers, depending
on the class of business, for example premium tax, income tax and fire brigade charges.
Lloyd’s syndicates have some help in finding out this information. They can access
www.lloyds.com and use a system called ‘Crystal’ which contains the relevant
information.
Country of origin Where the insured is resident (if it is an individual or if a company), they have their main
operating address – likely to be a head office for a risk that is multinational.
Overseas broker With many risks coming into London from overseas there is often another broker in the
chain between the London placing broker and the ultimate insured. If so, they should be
identified here. If there is no other broker in the chain, it should be made clear that it is a
direct placement into London.
Fiscal and regulatory

Surplus lines broker Lloyd’s has a very particular relationship with the USA. In fact, it has a number of
relationships as each state deals with insurance regulation separately. For direct
business in most of the US states, Lloyd’s can write such business only on a surplus
lines basis and the surplus lines broker must be identified here.
State of filing If the business is coming from the USA, it is important to identify exactly which state
the broker will be filing information and paying appropriate taxes. It may be a number of
states and in this case a spreadsheet or similar can be used to show the relevant
information and attached to the main document.
US classification If the premium is being paid to Lloyd’s insurers in US dollars, or the country of origin is
the USA even if the premium is being paid in another currency the US regulators want to
know about the risk. There are a number of categories that can be used, for example
identifying whether it is surplus lines or reinsurance.
Allocation of premium to All risks written in Lloyd’s must have a code applied to them which identifies which of a
coding large number of preset types of business it is. This code is called a risk code and
Lloyd’s creates these codes in accordance with its internal requirements for reporting.
For example, it could be that a MRC is going to be for a cargo risk and the entire
premium is applicable to that; here, the code would be V which is the code for cargo
and 100%.
If some war or terrorism risks are being written as well, they have a different code and
the leading underwriter must estimate the split in the premium being charged between
the two categories.
Allocation of premium to This is used only if the policy period exceeds 18 months (for example some
years of account construction contracts, both for buildings and ships/oil rigs).
Regulatory client There are a number of categories into which the risk being presented must be allocated.
classification Most risks in the London Market are either commercial or large risks. Large risks
include marine and aviation risks, for example.
Broker remuneration and deductions

When a broker is used to place the risk in the London Market, the underwriters often agree an amount called
Brokerage is deducted
brokerage which is deducted from the premium paid by the insured and retained by the broker which then sends the from the premium
balance to the underwriters. paid by the insured
and retained by the
Fee payable by the client As well as getting brokerage from the insurers, the broker might be obtaining a fee for broker
their work from their client. There is a need to indicate ‘yes’ or ‘no’ to this question
here – not the actual amount.
Brokerage amounts This information can be shown either as a total figure for both retail and wholesale
brokerage or split out between the two.
Any other deductions from Any administration fees or similar which are deducted from the premium go here – if
premium there aren’t any, put ‘None’.
Reinforce Chapter 8
The retail broker is the one with direct contact with the client; the wholesale broker is the one with contact with the
insurers. They might be different organisations or different offices of the same organisation.
These are the fields for the main Open Market MRC but, as we said earlier in the section, there are other
fields required if the risk being placed is involving a line slip or binder.
Activity
Review these fields in conjunction with some live MRCs from your company and see how, in practical terms, the
information is inserted into each of the fields.
Review this website and see what guidance is available for brokers and insurers in terms of the completion of these
documents:
www.londonmarketgroup.co.uk
B3 Endorsement
Changes to the insurance contract are a fact of life and it is important that there is a process for agreeing
the changes, as well as for advising all insurers and the client. The ‘endorsement’ is the document on
which the broker presents the changes to the underwriters and it can also be used to send to the client
as evidence of those changes.
As we saw above, there are provisions in the MRC to indicate the combination of insurers that have to
agree to certain types of changes and we are going to review those provisions first and then move onto
studying the documents used to advise them.
B3A General Underwriters’ Agreement

The General Underwriters’ Agreement (GUA) has a very distinct purpose which is to:
• create an agreement between all the underwriters on a particular MRC as to who will deal with any
contract changes;
• clarify the extent of the authority given to the leaders and any other identified underwriters to agree
the changes;
• enable flexibility for each class of business to refine the rules to suit their own requirements; and
• ensure that all underwriters are advised of the changes even if they are not involved in the agreement
process themselves.
Particularly in relation to the third bullet point above, the GUA has a number of ‘class of business-
specific’ schedules such as non-marine, marine cargo and political risks.
These schedules are divided into three parts, each indicating what type of changes can be agreed by a
certain combination of the insurers on the risk, as follows:
• Part 1 – slip leader only (note this is not bureau leaders).
• Part 2 – slip leader plus agreement parties.
• Part 3 – all underwriters.
A slip leader can be in any part of the London Market, so, for example, a Part 1 change could be agreed
A slip leader can be in
any part of the by an insurance company as slip leader and this would bind the whole Lloyd’s Market on that slip and
London Market vice versa.
Agreement parties are those insurers set out in the MRC as being responsible for agreeing changes to
the contract on behalf of all of the other insurers. Note that the GUA refers to the MRC by the traditional
term of slip but it means the same thing.
Using the GUA non-marine schedule as an example, let’s look at some of the changes that fall into each
of these three categories – the complete list can be found in the individual schedules.
Part 1 • Anything that the slip says can be changed by leader only.
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• Anything that is obviously a typographical error.

• Any change which reduces the monetary exposure.
• Restrictions in coverage.
• Return premiums if provided for in the slip.
• Agreement of wording if leader only agreement is provided for in the MRC.
Part 2 • Anything provided for in MRC to be agreed by leader and agreement parties.
• Anything that does not fall into Part 1 or Part 3.
Part 3 • Anything that MRC says has to be agreed by all underwriters.
• Anything that slip leader or agreement parties feel should be agreed by all underwriters.
• Changes to geographical scope.
• Policy extensions in excess of 30 days or one calendar month whichever is longer.
• Changes to jurisdiction of the contract.
• Backdating of the policy period.
As we saw in the MRC above, there is a place for the agreement parties to be clearly identified at the
placement of the risk.
When the endorsement is presented to the slip leader, they should attach what is known as the GUA
stamp to the endorsement and indicate which combination of underwriters is required to agree, by
signing in the appropriate box.
Figure 8.1: Marine GUA stamp
Figure 8.2: Non-marine GUA stamp
The marine stamp is different because the marine market has had historic notification or listing practices
which are being maintained, even though the GUA provides for advising all underwriters if the agreement
parties request. Historically, if a change was agreed to a contract then a copy of the change was dropped
off at each underwriter’s box (or office, for companies) so that they could update their records.
Activity
Review some MRCs used in your organisation or that you can access and see what changes have been applied and
which GUA schedule is applicable.
Access a GUA and the schedule either in your office or via this website link and review the terms:
Chapter 8
www.londonmarketgroup.co.uk/index.php/current-resources/placing-documentation/gua
B3B Market Reform Contract Endorsement (MRCE)

As in the case with the MRC, the Market Reform Contract Endorsement (MRCE) document is constructed
The Market Reform
in a set format into which the relevant information for the change that is being requested is populated. Contract Endorsement
The sections of the MRCE are: (MRCE) document is
constructed in a set
format
• Risk and endorsement identification.
• Contract changes.
• Information (if required).
• Agreement.
• Contract administration and advisory (if required).
Table 8.1 summarises the contents of each of those sections.
Table 8.1: Sections of the MRCE

Risk and endorsement Clear reference to the UMR of the contract being changed and ideally sequential
identification numbering of the endorsements. This means that it can be easily seen whether, on
review of the contract at a later date, one is missing.
Contract changes This is not a complete restatement of the whole MRC, but using the headings of that
contract (i.e. the insured’s name or address) it indicates which elements are being
changed and from what point the changes will take effect.
Information As with the MRC, supporting information can be provided for the changes, or may not
be required.
Agreement This section captures details of the parties who have to agree to the change and also
evidences their agreement. As we saw in the previous section, there are various market
rules as to which parties have to agree to changes.
Contract administration or Any changes to the sections of the MRC such as ‘subscription agreement’, ‘fiscal and
advisory regulatory’ and ‘broker remuneration’ are shown here.
If the change requires premium to be either paid or refunded, then a settlement due date should also be
shown.
As with the MRC, the change can be evidenced to the insured by sending them one of the following:
• a copy of the MRCE;
• a copy of the MRCE with the contract administration and advisory section removed;
• a formal policy endorsement; or
• a broker insurance document (BID).
Electronic presentations
There are processes in place within the London Market for a MRCE to be presented and agreed by
underwriters electronically either by use of email and scanned documents or electronic messaging. There
are a number of potential benefits to brokers, clients and insurers from the use of this technology, such
as not having to operate within the city, speed of turnaround and a reduction in the volume of paper
being moved around.
Activity
Review the London Market Group website www.londonmarketgroup.co.uk and look at the information available on
MRCE and E-MRCE as well as the Exchange.
Speak to colleagues – how many endorsements is your organisation handling electronically?
Write some notes here regarding the benefits of E-MRCE or the Exchange to your organisation:
Chapter 8
Question 8.4
For what does the General Underwriters’ Agreement (GUA) set out provisions?
a. Agreeing changes to the contract. F
b. Renewing the contract. F
c. Claims handling. F
d. Accepting premium under the contract. F
C Key terms and conditions used in policy wordings

In this section, we are going to look briefly at the way in which insurance policies in the general
insurance market are constructed and then focus in more detail on some of the key elements of the
wording of these policies.
We have already seen that in the London Market, the risk is usually presented to the underwriter on a
MRC, which can be sent to the insured as evidence of the insurance, perhaps accompanied by full
wordings of some of the terms and conditions referred to within the MRC. We also saw that a proposal
form can be used in some cases.
The practice differs for other areas of insurance usually written outside the subscription market
particularly where only one insurer is covering the whole risk. The client is often sent a policy
document – perhaps a booklet with the standard wording, together with a schedule which is a page
setting out the key aspects of their risk, i.e. the name, address, policy period and any key exclusions.
The structure of a general insurance policy document is shown in table 8.2 for completeness.
Table 8.2: The structure of a general insurance policy document

Heading Name of insurer (which outside the London Market may be just one company).
Recital Sets the scene by saying that the insurer and insured (without identifying them) are entering
into a contract and in return for the premium, the insurer will pay claims.
Signature The signature of the insurer (usually pre-printed).
Operative clauses The key element – setting out what is covered under the policy.
Exceptions Most if not all insurance policies have some exceptions or exclusions within them and many
classes of business have general exclusions that apply to all policies (such as for war or
radioactive risks).
Conditions These can be ‘express’ or ‘implied’ – we will discuss these in more detail later in this section.
Schedule The element of the policy that makes it personal and specific to the person or company
buying it.
Activity
If you or a family member/friend have house, contents or car insurance, review the policy and associated paperwork
in detail and identify the various sections that relate to the listing above. Compare those documents to the ones that
you see during the day such as the MRC and occasionally policies.
Note your observations here:
Chapter 8
C1 Conditions
The term ‘condition’ covers a number of different elements of the wording in an insurance policy. The
standard conditions or terms provide for the insured complying with the terms of the policy and telling
underwriters promptly about any changes to the risk. There are also conditions advising the insured
about the concept of subrogation, contribution and what to do in the event of a claim. Although the
concept of an implied condition exists, it makes more sense to set out conditions specifically and
expressly within the wording, so that there can be no mistake as to the insurer’s expectations.
There are two particular types of condition that we need to consider in more detail here:
• condition precedent to contract; and
• condition precedent to liability.
The word ‘precedent’ in this context means that the condition must be satisfied for either the contract to
exist or for the insurer to have any liability under the contract. Therefore, it can be seen that a breach of
these conditions by the insured could have a catastrophic effect on the insurance or any claim that they
might have.
A condition precedent to contract would include the requirement to have an insurable interest. For non-
A condition precedent
to contract would marine insurance, insurable interest is required at the point of purchasing the insurance as well as the
include the point of the claim. If no insurable interest exists at the point of purchase, the insurance contract is not
requirement to have
an insurable interest valid.
In many commercial insurance contracts, there are very specific claims notification clauses and many of
these are stated to be conditions precedent to liability. The wording will be along the lines of ‘It is a
condition precedent to liability that all claims are notified within x days’. Should this provision not be
complied with, the insurer could refuse the claim (although the policy itself remains in force).
From a legal standpoint, the condition does not have to be stated to be a condition precedent to liability
for the court to interpret it as one. It is also true that calling it one does not necessarily make it so. This
means that the courts interpret terms in a policy according to legal measures of their intention and
effect, not just what they are called – in the same way that calling your pet dog ‘Cat’ does not make it a
cat! Insurers need to be watchful of this point so as not to find out after the event that a condition within
their policy wording is not as strong in law as they had believed that it was.
Question 8.5
If a condition precedent to liability is breached, what is the most likely result?
a. Underwriters cancel the policy. F
b. Underwriters can refuse to pay a particular claim. F
c. The insured has to pay more premium. F
d. The insured has to refund any claims already paid. F
C2 Exclusions
An exclusion is a risk that the insurer will not cover under a particular policy. There are some risks that
An exclusion is a risk
that the insurer will are market exclusions such as radioactive contamination; however, some others are exclusions that are
not cover under a present on individual policies, but the coverage may be purchased separately from specialist
particular policy
underwriters. A good example of this is war risks, particularly marine and aviation war risks. Most
general underwriters exclude war from standard hull/cargo/aviation policies; however, there is a specific
market for this business that provides cover.
Note that cover for war on land is a far more restricted type of insurance and is not so freely available.
Cover for war on land
is a far more Historically there were restrictions on the amount of war on land business that a syndicate could write as
restricted type of a proportion of its overall capacity. Those restrictions were removed in April 2011. They were replaced
insurance and is not
so freely available with a far stricter requirement to formally request permission to write any type of war business as part of
the business planning process and for regular exposure reports for both static and mobile risks (realistic
disaster scenarios) to be submitted to Lloyd’s.
Refer to chapter 2, Government schemes also exist in a number of countries to cover terrorist attacks on property and to
section A3E and
provide a type of reinsurance to ensure that the commercial market still provides this cover for its
Chapter 8
chapter 3, section D
clients. Refer back to chapter 2, section A3E and chapter 3, section D for more information about these
schemes and how they operate.
Activity
Review some policy wordings and MRC that you see either as a broker or an insurer. What types of exclusions come
up most frequently?
C3 Warranties
Warranties are promises made by the insured relating either to facts or to performance concerning the
risk. Essentially a warranty is the insured saying that:
• something will or will not be done; or
• a certain fact exists or does not exist.
Warranties are used by insurers for those elements which they consider most important about a risk
Warranties are used
and they carry the heaviest penalties if breached. Examples of warranties include: for those elements
they consider most
• For a property risk – a warranty that there is a fully operational sprinkler system. important about a risk
• For an aviation risk – a warranty that only personnel with a certain number of flying hours will operate
the equipment.
• For a marine risk – a warranty that the vessel will not trade in certain areas of the world.
Most warranties have to be written clearly in the policy (i.e. they are express warranties) but in marine
insurance implied warranties apply if the policy is subject to English law. Implied warranties do not have
to be written into the policy; therefore, it is important that the insured is advised about them given the
penalties for breach.
Consumer contracts and breach of warranty

The FSA historically stated that insurers cannot refuse to pay a claim (marine or non-marine) on the grounds of
breach of warranty unless the breach is connected to the claim. The only exception to this is where fraud is involved.
The new regulators have not changed that position.
The law on warranties in relation to consumer insurance was partially amended by virtue of the
Consumer Insurance (Disclosure and Representations) Act 2012 which came into force in April 2013.
This Act removed the ability of insurers to rely on the basis of contract clauses to create a warranty from
a representation made by a consumer.
Suspensive conditions
Under the Insurance Act 2015, if there is a breach of warranty the policy is suspended until the breach is
remedied and the suspension lifts automatically. The insurer has no liability under the contract for any
loss which occurs or is attributable to something which takes place during that time of suspension.
Link between breach and loss
Historically there did not need to be a link between a breach of warranty and a loss for an insurer to be
discharged from liability under a policy.
The Insurance Act highlights three types of provisions typically included in historic warranties which, if
complied with, would reduce the risk of:
• particular types of losses;
• losses in particular locations; and
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• losses at particular times.
Consider this…
If an insurer is considering the particular perils and hazards of any risk, they might want to put controls around
matters such as the use of security devices, the safe use of machinery or how many people are on site at any point
in time. These are exactly the types of conditions affected by the Act.
Under the Act, the insurer is not able to rely on a breach of one of these conditions when a loss occurs if
the insured can show that there was no increase in the risk of the loss which actually occurred as a
result of the circumstances in which it took place.
The Act does suggest that this provision does not apply if the term in question defines the risk as a
whole. However, the guidance is not entirely clear as to what such clauses might look like! Perhaps
these types of clauses are more suitable for an insurer who is concerned about certain types of
behaviour, as they can make their requirements and the penalties for non compliance clear.
Basis of contract clauses
As under the Consumer Insurance (Disclosure and Representations) Act 2012, the Insurance Act 2015
removes the insurer’s ability to use basis of contract clauses to convert representations made at the time
of placement into warranties.
Additionally, whereas all of the other provisions of the Act can be contracted out of so that the parties
involved agree that they will not apply, it is not possible to contract out of this provision.
C4 How the London Market uses other markets’ policy forms

In many cases, insurers operating in the London Market choose to use another market’s policy wordings,
as that other market has in fact led the risk, or is writing the primary layer when London is providing the
excess layer coverage. There are a number of wordings by which the London Market insurers try to
ensure that key elements are covered, and for primary and excess placement, try to make sure that they
are on the same terms.
One example of this would be LPO 348, used in the non-marine market, which reads in part as follows:
Application of underlying provisions.

In respect of the Perils hereby insured against this Insurance is subject to the same warranties, terms and
conditions (except as regards the premium, the Limits of Liability other than the deductible or self-insurance
provision where applicable, and the renewal agreement, if any, AND EXCEPT AS OTHERWISE PROVIDED
HEREIN) as are contained in or as may be added to the insurance(s) of the Primary Insurers prior to the
happening of a loss for which claim is made hereunder and should any alteration be made in the premium for
the Insurance(s) of the Primary Insurers, then the premium hereon may be adjusted accordingly.
Another example used in the marine market is the Institute Marine Policy General Provisions (cargo) 1/
10/82, which, when added to an overseas market wording being used, ensures that some of the key
provisions that insurers would expect to find when using London Market wording are included if
required, such as:
• English law and practice.
• Insurable interest clause.
• Sue and labour clause.
• War and nuclear exclusions.
D Methods of conducting business in the London Market

In this section, we are going to introduce some variations on the business models, aside from insurance
companies and Lloyd’s syndicates, operating in the London Market. Some of these models will be
discussed in more detail in chapter 9.
D1 Service companies
Traditionally, syndicates operating within the Lloyd’s Market have been reliant on the Lloyd’s broker
Traditionally,
syndicates operating network to obtain business. As a result they may have missed out on some good business opportunities
within the Lloyd’s which have not come into the Lloyd’s Market. Reasons for this might be:
Market have been
reliant on the Lloyd’s
broker network to • The business is being handled by regional or overseas brokers who are not prepared to use Lloyd’s
obtain business brokers to access one particular market and do not need the Lloyd’s Market.
• The client is located outside the UK, traditionally focused and loyal to local insurance providers.
Chapter 8
Refer to chapter 9 We will be discussing the various types of delegated underwriting in chapter 9, section A. Meanwhile, we
for more on
delegated will be looking at one type of delegated underwriting here: service companies. Service companies
underwriting operate in the Lloyd’s Market whereby managing agents set up insurance organisations in various
locations (they might be within the UK, or overseas). These organisations are empowered to underwrite
business on behalf of the syndicate and have the syndicate/managing agent brand behind them.
Since they are backed by the syndicates, the rules and requirements of operating in the Lloyd’s Market
still apply – such as ensuring correct data capture for regulatory reporting.
Activity
If you work for a Lloyd’s managing agent, find out if you have service companies within your group and where they
are located. Do they write a particular type of business?
If you work for a broker, find out whether you place any risks with service companies.
D2 Branch offices
One of the advantages of the Lloyd’s Market is that Lloyd’s obtains regulatory permission centrally in
various countries for syndicates to write risks coming from those countries, without (in most cases) any
physical presence. Where physical presence is required, then Lloyd’s effects that centrally.
However, insurance companies have to obtain their permission individually and in most cases that
permission is only granted if the insurer sets up a branch office in that country to write the risks ‘on the
spot’. This of course represents a far higher capital outlay for an insurance company than would be the
case for a syndicate with Lloyd’s centrally-obtained permission.
D3 Services and establishment business

Particularly within the EU, the regulators in each country recognise the regulatory authority of the other
Particularly within the
countries. This means that, for example, the German regulator recognises the UK regulator and does not EU, the regulators in
seek to re-regulate an insurer that is already subject to UK regulation. This allows insurers working within each country
recognise the
the EU to operate in two different ways: regulatory authority of
the other countries
• Services. This means that insurers can stay within their own country and write risks coming out of
other countries on what is known as a cross-border basis. They are regulated only by their home
regulator.
• Establishment. This means that insurers can choose to set up an office in another country and write
the risks from there.
Question 8.6
If an insurance company based in the UK is writing business in France without setting up an office there, on what
basis is it writing?
a. Services. F
b. Establishment. F
c. Delegated. F
d. Legal. F
D4 Delegated underwriting
Delegation means asking and authorising another party to do something on your behalf. The London
Delegation means
Market uses a significant amount of delegated underwriting to obtain business. This will be discussed in authorising another to
more detail in chapter 9. In that chapter we will look at to whom the authority is delegated, the do something on your
behalf
documentation used and how the process must be managed.
Chapter 8
E Contract certainty
In this final section of the chapter, we will review the concept known as ‘contract certainty’. Contract
certainty can be summarised as all parties to a contract knowing exactly what is going on at the point the
contract comes into force.
This appears on the face of it to be quite a simple concept but in reality the London Market had
historically been very focused on developing innovative insurance solutions and sometimes slightly less
focused on documenting the details of the contracts into which they were entering. Let us start by
considering the impact of the following issues that arose as a result of this lack of focus:
• Trying to consider a claim when it is not entirely clear what are the terms and conditions of the
insurance – is it covered or not?
• Insurance disputes – both sides are more likely to have a different interpretation of what they thought
they had agreed (as they will of course adopt the stance that suits them best).
A few years ago, it was common to find in slips (the predecessor document to the MRC) the following
terms:
• ‘Wording as expiry’.
• ‘Wording TBA’.
You might consider the first term, ‘Wording as expiry’ to be entirely acceptable, until you track back
through various previous years of slips and find out in reality that no wording has ever been agreed.
Given the sheer size and complexity of some of the risks written in the London Market it is perhaps
surprising that quite so little of the detail of the contracts being entered into was being documented in
some cases.
Activity
Speak to senior colleagues and ask them how certain their contracts were before the ‘contract certainty’ initiative.
How many risks in which your firm was involved were finalised before the contract incepted?
Find out if there was any backlog of policy wordings to be signed or agreed in the time prior to contract certainty.
In late 2004, the regulators set a challenge to the entire UK insurance market (not just the London
Market). This challenge was to end what it called the ‘deal now, detail later’ mentality. The London
Market took up the challenge and has worked hard to reach the standard expected. But what is the
standard?
Contract certainty is achieved:
of all terms with contract

by the complete at the time that
between the documentation
and final they enter into the
insured and the provided promptly
agreement contract
insurer thereafter
Table 8.3 outlines the principles of contract certainty which should be followed.
Table 8.3: The application of the principles of contract certainty

Principle Practical operation
A When entering into the contract: Check that the MRC terms are clear and
unambiguous – include wordings if not using market
• The insurer and broker (where applicable) must standard ones. Every insurer, not just the leader, must
ensure that all terms are clear and unambiguous by check.
the time the offer is made to enter into the contract
or the offer is accepted. If the risk is being placed after inception use WNKORL.
• All terms must be clearly expressed, including any If there is a subjectivity, make clear who is responsible
conditions or subjectivities. and the penalty for non-compliance.
A subjectivity would be an item such as the
Chapter 8
requirement to have a satisfactory survey provided by

the insured (stating that if the survey is not provided or
not acceptable then the insurers will come off risk).
B After entering into the contract: Various options exist, either full policy, MRC, or BID.
Contract documentation must be provided to the In some cases, a certificate is adequate.
‘Promptly’ is 30 days
after inception.
insured promptly.
‘Promptly’ is 30 days after inception.
C Demonstration of performance: Have in place process controls:
Insurers and brokers must be able to demonstrate • audits;
their achievement of principles A&B. • use of checklists.
D Contract changes: Use of MRCE and E-MRCE
Contract changes need to be certain and documented Make sure that changes do not clash with rest of
properly. contract.
Give information to the assured promptly using a copy
of the MRCE, formal endorsement or BID.
Table 8.3: The application of the principles of contract certainty

E When more than one insurer is involved: Ensure that the section of the MRC on signing
provisions is clear as to whether lines are of order or of
The contract must include an agreed basis on which whole.
each insurer’s final participation will be determined.
Brokers should not seek to take the written or signed
Post-inception over-placing must be avoided. lines above 100% of the risk after inception.
F After entering into the contract: The broker should ensure that the risk information is
passed quickly to Xchanging to be registered in
The final participation for each insurer must be databases and that final signed lines are advised to
provided promptly. insurers.
The broker can advise signed lines directly to insurers
as well.
Insurers should use ‘line to stand’ if they want their
written line to be their final share of the risk.
G If principles are not met:
The insurer and broker have a responsibility to resolve
exceptions to any of the above as soon as practicable
and without delay.
To all intents and purposes, contract certainty is now ‘business as usual’ rather than a reform project
Contract certainty is
although it is important to maintain the standards going forward. now ‘business as
usual’
Activity
Find out what your organisation does to ensure compliance with contract certainty requirements. Look at this
website to see the tools that Lloyd’s underwriters can use to assist them with compliance:
www.lloyds.com/The-Market/Tools-and-Resources
Look at the Open Market QA tool – no passwords required.
Select a direct risk, and then the class of business of your choice. Choose an international and tax country and then
view the results. These are the things that should be checked for the type of risk you have selected. Look for the
ones marked up as CC – these are the contract certainty ones.
Are you surprised at the number of things to be checked?
Chapter 8
Key points
Formation and termination of the insurance contract
• Quotations are used by insurers to indicate the terms and conditions they will offer.
• A broker might obtain a number of quotations.
• Quotations are not unlimited in their validity, but if the insured accepts them within time then the insurer must
honour the offer.
• London Market underwriters indicate their agreement to take all or part of the risk by putting a stamp on the Market
Reform Contract (MRC) or agreeing electronically.
• An underwriter’s agreement is known as their written line, which might get reduced in size.
• The signing down process creates the signed line.
• An individual contract is created between the insurer and insured when the written line is put down either physically
or electronically.
• The insurer is on risk at start of policy period.
• An insurance contract can terminate naturally either by expiry, cancellation or fulfilment.
• An insurance contract can terminate early usually because of behaviour by the insured. However, the Insurance Act
2015 aims to make it less easy for an insurer to terminate a contract.
• An insurance contract can be renewed and the process is similar to the creation of an original contract.
Documents used in the London Market
• In the London Market, proposal forms are only used in certain classes of business, such as yacht and professional
indemnity.
• The main document used to present risk to insurers is the Market Reform Contract (MRC).
• This document can also be known by the older name of ‘slip’.
• The MRC has six sections into which the broker enters information about the risk.
• Different forms of MRC exist for open market, binders and line slips.
• Endorsements also have a form called MRCE.
• Endorsements can also be performed and managed electronically.
• The General Underwriters’ Agreement (GUA) sets out the way in which certain combinations of underwriters can
agree changes to the risk.
Key terms and conditions used in policy wordings
• Conditions can include any terms in the policy but can also include terms which are fundamental to either the
contract itself or to liability – these are known as conditions precedent.
• Conditions can be express or implied.
Chapter 8
• A ‘warranty’ is a promise by the insured. If this is broken, the insurance will be suspended until the breach is
remedied.
• Warranties can be express or implied.
• Exclusions set out what will not be covered under the policy.
• Some exclusions are market-wide such as radioactive contamination and some are just on individual policies such
as war, where this insurance can be purchased elsewhere from specialist insurers.
Methods of conducting business in the London Market
• Service companies are set up by syndicates to enable them to access business from outside the Lloyd’s Market
which they would not otherwise see.
• Syndicates must still comply with all Lloyd’s regulatory requirements in relation to business written through service
companies.
• Branch offices are used by insurance companies to access business in different countries where they are required
to set up a physical presence in that country in order to get permission from the regulator.
• Insurers within the EU can write business on a services basis which allows them to stay in their home state but
access business in other EU countries.
• Insurers can also write business on an establishment basis in the EU, which will involve them setting up offices
there.
Contract certainty
• This is the complete and final agreement of all terms at the time the contract is entered into with documentation
provided promptly.
• A number of principles apply with which the market needs to comply at the time a contract is entered into, and
when any changes are effected.
• The MRC assists with compliance with contract certainty.
• Contract certainty is now ‘business as usual’ rather than a market reform project.
Chapter 8
Question answers
Activity answer
Risk 1 answer
The total written lines add up to 135% so to calculate the signed lines you need to work out the proportion of
135 that 100 represents.
The calculation is (100 ÷ 135) × 100, which tells you that 100 is 74.07% of 135. Therefore, each line must
be signed down to 74.07% of the written value.
Syndicate 1 has a signed line of 18.51%.
Company A has a signed line of 7.41%.
The signed lines now total 100%.
Risk 2 answer
In this example, Syndicate 1 wants to keep the full written line which means that Syndicates 2 and 3 plus
Company A will have to have their lines reduced more than was the case in Risk 1.
The calculation works in a similar way:
Syndicate 1 keeps 25% so there is 75% left of the risk to allocate among the others.
The written lines of the balance add up to 110%. What proportion is 75 of 110? How do we fit 110 into 75?
The calculation (75 ÷ 110) × 100 tells us that 75 is 68.18% of 110. Therefore, each of the lines of
Syndicates 2 and 3, plus Company A will have to be reduced to 68.18% of the written line taken by each
insurer.
Syndicate 2 has a written line of 50% but a signed line of 34.09% (which is 68.18% of 50%).
Syndicate 3 has a written line of 50% but a signed line of 34.09%.
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Company A has a written line of 10% but a signed line of 6.82% (which is 68.18% of 10% rounded up).
Together with the 25% line for Syndicate 1, the signed lines now total 100%.
Self-test questions
1. What is meant by a ‘quotation’ in insurance?
2. What is the insurer’s obligation if the quotation is accepted exactly as offered within the stated timeframe?
3. For a risk placed on a subscription basis, at what point is the contract concluded between each insurer and
the insured?
4. What is meant by ‘signing down’?
5. Give three ways in which a contract of insurance can terminate naturally.
6. When will an insurer put ‘Warranted no known or reported losses’ (WNKORL) on the Market Reform
Contract (MRC)?
7. What are the three main purposes of the Market Reform Contract?
8. What is the role of the General Underwriters’ Agreement?
9. What is meant by a ‘condition precedent to liability’?
10. What is the difference between ‘services’ and ‘establishment’ business?
Chapter 8
Delegated underwriting
9
outcomes
Learning objectives
Introduction
Key terms
A Purpose and types of delegated underwriting 9.1, 9.4
B Operation of delegated underwriting contracts 8.14, 9.2
C Controls over delegated underwriting 9.3
D Outsourcing of other activities by insurers 9.1
Key points
Question answers
Self-test questions
Learning objectives
• explain the various types of delegated underwriting;
• explain the benefits of delegated underwriting;
• explain the operation of delegated underwriting contracts;
• explain the controls exercised by Lloyd’s over delegated underwriting; and
• outline other types of outsourcing by insurers.
Chapter 9
Introduction
In this chapter, we will be looking at the concept of delegation. Put simply, delegation is asking and
empowering another person or organisation to perform tasks on your behalf. The London Market uses
delegated authority arrangements for various aspects of its insurance business. Therefore, it is
important to understand what they are, how they work and the issues that can arise in their operation.
In this chapter, we will primarily concentrate on the delegation of underwriting authority.
However we will also explain outsourcing of other tasks within an insurer’s operation.
Key terms
Approved coverholder Auditing Binding authority Bordereau
Conflict of interest Consortium Coverholder Coverholder undertaking
Declaration Delegated authority Line slip Outsourcing
A Purpose and types of delegated underwriting

In this section, we’ll consider the parties involved in delegated underwriting, along with some of the
associated terminology used in the Market.
A1 Which parties delegate their activities?

Insurers (both Lloyd’s and companies) in the London Market can delegate some or all of their business
Insurers in the
London Market can activities. Brokers can also delegate some of their activities, such as document production.
delegate their
business activities As this chapter concerns delegated underwriting, we will focus on the insurer.
A2 To which parties is underwriting authority delegated?

An insurer can choose to delegate underwriting authority to:
• another insurer (or set of insurers);
• a broker; or
• another entity altogether.
Let’s consider these options in turn.
A2A Delegation to another insurer (or set of insurers)

There are two main forms of contract that can be set up in the London Market that allow an insurer to
delegate its underwriting authority to another insurer or set of insurers: these contracts are known as a
consortium and a line slip.
Consortium
A consortium is a group of insurers which have formed an agreement to accept risks together, in a set
A group of insurers
which have formed an proportion. For example, if five insurers group together they might agree to accept all risks 20% each, or
Chapter 9
agreement to accept they might agree that one will always take 50% and the other four take 12.5% each. Whatever they agree,
risks together
the usual practice is that all risks written by the consortium are sub-divided among the individual
members of the consortium in the pre-agreed way.
Their agreement sets out the types of risks that they are prepared to accept and any that they are not.
One of the insurers is designated the consortium leader/manager; the broker visits this insurer as
consortium leader and the insurer accepts or declines the risks on behalf of the consortium. If required,
the consortium leader also handles the claims as they arise.
A consortium is usually set up for a year and just as a syndicate has a unique identifying number and
letter code, so does a consortium (generally a four number code).
A consortium has a stamp which the consortium leader can use on the slip to indicate each consortium
member’s agreement to take a share of the risk, rather than having to put every insurer’s stamp down
separately. When the premium is processed through Xchanging, it is shared among the individual
consortium members at the time of payment.
Chapter 9 Delegated underwriting 9/3
The benefits of this arrangement for the parties involved are as follows:
• Broker. The placing process is potentially shorter as a consortium can usually accept a larger share of
a risk with one visit and one signature, than any single insurer acting on its own.
• Consortium leader. Most consortium agreements provide for a commission and sometimes fees to the
consortium leader in respect of their responsibilities.
• Followers. The other consortium members have access to business without needing to see a broker,
thus saving time and effort. In many cases, consortia are set up by specialist insurers in niche areas,
such as satellite insurance, which lets other insurers share in their business.
• All parties. There may also be some benefits for both the broker and the insurers in relation to the
administration of smaller risks if they can be placed with a pre-set group of insurers.
Line slip
The concept of the line slip is very similar to that of the consortium; the key difference is that the line
The line slip consists
slip consists of a set of insurers that have been brought together by a broker, rather than creating their of a set of insurers
own group. The broker finds a number of insurers which are all interested in writing similar business on that have been
brought together by a
similar terms. The line slip can be put together using a Market Reform Contract – MRC (there is a specific broker
MRC form for line slips). Within the line slip terms and conditions, there is normally a provision that one
(or sometimes two) of the insurers participating will act as the leader(s) and agree any risks attaching to
the line slip on behalf of the other insurers.
Be aware
You can come across line slip where each participating insurers is still agreeing their own participation, so with no
delegation involved at all. The purpose of this arrangement is often to help a broker be able to say to their own
clients that they have a pre-agreed group of underwriters already in place.
Having put together this pre-agreed group of insurers, the broker can decide – for every risk that they
have to place – whether to use this pre-agreed group, or to place the risk in the open market (which
means that the broker visits underwriters individually), or perhaps a mixture of the two approaches.
There are a number of advantages to this system which are:
• Broker. Having pre-set security (see below) in place is more efficient when trying to place risks that fall
within the set criteria.
• Followers. Insurers gain access to business without having to agree the risks individually themselves.
Security
This is a term often used when talking about insurers or the Market as follows:
‘What security do you have on that risk?’
‘I am using Lloyd’s security on this risk.’
‘The security on the risk is all London Market.’
Note that unlike a consortium arrangement, it is not usual to have commissions or fees for leaders within
line slips – meaning fewer advantages for a line slip leader.
Question 9.1
Chapter 9
What, if anything, is the key difference between a line slip and a consortium?
a. A consortium can involve only Lloyd’s syndicates whereas line slip can involve Lloyd’s and companies. F
b. A consortium is set up by a broker whereas a line slip is set up by the insurers themselves. F
c. There is no difference between them. F
d. A line slip is set up by a broker whereas a consortium is set up by the insurers themselves. F
Line slip terminology

Note the following terminology concerning a line slip:
• Declaration. The individual risk that is being presented for agreement by the broker so it can be attached to the
line slip.
• Bulking line slip/non-bulking line slip. These terms indicate whether the broker can aggregate premium
presentations into Xchanging (bulking line slip) or whether the premium for each risk declared under the line slip
must be presented individually (non-bulking line slip). Clearly, a bulking line slip is easier for the broker to
administer, but more difficult for the insurers to determine easily how much premium relates to which risk.
• Facility. This is another term for a line slip.
A2B Delegation to a broker or another entity

It is possible for an insurer to delegate underwriting authority either to a broker or another entity
It is possible to
delegate underwriting altogether. This type of contract is known as a ‘binding authority’ or ‘binder’.
authority to a broker
or another entity As binding authorities/binders form the greater proportion of delegated underwriting undertaken in the
London Market, the balance of this chapter will be devoted to the operation and management of these
contracts.
Consider this…
Spend a moment reflecting on the relevance of the risks that are run by an insurer if it gives underwriting
authority away.
Question 9.2
What is the name of the process which attaches a risk to a line slip?
a. Declaration. F
b. Statement. F
c. Endorsement. F
d. Binding. F
B Operation of delegated underwriting contracts

Every insurance company who writes using delegated authority should have internal processes and
procedures concerning the decision to enter into the contract, the choice of partner, the setting up of the
arrangements and the ongoing management and monitoring of the account.
Lloyd’s in particular, as a partial regulator of the Lloyd’s marketplace, is very thorough in the discipline
that it imposes on the syndicates operating within the Market in relation to delegated underwriting. In
this section, we will look at the process of setting up and the day-to-day operation of a binding authority
to ensure that all the Lloyd’s requirements are met.
If you work for an insurance company, for each section below consider what your own internal processes
might be.
B1 Decision to delegate some underwriting authority

Chapter 9
Why might an insurer want to delegate some underwriting authority? Perhaps ‘why would it not want to
do so?’ would be a better question to ask. The reasons might include:
• Manpower. There are not enough hours in the day for the insurer to underwrite everything directly.
• Local access. The insurer wants to get access to local business without setting up offices out of
London.
• Other access. The insurer wants to get access to business that would not otherwise come into the
London market.
B2 Choice of partner
Choosing the right partner for a delegated underwriting agreement is arguably the most important aspect
The partner in a
of the arrangement for the insurer. The term used for this partner is a ‘coverholder’. The type of business delegated
that an insurer targets when seeking a coverholder is one with a good professional reputation which is underwriting
agreement is called
already well-known in its home market – often with expertise in niche products and/or territories. the ‘coverholder’
Consider this…
Aside from the pure financial arrangements, are there any benefits for the coverholder? Yes, there is real value to a
coverholder outside London – particularly in the security and brand name of Lloyd’s. This means that many
organisations actively want to partner with an insurer based in the London Market.
There are currently approximately 39,000 individual coverholders writing business on behalf of Lloyd’s
syndicates, which represents about 30% of Lloyd’s premium income.
Activity
If you work for an insurer, find out if your firm has any coverholders.
If you work for a broker, find out whether your firm is itself a coverholder.
It might come as some surprise to find that a broker can be a coverholder. A broker that becomes a
A broker can be a
coverholder finds itself in a strange position whereby its client base no longer comprises only insured coverholder
clients: it now includes insurer clients for which it is a coverholder. This is one of the circumstances
which can give rise to what is known as a ‘conflict of interest’.
Consider this…
A conflict of interest can be likened to being the rope in a tug of war, or the concept of trying to serve two masters. It
is fundamentally important to ensure that neither master is disadvantaged by the existence of the other master. That
is not always easy.
It can cause an issue for a broker since they are supposed to act in the best interest of their insured
clients. However, if they are a coverholder for an insurer then they are acting as their agent and so the
conflict of interest arises when selecting insurers in the risk placement process. There might be a
temptation to ‘favour’ the insurer for which the broker is a coverholder and this might not provide the
best deal for the insured client. Alternatively, they might decide not to place business to the coverholder
at all but to place it elsewhere thus starving the coverholder of business.
Managing conflict of interest

If a broker has delegated underwriting authority from an insurer and the broker wants to manage the conflict of
interest issue, its best option is to identify one or two persons within its firm whose role it is to hold that authority.
This ensures that only a person with delegated underwriting authority deals with the insurer client and that it has no
contact with insured clients.
Activity
If you work for a broker and your firm has coverholder status, find out how conflicts of interest are managed.
Chapter 9
B3 Setting up a new coverholder

Before an insurer can start to delegate authority to a new coverholder, the latter must obtain approval
Before a Lloyd’s
from Lloyd’s. Lloyd’s undertakes the approval process as part of its role in managing and supervising the insurer can start to
Market. delegate authority to
a new coverholder it
must obtain approval
Potential new coverholders are usually sponsored by a broker and their application supported by the from Lloyd’s
managing agent. However, they can also be sponsored by a managing agent without a broker being
involved.
Obviously the supporting managing agent should be the one that wishes to use this coverholder going
forward, but once the coverholder is approved, they are available for use by any managing agent.
The managing agent must complete investigations into the new coverholder (known as a process of ‘due
diligence’). This is because managing agents should delegate their authority only to competent and well-
run organisations since they will be representing the insurer (and hence the Market) in their local area.
Brand reputation and the protection of the insured are very important in these arrangements.
When reviewing applications from potential coverholders, Lloyd’s has to consider a number of different
criteria – in particular:
• suitability and experience of individuals working for the applicant;
• systems and controls used in the applicant’s infrastructure;
• financial status of the applicant; and
• authority of the applicant to operate in specified territories.
The application process is electronic and is started by the sponsoring broker via a system called
The application
process is electronic ‘Atlas’. The prospective coverholder is given access to Atlas to finish the application form online.
and is started by the If all of the required information is submitted, the application should be considered by Lloyd’s
sponsoring broker via
a system called ‘Atlas’ within 25 working days.
Once approved, a new coverholder must sign the ‘coverholder undertaking’ which sets out formally the
high standards expected by Lloyd’s of its coverholders.
Useful website
You can view the coverholder undertaking document here:
https://www.lloyds.com/the-market/i-am-a/delegated-authority/applications-and-processes
When making the application to be a coverholder, the parties to the proposed arrangement should
indicate the:
• types of work in which the coverholder is applying to be involved; and
• areas of the world in which they will be operating and from which they will be accepting risks.
Territories
Coverholders are authorised within their own domicile, but must have specific authorisation to write risks coming out
of any other country. Certain countries such as Australia, Canada, USA, the United States Virgin Islands, South
Africa and Switzerland have to be approved separately, but some territories such as the EEA countries can be
approved in one group as can some other areas of the world.
Question 9.3
Which of these situations best describes a conflict of interest?
a. A broker that usually acts for insured clients only, now holds a binding authority from an insurer. F
b. An insurer takes on a second coverholder. F
c. A coverholder is approached by two brokers to place different risks for the same insured. F
d. A broker approaches two coverholders to place proportions of the same risk. F
Chapter 9
B4 Types of coverholders
There are two main types of coverholders within the London Market: one is an ‘approved coverholder’,
the other is a service company.
Both an approved coverholder and a service company have to pass a Lloyd’s approval process and have
their authority controlled through the delegated authority contracts that they receive from the insurer.
A service company is set up by a managing agent as a separate company – perhaps in another country. It
obtains its authority to underwrite business, not as a normal insurance company, but under a binding
authority from the syndicate. This allows Lloyd’s insurers to access more business overseas and to have
a presence in other countries if required. Even though the delegation is carried out between firms within
the same corporate group, the rules for managing the delegation of underwriting authority still apply.
Service companies are also used by Lloyd’s syndicates to write personal lines insurances (such as
motor) which would not be efficient to write in the traditional Lloyd’s format of individual presentations.
B5 Types of authority
One of the following types of authority will be given to the coverholder:
• Full authority, where complete control is given to the coverholder.
• Pre-determined rates, where possible price matching or discretion are allowed for renewal
businesses.
• Pre-determined rates with no discretion, where no change at all is made from the rating matrix.
• Prior submit, where all risks are to be referred to the underwriter prior to the binding.
B6 Evidencing the binding authority agreement

The MRC is used by the Market to capture the key information about the risk to present to underwriters
and for them to indicate their agreement.
For a binding authority, a slightly more complex document has to be used. This is because it has to
capture the key details of the delegated underwriting contract, together with the other information such
as written lines, fiscal and regulatory information and the subscription agreement. The documentation
consists of three parts:
• binding authority schedule;
• binding authority wording; and
• non-schedule sections (which essentially mirror the elements of the MRC previously reviewed).
Activity
Find out if your organisation has binding authorities and obtain a copy of one to refer to in studying the rest of this
chapter.
If your organisation does not have binding authorities, visit this website to access a template for your reference:
www.londonmarketgroup.co.uk
From the left-hand menu on the website, follow the ‘Placing’ link, then ‘MRC’ followed by ‘Binder’. Finally, select the
‘LMA3114’ template on which the following extracts in this chapter are based.
We will now review the key elements of a standard market binding authority document. We will use the
US Non-Marine Model Binding Authority Agreement, primarily because most of the binding authority
business written in the market is both non-marine and emanates from the USA.
Other binding authority templates

There are further templates entitled:
• Marine Binding Authority Agreement;
• Canadian Non-Marine Model Binding Authority Agreement; and
• Non-Marine Binding Authority (excluding USA and Canada) Non-Marine rest of the world.
We’ll start by looking at the binding authority schedule itself, followed by the elements of the non-
schedule agreement which are different from the fields found in an Open Market MRC. An explanation for
each of the fields in the schedule is provided.
Chapter 9
Agreement Number: This is a unique number given by the broker or the insurer to this contract. It does not have
to follow a particular format.
Unique Market The Unique Market Reference is generated by the broker. It is used for all risks in the London
Reference Number: market, not just binding authorities and always follow the same format:
B/four-digit broker code/broker policy reference.
The Coverholder: Name of the organisation to which delegated authority is being given under this contract. It
might be an individual operating alone, but is more likely to be an organisation.
Address:
The [Lloyd’s] Broker: A broker is often involved in a binding authority, sitting between the insurer and the
coverholder. Many different brokers (i.e. not just the broker who sets up the agreement) can
present risks to the coverholder once it has delegated authority.
Address:
AGREEMENT SECTION NARRATIVE

NUMBER
Section 2 PERIOD: What is the period of the agreement, i.e. for how long does the delegated authority
last? As with any other policy, it is good practice to enter a time zone as well as a date and
time in this section for both the start and end of the period of authority.
Sub-section 3.1 THE PERSON(S) RESPONSIBLE FOR THE OVERALL OPERATION AND CONTROL:
If cease to be
employed, insurer This is an individual employed by the coverholder. If they cease to be employed by the
should be informed coverholder during the binding authority period, the insurer should be informed and the
contract updated.
Sub-section 3.2 THE PERSON(S) AUTHORISED TO BIND INSURANCES:
This might be a different individual to the one(s) named in sub-section 3.1. They exercise the
authority and agree or bind business under the contract. As indicated above, if they cease to
be employed by the coverholder during the binding authority period, the insurer should be
informed and the contract updated.
Sub-section 3.3 THE PERSON(S) WITH OVERALL RESPONSIBILITY FOR THE ISSUANCE OF DOCUMENTS
EVIDENCING INSURANCES BOUND:
This might be a different individual to the one(s) named in sub-sections 3.1 and 3.2. Their
role is not to agree any insurances but to administer documentation. Again, if they cease to
be employed by the coverholder during the binding authority period, the insurer should be
informed and the contract updated.
Sub-section 3.4 THE PERSON(S) AUTHORISED TO EXERCISE ANY CLAIMS AUTHORITY:
Again, this might be a different individual to the one(s) named above – particularly since it
would be preferable for them not to be the individual with underwriting authority. Not every
binding authority has claims authority given to the coverholder and in some cases the
authority might be:
• retained with the insurer so that the broker has to visit them each time;
• given to the coverholder but only up to a certain financial limit and excluding certain types
of claims; or
• given to another party altogether such as a loss adjuster.
Sub-section 6.1 OTHER CONDITIONS AND/OR REQUIREMENTS RELATING TO THE OPERATION OF THE
AGREEMENT:
This section can be used to include any further terms relevant to the delegated authority
agreement which do not concern any risks that might be bound by the coverholder.
Section 7.1 AUTHORISED CLASS(ES) OF BUSINESS AND COVERAGE(S):
Identifies nature of
business the This identifies the nature of the business that the coverholder can write. This can be as wide
coverholder can write or narrow as the insurer wants, subject to any other terms, conditions, exclusions and
limitations of the Agreement.
The binder schedule has to be read in conjunction with a wording to which these various
sections refer.
Sub-section 8.1.5 OTHER EXCLUDED CLASS(ES) OF BUSINESS OR COVERAGE(S):
As stated earlier, the binding authority contract consists of this schedule, the wording and the
non-schedule agreements (similar to the Market Reform Contract (MRC) used in the London
market). Within the wording there are some standard exclusions, i.e. types of risk that the
coverholder cannot write (and, because we are using a US template as an example here,
subject always to the provisions of the US General Cover Conditions).
Note: the US General Cover Conditions identify a number of criteria set out by various US
Chapter 9
state regulators which restrict the business that coverholders in certain US states can write.
Sub-section 9.1 RISKS LOCATED IN:
Is there a geographical limitation regarding the location of the risks?
Sub-section 9.2 INSUREDS DOMICILED IN:
Is there a geographical limitation regarding the domiciled location of the insureds?
Sub-section 9.3 TERRITORIAL LIMITS:
Is there a geographical limitation on the extent of the insurance that can be written by the
coverholder? Can the policies provide worldwide coverage for the insureds even if there are
restrictions on the domiciled location of the insureds?
Section 10.1 MAXIMUM LIMITS OF LIABILITY/SUMS INSURED:

Limits apply to the size of policy that a coverholder can write. For example, for contracts
using this template, this could perhaps be a policy limit of £50 million. If a risk is presented
to a coverholder that exceeds its limit, there is nothing to stop the coverholder referring it to
the insurer for its direct agreement.
Sub-section 11.1 BASIS FOR THE CALCULATION OF GROSS PREMIUMS:
This section allows confirmation of whether any fees or charges can be deducted from gross
premiums (which are the premiums paid by the insured before the broker deducts their
brokerage).
Sub-section 11.2 DEDUCTIBLES AND/OR EXCESSES:
Any standard deductibles or excesses to be applied to the risks being accepted by the
coverholder are captured here.
Sub-section 12.1 GROSS PREMIUM INCOME LIMIT:
Insurer puts a limit on
The insurer puts a limit or total on the amount of premium that the coverholder can accept, the premium the
which is a way of controlling the amount of risks that are being written. coverholder can
accept
Sub-section 12.2 NOTIFIABLE PERCENTAGE OF THE LIMIT NOT TO EXCEED:
When the coverholder reaches this ‘trigger point’ (which might be, say, 80% of the limit not
to exceed), it must warn the insurer. However, the insurer should also monitor the
coverholder’s activity and be aware that it is approaching the notifiable percentage.
Sub-section 13.1 PERIOD OF INSURANCES BOUND:{ } months
This section states the duration for which the coverholder can accept policies. Generally this
is 12 months with a maximum of 18 months. This information is included in this section
under the next heading of ‘Maximum period of insurances bound’. For some risks the
duration might be extended beyond this period to, say, 36 months – for example in the case
of construction contracts.
MAXIMUM PERIOD OF INSURANCES BOUND:{ } months including odd time.
The concept of odd time is to allow policies to occasionally run for periods other than normal
month increments usually to try to align them to common renewal dates or with applicable
reinsurances.
Sub-section 13.3 MAXIMUM ADVANCE PERIOD FOR INCEPTION DATES:{ } days
If a policy is due to incept on 1 January, this section puts a limit on how far in advance the
risk can be accepted (for example, no earlier than October the previous year). This prevents
issues with changes in the risk between agreement and inception.
Sub-section 14.2 AMENDMENTS:
Sub-section 16.1 THE COVERHOLDER’S COMMISSION:
Commission can be earned for writing business, or as shown below for making a profit.
Commission is usually calculated as a percentage rather than a flat fee.
Sub-section 16.2 CONTINGENT OR PROFIT COMMISSION:
This section allows the underwriters granting the delegated authority to indicate if any profit
commissions will be earned by the coverholder on the basis of the profitability of the
business and on what basis they will be calculated.
Section 19 APPLICATIONS OR PROPOSAL FORMS:
Depending on the class of business, these may not be used. However, if they are to be used,
Chapter 9
they can be referred to here – and attached to the agreement, if necessary.

Sub-section 19.6 VARIATIONS TO THE STATED PROCEDURE IN RELATION TO COPY DOCUMENTS:
Generally, the coverholder has to keep copies of all documents and send them to the insurer,
if requested.
Sub-section 20.1 WORDINGS, CONDITIONS, CLAUSES, ENDORSEMENTS, WARRANTIES AND EXCLUSIONS
Makes clear any
APPLICABLE TO INSURANCES BOUND: terms and conditions
This is an important section as it makes clear to the coverholder any specific terms and which must form part
of any risk
conditions which must form a part of any risk that it underwrites and binds to this binding
authority. Different parts of the world and different classes of business have requirements in
this area (e.g. war exclusions are generally attached).
Section 20.5 FORMAT OF CERTIFICATES:
At Lloyd’s generally, certificates should follow a market standard – if a different document is
required, it must be approved by Lloyd’s. Any certificate must satisfy all the requirements of
any countries from which business may be written.
Sub-section 20.6.9 SEVERAL LIABILITY NOTICE:

Several liability is the concept of each insurer not being liable for any more than its agreed
share (which at Lloyd’s and the London market is its signed line, as we shall see in chapter
8, section A2B).
Section 20.8 COMBINED CERTIFICATES
This section is included because we are following a Lloyd’s template as an example. It
relates to certificate issue where the market on the binder is not just Lloyd’s and requires the
other insurers to be identified
Section 21.1 PROCEDURE FOR THE HANDLING AND SETTLEMENT OF CLAIMS:
This section states whether the coverholder has to report claims to the insurer, as well as the
coverholder’s authority level (either financial or factual).
Sub-section 23.1.2 RISKS WRITTEN REPORTING INTERVALS:
Sub-section 23.2.1 BASIS OF MONITORING AGGREGATE EXPOSURES:
Aggregates enable the insurer to monitor not only the risks it is writing directly, but also
those being written under delegated authority contracts. The basis and method of reporting
can be decided between the parties, as can the reporting intervals and any maximum
aggregate exposures that the coverholder can accept.
Sub-section 23.2.3 MAXIMUM TOTAL AGGREGATE LIMIT(S):
Sub-section 23.3 STATISTICAL INFORMATION REQUIRED BY THE UNDERWRITERS:
Data hugely important
to the insurer Data is hugely important to the insurer and, as well as the monthly bordereaux, it can request
other information from the coverholder and set out the details in this section.
REPORTING INTERVAL(S): *monthly / quarterly.
*(Delete as applicable)
MAXIMUM NUMBER OF DAYS
Sub-section 24.2 PREMIUM BORDEREAU INTERVAL:
*monthly / quarterly.
Sub-section 24.3 CLAIMS BORDEREAU (PAID AND OUTSTANDING) TO BE PRODUCED BY THE
COVERHOLDER:
*Yes / No.
CLAIMS BORDEREAU INTERVAL:
*monthly / quarterly.
*(Delete as applicable)
Bordereau (French for ‘forms’) are used by the coverholder to send information to the insurer
on a regular basis (usually monthly, but can be quarterly). These forms set out all the risks
that have been written (with the premium charged) and the claims that have been submitted
during the period.
Sub-section 24.4 MAXIMUM PERIOD FOR SUBMISSION OF BORDEREAU:{ } days
The number of days that the coverholder has to submit its bordereau to the insurer after the
end of the month.
Sub-section 24.6 MAXIMUM PERIOD FOR REMITTANCE OF SETTLEMENTS:{ } days
The time limits for submitting monies either from the coverholder to the insurer or vice versa.
Chapter 9
Sub-section 24.7 FEES AND CHARGES TO BE DEDUCTED BY THE COVERHOLDER:

Sub-section 36.1.1 NUMBER OF DAYS NOTICE OF CANCELLATION:{ } days
This applies to the cancellation of the binding authority, not the individual risks attached to it.
Section 42.1 JURISDICTION AND GOVERNING LAW STATE:
This section indicates where any dispute between the insurer and the coverholder might be
heard. As this is a US binding authority agreement, it is important to indicate which individual
state’s laws will apply – usually this is where the coverholder is based.
Agreement Number: The same agreement number as we saw at the beginning of the contract appears here.
Unique Market The same UMR as we saw at the beginning of the contract appears here.
Reference Number:
This last section is where the coverholder and the insurer both sign the agreement setting out the terms of the
delegated underwriting agreement between them.
SIGNATURE OF THE COVERHOLDER

In accordance with Section 1 of LMA3114, the Agreement is signed on behalf of the Coverholder as acceptance of the
terms and conditions of the Agreement inclusive of any attachments identified in the Schedule.
Signed and accepted on behalf of the Coverholder
Name and Position of Signatory
Date of Signature
ACKNOWLEDGEMENT OF THE UNDERWRITERS
Signed and accepted on behalf of the Underwriters
Date of acknowledgement
Be aware
In October 2015 Lloyd’s updated its rules to allow multi-year binders to be offered.
A binding authority wording should also be used and the completion of the schedule is required to
ensure that the wording makes sense. At several points, the wording refers the reader to the schedule.
As well as the binding authority schedule and the wording of the agreement, the final part of the MRC
that the broker puts together to place a binding authority is what is known as the ‘non-schedule
agreements’. In practice, these look like the sections of the MRC that we reviewed previously and indeed
many of them are the same as the MRC sections.
Finally, we will consider the one field that appears in this section that does not appear in an Open
Market MRC.
Binding authority registration date All binding authorities, other than restricted binders have to be registered with
and number Lloyd’s – more details on this topic in the next section.
Activity
Regarding sub-section 8.1.5 just reviewed in the Open Market MRC, look at any binding authorities in which your
company is involved and see what limitations are placed on the coverholder in terms of the business that it can
write.
C Controls over delegated underwriting

In this section, we will review the methods that can and should be applied by any insurer which is
delegating underwriting authority to another party, in order to control that delegation.
Lloyd’s has minimum standards set out for the management of delegated underwriting which are as
Lloyd’s has minimum
Chapter 9
follows: standards set out for

the management of
• The managing agent has a clear strategy for writing and managing delegated underwriting as part of its delegated
underwriting
overall business plan.
• The managing agent carries out thorough due diligence of coverholders to which it proposes to
delegate authority.
• The managing agent ensures that it has binding authorities in place with each coverholder to which it
delegates authority. The binding authority clearly defines the conditions, coverage, scope and limits of
that authority and complies with contract certainty requirements, including the requirement to
demonstrate regularly that insurance documents have been issued within required timescales.
• The managing agent proactively manages delegated underwriting contracts once incepted to ensure
compliance with contract conditions. This involves, for example, putting in place a regular audit cycle.
• The managing agent shall recognise and manage the Conduct Risk posed by delegated authority and Conduct Risk
covered in
be able to evidence that conduct issues are assessed, monitored and managed. chapter 10,
section D1
C1 Clarity of agreement setting out the levels of authority

Refer to chapter 8, We discussed contract certainty in chapter 8, section E and it’s important to note that it applies equally
section E
to delegation contracts. The line slip and binding authority MRC formats are mandatory for use in the
London Market; they have been designed specifically to try to ensure that all the key details about levels
and extent of authority are captured.
Consider this…
Reflect on the potential issues that could arise for the insurer and the coverholder if contract certainty was not
achieved in a delegation contract.
C2 Registration
Within the Lloyd’s Market, as well as authorising coverholders, Lloyd’s also requires the registration of
Lloyd’s also requires
the registration of all all binding authority agreements (except restricted authority agreements). Registration is performed
binding authority using an online system called BAR (Binding Authority Registration). This allows Lloyd’s to capture
agreements (except
restricted authority information about the contracts being entered into with each coverholder, including the types of
agreements) business being conducted under the binding authority.
As part of the original coverholder approval process, restrictions concerning the type of business to be
written and geographical limits can be put in place. This information will be checked when the binding
authorities are registered and also when paperwork is submitted to Xchanging for entry onto the
premium/risk databases. If attempts are made to grant a coverholder a binding authority contract which
is wider in scope than the approval originally received from Lloyd’s, it will be rejected.
Once a binding authority is registered successfully, a date and unique number are allocated, which have
to be put onto the binding authority MRC elements before submission to Xchanging for entry onto the
risk data systems.
C3 Reporting
As we saw in the binding authority schedule above, certain sections indicate any restrictions on the
coverholder’s authority, as well as reporting requirements. Careful analysis of the monthly or quarterly
bordereaux reporting received from the coverholder allows the insurer to identify potential breaches of
authority. Therefore, it is the insurer’s responsibility to advise the coverholder of the information that it
requires to be reported in the monthly/quarterly bordereaux and it should ensure that the report
includes all those items which allow the insurer to complete a full analysis of the risks being written and
to validate compliance with the terms of the binding authority.
Analysis of this data can be very time-consuming, depending on the amount of delegated underwriting
business written by an insurer. Therefore, dedicated resources such as a full-time binding authority
manager is often needed to undertake this task.
C4 Documentation
The insurer should always ensure that the documentation that is being issued by any coverholder
complies with the binding authority agreement (e.g. including a several liability agreement), as well as
any local regulations that apply where the insurance is being sold.
Reinforce
Chapter 9
As we saw in section B6, the several liability wording makes it clear that no insurer will be liable for more than its
agreed share of the risk.
C5 Auditing
As well as reviewing the regular reporting received from the coverholder, regular physical audits on
the coverholder should be performed by the insurer. Each insurer should have an audit policy which
states the:
• frequency of audits;
• scope for review in the audit; and
• details of the auditors (they can be external or internal but clarity as to the skills required is needed).
If a binding authority is written by more than one insurer (i.e. on a subscription basis) then the leader is
the party generally responsible for organising audits of the coverholder, although costs can be shared
between all subscribing insurers who have the benefit of the audit activity.
Examples of areas that should be considered for examination in any audit of delegated underwriting are:
• underwriting;
• accounting;
• financial reporting;
• credit control;
• information technology (IT) systems;
• documentation controls; and
• compliance with any Lloyd’s or other regulations.
At the end of an audit, there should always be a follow-up with the coverholder to discuss any areas of
There should always
concern and if the binding authority is written by more than one insurer, the audit report should be be a follow-up with
shared by the leader with the following market. the coverholder
Question 9.4
Which of these questions is not designed to be answered by the audit of a coverholder?
a. Is the coverholder following the underwriting rules? F
b. Is the coverholder capable of attracting new business? F
c. Is the coverholder preparing documents correctly? F
d. Are the coverholder’s accounting systems working as they should? F
D Outsourcing of other activities by insurers

In this section we will look at a number of other activities within the insurance market that insurers
The concept of
choose to outsource, or delegate. The concept of outsourcing and delegation are in fact the same. One outsourcing and
party is requesting and empowering another to perform tasks on their behalf subject to an agreement as delegation are in fact
the same
to the extent of the authority given. Outsourcing as a term, however, is generally used for those roles
which are not core to a business (and of course underwriting is core to an insurer’s business). Therefore,
in the context of the London Market, delegation is the term used when discussing underwriting and
‘outsourcing’ is used when discussing other activities such as claims handling, data capture and money
movement.
Chapter 9
D1 Premium processing and risk data recording

Within the Lloyd’s and London Company Market the two functions of data capture of risk information and
money movement for premiums have been centralised. This centralisation has occurred for many years
and by outsourcing such activities, insurers require fewer in-house data and accounting resources.
These functions are performed by an Xchanging company (Xchanging Ins-sure Services).
D2 Claims handling
There are a number of ways in which an insurer can delegate underwriting authority such as a Refer to chapter 10
consortium, line slip or binding authority. Within each of these agreements it is possible for the claims
handling function to be delegated as well. Table 9.1 shows how this works in practice.
Table 9.1: Delegation of the claims function within delegated authority arrangements
Consortium Quite often, the claims handling for the consortium is handled by the consortium leader
alone, irrespective of the number of consortium members.
Line slip The attachment of the risks to the line slip can be performed by the agreement of one
(sometimes two) of the participants. However, the claims tend to be handled in accordance
with the market claims handling rules for Open Market business that we will discuss further
in chapter 10.
Binding authority Some claims handling authority can be given to the coverholder – usually up to a certain
financial limit and excluding certain contentious types of claims irrespective of size (for
example, in situations where the insured has sued the insurer). Alternatively, the insurer can
delegate claims handling under the binder to a separate entity (such as a loss adjuster –
covered in chapter 10, section B4).
As we will see in chapter 10, section B2, there are specific claims handling rules for both the Lloyd’s and
There are specific
claims handling rules Company Markets which have significance for the leading insurer. However, a leading insurer can decide
for both the Lloyd’s to outsource claims handling to another organisation if it chooses. There are a number of options for the
and Company Markets
insurer to choose from: they can choose to outsource to Xchanging or a number of specialist providers
including lawyers and loss adjusters.
Activity
Use these links to find out more about an organisation that offers outsourced claims handling:
www.ctplc.com/insurance-support-services/charles-taylor-insurance-services/claims-services
http://uk.crawfordandcompany.com/solutions/for-lloyd's-london-market/crawford-volume-claims-service.aspx
For both Lloyd’s and company market business, claims data will be captured on central systems run by
Xchanging, which will also facilitate electronic messages to insurers relating to claims and the
movement of money between insurers and brokers.
Chapter 9
Key points
Purpose and types of delegated underwriting
• Delegated underwriting consists of authorising another party to underwrite risks on your behalf.
• Authority can be given to a number of different parties.
• A consortium is a group of insurers that join up (and nominate one of the group as a leader) to accept risks.
• A line slip is a group of insurers set up by a broker. Normally, authority is given to one or two of them to bind the
other insurers to any risks, but line slips can be found with no delegation involved.
• A binding authority is delegating authority often to a completely separate party. This party is known as a
coverholder.
Operation of delegated underwriting contracts
• The first step for a binder is to identify a likely coverholder.
• A coverholder could be a service company which is a member of the same wider corporate group as the insurer.
• Approval is required by Lloyd’s to become an approved coverholder but this is not necessary for the company
market.
• Applications from new Lloyd’s coverholders have to be sponsored by a broker and supported by a managing agent.
• Due diligence is required by any insurer supporting the approval of a new coverholder.
• Coverholders can have either full or limited binding authorities.
• Line slips are agreed on a specific form of a MRC.
• Binding authorities comprise three parts: the schedule, the wording and the non-schedule agreements (which look
like a MRC).
Controls over delegated underwriting
• Ensure the agreements are clear.
• Lloyd’s registration process monitors whether coverholders are receiving binder authority wider than their approval.
Companies have to manage this internally.
• Limit the types and extent of risks written.
• Careful review is required of reporting received from coverholder.
• Regular auditing.
Outsourcing of other activities by insurers
• Premium payments are centralised.
• Risk data capture is centralised.
• Both of these activities are outsourced to Xchanging Ins-sure services for both Lloyd’s and Company Markets.
• An insurer, if acting in a lead capacity, is usually involved in claims but can outsource if it wishes to do so.
• Within the Lloyd’s Market, there is a centralised claims office (Xchanging) which handles the data capture and
movement of money for Lloyd’s claims. For the company market the movement of money is automated once the
agreement parties agree the claims, with no further system entry work required by Xchanging.
Chapter 9
Question answers

Chapter 9
Self-test questions
1. Explain what is meant by ‘delegating’ a task.
2. To whom might an insurer delegate tasks such as underwriting?
3. Explain the difference between a consortium and a line slip.
4. What is the benefit of participating, to an insurer which is not a consortium or line slip leader?
5. What is meant by a ‘declaration onto a line slip’?
6. If delegated underwriting authority is given to a broker what do they have to consider in terms of internal
business practice?
7. If a new coverholder is being presented to Lloyd’s for approval, which party or parties have to support the
application?
8. What relationship does a service company usually have with the insurer?
9. Identify two of the four minimum standards for the management of delegated underwriting in Lloyd’s.
10. List five areas that should be covered in a coverholder audit.
Chapter 9
Helping you
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Claims handling
10
outcomes
Learning objectives
Introduction
Key terms
A Role of claims in the insurance process 10
B Roles and responsibilities of various parties in the claims process 8.14, 10.1, 10.2
C Practical claims handling 10.3, 10.4
D Regulation of claims handling 11.2
E Complaints handling, the Financial Ombudsman Service (FOS) and the Financial 11.3, 11.4
Services Compensation Scheme (FSCS)
Question answers
Self-test questions
Learning objectives
• explain the importance of good claims handling in the market;
• explain the role and responsibilities of all parties in the claims handling process;
• explain practical claims handling concepts and application of key insurance concepts;
• explain the importance of a robust complaints process and what it will entail;
• explain the regulation of claims handling; and
• explain the role of the Financial Ombudsman Service (FOS) and the Financial Services Compensation
Scheme (FSCS).
Chapter 10
Introduction
In this final chapter we will explore the area of the business that is probably most well-remembered by
the client in terms of the perception of their insurer, being the area where they discover the usefulness
of the insurance they have purchased. This area is claims handling.
Key terms
This chapter features explanations of the following terms:
Complaints handling Contribution Deductible/excess Electronic Claims
Files (ECF)
Estoppel Exclusions Expert management Financial Ombudsman
Service (FOS)
Financial Services Indemnity Insurance fraud Market claims handling
Compensation Scheme agreements
(FSCS)
Proximate cause Regulation in the UK and Reservation of
overseas Rights (ROR)
A Role of claims in the insurance process

‘Claims’ is often, with good reason, called the shop window of an insurer (or a broker). A purchaser of
‘Claims’ is often
called the shop insurance will of course hopefully pay attention to their insurer at the time of purchase, and they might
window of an insurer even read the policy wording and associated documents that are provided to them. It is at the time of a
(or a broker)
loss – which is usually a stressful situation – that the reaction and behaviour of the insurer’s claims
team will leave a lasting impression of the insurer with the client. A good claims team will ensure that
this impression is a positive one, leading to a happy client and renewed business.
However, the claims team of an insurer (or broker) has a far wider role to play than merely leaving a good
impression on the client. It has a valuable role to play in terms of interfacing with other departments
within its organisation, to enable the organisation to flourish in the marketplace.
Activity
Take a moment to consider which other departments within an insurer or a broker with which the claims team should
interface and why?
Write some notes here – speak to colleagues and see if they agree with you:
A1 Interface between Claims and other teams

Table 10.1 shows the different departments within an insurer and the various points of interface between
them and the claims team.
Chapter 10
Chapter 10 Claims handling 10/3
Table 10.1: Points of interface between the Claims team and other insurer departments
Department Points of interface
Underwriting • Report wordings that are causing problems in interpretation.
• Advise on clarity (or not) of new wordings before they are put into use.
• Provide up-to-date claims data to enable the underwriters to review risk
performance at renewal.
• Liaise concerning intent, if a claim appears to be outside the scope of coverage.
• Underwriting should give Claims its view about commercial pressures to settle
certain claims.
Outwards reinsurance • Claims must know which reinsurances contain any forms of claims control or co-
op clauses designed to avoid unintentional breaches.
• Provide adequate data to reinsurers to enable clear advices to be made.
• Code losses accurately to ensure aggregation of reinsurance recoverable.
• Keep claims data (especially reserves) up to date so that reinsurance renewals
are effected on accurate loss data.
Complaints • Provide clear information about handling on any claim to enable complaints
handlers to deal with issues.
• Complaints should provide advice on regulatory information to both Claims and
Underwriters so that it can be incorporated into their work.
Management Information (MI) • MI should liaise with Claims to get its input on any system designs or changes.
• MI should review reports with Claims to ensure that data is being reported
properly.
Legal • Liaise over any outsourcing of claims to ensure agreements are appropriate.
• Liaise where appropriate if claims go in litigation.
• Legal should work with Underwriting and Claims to advise on any problems with
wordings being used or proposed.
Compliance • Ensure that all claims handlers are appropriately trained and authorised.
• The claims manager should ensure that all staff are aware of regulatory
requirements.
Marketing • Highlight any issues that have arisen out of marketing or publicity material where
clients have not had a clear understanding of the product, causing problems when
claims have arisen.
• Marketing should use Claims as a publicity tool.
Senior Management/Board • Report large claims.
• Report matters that are of wider importance to the company (note that a director
should be responsible for the critical function of Claims).
Activity
Review your notes from the previous Activity in conjunction with the list above and note which elements were not on
your list. If these departments can be found within your organisation, try to find out whether these points of interface
with Claims actually take place.
Chapter 10
B Roles and responsibilities of various parties in the

claims process
In this section, we are going to look at ‘who does what’ in relation to the claims handling process in the
London Market. We are also going to look at the realistic scenario where risks are placed partly in the
London Market and partly overseas to see whether that makes any difference to the process.
Note that first we’ll consider risks other than those written via a binding authority. We will overlay the
scenario that includes a binding authority at the end of this section.
B1 Broker’s role in the claims process

The broker is generally the first point of contact with the insured and they will be the first party to find
The broker is
generally the first out about any claims from the insured. This point in the claims process is known as ‘first advice’, or ‘first
point of contact with notification’. At this stage, the broker’s role is to gather as much information as they can about the loss
the insured
and then to work out which insurers need to be advised.
The broker does this by reviewing the various insurance contracts (which may be one Market Reform
Contract: MRC if the risk is totally placed in London). Once the broker has worked out which insurers are
on risk, they must decide whether to present the claim electronically or using a paper file. (We examine
these two options in more detail in section C on practical claims handling.)
It is important to appreciate that there may be more than one broker in the chain between the insured
and any London Market insurers. This may be the case whether business is placed wholly in the London
Market, or whether there is also a placement in another market.
Reinforce
Do you recall the difference between retail and wholesale brokers? If not, refer back to chapter 6 about
intermediation/broking.
On an ongoing basis, the broker’s role is to:

• provide updated information to insurers, as provided by the client and any experts appointed;
• negotiate on behalf of their client (if required); and
• receive any claims funds (usually) for onward transmission to their client.
B2 Insurer’s role in the claims process

Within the London Market there are two main claims handling agreements which set out pre-agreed
Within the London
Market there are two combinations of insurers that make decisions on claims and can bind the rest of the market. Added to
main claims handling this is the involvement of any overseas insurers, which, in some cases, can be the decision-makers
agreements
where the London Market insurers are bound by their decisions.
When we reviewed underwriting in chapter 7, section A2, we discussed the concept of leading and
following underwriters and again in chapter 8, section B2 we saw how in the MRC/slip there was a
section for setting out the claims agreement parties, at least for the London Market proportion of the
risk.
There is a distinction in these agreements between the Lloyd’s and the International Underwriting
Association of London (IUA) Company Markets and it is important to understand how these agreements
work in each Market. The Markets and basis of rules are set out in the table below.
Table 10.2: Claims agreement rules

Market Basis of rules
Lloyd’s Market Lloyd’s Claims Schemes
Chapter 10
IUA Company Market (marine and aviation) IUA claims handling agreements
IUA Company Market (non-marine) No binding possible – each insurer agrees for its own
share
Let’s look at these markets in turn, taking the one with the simplest rules first.
B2A IUA Company Market (non-marine)

The members of that part of the Company Market are not prepared to agree to one leader binding or
making claims decisions on behalf of the rest of the market and the broker needs to obtain the
agreement of all individual insurers on a risk that are placed within that marketplace. (As indicated in
table 10.2). This rule applies to any information submitted by the broker, whether it is an advice or a
request for settlement. The only exception to this is that individual companies can set up the claims
agreement system to automatically bypass them with further advices if their share is below a pre-set
financial limit.
B2B IUA Company Market (marine and aviation)

The rules here vary as to whether the submission from the broker:
• is an advice or a settlement;
• includes any Lloyd’s involvement; or
• is direct or excess of loss reinsurance (proportional reinsurance is outside the rules).
Advices can be agreed by the lead Company Market underwriter only; however, settlements have a
Advices can be
combination of requirements: agreed by the lead
Company Market
• Marine business (not excess of loss). If there is Lloyd’s involvement, only one company can bind the underwriter only
rest of the Company Market. If there is no Lloyd’s involvement, the first two companies are required
to agree.
• Aviation (not excess of loss). If it is direct business, the first two companies are required to agree.
If it is facultative reinsurance, the lead company only.
• Excess of loss reinsurance. The requirement is always that the first two companies must agree.
Understanding types of company

A company can be identified as being part of the non-marine or marine/aviation grouping by the code allocated to it.
The code can be found on its underwriting stamp.
Non-marine companies have codes constructed as follows: A1234.
Marine/aviation companies have codes constructed as follows: 3000/01.
Activity
If you work for an insurance company, find out your code and look at some MRCs/slips to find other insurers’ codes.
If you work for a broker look at the company underwriting stamps on some MRCs/slips to find their codes.
Write an example of one of each here:
B2C Lloyd’s Market

Claims handling within the Lloyd’s Market is governed by documents called the Lloyd’s Claims Scheme Refer to LM1,
chapter 5
(Combined).
Issue of Lloyd’s Claims Schemes

This document is issued by Lloyd’s under market byelaws (the rules of Lloyd’s that are made by the Council of
Lloyd’s).
Reinforce
Chapter 10
For more information on byelaws and the Council of Lloyd’s, visit www.lloyds.com
This document contains the basic rules concerning the agreement parties required for claims, together
with some exceptions for certain classes of business and any business written by only one syndicate (or
two syndicates managed by the same managing agent), known as ‘singleton’ business.
All claims which are not on risks written as singletons, whether paper or electronic, are now either single
or dual leader agreements in Lloyd’s. Claims fall into one of two categories:
Standard claims
• Claims under £250,000 (or £500,000 for energy or property treaty classes): handled by leader only.
Complex claims
• Claims above £250,000 (or £500,000 as above) handled by the first two syndicates only. Claims can
also be deemed complex on their facts rather than their value but that is a decision that is made by
the leader at the time of presentation.
Claims can also move between categories during their lifecycle – for example, a claim might be
considered to be complex on its facts rather than its value at first advice but then be downgraded once
more facts develop.
The business rules that underpin how claims are handled by the leaders can be found within the Claims
Transformation Programme guidelines. The CTP was a process of change in the decision makers for
claims from leader and Xchanging to just leaders and was started in 2010, although is now business as
usual. The aim of the process was to ensure that the London market became more streamlined in its
claims decision making to enable it to keep up with international competition.
Activity
Use this link to find out more about CTP in Lloyd’s:
www.lloyds.com/the-market/operating-at-lloyds/claims-at-lloyds/claims-transformation-programme
Activity
Find some MRCs/slips and look at the claims handling arrangements. Are they always the same?
Question 10.1
Which of these best describes the Lloyd’s Claims Schemes?
a. Rules for claims handling in the Lloyd’s Market. F
b. Rules for claims handling in the London Market. F
c. Rules for claims handling for binding authorities. F
d. Rules for appointing experts on claims. F
B3 Role of Xchanging in the claims process

XCS provides a key service for Lloyd’s insurers: maintaining the Lloyd’s Market claims database, which
includes entering of data, sending out overnight messages to Lloyd’s insurers and moving funds (both
for indemnity and fees) from syndicates to brokers (or other destinations as appropriate). This is called
the ‘Technical Processing’ service and is conducted on all files.
Additionally, it is possible for leaders to choose to delegate their authority to another party to handle
claims. This delegation can be to XCS where they would act solely for that leader, sometimes meaning
that an XCS adjuster making lead decisions will be working in conjunction with another XCS colleague
who is entering the data onto the market systems.
Chapter 10
Activity
Research the Volume Claims Service which rolled out in early 2014 to allow leaders to delegate some claims
handling to specific outsource providers:
www.lloyds.com/the-market/operating-at-lloyds/claims-at-lloyds/claims-transformation-programme/volume-claims
B4 Experts
Not every claim requires the use of an expert. However, insurers in the London Market consider the use
Not every claim
of appropriate experts, not only to investigate the claim, but also in the case of liability matters to requires the use of an
defend the insured against any legal action that commences against them. expert
In most cases, the expert is appointed via the broker as a communication channel and their reports are
sent to the insurer via the broker. Clearly, the insured also has access to the reports because they are
being sent to their agent.
However, there are certain situations where the insurer may want to appoint experts for advice only and
these situations arise when insurers are concerned about the coverage under the policy against which
the claim has been made. Obviously, in such cases, the insurer does not want the insured to be aware of
the advice it is obtaining. Therefore the insurer appoints the experts itself and they report directly to the
insurer.
Activity
Think about all the different types of experts that might be used on a claim.
Write your list here:
The types of experts that might be used in the claims process are as follows (note that the list is
illustrative not exhaustive):
• lawyers, either to defend the insured or to advise the insurer about policy coverage;
• loss adjusters to inspect damage and make recommendations for repairs;
• surveyors to evaluate loss or damage;
• accountants for business interruption type claims;
• investigators – personal injury claims sometimes require the claimant to be observed and monitored;
• specialist experts such as fire investigators, ship collision experts and chemists;
• translators and interpreters; and
• subrogation/recovery specialists.
Expert management is a very important concept in the London Market; in practice this means firstly that
Expert management is
the party (usually the insurer) employing the expert should ensure that the expert is properly briefed and a very important
that they understand what is required of them. Secondly, the insurer should hold the expert accountable concept in the London
Market
if they do not deliver what is required of them.
Some insurers issue documents known as ‘Terms of Engagement’ to help the expert to understand what
is required of them. These only need to be issued once (unless the terms change) and they set out in
detail the required scope and frequency of reports, what the expert can charge for and how often they
can submit invoices. As we will see in the next section on practical claims handling, when an expert is
appointed, the insurer should provide them with a detailed instruction letter covering the specifics of the
task required for that particular instruction.
Question 10.2
What role does XCS usually play for all claims in the Lloyd’s Market?
a. Entering data on the central claims database. F
b. Making claims decisions. F
Chapter 10
c. Appointing experts in respect of claims. F

d. Checking compliance by the Company Market with their claims handling procedures. F
C Practical claims handling

In this section, we are going to build on what we just learned about claims handling, focusing on how it
works in practice. A simplified outline of the process is shown below.
Once notified of a loss, the broker must work out the right combination of insurers from which they need
to obtain instructions.
Broker submits information to chosen agreement parties, either on paper file or via an Electronic Claims File (ECF).
Agreement parties consider information and respond to broker, either on paper file or electronically.
If an insurer decides it has a conflict of interest, it will withdraw from its agreement party role.
For Lloyd’s only, XCS enters the claims data onto the XCS claims system to be sent to syndicates.
Broker receives messages which advise of agreement parties’ comments as soon as they are made on an electronic
claims system or reads what the agreement parties have written on a paper claims file.
Agreement parties receive daily messages updating the information held about the claims on their own systems.
Should the agreement parties agree to any payment being made for a presentation concerning a request for
settlement, funds are debited from their accounts to that of the broker.
Broker updates its file and repeats process as often as is required.
C1 First notification of loss

First notification of loss generally goes to the broker; it may arrive with the London broker indirectly
First notification of
loss generally goes to through a chain of brokers, or directly from the insured. However, there are some types of insurance
the broker where the insurer requires the insured to advise named experts in the event of the loss. The insurer
usually stipulates this requirement by inserting the details of the named experts into the policy.
Examples are as follows:
• Professional indemnity – insurers nominate a lawyer to be the point of contact for the insured to notify
a claim.
• Cargo – insurers anticipate that the insured will immediately notify a surveyor local to them at the time
and place of the loss, to review and suggest potential remedial action for damaged cargo.
There is a very practical reason for this, particularly with physical damage losses such as hull, cargo and
property. Losses can occur at any time, including evenings, weekends and public holidays when neither
the broker nor the insurer might be contactable. In some cases, immediate action is required, so by
empowering the insured to take particular steps and instruct pre-agreed experts the potential for later
Chapter 10
dispute on this subject is reduced.

Question 10.3
What is the most likely reason that an expert is the first party to find out about a loss?
a. They happened to be on site at the time. F
b. They have been written into the policy as the notification party. F
c. Their office is local to the insured. F
d. They know the broker. F
At the point at which the broker receives the information about the loss, they have to consider whether
any particular individual within their firm might be precluded from handling the claim. This decision is
based on whether there is any conflict of interest, as opposed to an issue of workload or experience.
Where the broker has delegated underwriting authority, a conflict of interest can arise in any situation
A conflict of interest
where they are potentially serving two masters. Interestingly, an insurer can also be challenged by can arise where the
potential conflicts of interest. broker is potentially
serving two masters
Practical examples for an insurer, in the context of claims handling are:
• Professional indemnity. Two different experts being sued because of the same underlying problem.
• Marine hull. Handling claims for both vessels in a collision situation, where both are the firm’s
insureds.
• Aviation. Dealing with product liability claims for the manufacturer and distributor of some parts.
Activity
Referring back to chapter 2 and the various different classes of business, think of at least three more potential
conflict of interest situations that an insurer could face.
C2 Advising the insurers

As stated earlier, when the broker has received advice of the loss, they need to work out the right
combination of insurers from which they need to obtain instructions. In addition, they need to make sure
that information is actually sent to all the insurers. Let’s consider how they do this.
C2A Paper or electronic?

The London Market uses electronic claims notification and agreement functionality for a large proportion
of the claims handled; however, there is still the need for the occasional paper file. Therefore, we will
start by reviewing that system.
Note that owing to logistical issues, a paper file has no place for overseas underwriters; therefore, they
Owing to logistical
will often receive their communications by email with attached documents. issues, a paper file
has no place for
Paper file overseas
underwriters
Once the broker has identified from which parties they need to obtain instructions, they make up a
paper file containing all the information that the insurers will need in order to consider the claim and
give any instructions for next steps. The information that the broker should include in this file for a first
advice includes:
• A full copy of the MRC/slip and any endorsements to it. If the claim is on a binding authority they need
Chapter 10
to include the binding authority itself and any certificates evidencing the insurance issued by the
coverholder in relation to the risk concerned with this loss.
• All information received to date about the loss.
Copy of the MRC/slip

It might appear strange that an insurer is not expected to look at its own copy of the MRC/slip, which it would have
made at the time it wrote its line. The reason is that the insurer generally does not have a copy of the finalised
document that was submitted to Xchanging for entry onto the risk system – the broker retains this and provides it in
the claim file.
Having made up the paper file, the broker visits the required insurers to obtain instructions. For the rest
of this chapter, we use the market term ‘agreement parties’ to refer to these insurers.
For the Company Market agreement parties (which could be all of them), the paper file supports an
electronic message that the broker should have already sent to them.
For Lloyd’s agreement parties, no such electronic message will have been sent by the broker if they are
using a pure paper file and their arrival might be their first notice of the loss. The leader considers the
file and asks questions, appoints experts and/or might even decline the claim if there is enough
information to indicate that coverage is unlikely. His comments will be written onto the broker’s
paper file.
As we will see below, the Lloyd’s leader does not need to enter any claims data into its system at this
point, although of course it may if it so wishes.
Having left the leader, the broker takes their file to XCS where they will enter data for the Lloyd’s market.
All of the agreement parties visited by the broker have to consider whether they have a conflict of
interest. There are practical ways for insurers to deal with potential conflicts of interest, depending on
which of the two types it is:
• Organisational conflict. The insurer as a whole decides that it cannot be an agreement party on the
Two types of conflict
of interest are claim and so the role is passed on to the next insurer on the list. Of course, the conflicted insurer still
‘organisational’ and has to pay its share of any claim – conflict does not impact on its position as an insurer, just on its
‘individual’
decision-making role.
In this case, the broker has to note which insurer is withdrawing from its agreement party role and
ensure that they visit the new combination of insurers.
• Individual conflict. This type of conflict management is also known as ‘Chinese Walls’ or ‘Ethical
Walls’ and it seeks to manage the conflict internally. To avoid the conflict of interest, the insurer’s
claims adjuster ensures that files are clearly marked to tell brokers who to see within the organisation.
Question 10.4
Which of these best describes a conflict of interest?
a. Any situation where the broker has more than one claim to advise. F
b. Any situation where the insurer has more than one claim to consider for the same broker. F
c. Any situation where the insurer or broker is involved in more than one interest from the same loss. F
d. Any situation where Lloyd’s and an IUA company are on the same risk. F
C2B Claims data transmission to insurers

In respect of the ‘paper file’ process, the broker also uses an electronic message for the Company
Market, supported by a paper file for more information, see section B2A. In this case, the data submitted
by the broker (once it has been cleared by the agreement parties) is converted into an electronic
message which goes out overnight to populate each company insurer’s system.
For Lloyd’s, if no electronic message has been created by the broker, how is the data supplied to the
syndicates which are not agreement parties? The answer is that XCS, when presented with the paper file,
inputs the claims data into its claims database which sends out the messages overnight to the Lloyd’s
syndicates to populate their systems.
Activity
Find out what proportion of claims handled in your organisation, whether as a broker or an insurer, are presented on
paper to London Market insurers.
Write your answer here:
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C3 Electronic claims handling

The Electronic Claims File (ECF) is a way in which the broker is able to load and submit data and
documents to insurers located not only in London, but also anywhere with an internet connection. In this
section, we will see how this system operates and explore some of the advantages and disadvantages of
the electronic system, versus paper.
Currently, not all claims can be handled via the electronic system so the first thing the broker needs to
do is ensure that their claim is not on the ‘out of scope’ list. Very few classes of business or types of
claims are now out of scope and the positive push within the market is to use the electronic system for
as much as possible.
Activity
Review the ECF website for more information:
www.ecfinfo.com
If it appears that the claim is not on the ‘out of scope’ list, the broker can start their presentation to
insurers. The key difference between paper and electronic claims handling is quite simple: instead of
presenting insurers with a paper file to consider and comment on, the broker submits the relevant
information (including documents) electronically. So how does it work?
ECF comprises two components:
ECF comprises a data
messaging system/
• data messaging system/database called CLASS; and database called
• document repository. CLASS and a
document repository
• The broker sets up the electronic message and creates a unique reference for their claim, called the
Unique Claims Reference (UCR).
• Each claim must be linked to the correct policy. Every MRC has to have a Unique Market Reference
Every MRC has to
(UMR), which is essentially a policy number with the broker’s ID code at the start of the reference have a Unique Market
which identifies it within the premium database. This also serves to identify the policy in both the Reference (UMR)
database and the document repository.

• The broker sets up the claims data using the UMR and UCR as the key references and completes the
data message fields with all the key information about the claim – the same information that they
would have presented to the insurers via the paper file.
• Next, they add to the document repository all of the documents (including the MRC/slip) that would
have been in their paper claims file.
– The broker can send this electronic message from their office (which does not necessarily need to be
in London any more).
– The CLASS data messaging system has built-in routing mechanisms, so that the message is sent
The CLASS data
to the leaders first. It is sent simultaneously to leaders in the Lloyd’s and Company Markets and messaging system
they can view each others’ comments on the system as they would have been able to do on the has built-in routing
mechanisms
paper file.
– The leaders can also view all the attached documents (and if they so choose, add their own).
• Once the leaders have considered the presentation, they can either agree or query it. The broker can
see what response the leaders have given to the message and the message itself continues down the
electronic path to the next agreement party that has to see it.
– The agreement parties use a combination of ‘radio buttons’ (requiring them to make a choice among
a set of mutually exclusive, related options) and text boxes to put their comments on the broker’s
presentation, which might be the appointment of an expert, a request for more information
immediately or merely a noting of what has been provided and awaiting any further information
when available.
– For Company Market business, as soon as the correct combination of agreement parties has seen
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the message, the system feeds the data into all company insurers’ databases overnight.
– For Lloyd’s business, where there is sometimes a second syndicate that has to see the claim before
it arrives with XCS, the leader can ‘tell’ the system to send it onto the second syndicate. Once the
second syndicate has dealt with it, it goes to XCS.
– XCS takes the electronic data in every file sent by the broker and copies it into its own system to
send out the electronic message overnight to the clients.
The electronic claims system can cope with changes in agreement parties (for example, brought about by
The electronic claims
system can cope with conflicts of interest) and has functionality to deal with both organisational and individual conflicts.
changes in agreement
parties Table 10.3 compares the paper and electronic systems to show some examples of the advantages and
disadvantages of each. Note that the list is illustrative not exhaustive.
Table 10.3: Comparing the paper and electronic claims processes

Paper Electronic
A broker creates a physical paper file which is held by All data and documents are held electronically and can be
them and carried around to the various insurers. If any accessed by all insurers simultaneously as long as they
insurers are outside London, they must use email or other have internet access and logins to the CLASS system.
communication methods. Insurers have to wait their turn
to see the physical file. Neither the insurers’ claims personnel nor the broker need
to be in London.
The file is either deposited with an insurer or physically The electronic system is available almost all of the time
‘broked’ (negotiated). Insurers have limited opening hours and can be accessed by insurers whenever required.
for brokers to visit.
Paper can get lost from a file. Once loaded on the system, documents cannot be
deleted.
Depending on the size of the claim, a file might run to two All data and documents are held in one central location so
or more volumes. everything is available to review.
Once a leader has dealt with the file, a broker has to take Once the leader has dealt with the transaction, the system
it physically to the next agreement party. automatically routes it to the next agreement party.
If a broker is attending an insurer’s office to discuss a A broker can attend an insurer’s office to discuss a claim,
claim they should carry the file (or files) with them. The knowing that all documents and information are already
insurer may not be prepared to make a decision ‘on the there. The insurer would have had a chance to consider
spot’ and may want to keep the file for a while. them before the meeting and can make reference to the
information afterwards.
Paper is a familiar medium for reading information. Scanned documents take some practice to read and the
system takes time to learn to use.
Question 10.5
If the broker is using ECF to submit claims to insurers, what two actions must the broker take to start the process?
a. Set up and send electronic messages; load documents to the repository. F
b. Set up electronic messages; telephone the insurers to tell them about the claim. F
c. Email the insurers; load documents to the repository. F
d. Load documents to the repository; take a paper file to the insurers for reference. F
C4 Further claims handling

Each time a broker receives more information, whether from their client or perhaps in an expert’s report,
they need to advise the insurers using whichever communication method is being used and obtain their
instructions and agreement/comments. No two claims are the same: some claims can be resolved with
two transactions only, while others may take several years to resolve and involve a number of
transactions submitted to the various agreement parties.
At any point, the agreement parties may decide to obtain their own expert advice which will not be
received through the broker. This advice will be sent to them directly from the experts concerned.
Documentation can be uploaded to the insurers’ own part of the document repository that the broker
cannot see.
Consider this…
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Note that if insurers want to bypass the broker for expert advice on those claims which the broker is running on a
paper file, the insurers will simply keep their own internal files.
C5 Settlements
Monies can be paid at any time during the claim lifecycle either as an interim payment of indemnity
(sometimes known as a payment on account), or for experts’ fees. Whether the file is presented on paper
or electronically there are some key matters to consider.
• Is the amount being requested reasonable and supported by any evidence, either as fee bills or advice
from the expert?
• Is the claim covered under the policy?
• Has any applicable deductible or excess (not generally required for fees) been taken off the claim
amount?
• Are there any parties named in the policy which have control over where claims payments are made –
this often happens where banks have lent money as mortgages. They appear as loss payees in the
policy (so they are not insureds in any way). In practice, this means that their permission must be
sought before the payment of any indemnity (usually not required for the payment of fees) under the
policy.
The loss payee clause may permit small claims to be paid to the insured but generally larger ones will
have to be paid directly to the bank.
• In what currency is the claim being presented? Whilst the Company Market has very few currency-
related restrictions, there are only 14 currencies in which Lloyd’s can settle claims and one of them (US
dollars: USD) is even more restricted in that claims can only be paid in USD if the premium was paid in
USD and vice versa.
• Indemnity payments should only be made in exchange for a receipt or other similar document. This
Indemnity payments
document is the insured’s formal confirmation that the amount of money being claimed is accepted in should only be made
whole or partial settlement of the claim being made. This document is very important as it seeks to in exchange for a
receipt or other
prevent repeat claims being made. similar document
• Confirmation of where the money is to be paid – as well as getting the permission of the loss payees,
insurers need confirmation that both the insured and loss payee are happy for money to be paid to the
broker. As noted in the point above, the insurers do not want to have to pay again, if for some reason
the funds do not get from the broker to the final client. Full and final payment of funds to the client is
the broker’s final role in claims handling for their client.
With the coming into force of the Enterprise Act 2016 in May 2017, the insured now has the right to
commence an action for damages for late payment of his claim any time up to 12 months after the claim
was actually paid. Therefore it is now even more important to ensure that payments, whether they be
partial or in full are made as promptly as they can, taking into account all the circumstances of the claim
and the entirely reasonable need of insurers to actually investigate it to come to a decision.
Should the agreement parties agree to any payment being made, the movement of money is carried out
in one of two ways depending on the sector of the market:
• for the Company Market, the agreement parties agreeing to the settlement transaction that the broker
puts on the electronic messaging system will automatically trigger the money moving from their
accounts; although it will not always be immediately, and in some cases only the last insurer’s
positive response will trigger payment from all of them (they might need to see the paper file as well if
documents are not scanned into the repository); and
• for the Lloyd’s Market, XCS enters the settlement information onto its database once all the agreement
parties have agreed the settlement. XCS triggers the movement of money from the Lloyd’s insurers.
C6 Claims handling under binding authorities

It is possible for insurers to delegate some claims handling authority under binding authorities either to
coverholders or organisations such as third party administrators (TPAs).
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In a claims situation, these parties consider exactly the same information as insurers; however, the
information flow is slightly different.
Parties handling claims under delegated authorities receive information either from a broker or possibly
Parties handling
directly from the insured. They handle claims within their authority (which can include financial and claims under
factual limits) and refer anything outside their authority to their principals (the agreement parties under delegated authorities
receive information
the binding authority). These referrals go via the London broker and can be done via a paper file or ECF either from a broker
as we saw earlier. or possibly directly
from the insured
On a regular basis (usually monthly) the coverholder/TPA sends a ‘bordereau’ via the broker to the
insurers. This is reviewed by the agreement parties and the relevant information updated onto the
insurers’ systems using the methods previously discussed.
One of the key differences with claims handling under binding authorities is that the insurers often
provide the coverholder/TPA with an amount of money up front, to enable them to settle claims
promptly. This money is known as a ‘loss fund’. Once a month, when the bordereau are submitted the
loss fund is replenished by insurers on the basis of the claims that have been paid out during the
previous month.
At the end of the binding authority when the claims are concluded, the loss fund should be returned to
insurers in full, unless they had agreed in previous months to stop the replenishment process and let
the fund run down. In this case, only the balance left in the fund would be returned to the insurers.
C7 Practical considerations when handling claims

Refer to chapter 1 Notwithstanding the class of business there are various issues that claims adjusters and brokers need to
consider when reviewing claims information (whether submitted on paper or electronically). These are
shown in table 10.4.
Table 10.4: Reviewing claims information

Concept Issues that arise to be considered
Indemnity As we saw in chapter 1, not all policies are policies of indemnity. Personal accident policies use a
schedule of values for each type of injury to pay out regular benefits or a lump sum for disablement.
For other types of policy, the key to indemnity is putting the insured back into the position that they
were in before they suffered the loss. Insurers have to be mindful of the situation where the insured
might end up better off after the loss than they were before.
For example a five-year-old machine might be so badly damaged in a fire that it is impossible to
repair. The model of machine is no longer made and second-hand ones are unavailable, meaning that
the insured will want a new one. This concept is called ‘betterment’ – where the insured improves
their situation after the loss. Claims adjusters must look carefully in the policy wordings applicable to
the claim being handled to see if there is any specific provision to deal with this situation. If there is
no specific wording, the general insurance principle of the insured not profiting from their loss applies
and some negotiation may need to take place.
Many wordings have specific provisions for betterment which prevents any dispute on the subject at
the point of a claim.
It’s also important to recognise that there are certain policy features which reduce the amount that an
insurer has to pay even if there are no issues around coverage or betterment:
• policy limit;
• any applicable sublimits; and
• any excess or deductible applicable.
The existence of sublimits is very important as many risks will have internal sublimits which will
apply to different locations or perils, and must be carefully reviewed.
Subrogation Subrogation is the right of an insurer, having indemnified the insured, to ‘step into their shoes’ and
claim against any third parties which might have contributed to the loss. For example:
• Cargo. If a cargo insurer pays a claim for damage to goods being transported, it will make a
subrogated claim against the carrier (transportation company).
• Property. If a property insurer pays a claim for a fire and it appears that the sprinklers in the
property had been incorrectly installed or maintained, the insurer will make a claim against the
installers and the maintenance company.
The key to successful subrogation is not losing evidence or the right to make a claim. For this
The key to successful
subrogation is not
reason, the insurer should be thinking about subrogation from the moment of first advice. Its legal
losing evidence or the rights do not arise until it indemnifies the insured; however, many policy wordings now contain
right to make a claim clauses which indicate the need for the insured to co-operate with the insurer before final
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settlement of the claim either by formally making claims against the third parties or ensuring that
evidence is preserved.
Table 10.4: Reviewing claims information

Contribution Contribution is the concept of two insurers covering the same subject-matter (physical item or
Contribution is the
liability) against the same risk. Here, the insurers should share any claims made, rather than one concept of two
policy having to pay the whole claim and the other not have to pay anything at all. insurers covering the
same subject-matter
It is not as easy as splitting the claim 50/50 between the two policies; the most commonly used (physical item or
approach to the calculation of liability is what is known as the ‘independent liability’ method. liability) against the
same risk
As the name suggests, this method works out what each policy would have been liable to pay if it
were the only one on risk. If both policies are for the same amount, the claim is split 50/50.
Proximate Insurance policies do not cover every loss that occurs in respect of the subject-matter:
cause
• there has to be fortuity;
• there may be a set of named perils (as we saw in chapter 1); and
• there will usually be some exclusions.
Therefore, it is very important to work out whether the loss was actually caused by a peril covered
under the policy.
Proximate cause is the most dominant or operative cause, not necessarily the last thing that
Proximate cause is
happened before the loss. the most dominant or
For example, a ship is damaged by a torpedo which causes a hole in her side; she then sinks during operative cause, not
necessarily the last
a storm. What is the proximate cause of the loss: the torpedo causing the hole or the storm? Why thing that happened
does it matter? It matters if loss by storm is covered and loss by torpedo is not. before the loss
If a property loses its roof during a fire and rain subsequently enters the property, damage may be
caused to some items by the original fire and some by the subsequent rain. If damage by fire is not
covered but water damage is then you have to consider the proximate cause of each element of
damage.
If the argument could be made that the water damage could not have happened but for the fire
damage having occurred previously, then the proximate cause of all the damage is the fire. If damage
by fire is covered, the insured can claim for both the fire damage and the subsequent water damage.
If their policy does not include damage by fire, but does include damage by water, they may not be
able to claim as arguably the proximate cause of the loss was not the rain but the original fire.
What about those situations where there is more than one proximate cause and the resultant damage
cannot be ‘unravelled’ so as to allocate costs of repair or replacement to each of the proximate
causes?
Here, if the policy covers one of the causes and is silent on the other then the whole claim is paid.
However, if the policy covers one and expressly excludes the other, the whole claim is excluded.
Deductible/ These are the first amounts of any loss that have to be paid by the insured. In many London Market
excess policies, there is more than one deductible/excess – maybe separate ones for, say, different aircraft,
offices of an accounting firm or properties being insured. In addition, there can be different
deductibles/excesses for different causes of loss (e.g. a higher one for earthquake or windstorm in a
property policy).
Claims adjusters have to be careful that any amounts paid in indemnity take into account the correct
deductible or excess. In some policies, the deductible or excess may reduce significantly once a
certain number of individual claims have been paid. In these cases, it is important to ensure that the
correct amount is identified so that insurers pay neither too much nor too little.
Exclusions As already mentioned, exclusions are present in almost every insurance policy and the claims
adjuster has to be very careful to check whether the insured’s claim is excluded either in whole or in
part. As we will see in the next section, the regulation of claims handling makes clear that clarity in
communications with an insured is important and this is especially so if there is a potential issue with
the claim or interpretation of an exclusion. An insurer may decide to take some advice themselves
about whether the wording of an exclusion is strong enough to decline the claim, but the insured
should always be told as a matter of courtesy exactly what is happening.
In this situation, an insurer issues what is known as a ‘Reservation of Rights’ (ROR). This means that
it is warning the insured that it thinks that there might be a problem with the claim; however, it is
investigating some more. The insurer should say in respect of what aspect of the claim it is reserving
rights (e.g. the application of a policy exclusion).
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The legal issue here is called ‘estoppel’. An insurer could find itself ‘estopped’ or prevented from
declining a claim because it had led the insured to believe (by its behaviour) that it had no queries
with the claim. By issuing the ROR the insurer endeavours to make clear that there is a problem and
that its continuing investigations should not be misinterpreted as the problem having been resolved
satisfactorily.
However, the insurer should attempt to resolve the query as soon as possible to get to a position
where the reservation is lifted or the claim denied.
Given the volume of business written out of the USA, it is very important that insurers and their
claims personnel understand the legal impact of using RORs and take appropriate legal advice.
Example 10.1
Let’s examine an example of contribution.
A claim is made for £100,000.
Policy 1 has a limit of £50,000 and Policy 2 has a limit of £100,000 – we will ignore deductibles for this calculation.
Therefore Policy 2 pay twice as much of the claim as Policy 1 if the policies were just presented individually.
Therefore the split between the policies will be one third payable by Policy 1 (i.e. £33,333) and two-thirds by
Policy 2 (i.e. £66,667).
Activity
Review some slips that you have access to and see if any of them contain sublimits. Speak to colleagues and find
out if the sublimits caused any issues arising out of the large Cat losses in 2011, such as the Thai Floods.
Activity
Other than cargo and property, think of two different types of insurance claim and consider which parties an insurer
might subrogate against, in each case.
Write some notes here and ask your colleagues for their input:
Activity
Ask some claims colleagues if they have had situations where they have had to consider the proximate cause of a
loss because of any limitations of coverage under the policies. Good examples might be property losses following
hurricanes where wind damage is covered but flood damage is not.
Activity
Look at some MRCs and review the deductible/excess provisions. Can you find any complex ones?
Activity
Speak to some claims colleagues and find out what they know about RORs. Are they used in your firm?
Chapter 10
Question 10.6
What is the importance of proximate cause in claims handling?
a. It enables the insurer to determine whether the claim is covered since some perils are excluded from
the policy. F
b. It enables the insurer to determine whether the insured has an interest in the subject-matter of insurance. F
c. It determines which experts are required by the insurer to investigate a claim. F
d. It helps the insurer to detect fraud. F
C8 Insurance fraud
Insurance fraud is a major problem which prevails throughout the insurance market, including the
Insurance fraud is a
London Market. In fact, fraud can be on a much bigger scale in the London Market, since larger claims major problem which
are more common and this is reflected on the potential scale of fraud. All claims personnel (both in prevails throughout
the insurance market
brokers and insurers) should be watchful for some of the key fraud triggers such as:
• excessively documented claims file;
• pressure to settle;
• reluctance to answer questions;
• and stories that do not add up!
Activity
Review this loss adjuster’s website to review the work they have been doing to combat insurance fraud:
www.crawfordandcompany.com/services/counter-fraud-solutions.aspx
D Regulation of claims handling

In this section we are going to look primarily at the regulation of claims handling in the London Market.
However, we are also going to touch on overseas regulation given the volume of business in the London
Market that emanates from other countries.
D1 UK regulation
The FCA handbook contains the Insurance: Conduct of Business sourcebook (ICOBS) which includes an
entire chapter dedicated to requirements for claims handling. Certain sections of the sourcebook apply
to insurers and others to intermediaries. Additionally, there are distinctions drawn between acceptable
behaviour between consumer and commercial clients.
ICOBS 8.1.1 says:

An insurer must:
1. handle claims promptly and fairly;
2. provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress;
3. not unreasonably reject a claim (including by terminating or avoiding a policy); and
4. settle claims promptly once settlement terms are agreed.
ICOBS 8.1.2 says:
A rejection of a consumer policyholder’s claim is unreasonable, except where there is evidence of fraud, if it is for:
1. non-disclosure of a fact material to the risk which the policyholder could not reasonably be expected to have
disclosed; or
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2. non-negligent misrepresentation of a fact material to the risk; or

3. breach of warranty or condition unless the circumstances of the claim are connected to the breach and unless
(for a pure protection contract):
a) under a ‘life of another’ contract, the warranty relates to a statement of fact concerning the life to be
assured and, if the statement had been made by the life to be assured under an ‘own life’ contract, the
insurer could have rejected the claim under this rule; or
b) the warranty is material to the risk and was drawn to the customer’s attention before the conclusion of the
contract.
Be aware
In chapter 5, section B1, we discussed the Consumer Rights Act 2015, which came into force on 1 October 2015.
This legislation has a requirement to ‘perform a service within a reasonable time,’ which adds another dimension for
insurers to consider, in addition to the ICOBS requirement that claims should be managed ‘promptly’.
There is a clear distinction between these two sections. The first deals with any type of insured;
however, the second draws the distinction of the consumer.
Insurers are subject to far stricter rules when dealing with the consumer insured and cannot invoke
Insurers are subject
to far stricter rules certain key areas of insurance law such as non-disclosure and misrepresentation without showing that
when dealing with the fraud has occurred. Fraud is notoriously difficult to prove in the English Courts and insurers have
consumer insured
historically avoided it where possible, instead using the arguments of non-disclosure and
misrepresentation to extricate themselves from insurance contracts.
Conduct Risk
A similar concept called Conduct Risk requires insurers to take into account the relative sophistication of their
clients. Among other things, insurers must not put any barriers in the way of their making a claim or a complaint,
and therefore ensure that the methods available for doing either are clear to all customers.
It is important to remember that Conduct Risk applies to all customers, whether or not they also fall within the
definition of a consumer; only their relative levels of sophistication can be used to differentiate between them.
Consider this…
What conduct risk training have you received? Did any of it relate to claims?
ICOBS 8.3 deals with intermediaries’ responsibilities. There are two key sections to this part which are
worthy of closer review:
ICOBS 8.8.3 deals with conflicts of interest and says:

1. Principle 8 requires a firm to manage conflicts of interest fairly. SYSC 10 also requires an insurance
intermediary to take all reasonable steps to identify conflicts of interest, and maintain and operate effective
organisational and administrative arrangements to prevent conflicts of interest from constituting or giving rise to
a material risk of damage to its clients.
2. [deleted]
3. If a firm acts for a customer in arranging a policy, it is likely to be the customer’s agent (and that of any other
policyholders). If the firm intends to be the insurance undertaking’s agent in relation to claims, it needs to
consider the risk of becoming unable to act without breaching its duty to either the insurance undertaking or the
customer making the claim. It should also inform the customer of its intention.
4. A firm should in particular consider whether declining to act would be the most reasonable step where it is not
possible to manage a conflict, for example where the firm knows both that its customer will accept a low
settlement to obtain a quick payment, and that the insurance undertaking (i.e. the insurers) is willing to settle for
a higher amount.
We can see that the FCA considers the identification and management of conflicts in a broking firm to be of utmost
importance.
ICOBS 8.3.4 says:
A firm that does not have authority to deal with a claim should forward any claim notification to the insurance
undertaking promptly, or inform the policyholder immediately that it cannot deal with the notification.
This section states simply that a broker that does not have claims handling authority should tell the
insurer about its clients’ claims as soon as possible.
Reinforce
Remember that the new regulators have proposed a far wider definition of the consumer than existed under the
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previous regulatory regime and the provisions of ICOBS may apply more widely in the future.
D2 Anti-money laundering training

Under current UK regulatory rules, regulated firms are required to ensure that adequate processes are in Refer to LM1,
chapter 7, to remind
place to minimise the risks of the firm being used by criminals to commit financial crime (including, but yourself of the laws
not limited to money laundering). Whilst the majority of the indicators for money laundering are spotted and offences
concerning money
in the claims handling process, it is important that all personnel working in regulated firms are laundering
adequately trained to spot signs of potential money laundering activity and report them.
D3 Overseas regulation
Given that such a large proportion of the business coming into the London Market is from overseas, it is Refer to chapter 1
perhaps not surprising that this has had a regulatory impact as well. In chapter 1, section B2A, we
reviewed the ability of London Market insurers to write business from overseas through licences; in this
section, we are going to examine an area of overseas regulation which centres on claims handling.
In the USA, a number of states have their own insurance claims handling regulations. The most famous
In the USA, a number
of these is California, but a number of other states (e.g. Florida) also have them. Whilst these regulations of states have their
were originally created to temper the behaviour of local insurers and protect the innocent insured from own insurance claims
handling regulations
bad behaviour from insurers, they extend to any entity involved in handling claims for an insured in
California.
The key points for London Market claims personnel handling Californian claims to be aware of are the:
• timelines for acknowledging receipt of claims;
• timelines for updating the insured should investigations be ongoing; and
• information that insureds need to be given should claims be denied so that they can complain to the
California department of insurance.
London Market insurers need to ensure that all personnel handling Californian claims, i.e. internal
claims personnel and delegated claims authority personnel (such as coverholders and TPAs), are
certified annually.
D4 Sanctions
International businesses need to be aware of the existence and application of ‘sanctions’. A sanction
A sanction can be
can be quite simply defined as a ban. Governments around the world can ban all parties (governments, quite simply defined
businesses, individuals) from doing business with certain individuals, businesses, governments or even as a ban
whole countries/regimes. Insurers are required to comply with these sanctions.

Sanctions are imposed as a way of controlling the access to funds for regimes, companies or persons Refer to LM1,
chapter 7, section B
who are felt to be less than desirable – maybe because they have links to terrorism or other unlawful for a reminder of the
behaviour. use of sanctions
Activity
Review the list of reasons for sanctions above and think about news items that you might have seen recently about
countries or governments that might act in a way that will lead to the imposition of sanctions.
Use this link as a tool to start your research:
www.bbc.co.uk/news/world-europe-26672089
D4A UK/EU/UN sanctions

Remember that sanctions in their broadest definition are essentially a ban, but that ban can take
different forms. In this section, we’ll look at bans that are financial in nature, followed by those bans
that relate to trade.
Chapter 10
Financial sanctions can come in a variety of forms including:

• prohibiting the transfer of funds to a sanctioned country;
• freezing the assets of a company or an individual; and
• freezing the assets of a whole government, as well as the companies and residents of the country
concerned.
EU regulations imposing and/or implementing sanctions are part of EU law, are directly applicable and
have direct effect in the Member States. The measures apply to nationals of Member States and entities
incorporated or constituted under the law of one of the Member States, as well as all persons and
entities doing business in the EU, including nationals of non-EU countries.
D4B Countries impacted by UK/EU or UN sanctions

Certain countries and/or regimes have sanctions against them at any time and the list of them is subject
to change.
Activity
Access this website to see the list of countries that currently have sanctions against them and look for the
consolidated list of targets.
www.gov.uk/government/organisations/office-of-financial-sanctions-implementation
Choose any country and click on it to find out more about the specific sanctions that have been imposed.
Remember that sanctions can be applied to individuals or companies as well as governments or

regimes.
D4C US government sanctions

The London Market has very close links with the USA, both through the business coming into the London
Market from the USA and also because many of the insurers operating in the London Market have a US
parent company.
Therefore, it’s very important for insurers to understand and comply with any US sanctions, as well as
those coming from the UK/EU and UN.
Although many of the countries against which the USA has sanctions are common to the UK/EU/UN list,
there are some additions as well as some variations in the extent of the sanctions. A good example of
this is Cuba.
D4D Practical problems with sanctions

Historically, insurers have had to be watchful for sanctions and be careful not only to whom they sold
Historically, insurers
have had to be insurance but also to whom any claims were paid. In recent years another problem has arisen whereby
watchful for sanctions sanctions become part of a situation where the offending entity is not a party to the insurance at all.
Insurers have to be very careful when paying claims to consider to whom the money is actually being
paid and whether, although the insured is acceptable, the ultimate receiver of the funds is not. An
example of this within the London Market has been piracy claims handled by marine insurers, where for
example in Somalia the pirates to whom ransoms are being paid might or might not be linked to terrorist
organisations.
Another practical problem particularly with US sanctions is that all US dollar payments will go through a
US bank and therefore can be frozen if there is a problem. The ultimate penalty for an insurer is the total
freezing of their USD bank accounts which, given so much business is conducted in USD within the
London Market, would be, at the very least, inconvenient.
D4E How do insurers find out about sanctions?

Substantial information is available on both the websites for HM Treasury and the US Department of the
Treasury, Office of Foreign Assets Control (OFAC).
Lloyd’s insurers and brokers can also access the Crystal system on the Lloyd’s website, which has
information about sanctions on a country by country basis.
The Market Associations also provide guidance to their members.
Chapter 10
Activity
Visit the Office of Foreign Assets Control (OFAC) website to find out more about US sanctions:
www.ustreas.gov/ofac
Activity
Investigate what checks and balances exist in your organisation to prevent the receipt from or payment to any
individual or entity who might be on a sanctions list.
E Complaints handling, the Financial Ombudsman

Service (FOS) and the Financial Services
Compensation Scheme (FSCS)
In this section, we will review the operation of the Financial Ombudsman Service (FOS) and the Financial
Services Compensation Scheme (FSCS). These organisations are under the control of the Financial
Conduct Authority.
Consider this…
The FOS acts as the final arbiter, should the insured remain dissatisfied having gone through the insurer’s own
complaints process.
E1 Complaints handling
At the start of this chapter, we discussed the fact that claims are the ‘shop window’ of the insurer and
often the client’s view of the insured is tempered by the behaviour and actions of the claims team.
Surprising as it might seem, by having a well-documented and clear complaints process, the insurer can
retain some satisfaction or ‘goodwill’ from the client by rendering the process of making a complaint
clear and painless.
The type of information that a London Market insurer should communicate to insureds within its
published complaints procedure includes:
• Who to contact in the event of a complaint – with postal address, email address, telephone number as
appropriate.
• The timescales that will be applied for the consideration and resolution of the complaint.
– It goes without saying that sticking to these timescales is as important as having them written down
in policy documents.
• The fact that the FOS exists should the insurer be unable to resolve the complaint to the insured’s
satisfaction.
• The fact that referring the matter to the FOS does not remove any of the insured’s legal rights.
As important as having a robust complaints process is the learning process for the insurer in dealing
All complaints which
with the complaint itself. All complaints which are upheld against the insurer should be considered are upheld against the
carefully (recall the points made in section A1 about liaison by the claims team with other departments). insurer should be
considered carefully
Changes may need to be made to wordings, procedures and/or marketing material as a result.
Reinforce
It is also important to remember Conduct Risk, previously discussed in section D1. This requires the insurer to
consider the relative sophistication of its clients when designing a complaints process.
E2 Financial Ombudsman Service (FOS)

The Financial Ombudsman Service (FOS) is a free, independent and impartial service that deals with
The FOS is a free,
certain disputes between individual consumers or small businesses and financial organisations. independent and
Membership is compulsory for all authorised firms, including intermediaries. impartial service
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.
Chapter 10
The FOS only deals with disputes from eligible complainants. An eligible complainant is:
• a consumer;
• a micro-enterprise which employs fewer than ten persons and has a turnover or annual balance sheet
that does not exceed €2 million*;
• a charity with an annual income of less than £1 million; or
• a trust with a net asset value of less than £1 million.
*
(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 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 because 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 complained-about business 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 co-operate with the
FOS. The FOS must investigate the complaint and has 90 days to answer the complainant. 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
The FOS will reach a
decision based on account the law, FCA rules and guidance and good industry practice, including relevant ABI statements
what is fair and and codes of practice. The FOS is not bound by the law or legal precedent and will make a judgment on
reasonable
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 award the FOS can require a firm to make to a complainant is £150,000 plus interest, plus
costs, plus interest on costs. It may recommend a higher figure, if appropriate, but this will not be
binding on the firm.
• 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:
– 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
complainant must then accept 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.
The FOS is available only to certain policyholders:
Chapter 10
• consumers;
• small companies which employ fewer than ten people and have an annual turnover or balance sheet
of less than €2 million; and
• charities with annual income of less than £1 million and trusts of a similar size.
The FOS exists as an independent arbiter of disputes between these categories of insureds and their
The FOS exists as an
insurers and has the ability to bind insurers to decisions up to £150,000 – but does not bind the insured independent arbiter of
at all: they can still explore other dispute resolution methods such as litigation. disputes between
categories of insureds
and their insurers
The customer should only contact the FOS if they have exhausted the insurer’s own complaints process.
If the customer has gone directly to the FOS with their complaint, they will be referred back to the insurer
(although the FOS will pass on the complaint for the customer if necessary). The insurer has eight weeks
from first being notified of the complaint to revert to the customer with their final decision, or the reason
why they cannot yet provide one. Both these documents should make clear to the customer that they can
refer the matter to the FOS.
If the customer has gone through the insurer’s own complaints process and is still not satisfied, they can
then contact the FOS. The FOS then considers the matter and may engage in further communications
with both the insured and insurers. The FOS adjudicator then issues a final decision, with the availability
of a type of internal appeal to one of the ombudsmen themselves whose decision will be absolutely
final.
To try to assist insurers in understanding their position on certain topics, the FOS issues guidance
information on them.
Activity
The FOS issues ‘Ombudsman news’ as one way of providing information to the market.
Look at edition 65 online to find out more about a marine insurance claim and a contractors’ all risks claim.
www.financial-ombudsman.org.uk/publications/ombudsman.htm
Lloyd’s has its own complaints department for policies written at Lloyd’s, which acts as an interface
Lloyd’s has its own
between the FOS and individual managing agents. The Lloyd’s complaints department may receive complaints
notification of a complaint either from the FOS or directly from the client. The Lloyd’s complaints department for
policies written at
department works with the syndicates and the insured in trying to resolve the complaint; however, if it Lloyd’s
cannot be resolved, eligible insureds still have the option of referring the matter to the FOS.
Useful website
Visit the Lloyd’s website to find out more about the workings of its complaints department.
www.lloyds.com/the-market/operating-at-lloyds/regulation/complaints/complaints-by-lloyds-uk-policyholders
E3 Financial Services Compensation Scheme (FSCS)

The Financial Services Compensation Scheme (FSCS) exists to protect insureds should their insurer not
be in a position to pay valid claims – perhaps, because they have gone out of business.
There are various limits on the compensation that the FSCS pays out, but the basic rules are:
• Protection is 100% for:
– compulsory insurances (e.g. third party motor and employers’ liability)
– professional indemnity insurance;
– long-term insurance (e.g. pensions and life assurance); and
– certain claims for injury, sickness or infirmity of the policyholder.
• Protection is 90% of the claim with no upper limit for other types of policy, including general insurance
advice and arranging.
Consider this…
Why do you think that compulsory insurances are paid out in full?
Chapter 10
Remember the point about compulsory insurance being the protection of the innocent victim. If the insurer is not
able to pay, the innocent victim who has already suffered a loss suffers again. Therefore, the FSCS steps in and pays
the full value of the claim.
The trigger for the FSCS becoming involved is the insurer going into ‘default’ and unable to pay, which is
usually because it has been put into provisional liquidation and therefore has ceased to operate
normally as a company.
Activity
Search the internet to find out about the collapse of the Independent Insurance company and the amounts of
compensation paid out by the FSCS.
Lloyd’s can proudly state that no valid claim has ever gone unpaid in all its history. However, as a
Lloyd’s can proudly
state that no valid Market, it has had its share of financial crises – so what is its secret? Syndicates sometimes cease to do
claim has ever gone business and claims still need to be paid.
unpaid in all its
history
Refer to chapter 4, The ‘secret’ is the Central Fund. As we saw in chapter 4, section C, the existence of what is known as the
section C for more
on the Lloyd’s chain Lloyd’s chain of security means that claims can be settled within the marketplace. This means that if an
of security individual syndicate subscribing to a risk cannot pay its share of the claim, the Central Fund will provide
money once the members’ various deposits have also been used up.
Lloyd’s has been a member of the FSCS since 2004. Lloyd’s insurers (in line with other insurance
companies) have to pay a levy for the funding of FSCS and this levy is also paid partially out of the
Central Fund.
Chapter 10
Key points
Role of claims in the insurance process
• The service received from the claims team is often what the client remembers about their insurer.
• Claims teams should interface with all other departments in the insurer or broker business.
• The interface between the various teams and departments involves an exchange of information.
Roles and responsibilities of various parties in the claims process
• A broker will often receive the first notification of the loss from the insured.
• Sometimes experts’ details are written into policies in order that they receive first notification – particularly where
immediate action will be required.
• Often there are two or more brokers in the communication chain.
• There are various claims handling agreements in the London Market that set out the combination of insurers that
will make the decisions on claims.
• Experts are often used on claims, sometimes specifically to advise the insurers.
Practical claims handling
• Claims can be handled in the London Market using paper files or via electronic claims handling.
• Payments are made centrally for indemnity and fees once the agreement parties have agreed the claim.
• Insurers can delegate claims handling to others, particularly under binding authorities.
Regulation of claims handling
• The UK regulator (FCA) regulates the claims handling under ICOBS rules.
• Some rules apply to all claims and some to consumer claims only.
• Other countries also regulate claims handling for risks coming out of their country (e.g. California Fair Claims
Settlement practices).
• Insurers should consider sanctions issues and be aware of where claims monies are actually being paid.
Complaints handling, the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme
(FSCS)
• A clear complaints procedure can often make the client feel more satisfied with the insurer, even when they are
making a complaint.
• An insurer must analyse its complaints and learn from them.
• The FOS is not available to all policyholders, just consumers and small businesses.
• The FOS can bind insurers up to £150,000 but not the insured.
• Lloyd’s has a complaints department that gets involved in complaints against Lloyd’s insurers.
• The FSCS compensates policyholders for valid claims which cannot be paid because the insurer has gone into
default. Chapter 10
Question answers

Chapter 10
Self-test questions
1. Identify three teams within an insurance organisation with which a claims department should interface.
2. Set out the three main roles of a broker in the claims process.
3. What are the bases of rules that govern claims handling in the three Markets within the London Market (i.e.
Lloyd’s; IUA Company market: marine and aviation; and IUA Company Market: non-marine)?
4. Outline the two roles that Xchanging Claims Services (XCS) can perform in relation to claims in the London
Market.
5. What is the Claims Transformation Programme?
6. Identify five different types of experts that might be used on claims.
7. What purpose do ‘Terms of Engagement’ serve?
8. List three examples of losses which could lead to conflicts of interest for insurers handling claims.
9. What is the key document that must always be in the claims file, whether paper or electronic?
10. Why should an insurer’s complaints process always be clearly explained to the insured either in
documentation or verbally?
Chapter 10
Chapter 10
Self-test answers i
Chapter 1 self-test answers

1. A subscription market is one where two or more insurers take shares in a risk, rather than one
insurer accepting all of the risk.
2. An insurer can measure its capacity in relation to premium income, the total of the limits on all
policies written or in relation to the total amount of insurance written in a geographic area.
3. Three from:
• location of the insured;
• culture, local knowledge and relationships;
• insurer experience;
• claims service.
4. A captive insurer or ‘captive’ is an authorised insurance company that is owned by a non-insurance
parent company.
5. Three from:
• Brand – the Lloyd’s brand may be better known than the insurer’s, or vice versa.
• Licences – the company may not be able to write business in certain areas but Lloyd’s can, or vice
versa.
• Capacity – the insurer could spread risks between the two platforms, i.e. the insurance company
and the Lloyd’s syndicate.
• Regulation – an insurance company may be able to operate slightly differently from a syndicate,
as it does not have to comply with Lloyd’s rules.
6. An admitted insurer can operate in a local marketplace on the same basis as a local or domestic
insurer.
7. Permission in the USA is granted on a state-by-state basis, not at country or federal level.
8. Four from: broker quality, brand, reputation, capacity, knowledge, flexibility, ability to write
business overseas and claims service.
ii LM2/October 2017 London Market insurance principles and practices

1. In first party insurance (i.e. property), the claim will come from the insured, generally for damage to
their property. Another example would be personal accident insurance where the insured is insuring
against damage to their own body. In third party insurance, the claim is triggered by the insured
being held liable for causing injury and/or loss or damage to another party or their property.
2. Instead of trying to indemnify the insured for loss of a body part or suffering illness, a defined
benefit is paid out for a period of time – or sometimes a lump sum if there is permanent total
disablement.
3. Once the construction project is handed over to the owner, the contractor may retain a responsibility
under the contract to deal with issues arising during a period of time following handover. This
extension to the construction insurance is known as the maintenance period and covers issues
arising during that period.
4. Insurers can effectively take over the property during the reconstruction process.
5. Insurers generally require a forced entry or exit from the property.
6. Claims made against senior personnel of a company by, for example, shareholders of a filed
company alleging that behaviour (say, incompetent management) by those staff has caused them
financial loss.
7. Contributory negligence examines the share of the blame attributable to the injured person for their
own loss or damage.
8. The policy responds to injury claims during boarding, leaving the aircraft, or whilst on-board only.
9. A pilot who fails their medical and is no longer permitted to fly can claim under their loss of licence
insurance.
10. Two from:
• war;
• strikes and terrorism;
• malicious damage;
• radioactive contamination.
11. The special type of business interruption insurance that can be purchased in the marine market is
loss of hire or loss of earnings insurance.
Self-test answers iii

1. Three from: risk transfer, peace of mind, increasing capacity and stabilising the peaks and troughs
in its accounts.
2. Two from: access to new classes of business, access to new areas of the world and business
preference.
3. Claims control allows the reinsurer decision-making power on claims being handled by the insurer.
Claims co-operation means that the decision-making power remains with the insurer (but they must
keep the reinsurer informed).
4. An insurer might purchase facultative reinsurance where an original risk falls outside a group
definition or is deemed unusual and would not fit within a reinsurance treaty.
5. The insurer has a choice of which risks to offer to the reinsurer; if offered, the reinsurer has to
accept the risk.
6. The amount of any risk that the insurer keeps for itself is called the retention or retained line.
7. A collecting note is used to present the claim to the reinsurers.
8. There is no maximum number of lines that can be purchased under surplus lines reinsurance,
subject to there being buyers and sellers.
9. If a facultative reinsurance and excess of loss reinsurance both apply to a particular risk, the
facultative reinsurance will respond first followed by the excess of loss reinsurance which takes up
the balance of remaining amounts.
10. A catastrophe excess of loss reinsurance will generally protect the insurer’s entire book or portfolio
of business.
iv LM2/October 2017 London Market insurance principles and practices

1. Assets ľ paid claims + unpaid claims + operating costs.
2. IBNR stands for ‘incurred but not reported’. IBNR losses are those which the insurer does not yet
know about but needs to make provision for when considering its future liabilities.
3. The risk that a party with whom the insurer does business, such as a reinsurer, does not pay
amounts due and owing to the insurer.
4. The four objectives of Solvency II are: better regulation, deeper integration of the EU market,
enhanced policyholder protection and improved competitiveness.
5. The three pillars of Solvency II are: quantitative requirements, supervisory review and disclosure.
6. Four from: credit risk, operational risk, market risk, liquidity risk, group and capital risk.
7. The final link in the Lloyd’s chain of security is the Central Fund.
8. The insurer might not be shown business if they are downgraded but their peers remain at a higher
level/rating.
Self-test answers v

1. Three from: third party motor insurance, dangerous wild animals/dogs insurance, employers’
liability insurance, public liability insurance for some organisations, professional indemnity for
some professions, marine pollution and nuclear liability.
2. Compulsory insurance is required to protect the innocent victims (such as motor accident victims) or
those who have suffered from the negligence of a professional such as lawyer or doctor.
3. In compulsory insurances, the insurer cannot refuse to pay an innocent victim because of a breach
of the policy by the insured (for example, a breach of the duty of good faith).
4. The FCA has retail and wholesale consumers.
5. A term is defined as unfair if contrary to the requirement of good faith, it causes a significant
imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.
6. The third party is someone who is not a party to the contract itself.
7. The insurer is responsible for the payment of IPT to HMRC.
8. Three from: CEO, CFO, CRO, head of internal audit, chief actuary, CUO and underwriting risk
oversight function (Lloyd’s only).
9. Examples of a significant influence function are: directors not otherwise PRA approved, compliance
officers, anti-money laundering officers, apportionment and oversight, customer functions,
significant management functions not otherwise approved by the PRA and CASS operational
oversight function.
vi LM2/October 2017 London Market insurance principles and practices

1. A broker might have a conflict of interest if they hold delegated underwriting authority from an
insurer.
2. A retail broker has the contact with the client (as will a producing broker) whilst the wholesale
broker has contact with the insurer.
3. An agency agreement can be created by agreement, ratification or necessity.
4. The broker’s role in a claim ends when the funds are safely at their final destination.
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 does not include this permission.
6. A broker might have a TOBA with an insurer, a client and any producing brokers.
7. The three ways in which a broker can be remunerated are flat fees, specific fees for technical advice
(consultancy) and commissions/brokerage.
8. Under the IDD, the broker must disclose the nature and the basis of the remuneration.
9. A broker can fund premium and claims payments out of a non-statutory trust account even if specific
funds have not yet been received.
10. The Financial Conduct Authority has been the sole regulator for brokers since April 2013.
Self-test answers vii

1. An insurer might choose not to accept 100% of a risk owing to capacity (either in terms of premium
income, limits or geography), risk appetite, broker influence or insured influence.
2. Leaders are those insurers which make the initial determination as to terms and conditions to offer
the insured and the followers are the insurers that support them (without a separate requirement to
decide on appropriate terms and conditions) and take additional shares of the risk.
3. A broker will be responsible to their client should an insurer fail and be unable to pay claims – if
that broker could have found out that the insurer had a poor rating before using them on the risk.
4. The measurement of an insurer rating is undertaken against its peers. Therefore, if an insurer’s
peers suffer a reduced rating, the position of any insurer against its peers remains unchanged.
5. The broker will be looking for a leader that can offer its client good terms and conditions including a
competitive premium but which is also credible to the rest of the market and will be supported by
following underwriters.
6. If insurers are seen to be making profits in a particular class of business, more insurers will try to
become involved and as a consequence may drive prices down as they compete for market share.
Premium will be reduced and any losses suffered will be more severe as a result, thus leading to
insurers leaving the market again.
7. Two from:
• Are there a number of buildings being insured in the same geographical area?
• What is the total sum insured of any combination of properties in a set area?
• Are the same perils being covered for all properties?
8. Realistic Disaster Scenarios are used to ensure that the insurer can calculate accurately its total
exposure through all risks written to any given combination of events, as well as how any
reinsurance that has been purchased impacts its financial position.
9. The two basic elements of a premium calculation are the premium base and the premium rate.
10. An insurer should factor in operating costs, including general reinsurance costs and any taxes it has
to pay out of the premium.
11. Firstly, the reserves form part of the solvency calculation so the insurer will have to tie up more
capital to balance out the large liabilities. Additionally funds have to be kept in certain countries
based on the reserves on claims for local insureds so over-reserving will cause those funds to be
larger than they need to be.
12. ‘Reinsurance to close’ is reinsuring one Lloyd’s syndicate year of account into another one, so that
the profit or loss of the closing year can be calculated.
viii LM2/October 2017 London Market insurance principles and practices

1. A quotation is a proposal or indication from an insurer as to the terms and conditions (including
premium) that it suggests for the risk being put forward.
2. The insurer is bound by the quotation they have put forward as long as it is accepted exactly as
offered and in the timeframe advised by the underwriter within the quote.
3. The contract is concluded at the point that the insurer confirms or inks its line on the Market Reform
Contract (MRC) or accepts via an electronic placing system.
4. Signing down is the process by which the insurers written line is converted into the final share that
will be recorded on the market databases.
5. Three from: cancellation by the insurer, cancellation by the insured, fulfilment (i.e. paying a total
loss on the subject-matter of the insurance) and expiry of the policy period
6. An insurer will add ‘Warranted no known or reported losses’ (WNKORL) to the Market Reform
Contract (MRC) if it is being asked to subscribe to the risk after expiry so that it does not become
liable for any losses that occur before it accepts its line.
7. It is the document on which the broker summarises their clients risk for underwriters’ consideration,
the document on which the insurers formally agree to accept a share of that risk and the document
which can be sent to the client as their copy of the insurance contract.
8. The General Underwriters’ Agreement identifies the rules by which amendments to the insurance
contract can be agreed by set combinations of subscribing insurers.
9. A condition precedent to liability is a term of the policy that must be complied with before insurers
will be liable under that insurance contract.
10. ‘Services’ business means that an insurer can write risks coming from another country without
having a physical presence there. ‘Establishment’ business means that the insurer chooses to set
up an office and write business from inside that country.
Self-test answers ix

1. Delegation is asking someone to perform a task for you and giving them the authority to do so.
2. An insurer can delegate to other insurers, to brokers or to completely separate organisations.
3. A consortium is a group of insurers that organise themselves into a group to write risks together
whilst a line slip is a group of insurers put together by a broker.
4. The benefit for the insurer is being able to participate in risks that they might not otherwise see –
without having to underwrite them individually.
5. A ‘declaration onto a line slip’ is the individual risk that is being presented for agreement by the
broker so it can be attached to a line slip.
6. The broker has to consider potential conflicts of interest and should make appropriate arrangements
to segregate tasks.
7. Both the broker and the managing agent have to support the application for a new coverholder.
8. A service company is usually a sister company in the same corporate group as the insurer.
9. Two from: having a clear strategy for writing and managing delegated underwriting, engaging in due
diligence, clear documentation and proactive management.
10. Five from: underwriting, accounting, financial reporting, credit control, information technology (IT),
documentation controls and compliance with regulatory requirements.
x LM2/October 2017 London Market insurance principles and practices

1. Any three from: underwriters, outwards reinsurance, complaints, management information, legal,
compliance, marketing and senior management/board.
2. The three main roles of a broker in the claims process are: advising the underwriters and being a
conduit for communications, negotiating for their client and receiving settlement monies.
3. The three sets of rules are:
• For Lloyd’s: Lloyd’s Claims Schemes.
• For the IUA Company market (marine and aviation): claims handling agreements.
• For the IUA Company market (non-marine) no rules (i.e. no binding is possible – each insurer
agrees for its own share).
4. The two main activities that Xchanging Claims Services (XCS) performs are: entering claims data on
the central computer systems and moving money for Lloyd’s insurers paying claims or fees.
5. Claims Transformation is a project to realise Lloyd’s Claims vision of claims being on a par with
underwriting. This includes changing the agreement parties on a claim to leader or leader and
second lead, and working on broker interfaces, volume claims services, large loss co-ordination and
better MI for the market.
6. Any five from: lawyers, surveyors, loss adjusters, accountants, specialists such as fire investigators,
translators and subrogation/recovery specialists.
7. Terms of Engagement set out the basis of the relationship (such as regularity of reporting) between
an expert and an insurer that is using their services.
8. Examples of losses which could lead to conflicts of interest for insurers handling claims might
include:
• Professional indemnity – two or more experts being sued for damages arising out of the same loss
(for example a company failure) where the insurer covers them both.
• Marine casualty – where the insurer insurers both vessels involved in a collision; or a vessel and
the cargo on board the vessel where the cargo owner might sue the vessel.
• Aviation – two aircraft colliding where the insurer insures both.
• Products liability – the manufacturer, a distributor and the final retailer of a product could all be
insured by the same provider and each blames the other for the claims arising from customers.
9. The MRC/slip together with any endorsements must always be in the claims file, whether paper or
electronic.
10. A clear complaints process ensures that the insured knows exactly how to complain and to which
party to make the complaint, which means that even though they are complaining – their experience
of the process is positive which in turn impacts on their ultimate view of the insurer.
xi
Cases and statutes

Cases
Goshawk v. Tyser (2006), 6D1
Statutes
Bank of England and Financial Services Act 2016, 5D1
Companies Act 1985, 1A2A
Consumer Insurance (Disclosure and Representations) Act 2012, 8C3
Consumer Rights Act 2015, 5B1, 10D1
Contracts (Rights of Third Parties) Act 1999, 5B2
Data Protection Act 1998, 6D2
Employers’ Liability Act 1880, 5A2
Employers’ Liability (Compulsory Insurance) Act 1969, 5A1
Employers’ Liability (Compulsory Insurance) Regulations 1998, 5A3
Enterprise Act, 2016, 10C5
General Data Protection Regulation, 6D2
Insurance Act 2015, 7B4, 8A3B
Insurance Distribution Directive (IDD), 6F1
Insurance Mediation Directive 2002, 6F1
Lloyd’s Act 1982, 1A4
Public Order Act 1986, 2A1E
Riding Establishments Act 1970, 5A1
Road Traffic Act 1988, 5A1
Solicitors Act 1974, 2A2B
xii LM2/October 2017 London Market insurance principles and practices
xiii
Index
A non-Lloyd’s, 6B
producing, 6B
ACCORD (Association for Co-operative Operations
regulation of a, 6F2
Research and Development), 7A4
relationship with an underwriter, 7B
agency
remuneration, 6E, 8B2
by agreement, 6A
retail, 6B
by necessity, 6A
role in
by ratification, 6A
claims process, 6C, 10B1
law of, 6A
placing process, 6C
aggregates, 1A, 7A1
surplus lines, 6B
monitoring, 1A
transparency requirements for, 6F1
agricultural crop and forestry/hail insurance, 2A1A
UK regulation of, 6F
airline liability insurance, 2B2A
wholesale, 6B
airport operator’s liabilities, 2B2A
brokerage, 6E, 8B2
alternative risk transfer, 3C
bulking line slip, 9A2A
anti-money laundering training, 10D2
Business interruption (BI) insurance, 2A1F
approved persons, 5D
Association for Co-operative Operations Research
and Development (ACCORD), 7A4
Atlas, 9B3
C
aviation capacity, 1A, 1A3, 1C, 3A1, 7A1
insurance, 2B captive insurance companies, 1A2C
repossession insurance, 2B3D CAR (contractors’ all risks) insurance, 2A1E
war insurance, 2B3A cargo insurance, 2C1B
cash in transit insurance, 2C3D
CASS (client asset rules), 6F2B
B catastrophe modelling, 7D2A
CBI (contingent business interruption) insurance,
betterment, 10C7
2A1F
BI (business interruption) insurance, 2A1F
cedant, 3C
binder, 9A2B
cede, 3C
binding authority, 9A2B
Central Fund, 4C, 7G1, 10E3
claims handling under, 10C6
cession, 3C
evidencing the, 9B6
Claims
registration of a, 9C2
Co-operation Clause, 3C
BIPAR (European Federation of Insurance
Control Clause, 3C
Intermediaries), 7E1
handling, 10
bloodstock insurance, 2A1B
outsourcing of, 9D2
bond risks insurance, 2C3G
overseas regulation of, 10D3
bordereau, 10C6
regulation of, 10D
branch offices, 1A, 8D2
under binding authorities, 10C6
brand, Lloyd’s, 1A3
process
breach of
broker’s role in, 6C, 10B1
the duty of fair presentation, 8A3B
expert’s role in, 10B4
warranty, 8A3B
insurer’s role in, 10B2
broker, 6A
reserves, 4A, 7F
consortium advantage for, 9A2A
contribution to, as part of premium
deductions, 8B2
calculation, 7E2
EU legislation for, 6F
role of, in insurance process, 10A
influence of, 1A
under excess of loss (XL) reinsurance, 3C2A
Insurance Document (BID), 8B2
CLASS database, 10C3
line slip arrangement advantage for, 9A2A
Lloyd’s, 6B
xiv LM2/October 2017 London Market insurance principles and practices
client credit risk, 4B

asset rules (CASS), 6F2B Crystal, 1B2B, 5C, 8B2, 10D4E
influence of, 1A
money rules, 6F2B
collecting note, 3C D
collision liability insurance, 2C1A ‘Day One’
commission, 6E Average Memorandum, 2A1E
‘collecting’, 6E Reinstatement, 2A1E
common pool, 7E days of grace, 8A4A
companies declaration, 9A2A
captive, 1A2C deductible, 10C7
Lloyd’s service, 1A2E delegated underwriting, 8D4, 9
mutual, 1A2B choice of partner for, 9B2
propriety, 1A2A controls over, 9C
complaints handling, 10E operation of, 9B
compliance directors’ and officers’ (D&O) liability insurance,
systems and controls to ensure, 1B2C 2A2A
comprehensive general liability insurance, 2A2F document repository, 10C3
compulsory insurances, 5A
FSCS protection for, 10E3
in other countries, 5A4 E
conditions, 8C1
EAR (erection all risks) insurance, 2A1E
precedent to contract, 8C1
ECF (Electronic Claims File), 10C3
precedent to liability, 8C1
electronic
Conduct Risk, 9C, 10D1
claims
conflict
file (ECF), 10C3
individual, 10C2A
notification and agreement, 10C2A
of interest, 9B2, 10C1
placing/presentation, 7A4, 8B3B
organisational, 10C2A
employers’ liability insurance, 2A2E, 5A1, 5A2,
consortium, 9A2A
5A3, 7E
construction insurance, 2A1E
endorsement, 8B3
offshore energy, 2C1C
enterprise risk, 4B
vessels, 2C1A
erection all risks (EAR) insurance, 2A1E
contamination insurance, 2A3B
errors and omissions (E&O) insurance, 2A2B
contingency insurance, 2A1C
establishment, 8D3
contingent
estoppel, 10C7
business interruption (CBI) insurance, 2A1F
European Federation of Insurance Intermediaries
hull, liability or war insurance, 2B3E
(BIPAR), 7E1
contract
European Insurance and Occupational Pensions
certainty, 8E
Authority (EIOPA), 4B1
formation of, 8A2
European Union, 2C3E, 4B, 4B1, 8D3
frustration insurance, 2C3F
legislation of brokers, 6F
termination of, 8A3
excess, 10C7
contractors’ all risks (CAR) insurance, 2A1E
of loss
contribution, 10C7
claims under, 3C2A
Control of well (COW) – offshore energy, 2C1C
(XL) reinsurance, 3C2
controlled functions, 5D1
exclusions, 8C2, 10C7
coverholder
expert’s role in the claims process, 10B4
approval process, 9B3
exploration (offshore energy), 2C1C
approved, 9B4
exposure modelling, 7D1
audit of a, 9C5
external member, 1A4
documentation, 9C4
extortion/malicious product tamper/
reporting, 9C3
contamination insurance, 2A3B
service company, 9B4
types of, 9B4
undertaking, 9B3
Index xv
F incurred but not

enough reported (IBNER), 7F5A
facility, 9A2A
reported (IBNR), 4A, 7F5A
facultative
indemnity, 10C7
obligatory reinsurance, 3C1A
Insurance Mediation Directive (IMD), 6F1
reinsurance, 3C, 3C1
insurance premium tax (IPT), 5C
fair presentation, breach of the duty of, 8A3B
Insurance: Conduct of Business sourcebook
fidelity guarantee insurance, 2A1E
(ICOBS), 6E, 10D1
Financial Conduct Authority (FCA), 1A3, 6E, 6F1,
Insurers’ Market Repository, 6C1
6F2, 10D1, 10E
intermediaries
client money rules, 6F2B
independent, 6B
risk framework, 6F2A
types of, 6B
financial guarantee insurance, 2A3A
international licences, 1A, 1B2A, 3A2
Financial Ombudsman Service (FOS), 10E
USA, 1B2B
Financial Services Compensation Scheme (FSCS),
International Underwriting Association of London
10E
(IUA), 1A3, 1B1
fine art insurance, 2C3C
claims handling agreements, 10B2
first
IPT (insurance premium tax), 5C
advice, 6C2
notification of loss, 10C1
party classes, 1C
flat fee (broker remuneration), 6E
J
follower, 7A2 jeweller’s block insurance, 2C3B
and the premium, 7E1
line slip arrangement advantage for, 9A2A K
FOS (Financial Ombudsman Service), 10E key functions, 5D1
franchise Board, 1A4, 1B2C kidnap and ransom insurance, 2A1D
fraud, 8A3B, 10C8, 10D1
FSCS (Financial Services Compensation Scheme),
10E L
Full Follow Clause, 3C leader, 7A2, 7B2
legislation relating to insurance contracts, 5B
G liability insurance, 2A2, 2B2, 2C2
general for dangerous wild animals and dangerous dogs,
average, 2C1A 5A1
liability insurance, 2A2F licences, international, 1A, 1B2A, 1C, 3A2
Underwriters’ Agreement (GUA), 8B2, 8B3A USA, 1B2B
geographical limitations, 1A limitation, concept of, 2A2B
glass insurance, 2A1E line
governance of the Lloyd’s market, 1A4 slip, 9A2A
group and capital risk, 4B to stand, 8A2B
liquidity risk, 4B
livestock insurance, 2A1B
H Lloyd’s
hail/agricultural crop and forestry insurance, 2A1A and Solvency II, 4B2
hangar-keepers’ liability insurance, 2B2A brand, 1A3
homeowners’ insurance, 2A1G broker, 6B
hull, marine, 2C1A Central Fund, 4C, 7G1, 10E3
chain of security, 4C, 7G1, 10E3
complaints department, 10E2
I coverholder approval process, 9B3
governance of the market, 1A4
IBNER (incurred but not enough reported), 7F5A
Market Association (LMA), 7A4
IBNR (incurred but not reported), 4A, 7F5A
members, 1A1
Names, 1A1
xvi LM2/October 2017 London Market insurance principles and practices
registration of binding authorities, 9C2 Endorsement (MRCE), 8B3B

service companies, 1A2E, 8D1, 9B4 line slip MRC, 8B2
LMA (Lloyd’s Market Association), 7A4 Open Market MRC, 8B2
LMG (London Market Group), 7A4 multi-tied agent, 6B
London Market mutual
brand, 1C companies, 1A2B
capacity, 1C indemnity associations, 1A2D
claims service in, 1C
flexibility/entrepreneurial spirit of, 1C
Group (LMG), 7A4 N
international nature of, 1B Names, Lloyd’s, 1A1
knowledge, 1C nominated member, 1A4
licences, 1C non-bulking line slip, 9A2A
quality of brokers in, 1C non-Lloyd’s broker, 6B
reinsurance, 3B non-proportional reinsurance, 3C
reputation, 1C non-schedule agreement, 9B6
long-tail business, 7F4 non-statutory trust account, 6F2B
loss
fund, 10C6
modelling, 7D2 O
of earnings insurance, 2C3A
offshore energy insurance, 2C1C
of hire insurance, 2C3A
onshore energy insurance, 2A1E
of licence insurance, 2B3B
open
of use insurance, 2B3C
cover, 7E
market correspondent (OMC), 6B
years management, 7G
M operational
malicious product tamper insurance, 2A3B costs, as part of a premium calculation, 7E2
managing agent, 1A1 risk, 4B
marine order, 8A2
cargo, 2C1B outsourcing, 9D
hull, 2C1A over redemption insurance, 2A1C
insurance, 2C own risk and solvency assessment (ORSA), 4B
liability insurance, 2C2
market, 1A
cycles, 7C P
risk, 4B
passenger liability insurance (aviation), 2B2A
Market Reform Contract (MRC), 6C1, 7B2, 8B2,
pecuniary insurance, 2A1E
10B1
personal accident and health insurance, 2A1D
binder MRC, 8B2
physical damage to aircraft insurance, 2B1A
Endorsement (MRCE), 8B3B
placing
line slip MRC, 8B2
electronic, 7A4
Open Market MRC, 8B2
process, broker’s role in, 6C
medical malpractice insurance, 2A2B
Steering Group, 7A4
members’
PML (probable maximum loss), 7D1
agent, 1A1
political risks insurance, 2C3E
Funds at Lloyd’s (FAL), 4C
ports liability insurance, 2C2C
minimum capital requirement (MCR), 4B
premises liability insurance, 2B2A
money
premium
insurance, 2A1E
base, 7E
laundering, 10D2
calculation, 7E
motor insurance, 2D, 5A2
processing and risk data recording, outsourcing
third party, 5A1, 5A3
of, 9D1
MRC (Market Reform Contract), 6C1, 7B2, 8B2,
rate, 7E
10B1
principle (in agency), 6A
binder MRC, 8B2
prize indemnity insurance, 2A1C
Index xvii
probable maximum loss (PML), 7D1 retrocession, 3C

producing broker, 6B retrocessionaire, 3C
product recall insurance, 2A3C risk
products liability insurance, 2A2D, 2B2A, 7E credit, 4B
professional enterprise, 4B
indemnity insurance, 2A2B, 5A1, 7E group and capital, 4B
negligence insurance, 2A2B, 2C2B, 5A1, 5A2 liquidity, 4B
profit margin, as part of premium calculation, 7E2 market, 4B
property insurance, 2A1E operational, 4B
for airport buildings, 2B1B transfer, 3A1
proportional reinsurance, 3C RITC (reinsurance to close), 7G
reinsurance ROR (Reservation of Rights), 10C7
proportional, 3C3
proposal forms, 8B1
proprietary companies, 1A2A S
proximate cause, 10C7 salvage, 2C1A
Prudential Regulation Authority (PRA), 1A3, 4B1, sanctions, 10D4
6F2 satellites
public liability insurance, 2A2C, 5A1 liability risks for, 2B3F
seepage and contamination/pollution (offshore
energy), 2C1C
Q senior management functions (SMFs), 5D1A
quota share treaty reinsurance, 3C3A Senior Managers and Certification Regime
quotations, 8A1 (SM&CR), 5D1
Certification Regime, 5D1B
Rules of Conduct, 5D1C
R Senior Managers Regime, 5D1A
rating agencies, 4D, 7B1 service companies, 8D1, 9B4
RDSs (Realistic Disaster Scenarios), 7D2 services, 8D3
re-drilling – offshore energy, 2C1C settlements, 10C5
Realistic Disaster Scenarios (RDSs), 7D2 shipowners’ liability insurance, 2C2A
reinstatement, 2A1E short-tail business, 7F4
in reinsurance, 3C2 signed line, 6C1, 8A2B
memorandum, 2A1E signing down, 8A2B
reinsurance, 1A, 1B2A, 3 single tied agent, 6B
costs, as part of a premium calculation, 7E2 slip/MRC (Market Reform Contract), 6C1, 7B2,
excess of loss (XL), 3C2 8B2, 10B1
claims under, 3C2A binder MRC, 8B2
facultative, 3C, 3C1 Endorsement (MRCE), 8B3B
obligatory, 3C1A line slip MRC, 8B2
non-proportional, 3C Open Market MRC, 8B2
programme construction, 3D solvency, 1A, 4A, 4B2, 6C1, 7F3
proportional, 3C capital requirement (SCR), 4B, 4B1
stop loss, 3C2B margin, 4A
to close (RITC), 7G Solvency I, 4B
treaty, 3C Solvency II, 4B
line, 3C3B and Lloyd’s, 4B2
quota share, 3C3A role of the regulators in, 4B1
surplus, 3C3B space insurance, 2B3F
renewals, 8A4 specie insurance, 2C3B
Reservation of Rights (ROR), 10C7 statutory trust account, 6F2B
reserves, claims, 4A, 7F stock insurance, 2A1E
contribution to, as part of premium calculation, stop loss reinsurance, 3C2B
7E2 subrogation, 10C7
retail broker, 6B subscription
retrocedant, 3C agreement, 8B2
xviii LM2/October 2017 London Market insurance principles and practices
market, 1A, 7A1, 8A2

sue and labour, 2C1A
W
war insurance, 2A3D
surplus
aviation, 2B3A
line treaty, 3C3B
warranty, 5A3, 8C3
lines broker, 6B
breach of, 8A3B
treaty, 3C3B
wholesale broker, 6B
syndicate, 1A1, 1A2E, 1A3, 1B1, 1B2A, 1B2B, 2A3D,
workers’ compensation insurance, 2A2E
4C, 7D2, 7F5, 7G, 8A2, 8C2, 8D, 9B4, 10B2C,
working member, 1A4
10E3
written line, 6C1, 8A2
T X
taxes, as part of premium calculation, 7E2
Xchanging, 1B2B, 5C, 6C1, 7B2, 8A2B, 8B2, 9A2A,
Technical Processing service, 10B3
9C2, 10B3, 10C2A
terms and conditions used in policy wordings, 8C
Ins-sure Services, 9D1
Terms of
XL (excess of loss) reinsurance, 3C2
Business Agreements (TOBAs), 6D
claims under, 3C2A
Engagement, 10B4
terrorism insurance, 2A3E
theft insurance, 2A1E
third parties other than passengers (airline), 2B2A
third party
administrators (TPAs), 10C6
classes, 1C
TOBAs (Terms of Business Agreements), 6D
trade credit insurance, 2C3F
transparency requirements (for brokers), 6F1
treaty reinsurance, 3C
trust
account
non-statuary, 6F2B
statuary, 6F2B
funds, 7F6
U
underwriter
following, 7A2
and the premium, 7E1
line slip arrangement advantage for, 9A2A
lead, 7A2, 7B2
relationship with a broker, 7B
writing a risk post-inception, 8A5
underwriting, delegated, 8D4, 9
Unique
Claims Reference (UCR), 10C3
Market Reference (UMR), 8B2, 9B6, 10C3
V
vessels, 2C1A
physical damage to, 2C1A
Chartered Insurance Institute
42–48 High Road, South Woodford,
London E18 2JP
tel: +44 (0)20 8989 8464
customer.serv@cii.co.uk
www.cii.co.uk
Chartered Insurance Institute

@CIIGroup
The Chartered Insurance Institute 2017
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LM2

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London Market insurance

Summary of learning outcomes Number of questions

Published October 2017 LM2

1. Understand the business nature of the 6. Understand insurance intermediation

5. Understand the regulatory and legal

Published October 2017 2 of 4

9. Understand the purpose, benefits and

10. Know the handling of claims in the

Published October 2017 3 of 4

Reading list Exam technique/study skills

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2: Risks written in the London Market

5: Legal and regulatory requirements

10: Claims handling

A1 Structure of the subscription market

Where subscription placements are the exception

A2 Different types of companies

A2A Proprietary companies

A2B Mutual companies

A2C Captive insurance companies

A2D Mutual indemnity associations

A2E Lloyd’s service companies

Example of Lloyd’s service companies

A3 Insurers operating as both insurance companies and Lloyd’s

A4 Governance of the Lloyd’s market

B International nature of the London Market

B2A International licences

B2C Systems and controls to ensure compliance

C Appeal of the London Market

Table 1.3: Qualities of the London Market that attract clients

Reputation The London Market has a long-standing reputation worldwide for

Table 1.3: Qualities of the London Market that attract clients

First party and third party classes

You will find the answers at the back of the book

A Non-marine classes of business

A1B Bloodstock/livestock insurance

A1C Contingency insurance

adding in re-scheduled dates in case of cancellations?

A1D Personal accident and health insurance

A1E Property insurance, including onshore energy

Claims can arise in many different ways, for example:

• Lightning: an electrical discharge which may or may not lead to a fire.

The policy shows a sum insured in two parts:

Onshore energy insurance

Money insurance cover

Write your notes here:

A1F Business interruption insurance

A1G Homeowners’ insurance

A2 Non-marine liability classes

‘Losses occurring’/‘claims made’ policy