LM2TB3 2023 Online PDF

London
Market
insurance
principles and
practices
LM2
2023
STUDY
TEXT
Liiba
London &
International
Insurance
Brokers'
Association
London Market
insurance
principles and
practices
LM2: 2023 Study text
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2 LM2/October 2022 London Market insurance principles and practices
© The Chartered Insurance Institute 2022

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legal position. Specific advice should always be obtained before undertaking any investments.
Print edition ISBN: 978 1 80002 575 2
Electronic edition ISBN: 978 1 80002 576 9
This edition published in 2022
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.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.
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 support 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.
Contained within the study text are a number of features which we hope will enhance
your study:
Activities: reinforce learning through Key points: act as a memory jogger at

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

around points made in the text for which point previously learned in the course to
there is no absolute right or wrong embed understanding.
answer.
Examples: provide practical illustrations Sources/quotations: cast further light

of points made in the text. on the subject from industry sources.
In-text questions: to test your recall of On the Web: introduce you to other
topics. information sources that help to
supplement the text.
At the end of every chapter there is also a set of self-test questions that you should use to
check your knowledge and understanding of what you have just studied. Compare your
answers with those given at the back of the book.
By referring back to the learning outcomes after you have completed your study of each
chapter and attempting the end of chapter self-test questions, you will be able to assess your
progress and identify any areas that you may need to revisit.
Not all features appear in every study text.
Note
Website references correct at the time of publication.
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. 3
4. Understand market security. 3
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
12. 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 2023 until 31 December 2023.
• Candidates will be examined on the basis of English law and practice unless otherwise stated.
• This PDF document is accessible through screen reader attachments to your web browser and has
been designed to be read via the speechify extension available on Chrome. Speechify is an
extension that is available from https://speechify.com/. If for accessibility reasons you require this
document in an alternative format, please contact us on online.exams@cii.co.uk to discuss your
needs.
• Candidates should refer to the CII website for the latest information on changes to law and practice
and when they will be examined:
1. Visit www.cii.co.uk/qualifications
2. Select the appropriate qualification
3. Select your unit from the list provided
4. Select qualification update on the right hand side of the page
Published October 2022

©2022 The Chartered Insurance Institute. All rights reserved. LM2
1. Understand the business nature of the 6.6 Define the main EU and UK legislative provisions
London Market. applicable to insurance intermediaries.
1.1 Examine and explain the principal parties within the
7. Understand the underwriting function
London Market and their relationships with each
other and their clients. within the context of the London Market.
7.1 Explain how underwriting is conducted in London as
2. Understand the main classes of opposed to elsewhere.
insurance written in the London Market. 7.2 Explain the relationship between London Market
2.1 Explain the importance of the London Market and brokers and underwriters.
why clients may decide to place their business within 7.3 Explain lead and follow underwriters within the
this market. context of the subscription market.
2.2 Examine and explain the main classes of insurance 7.4 Describe the causes and effects of the market cycle.
written in the London Market and their main features 7.5 Explain the concept of the modelling and
and describe the losses and liabilities which may management of exposures and losses.
give rise to claims under each of the main classes.
7.6 Explain what is meant by reserving and why it is
2.3 Describe how underwriters diversify their risks and necessary to make provision for outstanding
manage their portfolios. liabilities.
3. Understand reinsurance within the 7.7 Explain the terms ‘open years management’ and
‘reinsurance to close’ within the Lloyd’s Market.
insurance market.
3.1 Examine methods of reinsurance; treaty and 8. Understand the way that business is
facultative; proportional and non-proportional and the
conducted in the London Market.
differences between them.
8.1 Describe the documentation used to present risks to
3.2 Calculate amounts ceded to re-insurers and claims insurers.
recoverable.
8.2 Explain the legal significance of quotations and
4. Understand market security. renewals.
4.1 Explain basic accountancy concepts including 8.3 Describe the duty of fair presentation and the
solvency margin calculations. principle of good faith and the consequences of non-
compliance.
4.2 Explain the Lloyd's chain of security.
8.4 Explain the legal principles essential to a valid
4.3 Explain the role of rating agencies.
contract.
5. Understand the regulatory and legal 8.5 Explain the purpose and content of the Market
requirements applicable to the Reform Contract (MRC).
transaction of insurance business. 8.6 Explain the placing process for open Market Reform
Contracts and electronic Market Reforms Contracts.
5.1 Describe the reasons for compulsory insurance and
the types of insurance that are compulsory in the 8.7 Explain the operation of the General Underwriters’
UK. Agreement.
5.2 Explain the impact of the Consumer Rights Act 2015 8.8 Explain how an underwriter will know they are on
in relation to insurance contracts. risk.
5.3 Explain the impact of the Contracts (Rights of Third 8.9 Identify and explain the various sections of an
Parties) Act 1999 in relation to insurance contracts. insurance policy.
5.4 Outline the EU solvency requirements for insurers 8.10 Explain the purpose and effect of warranties,
and industry regulator risk-based capital conditions and exclusions.
requirements. 8.11 Explain what is meant by the term ‘contract
5.5 Explain the purpose and calculate the rates of UK certainty’.
Insurance Premium Tax. 8.12 Explain the collection and processing of premiums.
8.13 Describe how contracts of insurance can be
6. Understand insurance intermediation in terminated.
the London Market.
8.14 Explain how conflicts of interest may arise and how
6.1 Define the different categories of UK and they may be managed.
international intermediaries and the services they
provide. 9. Understand the purpose, benefits and
6.2 Define and explain the roles of the various types of operation of delegated underwriting.
brokers within the London Market. 9.1 Examine and explain the purpose of delegated
6.3 Describe the purpose and function of a generic underwriting/binding authorities.
Terms of Business Agreement (TOBA). 9.2 Explain the controls that Lloyd’s has placed on
6.4 Explain broking remuneration including commissions delegated underwriting/binding authorities.
and fees. 9.3 Explain the operation of lineslips and consortium
6.5 Describe the basic features of the law of agency. underwriting.
Published October 2022 2 of 3

©2022 The Chartered Insurance Institute. All rights reserved.
7
10. Know the handling of claims in the Reading list

London Market.
10.1 Explain the role and responsibilities of insurers and The following list provides details of further
brokers in the processing of claims. reading which may assist you with your
10.2 Explain the roles of claims personnel. studies.
10.3 Explain the application of indemnity, subrogation, Note: The examination will test the
contribution, proximate cause principles, excesses syllabus alone.
and exclusions.
The reading list is provided for guidance
only and is not in itself the subject of the
11. Understand the main methods of examination.
resolving complaints.
11.1 Examine and describe the Financial Conduct The resources listed here will help you
Authority and Prudential Regulation Authority’s keep up-to-date with developments and
regulation of individuals within firms. provide a wider coverage of syllabus topics.
11.2 Describe the industry regulator’s requirements in
terms of claims handling. CII study texts
11.3 Describe the services provided by the Financial
London Market Insurance Principles and
Ombudsman (FOS). Practices. London: CII. Study text LM2.
11.4 Explain the main requirements of the Financial Books and eBooks
Services Compensation Scheme (FSCS). 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.
Post magazine. London: Incisive Financial
Publishing. Monthly. Contents searchable
online at www.postonline.co.uk.
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.
Examination guide
If you have a current study text enrolment,
the current examination guide is included
and is accessible via Revisionmate
(ciigroup.org/login). 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.
Exam technique/study skills

There are many modestly priced guides
available in bookshops. You should choose
one which suits your requirements.
* Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only).
Published October 2022 3 of 3

©2022 The Chartered Insurance Institute. All rights reserved.
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 the importance of the London Market and why clients 1C, 2A, 2B, 2C, 2D, 2E
may decide to place their business within this market.
2.2 Examine and explain the main classes of insurance written in the 2A, 2B, 2C, 2D, 2E
London Market and their main features and describe the losses
and liabilities which may give rise to claims under each of the
main classes.
2.3 Describe how underwriters diversify their risks and manage their 2E
portfolios.
3. Understand reinsurance within the insurance market.
3.1 Examine methods of reinsurance; treaty and facultative; 3A, 3B, 3C
proportional and non-proportional and the differences between
them.
3.2 Calculate amounts ceded to re-insurers and claims recoverable. 3B, 3C
4. Understand market security.
4.1 Explain basic accountancy concepts including solvency margin 4A, 4B
calculations.
4.2 Explain the Lloyd's chain of security. 4C
4.3 Explain the role of rating agencies. 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 impact of the Consumer Rights Act 2015 in relation 5A, 5B
to insurance contracts.
5.3 Explain the impact of the Contracts (Rights of Third Parties) Act 5B
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 6C
within 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.

and section
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 the modelling and management of 7D
exposures and losses.
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 documentation used to present risks to insurers. 8A, 8B
8.2 Explain the legal significance of quotations and renewals. 8A
8.3 Describe the duty of fair presentation and the principle of good 8A
faith and the consequences of non-compliance.
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
(MRC).
8.6 Explain the placing process for open Market Reform Contracts 7E, 8D
and electronic Market Reforms Contracts.
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 collection and processing of premiums. 7E, 8D
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.
9. Understand the purpose, benefits and operation of delegated underwriting.
9.1 Examine and explain the purpose of delegated underwriting/ 9A, 9B, 9D
binding authorities.
9.2 Explain the controls that Lloyd’s has placed on delegated 9C
underwriting/binding authorities.
9.3 Explain the operation of lineslips 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 10A, 10B
the processing of claims.
10.2 Explain the roles of claims personnel. 10B
10.3 Explain the application of indemnity, subrogation, contribution, 10C
proximate cause principles, excesses and exclusions.
11

and section
11. Understand the main methods of resolving complaints.
11.1 Examine and describe the Financial Conduct Authority and 5D
Prudential Regulation Authority’s regulation of individuals within
firms.
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
(FOS).
11.4 Explain the main requirements of the Financial Services 10E
Compensation Scheme (FSCS).
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 market 1/2
B International nature of the London Market 1/10
C Appeal of the London Market 1/14
2: Risks written in the London Market

A Non-marine classes of business 2/2
B Aviation classes of business 2/26
C Marine classes of business 2/31
D Motor insurance 2/41
E Portfolio management 2/41
3: Reinsurance
A Why reinsurance is purchased and sold 3/2
B Types of reinsurance products 3/4
C Reinsurance programme construction 3/16
4: Market security
A Solvency 4/2
B Solvency II 4/4
C Lloyd’s chain of security 4/6
D Rating agencies 4/8
5: Legal and regulatory requirements

A Compulsory insurances 5/2
B Legislation relating to insurance contracts 5/7
C Insurance premium tax (IPT) 5/9
D Regulation of individuals within firms 5/10
6: Insurance intermediation
A Law of agency 6/2
B Types of intermediaries 6/4
C Role of the broker in the placing and claims processes 6/5
D Terms of Business Agreements (TOBAs) 6/9
E Broker remuneration 6/12
F Impact on brokers of EU legislation and UK regulation 6/13
7: Underwriting
A Conduct of underwriting in the London Market 7/2
B How underwriters and brokers interrelate 7/5
C Market cycles 7/8
D Loss and exposure modelling 7/10
E Premium calculation 7/13
F Reserving 7/16
G Reinsurance to close (RITC) and open years management 7/18
8: Business process
A Formation and termination of the insurance contract 8/2
B Documents used in the London Market 8/10
C Key terms and conditions used in policy wordings 8/21
D Methods of conducting business in the London Market 8/26
E Contract certainty 8/28
9: Delegated underwriting
A Purpose and types of delegated underwriting 9/2
B Operation of delegated underwriting contracts 9/5
C Controls over delegated underwriting 9/13
D Outsourcing of other activities by insurers 9/16
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 10/9
D Regulation of claims handling 10/20
E Complaints handling, the Financial Ombudsman Service (FOS) and the 10/25
Financial Services Compensation Scheme (FSCS)
Self-test answers i
Legislation xi
Index xiii
Chapter 1
Business nature of the
1
London Market
Contents Syllabus learning
outcomes
Introduction
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 importance of the London Market and why clients may decide to place their
business within this market.
Chapter 1 1/2 LM2/October 2022 London Market insurance principles and practices
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 Licensing Lloyd’s Lloyd’s service
limitations companies
Managing agent Member Mutual company Proprietary company
Reinsurance Solvency Subscription market Syndicate
A Subscription market
The London insurance market is very much a subscription market. All this means is that
risks are shared among a number of different insurers, rather than being insured 100% by
one insurer.
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
following table.
Refer to
Market security on page 4/1 for more on solvency
Table 1.1: Reasons why an insurer may not take 100% of any risk
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 Structure of the subscription market
on page 1/4) 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 further discussion.
Chapter 1 Business nature of the London Market 1/3
Chapter 1
Table 1.1: Reasons why an insurer may not take 100% of any risk
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 purpose of this is to avoid the additional risks caused by having a
concentration of exposure in one place.
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.
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 fact that the business is being presented to an insurer in London by a
broker does not mean that the insurer is authorised to write the business.
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 capacity using the analogy of the pint glass to represent the insurer’s
available capacity to write business, as permitted by the UK regulator and the
insurer’s own internal controls. We said that once the glass was full (i.e. the
insurer has reached its full 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?
Additional reading
Refer to LM1, chapter 3, section D2A for more on capacity.
A1 Structure of the subscription market

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.
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 Claims handling.
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 Different types of companies on page 1/
5.
Focusing back on London, the Market can be divided broadly into three categories of
insurers:
• those operating in Lloyd’s;
• insurance companies; and
• 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.
Chapter 1
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, far more typically, 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
Refer to LM1, chapter 5
We will now take a closer look at the nature and structure of some of the types of companies
operating in the London insurance market and explore how the distinction between Lloyd’s
syndicates and companies sometimes becomes blurred.
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.
These are owned by shareholders who, in buying shares, contribute to the share capital of
the firm. Therefore, company profits (after expenses and reserves) belong to the
shareholders.
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
Look on the internet or in the financial pages of a daily newspaper for share price
information about your employer. If your employer is not listed on an exchange, search 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 look
at why they choose to do this later in the chapter.
A2B Mutual companies

In contrast to proprietary companies, mutual companies are owned by their
policyholders.
The policyholders share in the profits of the company by way of lower premiums. In theory,
the 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.
The only mutual company that has a presence in the London Market today is Liverpool
Victoria (LV).
Activity
Use these links to find out more about other insurers who are still mutual companies and
see what they say about the benefits of this structure.
Liberty Mutual: bit.ly/2CbEumE.
FM Global: www.fmglobal.com/about-us/why-fm-global/mutual-ownership-mutual-gain.
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, Bermuda and the Isle of Man because of their favourable tax regimes.
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.
Chapter 1
Refer to
See Reinsurance on page 3/1 for further information.
Although, by their nature, captive insurers are outside the London Market, they regularly
‘appear’ by purchasing reinsurance in the commercial marketplace, including London. While
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.
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. However, mutual indemnity associations have their origins in their members
grouping together essentially to self-insure. Mutual indemnity associations employ
professional managers to run the insurer on a day-to-day basis.
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.
On the Web
Use this link to find out more about various types of marine and non-marine mutual
indemnity associations:
www.thomasmiller.com/companies/insurance.
A2E Lloyd’s service companies

Although perhaps a contradiction in terms, there are some companies which are linked to
Lloyd’s syndicates.
The way in which they operate, including how they obtain authority from the syndicate, will
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.
Consider this…
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. □
b. Captive. □
c. Reinsurer. □
d. Intermediary. □
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:
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.
On the Web
Review the latest Lloyd’s annual report to see what is mentioned about the Lloyd’s brand:
www.lloyds.com/investor-relations/financial-performance/financial-results.
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 British Marine (part of the QBE insurance group). What type of insurer does it
appear to be? Insurance company, Lloyd’s syndicate or something else?
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 □
b. Lloyd's and International Underwriting Association of London (IUA) □
companies only.
c. London Market only. □
d. Any market – there are no restrictions. □
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.
Chapter 1
A4 Managing General Agents
A Managing General Agent is an organisation which holds delegated authority from an
insurer (or a number of insurers) to undertake certain tasks on their behalf. This can include
the underwriting of risks and the handling of claims.
While many MGAs are based internationally, thus providing underwriters in London with the
benefit of a more localised presence, many are based in whole or in part in London,
therefore offering another option within the subscription market.
MGA are generally permitted to take a subscription market share on a placement alongside
other insurers and might even be the leader of that placement.
Some MGAs are larger (in written premium income terms) than some insurers and can offer
the client all the same benefits that an insurer of any type can in terms of technical expertise
and customer service. However the important thing for the client to remember is that the
MGA will not be bearing any of the risk themselves and are acting as the agent of an insurer,
or insurers. Therefore it would be prudent for the client to be certain as to who the ultimate
insurers of their risk are as well as the agent.
Activity
Use these links to find out more about some MGAs who have offices in London:
DUAL Group: www.dualgroup.com
Pen Underwriting: www.penunderwriting.co.uk/about
CFC Underwriting: www.cfcunderwriting.com/why-cfc
Use this link to read about CFC starting their own Lloyd's syndicate during 2021:
www.cfcunderwriting.com/en-gb/resources/news/2021/04/cfc-to-launch-new-lloyd-s-
syndicate
If you work for an insurer, find out if you have any relationships with MGAs. If you work for
an MGA, find out which insurers back your business.
A5 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
marketplace. It is also a world-renowned insurance brand, without ever actually providing
any 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 three working, three external and nine 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 the executive committee of the
Corporation of Lloyd's together with a number of committees that report to the Council.
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.
On the Web
Find out more about the governance structure by visiting:
www.lloyds.com/about-lloyds/the-corporation/governance-structure
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.
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 operate as an insurance company or a Lloyd’s syndicate, insurers have a choice
as to whether to enter the London Market at all, or remain within their home markets.
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. It was then acquired by ACE – which already had a significant Lloyd's presence –
and the two entities were combined. Although ACE acquired Chubb, the Chubb brand had
the larger brand presence worldwide, so Chubb has been maintained moving forward.
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?
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? Has your company changed
its headquarters location as a result of Brexit? 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?
What impact has COVID-19 had on how your business operates? Do you think the Lloyd's
building will ever be used in the same way again?
B2 Source of risks
Only about 12% of the risks written in the Lloyd’s Market come from the UK – the balance
comes from elsewhere in the world.
For the company market, the latest IUA statistics report suggests that a much larger
proportion being 52% of their gross income overall is from the UK and Ireland.
Activity
Research your own organisation and identify where your clients are located around the
world. Is there a focus on a particular part of the world?
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 is either a licensed or an eligible surplus lines insurer, or is authorised or
registered as a reinsurer only.
Eligible surplus lines insurers are covered in US licensing on page 1/12.
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
(this often occurs in 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.
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 insurance companies have to negotiate for permission with each individual state
regulator rather than once with the Federal Government.
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 previously had 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'.
Lloyd's made the decision that the focus going forward was going to be on US surplus lines
and reinsurance business rather than admitted business, and so the licences were given up.
From 1 July 2021 no new business could be written on an admitted basis in Illinois or
Kentucky. 1 Jan 2022 was the cut off date in the US Virgin Islands.
• An excess or surplus lines insurer in every state/location (including Illinois, Kentucky and
the USVI). An excess or 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, unless an exception applies. Lloyd’s is not the only excess or surplus lines
insurer available to a broker.
Chapter 1
Activity
Look at the Lloyd’s website to find out more about Lloyd’s licences.
bit.ly/2RN0SrI.
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 most common 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.
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 DXC/
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.
Be aware
The text will refer to DXC and/or Xchanging. If you hear a colleague talk about DXC or
Xchanging it is the same organisation providing central data and money movement
services to the market.
B2C Systems and controls to ensure compliance

Systems and controls go wider than just the reporting against regulatory requirements but
underpin the entire business to ensure that at no time can a risk be written by an underwriter
(or an activity be undertaken by a broker) that is in contravention of the rules.
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, rather than knowing 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 there are in-house Principles for doing business, on which all managing
agents will be measured.
Responsibility for meeting the Lloyd’s Principles 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.
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 Source of risks on page 1/11, only about 12% of the business in Lloyd's
originates from UK-based clients although the figure for the IUA company market is higher
at 52%.
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.
Chapter 1
Table 1.3: Qualities of the London Market that attract clients
Quality of brokers While many regional and overseas brokers are of the highest calibre,
there is an unrivalled concentration of quality and knowledge among the
London Market brokers.
They provide their clients with the highest level of advice and support
that they could expect in both the placing and claims processes.
A broker in London can be a retail broker, which is where they will have
direct contact with the client as well as the insurers.
Alternatively they can be a wholesale broker, where their contact is with
another broker (the retail broker). The retail broker has the contact with
the client, the wholesale broker has the contact with insurers.
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.
Importance of ethical behaviours in delivering positive customer
outcomes
The principles set by the FCA reflect the professional and ethical
standards that should guide those who work in insurance as they go
about their day-to-day activities. However, it's vitally important for an
industry that relies on trust for customers to have confidence that they
are dealing with people who are putting their interests first; not because
they have to, but because they believe it's the right thing to do.
Organisations with a record of great customer service, treating every
customer fairly and with respect, build themselves a good reputation;
those who fail to do so won't be recommended to other people.
The CII Code of Ethics www.cii.co.uk/media/9223937/
cii_code_of_ethics.pdf provides members of the insurance and personal
finance profession with a framework in which to apply their role-specific
technical knowledge in delivering positive consumer outcomes. Under
the fifth 'Core duty' within the Code, members are required to: 'treat
people fairly regardless of: age, disability, gender reassignment,
marriage and civil partnership, pregnancy and maternity, race, religion
and belief, sex and sexual orientation'.
The fair treatment of customers and particularly of vulnerable customers
is a key focus for the market, the regulators and the CII.
Use this link to review the FCA guidance: www.fca.org.uk/publication/
finalised-guidance/fg21-1.pdf
This link takes you to the financial vulnerability task force resource
library which is a useful source of information: www.fvtaskforce.com/
resource-library
For those insurers who have consumers within their client base, the new
FCA Consumer Duty sets higher and clearer standards of consumer
protection across the whole financial services industry. Quite simply the
aim is that consumers:
• receive communications they can understand;
• products and services that meet their needs and offer fair value; and
• receive the customer support they need, when they need it.
Linked to those ethical behaviours is an increased focus by insurers on
environmental, social and governance factors (ESG). These factors will
influence both the way that an insurer runs its own business but also the
choice of risks that it underwrites. More about this topic can be found in
Risks written in the London Market on page 2/1
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.
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 sums insured on the policies. However, it is possible for
capacity to be measured in both the total sums insured of policies
written and also in geographical terms (for example an insurer not
wanting to write more than a certain number of risks in a particular
town).
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
needs to have a product available when they need it, rather than too
early or too late. An insurance market that develops a product after its
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.
Examples of products that have been developed in recent years to meet
customer demand are mergers and acquisitions, active shooter and
more complex forms of cyber insurance.
Flexibility/entrepreneurial spirit The London Market is highly flexible in the types of insurance and
reinsurance that it can offer its clients as well as in terms of the way in
which its products can be constructed. Competition on the basis of price
alone is not a viable approach in today’s insurance market. London
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, while 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
for a broker and an insurer.
While the London Market has a good reputation for professional claims
handling, the money movement process for claims is still sometimes
subject to criticism as the elapsed time in the 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.
Chapter 1
Activity
Research whether your organisation has consumer clients, and then speak to your
colleagues to see what your business is doing to comply with the new requirements.
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.
Activity
Visit the Lloyd’s website to see how it approaches various types of emerging
risks:www.lloyds.com/news-and-insights/news/emerging-risk
Refer to
Reinsurance on page 3/1
The next chapter examines the classes of business written in the London Market, some of
the risks that fall within those classes, the perils that are covered and the types of claims that
can arise. We will not be addressing reinsurance here, although most of the classes we will
be looking at could be written as reinsurance as well as direct insurance.
Subdividing classes of business

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.
Equally, the classes can be divided into short tail and long tail. The length of the tail
refers to the time lag between the policy being in force and the final conclusion of claims
that might be made. As such, first party classes are typically short tail, and third party
classes are typically long tail.
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. □
b. Flexibility. □
c. Cheapest prices. □
d. Brand. □
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.
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 12% of the business written in Lloyd’s but 52% 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.
Question answers
1.1 b. Captive.
1.2 d. Any market – there are no restrictions.
1.3 c. Cheapest prices.

Chapter 1
Self-test questions
1. Which phrase best explains the term 'the subscription market'?
a. Any business placed in the London Market. □
b. Any business placed using a broker. □
c. Any business shared between two or more insurers. □
d. Any business placed using an electronic system. □
2. Which measure is most normally used to express an insurer's capacity?
a. Premium income limit. □
b. Number of offices. □
c. Loss ratio. □
d. Value of reinsurance purchased. □
3. Which of these is NOT normally a reason why a risk might be placed partially outside
the London Market?
a. Location of the insured. □
b. Culture, local knowledge and relationships. □
c. Claims service. □
d. Reinsurance pricing. □
4. What is a captive insurer?
a. An insurer that can only write risks from one territory. □
b. An insurer which is wholly owned by another insurer. □
c. An insurer which is wholly owned by its non insurance parent company. □
d. An insurer that has authority to write business on behalf of a Lloyd's syndicate. □
5. Why might an insurance company want to have a Lloyd's syndicate as well?
a. Access to Lloyd's brokers. □
b. Access to Lloyd's licences. □
c. Access to the Lloyd's building. □
d. Access to the Lloyd's market to buy reinsurance. □
6. What is meant by an 'admitted' insurer?
a. An insurer that has an office in a particular country. □
b. An insurer who has permission to operate as a domestic insurer in a particular □
country.
c. An insurer who has permission to access a country's legal system. □
d. An insurer who has been accepted into the Lloyd's market. □
7. What is unusual about the way in which the USA grants permission for insurers to
operate?
a. Permission is granted at state level, not at federal/country level. □
b. The permission system is managed through the courts. □
c. Permission is only granted to US based insurers. □
d. The US is the most expensive country in which to obtain permission. □
8. Which of these is NOT normally a reason why insurance buyers come to the London
Market?
a. Broker quality. □
b. Brand. □
c. Reputation. □
d. Price. □
You will find the answers at the back of the book
2
Chapter 2
Risks written in the
London Market
outcomes
Introduction
A Non-marine classes of business 2.1, 2.2
B Aviation classes of business 2.1, 2.2
C Marine classes of business 2.1, 2.2
D Motor insurance 2.1, 2.2
E Portfolio management 2.1, 2.2, 2.3
Key points
Question answers
Self-test questions
Learning objectives
• examine and explain the main classes of business written in the London Market;
• describe the losses and liabilities which may give rise to claims under each of the main
classes; and
• describe how underwriters diversify their risks and manage their portfolios.
2/2 LM2/October 2022 London Market insurance principles and practices
Introduction
In this chapter, we will examine the main classes of business written in the London Market,
Chapter 2
including areas of cover and the types of losses that can arise.
Key terms
Aviation insurance Claims made Diversification of risk Environmental,

social and
governance (ESG)
Liability Marine Non-marine Occurrence
Portfolio Property/physical Reinsurance
management damage
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, while livestock
insurance covers all animals (including fish) that can be reared commercially.
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.
On the Web
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.
Chapter 2 Risks written in the London Market 2/3
For example:
• the artist has lost their voice;
• the venue’s roof has collapsed; or
Chapter 2
• the weather forecast predicts torrential rain and it’s an outdoor event.
Contingency insurance covers the costs of refunding tickets and rearranging the event, if
possible, to try to recoup some of the costs.
When considering this type of risk, an underwriter looks at:
• The tour schedule for concerts – are there enough rest breaks between dates? What is
the scope for 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 financial impact that the cancellation of the Olympic or Paralympic events in
Tokyo in 2020 would have had. What other major events were cancelled due to
COVID-19? Which events made successful or unsuccessful claims due to COVID-19?
Why did some events successfully claim while others failed?
On the Web
Use these links to find out more about the Government's Live Events Reinsurance
Scheme, which will run from September 2021 to September 2022. Under this scheme the
UK Government will provide reinsurance cover for Lloyd's insurers providing cancellation
cover where the cancellation is because of new lockdowns: www.lmalloyds.com/LMA/
News/Releases/lma_fac_060821.aspx
www.gov.uk/government/news/government-backed-insurance-scheme-to-give-boost-to-
events-industry
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 safety margin. The insurance will be triggered, as the name suggests, if there
is more redemption than expected.
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 incident occurring. As a precaution, there will also be an independent adjudicator
on site during the event to ensure no cheating.
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.
On the Web
Look at this website to read about a competition jigsaw called Eternity which was insured
at Lloyd’s:
Chapter 2
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 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. 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 an insured person is kidnapped, but many policies also include the costs
of medical and psychological treatment for them and the payment of their salary while
they are being held captive.
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
Chapter 2
about having to refund ticket sales should the artist fall ill and be unable to perform?
a. Accident and health insurance. □
b. Liability insurance. □
c. Professional indemnity insurance. □
d. Contingency insurance. □
A1E Property insurance, including onshore energy
One of the main areas of business within the London Market is property insurance, making
up at least a quarter of Lloyd’s business in 2020 and the same proportion for the IUA
companies. This area of the business can be further divided into construction insurances and
‘business as usual’ (also known as ‘operational’) 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. While 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 construction project, this is usually from the point that the materials for the construction
start moving to site and while they are being stored prior to use. This policy should terminate
at the point of completion 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 the handover/completion date. Insurers only cover this if the contractor has
maintained any contractual 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 while being moved including some testing
once installed);
• business interruption (see Business interruption insurance on page 2/13);
• 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.
Chapter 2
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 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
Read this article about a building under construction melting a car in London:
www.bbc.co.uk/news/uk-england-london-23930675.
Consider a building project going on in your nearest town or city – think about what
aspects of the risk a CAR insurer should consider.
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) insurance. This cover can be absorbed within a CAR policy but is often purchased
separately by the firms which provide cranes and/or those which are responsible for the
erection of any other steelwork, for 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.
View these articles to see real-life incidents where a crane has collapsed:
news.bbc.co.uk/1/hi/england/merseyside/8136336.stm.
www.telegraph.co.uk/news/2020/07/08/crane-collapses-house-bow-trapping-people-inside
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
Chapter 2
‘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 be purchased, depending on the use of the property.
Generally, property insurance can be split into three constituent parts:
• 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.
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 while 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’.
On the Web
Have a look at this website and find out about coal seam fires that burn endlessly:
www.globalforestwatch.org/blog/fires/embers-under-the-earth-the-surprising-world-of-coal-
seam-fires.
• 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.
On the Web
Read the Lloyd’s emerging risk report about earthquake risk in the Middle East:
www.lloyds.com/news-and-insights/risk-reports/library/seismic-shock.
• 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
Chapter 2
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.
– Flood; escape of water from its normal confines. Overflowing drains following heavy
rainfall or 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:
– inherent vice: the normal and natural behaviour of things which would not be a fortuity
but rather a certainty or inevitable such as iron rusting if not protected from the
atmosphere;
– 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;
Chapter 2
• 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 in the event of loss or damage. This is where the insurer agrees to make good
the property lost or damaged and effectively takes over the property during the period of the
reinstatement. They have to restore the building substantially to the pre-loss condition.
Depending on the policy wording, it will not 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 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. □
b. They do not have the specialist knowledge required to do so. □
c. They are not licensed to write motor risks. □
d. This class of business is generally unprofitable. □
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.
Chapter 2
Activity
If your 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?
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. This covers fixed glass and will provide all risks cover for boarding up,
replacing inbuilt alarm systems, lettering and window frames. The availability, however, of a
stand-alone product helps those clients who might not require a full property insurance
policy.
Stock insurance. This covers raw materials, materials being used in production and the
finished stock in storage ready for distribution. This is a physical damage insurance and the
policy is set up in such a way 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 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 should be covered elsewhere. However, there are certain specific and
policy-related exclusions as follows:
Chapter 2
– 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
Refer to Marine classes of business on page 2/31 for other policies with theft cover
The types of claims that arise are perhaps predictable – something has been stolen and it
is important 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 Marine classes of business on page 2/31 (‘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 necessarily owned by) the insured. Responsibility means that the insured may
have a role in 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 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. while the money is on the insured’s
premises, or any other insured sites during business hours, in transit, in a bank night safe
Chapter 2
or at the private residence of the insured (in a safe).

This insurance can also cover the risks of assault and injury to anyone carrying the money
itself.
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 while 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.
Consider this…
Think about which types of business might be naturally more risky than others from a
fidelity guarantee point of view.
Typical examples of the internal risk management activities that an insurer offering fidelity
guarantee insurance will require the insured to undertake are:
– 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.
Chapter 2
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 while 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 although rare). The insurer must bear in mind how long it might realistically
take either to rebuild the business premises or move it to another suitable location.
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, 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.
Activity
Consider the issues that have arisen in relation to COVID-19 business shutdowns and the
claims made for business interruption.
Many questions have arisen about whether those claims are covered and whether the BI
sections have been properly triggered if there has not been any physical damage to the
premises.
Read the FCA press release following the Supreme Court decision in the test case
brought by the FCA relating to the coverage available under business interruption
wordings: www.fca.org.uk/news/press-releases/supreme-court-judgment-business-
interruption-insurance-test-case
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:
Chapter 2
• 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.
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 the UK/European
storms Dudley, Eunice or Franklin in 2022.
A variation on the concept of CBI is ‘supply chain’ insurance. 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.
On the Web
Visit this website to find out more about one insurer’s offering of supply chain insurance:
bit.ly/2AWtCqM.
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. □
b. Business interruption. □
c. Contingent Business Interruption. □
d. Property. □
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
Chapter 2
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, also making the distinction between financial institutions and non-financial
institutions.
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:
• Automatically adding in any companies acquired after the inception date, as long as prior
notice given 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 triggered is the one in force when the shareholder/investor makes the claim on the
directors, rather than 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 2020, but it purchased an
extended reporting period to run until 19 October 2021 – even though the risk was not
Chapter 2
renewed with the same insurer.

Any claims that come in before 19 October 2021 can be advised to the original insurer as
long as the alleged wrongdoing happened before 20 October 2020.
If the alleged wrongdoing occurred after 20 October 2020 or the claim was in fact made by
the disgruntled investor after 19 October 2021 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 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 and accountants (for example under the Solicitors Act 1974 any solicitor
authorised by the Solicitors Regulation Authority is required by the SRA indemnity insurance
rules to take out and maintain professional indemnity insurance); the aim is the protection of
innocent victims who may incur a financial loss or, in the case of medical malpractice, an
injury.
Brokers also require professional indemnity insurance to remain in compliance with FCA
requirements.
As there are many different types of PI wordings specifically tailored for different professions,
we will choose one for consideration here: 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;
Chapter 2
• 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 received by the professional from an aggrieved party advising that they are
making a claim against them.
For cases of medical malpractice, if the claim is in relation to a problem that arose during
childbirth or 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 2017, a lawyer gives advice to a firm that has been their client since 2014. The
Chapter 2
lawyer receives a claim from the client claiming bad advice; this claim is received by
letter in 2018. Presuming the lawyer has a standard professional indemnity policy,
which policy year will be triggered?
a. 2017 only. □
b. 2014 only. □
c. 2018 only. □
d. 2014, 2017 and 2018. □
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 exclusions usually found on these policies include:
• Liability arising out of the use of mechanical vehicles, other than those used as a tool of
trade on site 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.
• Product defects or recall (note that separate insurance can be bought for this – see
Product recall insurance on page 2/23).
• Professional risks.
• Any liability assumed under contract that is wider than non contractual liability.
• Asbestos – a very good fire retardant material but very bad for the lungs if the fibres are
breathed in.
• Pollution.
Refer to
See Product recall insurance on page 2/23 for separate insurance for product defects
Claims under public liability policies can range from an individual who slips over on a grape
in the fruit aisle of the supermarket, to larger claims from people who are injured because a
train derails 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.
Chapter 2
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.
• Your firm provides public liability insurance to the management company that runs
Minster Court. The policy runs for twelve months from 1 January 2021 and has policy
limits and a deductible of £5m 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 while 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, 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’.
Chapter 2
As you might imagine there are exclusions which include:

• Damage to the products themselves.
• Any liability arising out of the recall of a product.
• 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 policy is working out whether the insured or any other party is likely to share
any of the blame.
Taking a practical example of a faulty car, while we all know the main manufacturer, it is
important to 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 wider UK composite market and so for completeness we will consider it here.
Remember that in the UK, this is a compulsory form of insurance.
The basic coverage is the legal liability of the insured firm for injuries to employees/persons
employed caused during any period of insurance (in contrast with PI above, this is generally
not a ‘claims made’ 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
Chapter 2
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 aims to have records of all new and renewed EL policies since 2011 (the year it
was founded to replace the pre-existing voluntary scheme), 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 the UK, an employer is legally liable if an employee becomes injured in
the workplace.
There is no equivalent to the UK National Health Service in the USA and other than
government schemes that pay some medical expenses for certain categories of individual,
all medical costs must be paid by the 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.
• There are also some occupation specific workers compensation regimes in the US, such
as the Jones Act for seafarers, and the Longshoreman and Harbour Workers
Compensation Act (LHWCA) for dock workers.
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.
Insurers are constantly considering what other liabilities an insured might face and a typical
example of a recently developed product (both in the US and the London Market) is active
shooter insurance. This provides liability cover to respond to litigation faced by an insured
resulting from harm involving guns and other weapons. Additional coverages include the
costs of crisis management and post-event counselling services.
Chapter 2
Activity
Use this link to find out more about a product covering the use of deadly weapons:
www.beazley.com/london_market/political_risks_and_contingency/
deadly_weapons_protection.html
If you work for an insurer or MGA, find out whether you write this business. If you work for
a broker, find out if you are obtaining it for any of your clients.
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.
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 permission is sought in the normal way via the business planning
process. Permission is more likely to be given if the premium written for this class of
business is less than 2% of the syndicate’s capacity (rising to about 6% for exempted
classes such as credit risk and contract frustration), so long as the syndicate can
demonstrate that it has the necessary controls in place, including knowledgeable
underwriting and analysis resource. 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 the potential to make a substantial gain, as well as a loss. Property values could
rise and companies 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’ and if a syndicate wishes to write a risk of this nature that falls outside their pre-
agreed business plan it will have to be referred to Lloyd’s for agreement.
A3B Extortion/malicious product tamper/contamination insurance
Unfortunately, people sometimes try to obtain money from companies by threatening them
(called extortion). One way to threaten a company is to allege that some of their products
have been tampered with – such as glass in cereal boxes, or in the pockets of clothes they
sell. However, the main targets 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.
Chapter 2
• 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 pipeline in a factory – thus mixing the mayonnaise with the pickle! Maybe the
machine that labels tins malfunctioned and instead of labelling tins as dog food, they were
accidentally labelled as stewed steak!
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-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 the affected products, issuing the recall notice and dealing with the recalled product
when it is presented under the recall. Typical recall insurance pays for:
• advertising to publicise the recall as widely as possible in a number of different media;
• any additional employee costs incurred by the insured in hiring extra staff to deal with the
recall and 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

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
Chapter 2
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. They also have to provide
returns in relation to moveable risks, such as those which are aviation or marine in nature.
Refer to
See Loss and exposure modelling on page 7/10 for realistic disaster scenarios
Realistic disaster scenarios are discussed further in Loss and exposure modelling on page 7/
10, but in essence they are calculations as to which risks would be exposed by any
particular loss event and what the financial impact on the syndicate would be.
A3E Terrorism and political violence insurance
Refer to
See Reinsurance on page 3/1for government reinsurance programmes
In the aftermath of events like the City of London bombings in 1992 and 1993 and the World
Trade Center attacks in New York in 1993 and 2001, the property insurance market became
understandably reluctant to provide cover for damage to property arising out of terrorist
attacks, partly because reinsurers were also unwilling to continue providing cover.
This reluctance on the part of property insurers led to the development of government
related reinsurance schemes, because the governments of 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, Australia and France which work, in effect, as a reinsurance programme
should there ever be an attack that falls within the required criteria. This means that
commercial insurers can continue to offer terrorism 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.
As time went on, what also developed was a separate class of direct business known as
political violence (PV) insurance. PV insurance looks like a property policy (in terms of
subject matter insured) but the perils are those that could be categorised as those caused by
humans rather than natural catastrophe.
A typical PV policy will cover the following perils:
• Terrorism – typically defined as violent or unlawful acts taken with a view to influencing
government or putting the public in fear for such purposes.
• Sabotage – an action to deliberately damage, destroy or obstruct, especial for political or
military advantage.
• Riots, strikes and civil commotions – see Property insurance, including onshore energy
on page 2/5 for the definition of riot. A strike is where employees refuse to work. Civil
commotion is usually defined as a politically motivated disturbance of the public peace.
• Malicious damage – deliberate damage, done for political reasons.
• Insurrection, revolution or rebellion – deliberate and organised resistance to a sovereign
government or an uprising against one.
• Mutiny or coup d’état – mutiny is deliberate resistance to orders by army/police or similar
and coup d’état is a sudden violent and illegal overthrowing of a sovereign government.
• War and/or civil war – war being a cross border matter and civil war happening within a
single nation’s borders.
Care has to be taken to consider how a PV and an ordinary property policy fit together, as
deliberate damage can be caused for a number of reasons (for example, rioting without any
political motive). Damage to buildings caused by these situations would not usually trigger a
PV policy, so the property policy must be wide enough to interlink with it suitably.
A3F Cyber insurance
Chapter 2
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, 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 while 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.
On the Web
Use this link to read more about a data breach suffered by EasyJet in 2020:
www.ncsc.gov.uk/news/easyjet-incident
Use this link to read about the Government guidance for home workers:
www.ncsc.gov.uk/news/home-working-increases-in-response-to-covid-19
Read these emerging risks reports commissioned by Lloyd’s:
www.lloyds.com/news-and-insights/risk-reports/library/business-blackout
bit.ly/2SxurxD
www.lloyds.com/news-and-risk-insight/risk-reports/library/technology/taking-control
A3G Mergers and acquisitions insurance/warranty and indemnity

When companies choose to buy other companies, there are a number of risks that can be
faced by both sides. Additionally, a number of stakeholders (such as shareholders) will be
keeping a close eye on whether their investment has been affected by inappropriate
behaviour by the directors of either company.
Companies choose to engage in mergers and acquisitions for a number of reasons, such as
looking for economies of scale, access to wider distribution networks, increasing market
share through buying competitors and even bringing together corporate and tax structures in
a more efficient way.
During the negotiations for a merger or acquisition, the parties will typically give each other
mutual warranties and indemnities. Either the seller or buyer should consider buying
warranty and indemnity insurance to protect them, in case the negotiations break down or it
is found that (after the transaction has closed) some of the warranties have been breached
by either side. For example, a seller warranting that the skills and relationships that they
have will be available to the buyer after the sale and then the buyer finding afterwards that
this is not the case.
For a seller, the insurance will often give them a cleaner exit and allow them to use the sale
proceeds to share with their investors, rather than having to hold onto funds just in case of a
claim after the transaction closes from the buyer.
Most policies will be crafted to closely match the actual terms of the merger and acquisition
transaction, looking at the risk allocation between buyer and seller, the complexity and value
of the transaction, relative financial stability of the parties and the industry sector.
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’.
Chapter 2
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 Non-marine classes of
business on page 2/2. Where these are mentioned, references to the appropriate section will
be provided.
Refer to
Liability on page 2/27
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 Liability on page 2/27.
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 while in one of three
aspects of flight, namely in the air (in flight), on the ground (not moving) or taxiing (i.e.
moving around an airfield).
Generally, insurers pay for the repair or replacement of either parts of or the whole aircraft.
Given the 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.
On the Web
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
Chapter 2
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 concept of betterment is also applied. Here, if the insured receives a replacement
part which is newer than the one that was lost or damaged, their claim will be reduced
accordingly.
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.
B1C Drone/unmanned aerial vehicle insurance
Drones are used commercially (by professionals such as marine surveyors, farmers, the
police and wedding photographers) and by private users. Insurance is available to cover
them for both physical damage including theft, cyber risks and also the liabilities that might
be incurred should bodily injury or property damage be caused.
The aviation regulators within the UK require insurance to be in place should a licence be
required to fly a drone commercially and much of the law surrounding the liabilities arising
out of them is derived from aviation law and regulation.
For example, a commercial drone operator will require a minimum legal liability insurance
cover of approximately £820,000 which will increase depending on the size of the drone. The
actual minimum is expressed as 750,000 Special Drawing Rights, which is a monetary
reserve currency used in international conventions, but equates to approximately £820,000.
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 while 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 how much has to be paid out should passengers be injured or killed during an
international journey. While these rules do not apply to every journey, the vast majority of
Chapter 2
international plane flights are governed by them. The insurer expects the airline to issue
tickets which make it clear that the 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.
• 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 concepts of liability insurance have been covered already, we will just look at the
specific elements of these policies.
• 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 to buy this insurance. This insurance covers the insured’s liability for
loss of damage to non-owned aircraft while on ground and in the care custody or control
or while being serviced, handled or 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 while in flight.
• Products liability. In the same way as any other products liability policy, this insurance
covers the insured’s liability for bodily injury or property damage arising out of the
possession, use, consumption or handling of any goods or products manufactured,
altered, repaired, serviced, sold, supplied or 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:
Chapter 2
• 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
If an aircraft manufacturer discovers a problem with one aircraft, there might be an order
from the Government aviation authorities that all aircraft of the same type are grounded
pending completion of any investigations. This is known as wholesale grounding. 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.
Download this document to read more about the wholesale grounding of the Boeing 737
Max after the incidents in Indonesia and Ethiopia: bit.ly/2p0fslW.
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. □
b. Airline liability. □
c. Airline physical damage. □
d. Hangar-keepers' liability. □
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 War insurance on page 2/24.) 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 main sections: Section 1 applies to loss or damage to the aircraft and
Section 2 to extortion or hijack.
Extortion has the same meaning here as it does in the non-marine section and hijacking is
seizing assets 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.
Chapter 2
• 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 injured or suffered illness and have failed a medical examination. It does not
cover losing their licence because of other actions such as drinking on duty. It serves as an
income replacement insurance, paying 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 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 the aircraft, perhaps to sell it in order to get some of their money back. However,
problems can occur if the aircraft is located in a hostile country because the owner has
leased it out to another airline and the authorities in that hostile country will not let it leave.
This insurance covers the costs of repossessing the aircraft and of reconstructing any
technical records for the aircraft, because even if it can be recovered, it is worthless without
the various technical records (for example: documents relating to ownership, maintenance
and records of regular inspections).
On the Web
Research the losses being faced by the lessors of aircraft whose aircraft were leased to
Russian entities after the sanctions were widened.
Use this article as a starting point: www.irishtimes.com/business/aircraft-lessors-face-
billions-in-write-offs-as-planes-re-registered-in-russia-1.4826923
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.
Insurance for satellites for the period known as ‘pre-launch’ is actually covered in the cargo
market, because the risk is the movement of an object from one place to another (albeit very
carefully), as the values involved are rather large. The insurance extends to the loading of
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the satellite onto the launch vehicle.
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 with other classes.
For property damage, there is ‘total loss’ which is usually obvious through something like a
catastrophic explosion or a failure of a vital part which impacts on the operation of the rest of
the 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!
International law makes the state that launches an object into space responsible for any
injury or 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 22,000 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
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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 much the same way as a non-marine construction policy. The shipbuilder and
the eventual owner can be covered under the policy; the important aspects are to ensure
that the values at risks under the policy are kept up-to-date with insurers so that there is no
danger of underinsurance should a claim be made 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 while 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 which cover all risks subject to exclusions.
There are all risks hull insurance policies but the main London Market wordings are named
perils. The perils covered include physical damage to the insured 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.
• 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.
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There are very few exclusions within the standard market hull wording, all of which except
the last one can be bought back from insurers:
• 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 commonly known in this context as three/fourths). The shipowner has to
look elsewhere for the remaining 25% and they will use a specific liability insurance policy
that we will consider in a moment.
• General average. There is a principle in maritime law whereby if someone makes a
sacrifice or incurs cost to save everybody else, then everybody else will chip in to pay
them back their sacrifice/costs. 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/incur the cost.
• Salvage. Salvage is someone coming to rescue you when you are out at sea in trouble.
Not unsurprisingly perhaps, your rescuers (or to give them their proper title: the salvors)
have earned a reward by saving you (as long as they were successful in their efforts).
The hull insurer will pay the 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 this category as can goods carried by road or rail. The main London Market
wordings provide a choice between three levels of cover: one being all risks and the other
two offering combinations of named perils.
The easiest way to explain the perils is to review the following table. 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
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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 damage might have occurred, whether the goods were actually the responsibility
or the property of the insured at the time and whether any of the exclusions may apply.
There may be many claims coming into 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 21,000 metal boxes on board, each filled with a different cargo,
or maybe multiple cargoes owned by different people.
Refer to
See Marine liability on page 2/37 for information on marine liability
In addition to physical damage insurance, cargo insurers cover the cargo share of any
contributions in general average or salvage as well as sue and labour expenses. However,
cargo insurance does not 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 business. However, many of the same concepts apply and the common
factor of the maritime environment perhaps still makes it more akin to marine than non-
marine.
Exploration
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
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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.
• 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/en/global/corporate/news-and-insights/press-releases/update-on-gulf-of-
mexico-oil-spill-01-june.html
Ask colleagues if your firm was 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 parties involved in the project and they can all be insured on the policy, with their
respective shares in the project set out. These various parties are often known 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.
Re-drilling. This covers the cost of creating a new well, generally to the point it was before
the incident.
The insured must be mindful that the insurer will not necessarily pay all the costs of a re-drill
– only 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.
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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.
• 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 situation, this extension covers the insured’s expenses in preventing a loss that
would otherwise be covered. This is in effect the same concept as sue and labour.
• 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. □
b. Re-drilling. □
c. Construction. □
d. Sue and labour. □
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.
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• 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 wreck is also covered but the following items are not:
• 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
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 (overtime or air freighting parts to get the repairs done more quickly).
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 Offshore energy insurance
on page 2/34; 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
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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.
On the Web
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 table 2.2.
Here are the risks covered by marine liability insurers:
Table 2.2: Risks covered by marine liability insurers

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 shipowner should buy an EL policy. This insurance tends to remain with marine
liability insurers due to the nature of the protection that ships’ crew have around the world.
Maritime EL covers employees who work in the maritime world but who would not be
categorised as ships’ crew but would potentially be able to claim what is known in the US as
‘seaman status’. It provides some cover for employers who find claims being made against
them which would trigger the more generous legal compensation regimes often available for
crew or those with seaman status.
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. The marine professionals typically involved would include surveyors, ship
agents, ship brokers, naval architects and ship managers.
On the Web
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 purchases very similar liability insurances for public and employers’
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liability. The only slightly unusual risk which requires careful consideration is the liability to
those vessels and personnel using the water areas for which a port authority is responsible.
On the Web
Review this website to find out more about the typical package policies which can be sold
to ports: www.wavelengthinsurance.com/.
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. Other variations on this type of wording will pay out if
the vessel has been seized by another party and the vessel is not damaged, but the insured
does not have the free use of her and therefore cannot earn money. In this instance, this
also could trigger physical damage cover under a war policy.
C3B Specie/jewellers' block insurance
This is insurance which covers physical damage and liability risks specific to the trade of
dealing in gems, precious metals, valuable documents and manufactured jewellery. Some
elements overlap with money, theft and fidelity guarantee policies within the non-marine
market.
Insurers are particularly concerned about the security aspects of the risk as the goods are
covered not only in bank vaults but also while being transported, sent by couriers and while
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’ diamonds.
C3C Fine art insurance
This insurance covers artwork held in private and public collections, museums and at
exhibitions. It also covers dealers, restorers and similar professions. With art-related losses
the coverage is not only for the costs of repair but extends to include the depreciation in the
value of the item after the repair or 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.
On the Web
Read this online article concerning damage caused to some Ming vases when someone
tripped downstairs:
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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) and even a customer and the bank if they are depositing takings for the day.
The key element again (as 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 care not to break sanctions laid down by the likes of the UN, the UK and US
governments and in some cases the EU. Certain products, for example arms and
ammunition, also require licences before they are 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.
C3F Contract frustration or trade credit/credit risk 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.
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.
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.
Chapter 2
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 fully understand the nature of the risk before agreeing to cover it.
Refer to
See Delegated underwriting on page 9/1
London Market insurers use ‘delegated underwriting’ contracts to access knowledgeable

parties in other parts of the world to write risks on their behalf. Motor insurance is a good
example of a type of business written that way.
Activity
Look up a specialist motor syndicate such as Equity Red Star:
www.ers.com.
E Portfolio management
When faced with a bewildering choice of different classes of business to possibly write as an
insurer, should all of them be written? The answer is 'probably not'. However, the real
question is: 'what is meant by portfolio management in real terms?'
Portfolio management as an insurer can be defined as making choices in terms of the
business written, which makes sure that the long-term financial objectives of the investors
(capital providers) are met. In short, the investors want return on their investment, so ideally
the portfolio selections should encourage profitability!
Each insurer will have a defined appetite which should be set out not only in communications
with investors, but also in the case of Lloyd's syndicates, as part of its business planning
submissions to Lloyd's. Lloyd's in particular will consider plans with a view to whether they
are logical, realistic and achievable, which is the same critical analysis the board of any
insurer should also give to a proposed plan.
Some insurers might have an appetite more towards short tail classes as opposed to long
tail, and some might do the reverse. The appetite might also have a geographical focus
where the balance of the portfolio will ensure that not too much business is coming from a
single area.
E1 Diversification
The concept of diversification is that of spreading the risk and reward across a number of
classes of business, so that simply put, if one makes a loss one year, hopefully the others
Chapter 2
will have made a profit. This spreading concept can also exist within individual classes by
having a geographical spread, or different types of customer.
E2 Investment strategy
When any capital provider is considering investing in an insurer (whether buying shares in a
company or becoming a Lloyd's name), then their own risk appetite should be considered.
This is particularly relevant for individual investors such as Lloyd's names. Their financial
advisors (such as Lloyd's members' agents) should consider whether their clients' risk
appetite is low where they would like modest regular returns, or slightly higher. If slightly
higher, then a syndicate where the profits might be greater, but the chances of a loss also
greater, might suit.
E3 Environmental, Social and Governance (ESG) issues

A significant factor for organisations in today's market is ESG issues, which govern not only
the way that they run their own business, but also how they view any potential stakeholders
or business partners.
The issue is a wide one, not only encompassing climate change but also matters of global
concern such as diversity, living wages, and supply chain resilience.
The FCA has set out their own strategy and as regulated organisations, both insurers and
intermediaries have to set out their own agendas and to remain mindful of how their actions
are perceived by their own client base.
In its capacity as a regulator, within the Principles, Lloyd's requires managing agents to have
a responsible investment strategy which clearly uses non-financial risk factors (such as
climate risk) in investment decisions.
In relation to the inwards risks accepted by insurers, ESG considerations also have to factor
into their risk appetite, and they need to manage the ongoing transition away from any
existing business, which is no longer aligned with their current position. A good example of
this is the reduction in appetite for coal related risks going forward.
Activity
Think about anything happening in your organisation which evidences consideration of
ESG matters. Discuss with colleagues and get their views too.
Use this link to read the Lloyd's ESG report where you can see reference to the coal
position: www.lloyds.com/about-lloyds/media-centre/press-releases/lloyds-takes-action-to-
accelerate-transition-to-sustainable-economy
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.
• Cyber insurance is continuing to grow in popularity. It can cover both physical damage
and liability risks together with the costs of managing the crisis communications with
clients.
• Newer products include mergers and acquisitions insurance, which can cover the risks
of a business deal not working out as expected.
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.
• New classes within the aviation market include physical damage and liability insurance
for drones and other unmanned aerial vehicles.
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, Jewellers' 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.
Motor classes of business
• Some motor insurance is written in the London Market which can be for UK or
overseas clients.
• Motor written tends to be either fleet insurance or private car and will cover both
physical damage and liabilities.
Portfolio management
• Portfolio management is spreading the risks in order to fulfil the long-term strategy of
the investors.
• This can be done by diversifying the business to ensure that there is not too much
concentration in one class or in one geography.
• All business now have to take into account ESG issues both when running their own
businesses and also engaging with business partners and stakeholders.
Question answers
2.1 d. Contingency insurance.
Chapter 2
2.2 a. They believe that they should be insured on more specialist policies.
2.3 c. Contingent Business Interruption.
2.4 c. 2018 only.
2.5 a. Premises liability.
2.6 a. Control of well.

Self-test questions
1. What is the difference between first party and third party insurance?
Chapter 2
a. First party insurance involves only one insured and third party insurance involves □
multiple insureds.
b. First party insurance will involve claims triggered by the insured only, and third □
party insurance claims will be triggered by an outsider claiming something from
the insured.
c. First party insurance is the insurance written in the Lloyd's and company markets □
and third party insurance is only written by mutual insurers.
d. First party insurance only has one layer involved, and third party insurance always □
has multiple layers.
2. Which of these types of insurance is a 'benefits' policy?

a. Personal accident. □
b. Motor. □
c. Marine Hull. □
d. Contingency. □
3. Explain the concept of a maintenance period in a construction policy.
a. The final few months before handover to the owners. □
b. The few months after handover where the contractor retains responsibility to sort □
out problems.
c. The waiting period that the insured will have to bear before making any claim □
under a construction policy.
d. An additional coverage that can be added onto the main construction policy. □
4. What responsibility do insurers take on when they agree to reinstate a property?
a. Responsibility to obtain all necessary planning permission. □
b. Responsibility to obtain all necessary construction materials. □
c. Responsibility for any additional damage or liability that arises during the □
reinstatement period.
d. Insurers do not take on any particular responsibilities. □
5. What extensions to the legal definition of theft are normally required by insurers for a
claim to be met?
a. Only certain things can have been stolen. □
b. The thieves must be professional. □
c. There must be a burglar alarm. □
d. There must be forced entry or exit. □
6. What is the basic risk covered by directors' and officers' (D&O) insurance?
a. Claims made by shareholders that a particular activity has reduced the value of □
their shareholding.
Chapter 2
b. Claims made by directors that they have been unfairly dismissed. □

c. Claims made by employees that they have been denied the opportunity to be a □
director.
d. Claims made by recruitment consultants that candidates they put forward for □
directors posts have not been accepted.
7. Explain the concept of contributory negligence.

a. More than one co-defendant in a liability case. □
b. An injured party having a share of the blame for their own injury. □
c. The insured contributing their deductible/excess to any settlement. □
d. The insured being responsible for the loss or damage caused. □
8. During which parts of the journey will an aviation passenger liability policy NOT
respond to injury claims?
a. Between arrival at the airport and boarding. □
b. During boarding. □
c. While on board. □
d. During disembarkation. □
9. What type of insurance covers the loss of income of a pilot who fails their medical
and is no longer permitted to fly?
a. Aviation liability. □
b. Aviation loss of use. □
c. Aviation loss of licence. □
d. Aviation grounding. □
10. Which of these is NOT a standard exclusion in a marine hull policy.
a. War. □
b. Strikes. □
c. Malicious damage. □
d. Insolvency. □
11. What is the name for the special type of business interruption insurance that can be
purchased in the marine market?
a. Loss of use. □
b. Loss of income. □
c. Loss of hire. □
d. Loss of business. □
Chapter 2
Reinsurance
3
Chapter 3
outcomes
Introduction
A Why reinsurance is purchased and sold 3.1
B Types of reinsurance products 3.1, 3.2
C Reinsurance programme construction 3.1, 3.2
Key points
Question answers
Self-test questions
Learning objectives
• examine methods of reinsurance; treaty and facultative; proportional and non-proportional
and the differences between them; and
• calculate amounts ceded to reinsurers and claims recoverable.
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 Claims Control Claims Co-operation Excess of loss

transfer Clause Clause
Facultative Facultative Full Follow Clause Proportional
obligatory reinsurance reinsurance
reinsurance
Quota share treaty Reinsurance Reinsurance Retained line
programme
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. It is often called ‘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 transfer of risk from
to transfer risk = the insurer along
with the premium
There are various ways to in which to arrange this deal which we’ll examine in Types of
reinsurance products on page 3/4.
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:
• Risk transfer. In this case, the ‘bad thing’ that might happen is a claim on the original
insurance that is substantially larger than expected.
• Peace of mind. For an insurer, this is protection against catastrophe-type losses that
would be very damaging financially to its business.
• Balancing out peaks and troughs. 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.
Chapter 3 Reinsurance 3/3
As we said in chapter 1, think of capacity as a glass of water. Once the glass is full and 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.
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.
Chapter 3
A2 Why firms sell reinsurance
The reasons why firms sell reinsurance can be summarised as:
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 directly. Approximately 35% of the Lloyd's premium income in recent years was
from reinsurance business.
Becoming involved in a class of business on a trial basis
If an insurer wants to investigate writing a new class of business, one approach might be to
hire an 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. Examples of this
would include Swiss Re and Munich Re, who although they do write direct business, write far
more as reinsurance.
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. □
b. By changing its licences. □
c. By requesting permission from the local regulator. □
Chapter 3
d. By opening a Lloyd's syndicate. □
B 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 insurer is retaining, which is known as their retention or retained line. The maximum
size of this line (i.e. how much of any one risk the insurer can keep) is important when
working out how much reinsurance is 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.)
On the Web
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.
www.investopedia.com/terms/c/catastrophebond.asp
www.artemis.bm/library/what-is-a-catastrophe-bond
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 buying the reinsurance) to operate exactly as it sounds. The insurer makes all the
claims decisions, it does not even have to tell the reinsurer that a claim is in progress – it just
presents the reinsurer with the bill!
Needless to say, this option is unpopular with reinsurers and more popular with original
insurers.
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.
Chapter 3
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 reinsurer’s preferred option. This option allows the reinsurer to have full
decision-making control and failure by the original insurer to allow this will, at best, delay any
reinsurance recovery and at worst adversely impact its ability to recover at all under the
policy.
When thinking about these three options and looking at the different types of reinsurance
that are discussed below, it is important to remember that there is a lot of trust involved in a
reinsurance contract. You might be surprised to discover this in the context of a highly
regulated business 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 for excess of loss reinsurance.
This can be supported by a bordereau (spreadsheet) which sets out details of individual
losses relating to a single storm for example.
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
Chapter 3
that one risk.
Non-proportional Reinsurance where the premium and claims do not have a direct correlation. The premium
reinsurance will be set more in line with a direct insurance, and the claims will be dealt with on a purely
financial basis, rather than on a shared basis. Excess of loss and stop loss are examples
of this type. Claims will be paid out in excess of a pre-agreed amount.
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.
Reinstatement The potential in non-proportional reinsurance for the layer to be 'reinstated' or brought back
to life, usually for the payment of additional premium. The price and the number of times
that this can be done will be agreed at the time the original reinsurance contract is written.
It would be expressed as a layer of US$1m xs US$1m with three reinstatements. This
means that a total of four total losses could be paid out on this contract or an aggregate of
US$4m in smaller losses.
Reinstatement The price paid by the cedant for the reinstatement of the layer (or part of the layer) after a
premium loss. Expressed as a percentage of the original premium but could in some cases be free.
Retrocedant A reinsurer obtaining reinsurance for itself.
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
business or even an insurer’s whole book of business.
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. □
b. Claims Co-operation Clause. □
c. Warranty Clause. □
d. Claims Control Clause. □
B1 Facultative reinsurance
The word facultative can be interpreted as meaning ‘optional’ or ‘not compulsory’. This
meaning helps us understand better how this type of reinsurance works. Firstly, the insurer
has a choice as to whether or not to buy it. In reality it has a choice as to whether to buy
reinsurance at all, but the concept of choice 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.
Chapter 3
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
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 be able to obtain on a slightly unusual risk that it has written.
For example:
• where an insurer has written a line on a multi-section policy covering a mixture of property
and liability, and it would prefer not to have written the liability but had no choice if it
wanted the property section;
• where an insurer has written (perhaps accidentally) a larger line on something than it
wanted to; or
• the risk is unconventional and falls outside any of the definitions of what is covered under
their treaties (the grouped reinsurances).
Reinsurance is not compulsory in the same way that, say, employers’ liability is, so it is a
business decision as to whether to purchase it at all.
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.
Example 3.2
An insurer writes a 10% share of a risk and purchases Fac RI for 50% of its line, paying
exactly the same premium terms as it is receiving on the original risk.
If its signed line ends up being 8% and the net premium they receive is £500 then they will
cede 4% of the risk to its reinsurer who will receive £250 in premium.
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
Chapter 3
themselves against just the earthquake element of the risk.

B1A 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 up the reinsurance available. It is optional for the insurer.
However, if it decides to cede the risk, the reinsurer has to accept it – that is the ‘obligatory’
element in the title.
On the face of it, there are some oddities with this type of contract which feels unbalanced
between the 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. □
b. The reinsurer. □
c. Both the insurer and the reinsurer. □
d. Neither the insurer nor the reinsurer. □
B2 Excess of loss (XL) reinsurance
Excess of loss (XL) reinsurance is ‘non-proportional’ reinsurance. The contract is non-
proportional because there is no concept of sharing the premium and the claims in
proportions or percentages.
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 3.3, 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:
• 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?
Chapter 3
Let’s illustrate this with an example – remember this is only an illustration: infinite variations
are possible.
Example 3.3
Insurer A has reviewed its claims history and can see that it has had a number of claims at
the £5m level and one spike of a claim which ended up at £10m, but that was in one year
only and has not been repeated. Insurer A decides to buy XL reinsurance to a top level of
£6m 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 £10m. 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
£2m xs
£4m
Third layer Second layer

£5m xs Third layer £5.5m xs
£1m £1m xs £500,000
£3m
Second layer
£2m xs
£1m
Second layer
£750,000 xs £250,000
First layer First layer First layer
£250,000 £1m £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: £1m 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 £6m, there is no reinsurance for the excess above
£6m in this reinsurance programme.
When determining the premium payable, the reinsurer considers the policy limit (i.e. size of
the layer) and also how often the layer might have to pay claims. Not surprisingly the lower
layers are more likely to have claims than the higher layers, as larger claims are less
frequent than smaller claims.
The lower layers in a reinsurance programme are often called the ‘working layers’ and the
higher ones ‘catastrophe layers’. The higher layers will usually charge less premium for the
same amount of policy limit (i.e. same 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 amount of inwards
Chapter 3
premium that the insurer receives.

The premium for a non proportional reinsurance will often be shown on an adjustable
basis. The reinsurer's calculation of the price for the reinsurance will be based on the
cedant's overall gross premium income in whatever part of the business is being protected
by the reinsurance. However at the start of the year the cedant does not know exactly what
that will be.
Therefore they pay a small amount up front to the reinsurers with an agreement to review the
figures at the end of the year (or when the cedant's actual premium income is finally known).
The contract will state 'Premium US$100,000 adjustable at 5% original gross premium
income (OGPI)'.
The US$100,000 is paid at the start of the contract and is known as the Deposit premium.
At the end of the year, the cedant states what their actual OGPI has been so the calculation
can be done.
Example 1
If their OGPI is US$3m, 5% of US$3m is US$150,000. US$100,000 has already been paid
so a further US$50,000 in RI premium is due and payable.
Example 2
If their OGPI is US$1m, 5% of US$1m is US$50,000. However, if the US$100,000 already
paid is stated to be both a Minimum and Deposit premium, the cedant does not receive any
refunds!
When considering reinsurance protection, an insurer is concerned not only with buying
enough to ensure 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).
Be aware
Deposit premium: the down payment payable which can be adjusted sometime later
(typically at the end of the policy period), and which might have to be partly refunded
depending on how the adjustment works out.
Minimum premium: the lowest amount of premium that will be payable on a contract,
irrespective of any later adjustment.
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 ‘burn through’ all its layers from zero (‘from the ground up’) and leave it exposed.
Therefore, it can agree with its reinsurers that they will ‘bring its policy back to life’ (called
reinstatement) a number of times within the year to allow it to collect more than one total loss
during any one year. If the insurer is very fortunate, reinsurers might reinstate its policy
without charge, but generally they charge a proportion of 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?
Chapter 3
Question 3.4
In the context of reinsurance, what are ‘reinstatements’?
a. Extra layers of coverage which can be purchased for additional premium. □
b. Reductions in the coverage if the premium is not paid. □
c. Triggers to bring the policy layers back to life after a loss usually for the payment □
of additional premium.
d. Cancellation provisions. □
B2A 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);
• 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 claims coming out of any one incident can be grouped together for presentation to
reinsurers. Usually, reinsurance policy wordings indicate that claims 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 or retention, 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 3.4
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/retention.
Be aware
When reviewing the figures being presented by the insurer/cedant, the reinsurer must be
clear whether the figures are 'from the ground up', i.e. starting from zero, or represent only
the claim being made on any particular layer of reinsurance.
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.
B2B Calculating reinstatement premiums
If a non proportional reinsurance contract has reinstatement provisions within it, it works in a
similar way to an aggregate policy limit in overall terms.
For example: Reinsurance contract US$1m xs of US$1m. Three reinstatements.
Chapter 3
What this means is that the client has a total of US$4m in reinsurance coverage available
(being the original 'life' and the 3 reinstatements). They can erode that either as four total
losses to the layer or as a number of much smaller losses.
When any claims on the contract are being considered, the financial position across the
whole contract must be analysed to work out whether enough money remains in the contract
for the claim (even if technically covered) to actually be paid.
For example, if US$3.5m has already been paid on the contract this policy year and a further
total loss is presented, it cannot be paid in full, even if covered as there is only US$500,000
left in the contract.
The second element to consider is the reinstatement premiums themselves which are paid
each time a claim is presented until the contract is used up.
Taking our example above, the pricing of the reinstatements could be:
Reinsurance contract US$1m xs of US$1m. Three RIPs: one @ 100%, two @ 50%.
What this means is that if the premium for the original layer is US$100, then the price for the
second 'life' is also US$100, but the third and fourth lives are cheaper at only US$50 each.
In practice the reinstatement premiums are not generally paid in full for each layer at one go,
but are paid in instalments as individual claims are presented and are reviewed and checked
by claims personnel rather than underwriters.
Example using our contract mentioned above:
Claim is presented of US$500,000 to the layer and it is the first claim on the contract.
As 50% of the first 'life' is being used up, a premium must be paid to activate 50% of the
second 'life'.
Therefore the RIP payable will be 50% of US$100 which is US$50.
Another example:
A claim is presented of US$250,000 to the layer. When looking at the contract you can see
that overall US$ 3.6m has been paid already. This means that the cedant is already
collecting from their fourth 'life' (that is aggregate claims between US$3m and US$4m) so
there is nothing to reinstate as all the lives are activated.
There is enough cover left in the contract to pay this claim of US$250,000 but RIP will not be
payable.
Reinstatement premiums do not trigger any payment of brokerage to the broker, even though
the original premium may have done.
B2C Stop loss reinsurance
Stop loss reinsurance is a variation on the concept of the excess of loss policy. Layers are
still used but in this case, the policy is linked to an insurer’s combined ratio. A combined ratio
is the percentage of premium income represented by claims and operating costs (including
the cost of reinsurance). In comparison, a loss ratio is the pure comparison of claims versus
premium.
If an insurer receives £1m 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 as 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.
Chapter 3
Example 3.5
Between 105% and
130% combined ratio:
stop loss triggered
Up to 105% combined ratio:

stop loss not triggered
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%.
B3 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.
B3A 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 percentage (e.g. 30%). Here, the reinsurance is called a 30% quota share, which
means that for each risk written that falls within the treaty terms, the reinsurer receives 30%
of the premium (irrespective of the financial value of that premium) and pays 30% of any
claims (again irrespective of the financial value of the claims).
There is no limit as to the extent of the percentage that can be shared with the reinsurer. It is
possible to find a 100% quota share, but these are in fact ‘fronting’ arrangements where the
insurer is acting as a local face in a market, perhaps to satisfy regulatory requirements but in
fact keeps none of the risk itself.
Finally, it is also possible to restrict the size of risk being ceded under the contract.
Example 3.6
In this example, the reinsurance is 30% quota share up to a maximum risk size of £5m.
The insurer writes an inward risk of £6m 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 £6m into two elements: £5m that can go to the
reinsurance and the other £1m which cannot.
The premium has to be divided in the same way: £500 and £100.
Chapter 3
Of the £5m 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 £5m 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 £1m that could not be ceded.
The insurer therefore keeps £450 retained premium of the £600 original premium.
In diagram form:
70% of risk
retained –
premium for this is
70% of £500 which
is £350
£5m – max size of
risk that
can be ceded –
premium for this
is £500
Original risk 30% ceded to
£6m with premium reinsurers –
of £600 premium for this
is £150
£1m – balance
which cannot be Balance risk
ceded to the retained by insurer
reinsurance – with premium
premium for this of £100
portion is £100
75% quota share to maximum limit of US$400,000 any one risk.

Risk was written by the cedant with a limit of US$500,000 so the apportionment of the risk
would be as follows.
Cedant keeps US$200,000 (being the US$100,000 additional risk, as well as the US
$100,000 which is the 25% retention under the contract).
Reinsurer receives US$300,000.
If a claim comes in on this contract for US$5,000 then the same concepts would apply, the
cedant would retain US$2,000 of the claim and claim US$3,000 from their reinsurers.
In diagram form; the claim:
Reinsurers cover
75% so will pay
£3000 for the claim
being 75%
of £4000
£400,000 can go to
the reinsurance –
i.e 4/5 of risk
Therefore 4/5 of
Chapter 3
claim can be
presented to
Original risk was reinsurers which Balance 25% of
£500,000 is £4000 claim £1000 is
retained by insurer
1/5 risk cannot be

ceded and is
retained Remaining £1000
is un reinsured
1/5 of claim is not
reinsured
B3B 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 3.7
An underwriter is permitted to write a maximum line of £5m (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 £30m.
So, to write a £30m risk with their £5m retained line, they need an additional £25m of
reinsurance, which is five times their original line. Therefore, they need what is called a
five-line surplus treaty (five lines of £5m each added to their retained line, to reach £30m
in total).
Having bought this reinsurance, the underwriter in example 3.7 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 £30m 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 3.8, the underwriter
has decided to write a risk where they take a line of £15m.
Example 3.8
The underwriter has a five-line surplus treaty but writes a risk where they take only a
£15m line. The underwriter can take £5m retained line on their own so they have to use
two of their five extra lines taking £5m each totalling £10m. 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 £30m, the underwriter will have to
Chapter 3
bear £10m and each of the two surplus lines will bear £10m – 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.
Example 3.9
Where it is not a neat use of individual lines:
An underwriter has a 10 line surplus treaty and a maximum retained line of £1m.
If they write a risk with a line of £6.25m they will be ceding £5.25m to the treaty which is
84% of their original line.
When any claims are made, their reinsurers will reimburse 84% of the claims.
C 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 principles which always apply:
1. The insurer should start by thinking about whether any individual risks are unusual
enough not to fit 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.
Example 3.10
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 £5m. 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
Chapter 3
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 £1.25m, so the insurer has
£3.75m 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 £2m xs £1m. The insurer declares the claims it has
made on the proportional treaty and shows the reinsurer its workings. Fortunately, the
insurer can claim £2m from that reinsurer which leaves them with £1.75m.
4. Finally, there is a whole account XL for £5m xs £250,000. Applying the excess of
£250,000, the insurer can claim £1.5m 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 £5m.
There are also government-based reinsurance programmes that focus on providing

terrorism-related reinsurance cover for the commercial insurance market. The reason for this
is the global insurance market’s concern about terrorism losses following the City of London
bombings in 1992 and 1993 together with the World Trade Center attacks in New York in
1993 and 2001.
For example, the US Government wants commercial insurers to continue to provide
terrorism insurance for property and has put in place a scheme whereby, should a loss ever
occur, that the commercial 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. It was renewed in 2015 under the Terrorism Risk Insurance Program
Reauthorization Act of 2015 (TRIPRA 2015) and again in 2019 for a further period of 7
years. Although the latest Act has the acronym TRIPRA, the original acronym of TRIA is still
commonly used.
Similar systems also exist in the UK (Pool Re), France (Gareat) and Australia (ARPC) as
well as some other countries.
Every insurer in the UK that offers home insurance must pay into the Flood Re scheme.
This means that in the UK insurers can continue offering policyholders flood insurance but
they can pass the flood element of any insurance policy to the Government as a reinsurer. If
a flood loss occurs, the original insurer pays up front and then claims the flood element from
the Flood Re fund.
You can find out more about Flood Re by visiting this link: www.floodre.co.uk/how-flood-re-
works
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, particularly how the Pool Re offering has been enhanced to include
business interruption losses not linked to direct damage:
www.gareat.com/.
www.poolre.co.uk.
www.treasury.gov.
Chapter 3
Be aware
In the aftermath of the losses arising from COVID-19 a working group is looking at the
possibility of a similar scheme called Pandemic Re.
Read more at: https://www.insurancejournal.com/news/international/
2020/06/01/570602.htm
Find out more about the Live Events RI scheme launched by the UK Government in
conjunction with Lloyd's in August 2021:www.gov.uk/government/news/government-
backed-insurance-scheme-to-give-boost-to-events-industry
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.
Chapter 3
• Reinsurance releases capacity for the insurer to write more direct business.
• Some firms specialise in reinsurance.
• 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
3.1 a. By writing reinsurance.
3.2 d. Claims Control Clause.
3.3 b. The reinsurer.
3.4 c. Triggers to bring the policy layers back to life after a loss usually for the payment
of additional premium.
Chapter 3
Self-test questions
1. Which of these is NOT a reason why an insurer might purchase reinsurance.
a. Risk transfer. □
b. To be able to offer cheaper prices to its own clients. □
c. Peace of mind. □
□
Chapter 3
d. Evening out peaks and troughs in its results.
2. Identify one main reason why a company might write reinsurance business.
a. To access business it is not allowed to write direct from a particular territory. □
b. To guarantee smaller losses than from direct business. □
c. To offer lower rates. □
d. To only have to deal with sophisticated clients. □
3. Which statement best explains claims control and or claims co-operation in a
reinsurance contract.
a. Claims control means that the reinsurer and cedant share all the decision making □
equally.
b. Claims co-operation means that the cedant just has to keep the reinsurer informed □
but the cedant maintains control of decision making.
c. They are different terms for the same thing. □
d. Claims control means that the cedant controls everything and just sends the □
reinsurer an invoice for its share.
4. Why might an insurer purchase facultative reinsurance?

a. It is generally cheaper than treaty reinsurance. □
b. To cover a risk that does not fit within the terms of the treaty reinsurance. □
c. To allow them to offer cheaper terms to the original insured. □
d. When required by the local regulations. □
5. In a facultative obligatory contract, what choice does the insurer have in respect of
ceding the risk?
a. The insurer has to cede everything within the terms of the contract. □
b. The insurer can choose which risks to cede. □
c. The insurer and reinsurer will negotiate each individual cession separately. □
d. The reinsurer can pick and choose the risks that it wants. □
6. What is the term used for the amount of any risk that the insurer keeps for itself?
a. Cession. □
b. Obligation. □
c. Retention. □
d. Excess. □
Chapter 3
7. What is a collecting note used for?

a. To present the quarterly accounts under a treaty reinsurance. □
b. To present premium to reinsurers. □
c. To collect brokerage. □
d. To present a request for funds to a reinsurer, typically under XL reinsurance. □
8. What is the maximum number, if any, of lines that can be purchased as surplus lines
reinsurance?
a. 10. □
b. 50. □
c. There is no limit subject to there being sellers offering the reinsurance. □
d. 100. □
9. If a facultative reinsurance and excess of loss reinsurance both apply to a particular
risk, which one will normally respond first?
a. The facultative. □
b. The excess of loss. □
c. Whichever one gives the cedant the larger claim first. □
d. Whichever one was placed first. □
10. Which part of an insurer's account does a catastrophe excess of loss generally
protect?
a. A particular class of business such as property business. □
b. A particular subgroup of classes such as the non marine account. □
c. The whole account including all classes of business written. □
d. Those parts of the account that do not have other reinsurance available to them. □
Market security
4
outcomes
Introduction
A Solvency 4.1
Chapter 4
B Solvency II 4.1, 5.4
C Lloyd’s chain of security 4.2
D Rating agencies 4.3
Key points
Question answers
Self-test questions
Learning objectives
• explain the basic accountancy concepts, including solvency margin calculations;
• explain the Lloyd's chain of security; 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 Group and capital
and Occupational risk
Pensions Authority
Chapter 4
(EIOPA)
Incurred but not Liabilities Liquidity risk Lloyd’s chain of
reported (IBNR) security
Market risk Members’ Funds at Minimum capital Operational risk
Lloyd’s (FAL) requirement (MCR)
Own risk and Quantitative Rating agency Solvency capital
solvency requirements requirement (SCR)
assessment (ORSA)
A Solvency
Solvency means having more assets than liabilities.
This can be shown as an equation:
Paid Unpaid Operating

Assets ≥ claims + claims + 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 dangerous for an insurer to try to set the level of its assets
to be just equal to its calculated liabilities (with no margin for error). Insurers need to build in
a further amount to keep assets above liabilities and 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.
Chapter 4 Market security 4/3
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?
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. □
Chapter 4
b. Claims, operating costs and reinsurance costs. □
c. Reinsurance costs, insolvency risks and claims. □
d. Operating costs, salaries and PRA levies. □
A1 Basic accounting concepts
When considering any business, whether it be insurance related or not, there are some basic
accounting concepts which need to be understood.
Assets
These are items of value or resources that a business owns or controls and can be both
tangible (a thing such as a building) or intangible (such as the value of goodwill in the
business). To an insurer, the premiums and investment income are assets.
Capital
What is the level of investment in the business? Working capital is the difference between
assets and liabilities in practical terms.
Liabilities
Any situation where money is owed to another person or organisation. Therefore, the
primary liabilities for an insurer are its claims, paid and outstanding. Liabilities also include
costs for reinsurance and the costs of running the business.
Liquidity
This refers to the ease with which assets held by a business can be converted into cash. A
business can have significant assets (so they are solvent) but be illiquid, which means that
they cannot be easily converted into cash.
Ratios
The relationship between various financial factors which can be used to indicate profitability.
• Loss ratio: the relationship between premium and claims (both paid and outstanding). A
loss ratio of less than 100% indicates profit on a pure loss ratio basis.
• Combined ratio: a ratio which compares operating costs as well as claims, as against
premiums and investment income.
B Solvency II
Solvency II is a pan-European solvency regime which operates across all EU Member
States. When it was first introduced it was brought into UK law by specific legislation and via
the Prudential Regulation Authority rule book.
Now that the UK has left the EU new UK legislation has been introduced (The Solvency II
and Insurance (Amendments etc.) (EU Exit) regulations 2019) to ensure that the
provisions of Solvency II continue to work in the UK even though it is now outside the EU.
Now that the UK is outside the EU there is no longer mutual recognition of each other's
regulatory systems, which means that the UK has to obtain 'equivalence' status from the EU.
This would mean that the EU recognised that the UK, although now what is known as a 'third
country', had a regulatory system which was equivalent in robustness to that of the EU. The
UK granted that status to the EU in late 2020, but as at mid 2022, the EU is yet to
reciprocate.
Chapter 4
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 simply 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):
Table 4.1: Examination of the three 'pillars' of Solvency II

Pillar name What it means in practice for insurers
Quantitative requirements As with previous solvency rules, this requires insurers to demonstrate that they
have adequate financial resources available to cover exposure to risks.
The key difference with Solvency II is the consideration of business risk over and
above the insurance-related risks.
Insurers now have to engage in a far more wide-ranging analysis of business risk
(e.g. the risk of reinsurers failing, or the building being 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.
Chapter 4
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 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 • Large organisations (e.g. those that are both syndicates and companies) need to
capital risk 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. □
b. Solvency capital requirement, minimum capital requirement and own risk and □
solvency assessment.
c. Qualitative requirements, supervisory review and disclosure. □
d. Supervisory review, solvency capital requirement and reserving. □
B1 Role of the regulators in Solvency II

The European Insurance and Occupational Pensions Authority (EIOPA) is the
overarching EU supervisory body of Solvency II. Its main goals are to:
• provide better protection for consumers and rebuild their trust in the financial system;
• 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
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.
Having left the EU, the PRA is now conducting work to identify what a replacement for
Solvency II might be in order to fulfil the Government's stated objectives, which are:
• to spur a vibrant, innovative and internationally competitive insurance sector;
• to protect policyholders and ensure the safety and soundness of firms; and
• to support insurance firms to provide long-term capital to underpin growth.
Many London Market insurers, including Lloyd’s, have 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

The regulators treat Lloyd's as a single entity. This means that the solvency measurements
applied under Solvency II by the regulators (both in the UK and historically in Europe) 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.
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.
Activity
Watch the financial and insurance press for updates on when and if the EU grants the UK
equivalence status.
C Lloyd’s chain of security

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

Link Description
Syndicate level assets The chain of security starts with this first link: the premiums received for the business
written 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
Lloyd’s (FAL) pay all the 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.)
Chapter 4
The amount of funds that each Member needs to provide in order to support their
underwriting is calculated by starting with the Solvency Capital Requirement (SCR) of
each syndicate.
The Corporation reviews each SCR and then uplifts it by a certain percentage to
ensure that there is sufficient capital available. This uplift is known as the syndicate's
Economic Capital Assessment (ECA). Based on this figure Members then put up the
funds necessary to support their involvement and Lloyd's sets out criteria around
what types of security can be used, e.g. Letters of Credit, cash and other securities.
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.
Under the Central Fund Byelaws, the Council of Lloyd's has the ultimate control of
the use of the Central Fund.
It is fed by contributions from all the written premium in the market and the basic rate
of contribution for all existing members is 0.36% for 2022.
Lloyd’s can set the levy for Central Fund as it deems appropriate. New corporate
members in 2022 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
2020, 2021 or 2022.
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 £1,800 (i.e. 0.36% × £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. □
b. Members' Funds at Lloyd's and available reinsurance. □
c. Premiums and available reinsurance. □
d. Members' Funds at Lloyd's and PRA levies. □
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 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 insurers (and reinsurers), publishing their
results for public consumption. These are independent opinions of an insurer’s strength and
Chapter 4
are not influenced in any way by the insurer itself. Currently, there are four main
organisations that conduct this rating process:
• Standard & Poor’s;
• Fitch;
• A. M. Best; and
• Moody’s.
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 intelligence. They provide risk evaluations, investment research and credit ratings to
their clients who can be individuals as well as organisations.
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 the 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.
Brokers and insurers have security committees; smaller organisations employ someone who
assumes responsibility for checking all the security that it is proposed is used. These parties
should also use the 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
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.
Chapter 4
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 business is not being run in accordance with acceptable standards (perhaps failure
to comply with the requirements of Solvency II).
If an insurer’s rating falls, it might find that it’s considered unacceptable as 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.
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.
b. If the rest of the market was downgraded at the same time as the insurer's □
individual downgrade.
c. If the rest of the market was NOT downgraded at the same time as the insurer's □
d. If the policy was placed on a subscription basis. □
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 pan-European solvency regime which operates across all 28 Member

States of the European Union.
Chapter 4
• The UK had incorporated it into UK law when it was first introduced and has created
new legislation to ensure it remains workable following the UK's departure from the EU.
• Solvency II has four main objectives which are better regulation, deeper integration,
enhanced policyholder protection and improved competitiveness.
• 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 regulators treats Lloyd’s as a single entity.
• Now the UK has left the EU, the Government is working with the EU to obtain
'equivalence' status for the UK regulatory regime and is also consulting on potential
changes to the regime in the future.
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
4.1 b. Claims, operating costs and reinsurance costs.
4.2 d. Supervisory review, solvency capital requirement and reserving.
4.3 a. Premiums and Members' Funds at Lloyd's.
4.4 c. If the rest of the market was NOT downgraded at the same time as the insurer's
Chapter 4
Self-test questions
1. What is the equation that best expresses solvency?
a. Assets ≥ paid claims + operating costs. □
b. Assets ≥ paid and unpaid claims. □
c. Assets ≥ paid claims + unpaid claims + operating costs. □
d. Assets ≥ operating costs + claims costs + reinsurance costs. □
2. What is meant by the concept of IBNR?
a. Claims that are known about but are holding nil reserve. □
□
Chapter 4
b. Claims that are not yet known about but need to be factored into overall reserve
calculations.
c. Claims that are likely to become total losses but are not reserved as such yet. □
d. Claims that have been notified but are likely to go away again. □
3. What is meant by counterparty risk?
a. The risk that a business partner does not pay you what they owe. □
b. The risk that a co-defendant in a liability claim does not pay their share of the □
liability.
c. The risk that a co-insurer goes out of business. □
d. The risk that your liabilities are greater than your assets. □
4. Which of these is NOT one of the four objectives of Solvency II?
a. Better regulation. □
b. Enhanced policyholder protection. □
c. Improved competitiveness. □
d. Improved profitability. □
5. Which of these is NOT one of the three pillars of Solvency II?
a. Quantitative requirements. □
b. Supervisory review. □
c. Qualitative requirements. □
d. Disclosure. □
6. How would you best explain liquidity risk?
a. Having enough assets that are all easily accessible. □
b. Not having enough assets in any form. □
c. Having enough assets but they are not easily accessible. □
d. Having too many assets. □
7. What is the final link in Lloyd's chain of security?

a. Central Fund. □
b. Premium funds. □
c. Members' Funds at Lloyd's. □
d. Reinsurance payments. □
8. What might happen if an insurer's rating is downgraded but their peers' ratings
remain the same?
a. They might not see business from brokers. □
b. They will have to charge higher prices. □
Chapter 4
c. They will see more business than before from brokers. □
d. They will have to offer more discounts. □
Legal and regulatory
5
requirements
outcomes
Introduction
A Compulsory insurances 5.1
B Legislation relating to insurance contracts 5.2, 5.3
C Insurance premium tax (IPT) 5.5
Chapter 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 in relation to insurance contracts and
the impact of Contracts (Rights of Third Parties) Act 1999 on insurance contracts;
• explain the concept of insurance premium tax; and
• examine and describe the FCA’s and PRA’s regulation of individuals within firms.
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 Consumer contract Controlled function Damages
insurances
Employers’ liability Injunction Insurance premium Liability insurance:
insurance tax (IPT) nuclear reactors
Marine pollution Money Laundering Non-consumer Professional
liability insurance Reporting Officer contract negligence/indemnity
(MLRO) insurance
Public liability Specific performance Unfair contract terms
Chapter 5
insurance
A Compulsory insurances
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.
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 for every business which uses motor vehicles on a road and has
employees respectively.
The main reasons why certain forms of insurance are compulsory in particular cases are:
• to provide funds for compensation; and
• in response to national concerns.
Refresh yourself on the reasons for and benefits of compulsory insurance by reviewing
LM1, chapter 5, section A.
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.
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.
The minimum required limit of indemnity has been increased over the years and now stands
at £5m, though the insurance market provides £10m as standard. There is also a
requirement for employers to display their insurance certificates (provided by insurers) at
Chapter 5
each place of work. Note that the requirement is no longer restricted to paper form, as long
as employees can easily get access to a digital certificate.
Refer to
Refer to Non-marine liability classes on page 2/15
Employers’ liability insurance is a very onerous insurance obligation both for employers and
insurers 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 Non-marine liability
classes on page 2/15.
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. □
b. Employers' liability and motor insurance only. □
c. Riding school liability and motor insurance only. □
d. Employers' liability, riding school liability and motor insurance. □
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.
On the Web
Access this link to see the professional indemnity requirements for accountants practicing
in England and Wales:
www.icaew.com/regulation/professional-indemnity-insurance
Chapter 5
A2 Why compulsory insurances are required
Refer to
Refer to Non-marine liability classes on page 2/15 for more liability insurance
As we have already mentioned, the common link between all the compulsory insurances in
England and Wales is that they are liability insurances rather than property insurances. This
means that they do not 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.
The key point is the protection of innocent victims whether they are a victim of a riding
accident, an accident at work, or a professional's failure to perform in accordance with
expected standards.
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 fundamental purposes and benefits of insurance. As we saw in Non-marine liability
classes on page 2/15, liability insurance 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. This removes the financial burden of the legal fees at least in part (as most policies
have a deductible or excess which often applies to fees).
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
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All the compulsory insurances in the UK are of a liability nature. Therefore, they protect the
insured should they be found legally liable for injury to a third party or loss or damage to third
party property not otherwise connected with the insurance. This idea that the insurance
‘protects’ a third party affects the insurer’s ability to apply otherwise ‘normal’ insurance
concepts to some of these compulsory insurances.
Refer to
Refer to LM1, chapter 2 for a reminder of these concepts
The most obvious of these is in relation to breaches of:

• warranty; or
• the duties of good faith and fair presentation.
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.
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. □
b. All claims can be declined. □
c. Underwriters will come off risk. □
d. Underwriters will still have to settle claims but can take action against the insured. □
Chapter 5
A4 Compulsory insurance in other countries

In the USA, workers’ compensation (also called employers’ liability insurance) provides
coverage for employees who are injured or become ill at work. This insurance provides
coverage for medical expenses, death benefits, lost wages and rehabilitation. In exchange
for coverage, employees relinquish the right to sue the employer for damages unless the
employer intentionally harmed the employee or failed to carry the required coverage for the
relevant state. Each state regulates its own workers’ 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 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 piece of English law, 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. However, if the consumer chooses to rely on that term then they may do so.
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
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in plain and intelligible language, and, if written, be legible.
A practical example of a potentially unfair term listed in the schedule to the Act is one which
‘makes the traders’ commitments subject to compliance with a particular formality’. An
example of this might be the claims notification provisions.
Commercial contracts: claims

You will 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?
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. □
b. A wholesale consumer because he is an insurance professional. □
c. A wholesale consumer because the artwork is being held in an office building. □
d. A retail consumer because he is paying the premium personally. □
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 actually a party to the contract can enforce the terms of the contract. The legal term
used for this is ‘privity of contract’.
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.
Chapter 5
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.
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. □
b. It allowed certain parties, not privy to the contract, to claim on the contract. □
c. It allowed different parties to pay insurance premium. □
d. It allowed certain external parties rights under the contract as long as they □
contributed to the premium.
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 is 12%. The higher rate is 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).
Chapter 5
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 paying it onto the tax authorities in the UK. In practice, this means that the
broker collects this sum from the insured together with the premium and pays both to the
insurer.
It must be shown on all the documentation (separately from the premium amount) when the
risk is 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.
How does this work in practice?
An insurer quotes a gross premium of £1,000 to the client, on a piece of business that is
subject to the standard rate of IPT. The insurer also agrees brokerage of 20% with the
broker.
What will the insurer actually receive? The brokerage is not applied to the IPT amount and
works out as follows;
• The client pays the broker £1,000 gross premium, plus an additional £120 IPT.
• The broker retains £200 (20% of the gross premium).
• The insurer will receive £800 net premium, plus £120 IPT which must be paid to HMRC.
Be aware
The following is an example of the wrong calculation:
Client pays the broker £1000 gross premium, plus an additional £120 IPT.
Broker retains 20% of the total (£224).
Insurer receives balance of £896.
Brokerage calculations never take IPT into account.
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.
D Regulation of individuals within firms

Refer to
Chapter 5
Refer to LM1, chapters 6 and 8, concerning the regulation of insurers and intermediaries
In this final section, we will be looking at another aspect of financial services regulation –
where the regulator seeks to ensure that appropriate personnel are involved in the running of
authorised firms, such as insurers and intermediaries.
D1 Senior Managers and Certification Regime (SM&CR)

The Senior Managers and Certification Regime (SM&CR) now applies to both insurers and
brokers/intermediaries.
The SM&CR introduced a new regulatory framework for individual accountability to replace
the previous 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.
Quite simply the regulators want SM&CR to:
• encourage staff to take personal responsibility for their actions;
• improve conduct at all levels; and
• make sure firms and staff clearly understand and can demonstrate who does what within
the firm.
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.
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.
The list of SMFs prescribed by the PRA for authorised firms is:
Executive
• Chief executive function.
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• 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, there are rules of conduct which will apply to senior managers, certified
persons and other employees.
First tier – individual conduct rules
You must act with integrity
You must act with due skill, care and diligence
You must be open and cooperative with the FCA, the PRA and other regulators
You must pay due regard to the interests of customers and treat them fairly
You must observe proper standards of market conduct
Second tier – Senior manager conduct rules

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SC1 You must take reasonable steps to ensure that the business of the firm for which you
are responsible is controlled effectively
SC2 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
SC3 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
SC4 You must disclose appropriately any information of which the FCA or PRA would
reasonably expect notice
The FCA has given examples of roles which fall outside of the scope of the individual
conduct rules. These are ancillary roles such as switchboard operators, receptionists,
security staff, HR and secretarial staff. The regulator does not regard these roles as
performing tasks specific to financial services.
The FSA historically gave examples of the kinds of behaviour that would not support their
previous principles. While 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:
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.
• Recommending a product for a customer where the AP knows they cannot justify
its suitability for the customer.
• Failing to inform a customer, firm or the regulator that their understanding of a
material issue is incorrect.
• Preparing inaccurate or inappropriate records or returns.
• Misusing the assets or confidential information of a customer or firm.
Table 5.1: Controlled functions: historic examples of unacceptable

behaviour
Acting with due skill, care • Recommending an investment for a customer without reasonable grounds to
and diligence believe it is suitable.
• Providing advice on transactions without a reasonable understanding of the risk
exposure of the transaction to the customer.
• Failure to provide control over a customer’s assets – this includes failure to make
timely payments!
Failing to:
• Disclose a conflict of interest.
• Inform a customer or the firm of material information when the AP was aware or
ought to have been aware of the information and the need to provide it.
Observing proper • Insider dealing.

standards of market
• Misusing market information.
conduct
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:

ensure that the business is
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organised in such a way as • Apportion responsibilities for all areas under your control as an AP.
to be able to be controlled • Apportion responsibilities clearly.
effectively • Share load appropriately among all directors and senior managers.
Exercising due skill care • Failing to ensure that you are adequately informed about the affairs of the
and diligence in the business.
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.
Ensuring compliance with Failing to:

the relevant requirements
and standards of the • Take reasonable steps to implement (either personally or through a compliance
regulatory regime function) adequate systems of control to comply with relevant requirements of
regulators.
• Take reasonable steps to monitor.
• Take reasonable steps to inform themselves as to why significant breaches
(suspected or actual) of regulatory requirements may have arisen.
• 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.
Firms should consider the following qualities when reviewing if an individual is fit and proper:
• honesty, integrity and reputation;
• competence and capability, including whether the person satisfies any relevant FCA
training and competence requirements.
• financial soundness.
Under SM&CR, firms must collect additional evidence when assessing candidates for senior
manager positions, certification functions or non-executive director roles. This includes
criminal record checks for senior managers and regulatory references covering the past six
years for all senior manager, certified persons and non-approved non-executive directors.
‘Grandfathering’ will apply to all approved persons who are performing the corresponding
role under the 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?
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 senior management 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.
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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.
D3 Money Laundering Reporting Officer (MLRO)/Nominated

officer
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) or nominated officer. This is also a senior management 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/Nominated officer 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. □
b. Handles the relationship with the regulator. □
c. Contributes to its profits. □
d. Has to be a director. □
Chapter 5
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.
Chapter 5
• 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.
• 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.
Individual regulation
• 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.
• SM&CR now applies to insurers and brokers/intermediaries.
• Compliance officers and Money Laundering Reporting Officers (MLROs)/Nominated
officers are two examples of senior management functions.
Question answers
5.1 b. Employers' liability and motor insurance only.
5.2 d. Underwriters will still have to settle claims but can take action against the
insured.
5.3 a. A retail consumer because he is buying insurance for his own use or benefit.
5.4 b. It allowed certain parties, not privy to the contract, to claim on the contract.
5.5 a. Is part of the effective system of governance.
Chapter 5
Self-test questions
1. Which of these is NOT a type of compulsory insurance?
a. Professional indemnity for lawyers. □
b. Liability insurance for riding schools. □
c. Nuclear liability. □
d. Compulsory motor insurance. □
2. Why is compulsory insurance required?
a. To provide guaranteed income for insurers. □
b. To ensure the public behave sensibly. □
c. To protect innocent injured parties. □
d. To protect people's income. □
Chapter 5
3. How is the operation of the concept of good faith and the duty of fair presentation
affected in relation to compulsory insurances?
a. There is no difference between compulsory and non compulsory insurances. □
b. The insured is under a heavier burden of disclosure for compulsory insurances. □
c. The insurer cannot decline a claim because of a breach of the duty in compulsory □
insurances.
d. There is no specific duty of fair presentation for compulsory insurances. □
4. How is a consumer defined under the FCA rules?
a. Anyone buying motor insurance. □
b. Anyone not using a broker. □
c. Anyone buying personal lines insurance. □
d. Anyone buying insurance outside their business, trade or profession. □
5. How does the law define an unfair term in a consumer insurance contract?
a. Something that benefits the insured. □
b. Something that causes an imbalance between the parties, to the disadvantage of □
the insurer.
c. Something that causes an imbalance between the parties, to the disadvantage of □
the insured.
d. Something that is written in small print. □
6. Who is the third party in relation to any contract of insurance?
a. The insured. □
b. The insurer. □
c. The broker. □
d. Anyone not a party to the insurance. □
7. Who is responsible to HMRC for the payment of the insurance premium tax?
a. The insured. □
b. The broker if one is being used. □
c. The insurer. □
d. They all have a shared responsibility. □
8. Which of these is NOT a conduct standard under SM&CR?
a. Acting with integrity. □
b. Acting with due care, skill and diligence. □
c. Treating customers fairly. □
d. Ensuring profitability. □
9. Which of these is NOT a senior management function?
a. Chairman. □
Chapter 5
b. Head of Risk. □
c. Money Laundering reporting officer. □
d. Head of Claims. □
Insurance intermediation
6
outcomes
Introduction
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
Key points
Question answers
Self-test questions
Chapter 6
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
• define the main EU and UK legislative provisions applicable to 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 Agency by necessity Agency by Broker remuneration

agreement ratification
Claims process Client money rules Collecting Conflict of interest
commission
Duty of care Independent Insurance Mediation Lloyd’s broker
intermediary Directive
Multi-tied agent Non-statutory trust Open market Placing process
account correspondent
Principal Producing broker Retail broker Single tied agent
Statutory trust Surplus lines broker Terms of Business Wholesale broker
account Agreement (TOBA)
A Law of agency
There can be a long chain of middle-men between the eventual insured and the insurers; the
Chapter 6
length of the chain depending upon on a number of factors including the geographical
location of the parties or whether the business is highly specialist or unique.
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 referred to as ‘broking’, although the formal term is insurance
intermediation (or insurance mediation).
Refer to
Refer to Business process on page 8/1 and Delegated underwriting on page 9/1 for
more on conflict of interest
Brokers operate under the law of agency, the main points of which are explained below:
• The broker is the agent and they serve a principal who, in English law, is generally the
insured.
In the case of reinsurance, 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 business). This might happen if a broker is given some authority by the
insurer (perhaps to settle claims or to underwrite business under a binding authority).
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 necessarily
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’.
Chapter 6 Insurance intermediation 6/3
• 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:
– Follow their instructions.
– 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 Client
money rules on page 6/14.
– Act with all due care and skill. See Errors and omissions (E&O)/professional
indemnity/professional negligence and medical malpractice on page 2/16 on
professional negligence business.
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
Chapter 6
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. □
b. By warranty. □
c. By agreement. □
d. By ratification. □
There is another area of law which is important when considering a broker’s conduct.
The broker owes a ‘duty of care’ to their client (and arguably to the insurer as well) to behave
in accordance with the standard of a reasonably able or competent broker in the relevant
area of the Market.
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:
• 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.
The following table 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
cannot also have contact with the client if they are the only broker in the chain,
but where there are several brokers, this term is used for the one closest to the
insurer.
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.
Single tied agent A single tied agent is a representative of the insurer, not the insured.
Chapter 6
Single tied agents are most common in a high street agency selling a number
of products from a single insurer. In this situation, the agent cannot advise the
client on other insurers’ products but is restricted to the products offered by
their principal.
These agents do not work in the London Market.
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 works for their ultimate client who is the insured or reinsured.
This agent can take an unbiased view of the entire market (London and
elsewhere) and advise the client on the best options for their particular needs.
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).
Table 6.1: Types of intermediary

Open market correspondent An open market correspondent (OMC) is an intermediary but is not a Lloyd’s
approved coverholder (a party holding delegated authority from a Lloyd’s
syndicate to write insurance business on its behalf). However, they introduce
business to Lloyd’s either directly or via a Lloyd’s broker on an open
market basis.
Open market means that the risk is individually placed rather than being
attached to any pre-existing form of delegated underwriting agreement such as
a binding authority or a lineslip. 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.
On the Web
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
Chapter 6
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. □
b. A wholesale broker has links to the client and a retail broker has links to the □
insurers.
c. A retail broker has links to the client and a wholesale broker has links to the □
insurers.
d. There is no difference – the terms are interchangeable. □
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 chapter 9, they can also have some of the insurer’s roles delegated to them.
For the purposes of this section, we will concentrate on the broker’s usual roles in the two
processes.
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 approach.
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 used to submit information to insurers in the Market; however, it is not
always the only document presented. Depending on the type of business (particularly
yacht insurance and professional/financial 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 and material
information from their client before approaching any potential leading underwriters to
commence the negotiation process.
Activity
Chapter 6
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.
Think about the types of information included in the submission.
Reinforce
Do you remember the concept of material information from LM1? 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 to review them with the client. They will need to advise the client on any
differences between the quotes to enable the client to make their final decision and select
the insurer that best suits them and their circumstances.
• Finalising the placement. Once the client has chosen the quote they prefer, the broker
must communicate again with the insurers concerned (both leading and following market)
to confirm (or accept) their lines. If this process is done on paper, 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%.
If the process has been done electronically (which is far more common in today’s market)
then the whole cycle from quote to bind can be done using one of the electronic placing
platforms being used in the market, such as Placing Platform Limited (PPL) or
Whitespace. When using this system the MRC is supported with uploaded data and the
insurers agreement to participate is recorded on the system with date and time stamps.
If overseas insurers are being used then they can apply their stamp to the MRC, which
can then be scanned and emailed back to the broker.
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
Before COVID-19 how much of your business was placed electronically whether you work
for an insurer or a broker? Consider what has happened in your business during 2020. Did
the business continue uninterrupted while everyone was working from home?
Read more about how PPL is forming the basis of the placing platforms within the Future
of Lloyd's project: placingplatformlimited.com/news/nextgen-update-ppl-chair/
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. Compare your notes with a market colleague (someone
who works for a broker if you work for an insurer or vice versa).
Question 6.3
Chapter 6
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. □
b. To avoid the client refusing to pay their fees. □
c. To avoid a professional negligence claim from the client if the insurers cannot pay. □
d. To comply with market regulations. □
Refer to
Refer to Underwriting on page 7/1 and Business process on page 8/1
• Compiling documentation for submission to Xchanging. This generally includes the

MRC and London 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 needs to know whether:
– 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 Market Reform
Contract (MRC) on page 8/11, 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 documentation to Xchanging. In the London Market, the vast majority of
submissions to Xchanging for recording the risk data and moving the premium do not use
paper, but are made electronically via a system called Accounting and Settlement. This
system allows brokers to upload 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 facilitates 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
Chapter 6
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
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 and investigate), the instruction is often made through the broker. This
is simply a traditional communication path, rather than being indicative of any agency role
that the broker has suddenly taken on for the insurers. In most situations, the experts’
(e.g. surveyors or loss adjusters) reports are 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 electronic – including in the presentation of claims. However, this does not
relieve the broker of their role of negotiating their client’s claim with the insurers; rather it
just means that they do not need to carry mountains of paper around with them.
• 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
Chapter 6
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 conditions under which a broker does business with various parties.
A broker has TOBAs with insurers, clients and possibly also with ‘producing brokers’. In the
case of Lloyd’s there would be an individual TOBA entered into by the broker with each
managing agent with 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 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
broker regulated in the UK must comply. It is important that a broker that is not regulated in
the UK (for example because they are not UK-based) complies with their own regulator’s
rules in this regard.
The UK regulator’s rules about client money will be discussed in Client money rules on page
6/14.
Remuneration Sets out how the brokerage/commission will be set out in the individual contracts of
insurance.
Holding money/ Broker has responsibility to insurer in relation to funds held but will account to the insurer in
taxes relation to any taxes paid on insurers behalf.
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Compliance Each party will comply with their respective obligations including contract certainty and
financial crime/bribery avoidance.
Ownership and The traditional paper-based process in the London Market relied on the broker maintaining
access to data and the master placing and claims information – and updating insurers as required. Insurers
records could take copies of documentation as they wished (for example they might copy the MRC/
slip when they agreed their written line) but rarely maintained a full copy of any claims file or
kept copies of every document that they might have reviewed during the placing process.
In the case of any disputes between the insured and insurers, the issue of access to
documentation sometimes arose where certain documents were held by the broker. This
was a particular issue if allegations were made that some documents were not shown to
insurers at the time of placing.
If the matter of ownership and access to data and records is clarified in the TOBA, there is
less chance of a dispute later.
Both parties agree to be in compliance with the Data Protection Act 2018 and General Data
Protection Regulation (GDPR).
Law and In any contract it makes sense to agree where – and under what rules – any dispute
jurisdiction between the insured and insurers will be heard.
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 business with clients.
On the Web
Access this online bulletin to see more about a court case dealing with this point before
TOBAs were in widespread use. 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. □
b. Hold funds. □
c. Agree claims. □
d. Pay experts' fees. □
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.
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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 GDPR/Data
Protection Act 2018.
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.
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.
Under the FCA Insurance: Conduct of Business rules (ICOBS) any broking firm must
provide a client with details of any fees that will be payable before the client incurs
any fees. If, for any reason, the actual fee cannot be stated beforehand, the basis for
its calculation must be provided.
If any further fees might be incurred during the life of a policy for other activities, the
broker must also advise the client up front about them.
Commission or The broker may earn a commission (or ‘brokerage’, as it is better known in the
brokerage London Market) for placing the business. Unlike the flat fee payment, brokerage is
paid by the insurer rather than the insured client.
In arranging brokerage, the insurer agrees that the broker can retain, or hold back,
part of the premium charged to the client when transferring it to the insurer.
The premium charged to the client is what is known as the ‘gross premium’ and the
amount received by the insurer (which is the gross premium less the brokerage
retained by the broker) is called the net premium.
If a commercial client asks the broker, they must tell them what commission/
brokerage they are receiving from the insurer. However, the broker does not have to
volunteer the information to a commercial client.
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Other fees/commissions Some brokers earn additional commissions by charging a ‘collecting commission’ on
claims (usually around 1% of the claims value). This means that the insurer pays
101% of the value of the claim, but the insured receives only the 100% component.
If a broker is acting as a coverholder under a contract of delegated underwriting
authority, the insurer 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 bit.ly/2PxucB6. 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
F1 Insurance Distribution Directive (IDD)
The Insurance Distribution Directive (IDD) came into force in the UK on 1 October 2018,
replacing the previous Insurance Mediation Directive (IMD). Although the IDD was an EU
directive it was brought into UK law by specific legislation.
While 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
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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 was anticipated that the new regime would ease the procedure for cross-border entry to
markets within the EU, but, in turn, it introduced stricter and more specific professional
requirements. These are 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:
• Distributors must always act honestly, fairly and professionally in accordance with the
best interest of customers.
• All information provided by distributors must be fair, clear and not misleading.
Furthermore, in relation to any remuneration received, distributors must disclose:
• the nature of the remuneration; and
• the basis for that remuneration (fee/brokerage, etc.).
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.
One of the key impacts of the UK leaving the EU was that both insurers and intermediaries
had to consider setting up EU domiciled entities to continue servicing their EU client base.
This was because the cross border nature of permissions granted within the EU no longer
applies to UK regulated entities.
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 Assets rules (or CASS for short).
The basic concept is that the broker must arrange adequate protection in respect of all client
assets for which they are responsible. Client assets could be premium funds on their way to
the insurer (if the broker does not hold a risk transfer TOBA for the insurer), or they could be
claims funds on their way from the insurer to the client.
Adequate protection includes being able to hold and account for the funds properly: for
example keeping them in segregated accounts.
The FCA rules require that the broker keeps the client’s money separate from the broking
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firm’s own money. This is very important, in case the firm should fail for any reason. By
keeping the client’s funds in segregated accounts away from the money used by the firm on
a 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.
F3 The Data Protection Act 2018 and the General Data

Protection Regulation (GDPR)
The DPA 2018 came into effect in the UK in May 2018, to coincide with the implementation
of the EU GDPR. Since Brexit, the key principles, rights and obligations remain the same.
However, there are implications for the rules on transfers of personal data between the UK
and EEA countries.
Be aware
DPA 2018 has been amended to reflect the UK GDPR and remains the legislation
governing data protection in the UK.
Main elements of the DPA 2018:

• Ensuring that sensitive health, social care and education data can continue to be
processed, to ensure confidentiality in health and safeguarding situations.
• Restricting the rights to access and delete data where there are legitimate grounds for
doing so (e.g. for national security purposes).
• Setting the age from which parental consent is not needed to process data online.
• Providing the ICO with enhanced powers to regulate and enforce data protection laws.
– For the most serious data breaches, it can levy fines of up to £17.5 million or 4% of
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annual global turnover.
– The ICO can bring criminal proceedings against a data controller or processor if they
have altered records following an SAR with the intent to prevent disclosure.
Who does the UK GDPR apply to?
The UK GDPR applies to data controllers and processors in the United Kingdom, including
Northern Ireland. Prior to its introduction, the European Union (EU) GDPR applied.
The UK GDPR places legal obligations on processors. For instance, firms are required to
maintain records of personal data and processing activities, and a firm has significant legal
liability if it is responsible for a breach.
Controllers are not relieved of their obligations where a processor is involved. The UK GDPR
places obligations on controllers to ensure their contracts with processors comply with the
regulations.
What information does the UK GDPR apply to?
It applies to personal data of an identified living individual. However, the definition of
personal data reflects changes in technology and in the way in which information is
collected. It makes it clear that information such as an online identifier – e.g. an IP address –
can be personal data.
It also applies to both automated personal data and to manual filing systems where personal
data is accessible according to specific criteria. This is similar to the EU GDPR but wider
than the definitions in the previous UK data protection legislation. It could include
chronologically ordered sets of manual records containing personal data. Personal data that
has been anonymised – e.g. key-coded – can fall within the scope of the UK GDPR
depending on how difficult it is to attribute such data to a particular individual.
Sensitive personal data

The UK GDPR refers to sensitive personal data as 'special categories of personal data'.
These categories include:
• race;
• ethnic origin;
• politics;
• religion;
• trade union membership;
• genetics;
• biometrics (where used for ID purposes);
• health;
• sex life; or
• sexual orientation.
Principles
Under the UK GDPR, the data protection principles set out the main responsibilities for
organisations. The most significant addition is an emphasis on accountability. The UK GDPR
requires firms to show how they comply with the principles – for example, by documenting
the decisions they take about a processing activity.
Consider this…
Data Protection Principles under the UK GDPR
The following principles apply to all personal data:
1. Lawfulness, fairness and transparency: data should be processed lawfully; data should
be handled in ways people would expect giving consideration to the effect of
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processing the data on the individuals concerned; and there should be full compliance
with the obligations of the 'right to be informed'.
2. Purpose limitation: data should only be collected for specified, explicit and legitimate
purposes and not further processed in a manner that is incompatible with those
purposes.
3. Data minimisation: data should be adequate, relevant and limited to what is necessary
in relation to the purposes for which it is processed.
4. Accuracy: data should be accurate and, where necessary, kept up to date.
5. Storage limitation: kept in a form which permits identification of data subjects for no
longer than is necessary for the purposes for which the personal data is processed.
6. Integrity and confidentiality: data should be processed in a manner that ensures
appropriate security of the personal data, including protection against unauthorised or
unlawful processing and against accidental loss, destruction or damage, using
appropriate technical or organisational measures.
Lawful processing
For processing to be lawful under the UK GDPR, firms need to identify a lawful basis before
they can process personal data and document it. This is significant because this lawful basis
has an effect on an individual's rights. The six lawful bases for processing data are:
1. Consent
Consent must be a freely given, specific, informed, and unambiguous indication of the
individual's wishes. There must be some form of positive opt-in; consent cannot be
inferred from silence, pre-ticked boxes or inactivity, and firms need to make it simple for
people to withdraw consent. Consent must also be separate from other terms and
conditions and be verifiable. Where a firm relies on someone's consent, the individual
generally has stronger rights, for example to have their data deleted.
2. Contract
The processing is necessary for a contract a firm has with the individual, or because they
have asked the firm to take specific steps before entering a contract.
3. Legal obligation
The processing is necessary for a firm to comply with the law (not including contractual
obligations).
4. Vital interests
The processing is necessary to protect an individual's life.
5. Public task
The processing is necessary for a firm to perform a task in the public interest or for its
official functions, and the task or function has a clear basis in law.
6. Legitimate interests
The processing is necessary for a firm's legitimate interests or the legitimate interests of a
third party, unless there is a good reason to protect the individual's personal data which
overrides those legitimate interests.
Rights
The UK GDPR contains similar rights to the EU GDPR, creates some new rights for
individuals and strengthens some of those that existed under previous data protection
legislation.
Right to be informed • Individuals have the right to be informed about the collection and use of
their personal data.
• This must be provided to individuals at the time the personal data is
collected from them.
Right of access • Individuals have the right to find out if an organisation is using or storing
their personal data.
• They can exercise this right by submitting a subject access request
(SAR) to the organisation concerned.
• A company should respond to an SAR within one month; it can take an
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additional two months in certain circumstances.
Right to rectification • Individuals have the right to have inaccurate personal data rectified or
completed if it is incomplete.
• An individual can make a request for rectification verbally or in writing.
Right to erasure • Individuals have the right to have their personal data erased, also known as
'the right to be forgotten'.
• The right is not absolute and only applies in certain circumstances.
Right to restrict processing • Individuals have the right to request the restriction or suppression of their
personal data.
• This is not an absolute right and only applies in certain circumstances.
• When processing is restricted, an organisation is permitted to store the
personal data, but not use it.
Right to data portability • This allows individuals to obtain and reuse their personal data for their own
purposes across different services.
Right to object • This gives individuals the right to object to the processing of their personal
data in certain circumstances.
• Individuals have an absolute right to stop their data being used for direct
marketing.
Rights in relation to • An individual has the right not to be subject to a decision based solely on
automated decision making automated processing.
and profiling
• Processing is 'automated' where it is carried out without human intervention
and where it produces legal effects or significantly affects the individual.
Accountability and governance

Accountability is one of the data protection principles under the UK GDPR. Firms are
expected to put into place comprehensive but proportionate governance measures. Good
practice tools such as privacy impact assessments and privacy by design are now legally
required in certain circumstances. Practically, this is likely to mean more policies and
procedures for organisations, although many will already have good governance measures
in place.
Breach notification
The UK GDPR introduces a duty on all organisations to report certain types of data breach to
the ICO, and in some cases to the individuals affected.
Transfers of personal data to third countries or international organisations
To ensure that the level of protection of individuals afforded by the UK GDPR is not
undermined, restrictions have been imposed on the transfer of personal data outside the EU,
to third countries or international organisations.
The UK GDPR still applies directly to firms operating in the EEA post-Brexit, and to any
organisations in Europe that send data to firms in the UK. These UK transfer rules broadly
mirror the EU GDPR rules, but the UK has the independence to keep the framework
under review.
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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
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• 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.
• 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.
Key points
Impact on brokers of EU legislation and UK regulation
• The Insurance Distribution Directive (IDD) came into force in October 2018. It is a
piece of EU legislation but was brought into UK law by specific legislation.
– All brokers are required to be registered in their home state.
– UK brokers have to consider setting up EU domiciled entities to continue to service
EU domiciled clients as having left the UK, there are no ongoing cross border
permissions.
– 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.
Chapter 6
Question answers
6.1 b. By warranty.
6.2 c. A retail broker has links to the client and a wholesale broker has links to the
insurers.
6.3 c. To avoid a professional negligence claim from the client if the insurers
cannot pay.
6.4 b. Hold funds.
Chapter 6
Self-test questions
1. Choose the scenario in which a broker might most often have a conflict of interest.
a. Where they also hold authority from insurers under a binding authority. □
b. Where they have both wholesale and retail client. □
2. Distinguish between retail and wholesale brokers.
a. A retail broker is closer to the insurers and the wholesale broker is closer to the □
client.
b. A retail broker only deals with domestic markets and a wholesale broker deals with □
international insurers.
c. A wholesale broker only deals with domestic markets and a retail broker deals with □
international markets.
d. A wholesale broker is closer to the insurers and a retail broker is closer to the □
client.
3. Which of these is NOT a ways that an agency agreement can be created in law?
a. Agreement. □
b. Assumption. □
c. Necessity. □
d. Ratification. □
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4. At what point in the claims process does the broker's role end?
a. When insurers agree the claim. □
b. When insurers pay the funds. □
c. When the broker receives the funds. □
d. When the client receives the funds. □
5. What is the difference between a risk transfer TOBA and a non-risk transfer TOBA?
a. One is just an old fashioned version of the other. □
b. A risk transfer TOBA allows the broker to hold funds for insurers, a non risk □
transfer TOBA does not.
c. A non risk transfer TOBA allows the brokers to hold funds for insurers, a risk □
transfer TOBA does not.
d. One is a contract between broker and insurers and the other between brokers and □
their clients.
6. With which parties might a broker have a TOBA?

a. Clients. □
b. Clients and insurers. □
c. Clients, insurers and producing brokers. □
d. Clients, insurers and employees. □
7. How can a broker can be remunerated?

a. Just brokerage. □
b. Brokerage and fees. □
c. Brokerage and commission. □
d. Brokerage, commission and fees. □
8. What are the basic requirements for a broker under the Insurance Distribution
Directive (IDD)?
a. Disclosure of the basis and nature of any remuneration. □
b. Disclosure of the amount of any renumeration. □
c. Disclosure of the basis and amount of any remuneration. □
d. No disclosure requirements exist in IDD. □
9. What flexibility is given to a broker with non-statutory trust accounts?
a. They can pay office expenses from this account if required. □
b. They can fund premiums and claims without having received specific funds first. □
c. They can fund premiums but only having received funds from the client. □
d. There is no flexibility with this type of account. □
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10. Which regulator is the sole regulator for brokers?
a. FCA. □
b. PRA. □
c. FPC. □
d. Lloyd's. □
Underwriting
7
outcomes
Introduction
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
Learning objectives
• explain how underwriting is conducted in the London Market;
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• explain the relationship between the various parties;
• describe the cause and effects of the market cycle;
• explain the concept of loss and exposure modelling;
• explain what is meant by reserving and why it is necessary to make provision for
outstanding liabilities; and
• explain the terms 'open years management' and 'reinsurance to close (RITC)' within the
Lloyd’s market.
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 Long-tail business
reported (IBNR)
Premium calculation Probable maximum Reinsurance to close Reserving
loss (PML) (RITC)/open years
management
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 can participate in any single risk, rather than risks being written by only one
insurer. That is not to say 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
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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 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.
Chapter 7 Underwriting 7/3
• 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.
• Insured’s influence. The insured may have a view about the choice of insurers for their
risk. They may indicate a preference for a single insurer with which a relationship can be
built – rather than a number of different insurers. Of course, the insured’s influence can
also be only for their preference of a 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 How underwriters and brokers interrelate on page 7/5, 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.
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• 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.
Question 7.1
What do we mean when we say that the London insurance market is known as a
‘subscription market’?
a. Every insurer has to subscribe to the market rules. □
b. Risks can be shared with a number of insurers each taking a proportion. □
c. Insurers use a 'slip' for indicating their agreement. □
d. All risks must be written entirely in London. □
A4 Electronic placing
The negotiation and presentation of the risk by the broker to the underwriter has traditionally
been a face-to-face process.
In line with the rest of the business world, there is an increasing use of electronic methods
not only to distribute data and information, but also to support the negotiation and agreement
stages of the process.
The London Market Group (LMG), as part of a wider programme of market modernisation –
including the Future at Lloyd's work – is working to develop electronic processes to support
the placement of business within the London Market.
The work being done has a simple aim, which is to make it easier to do business in the
London Market, making it more accessible to customers and providing more cost effective
and efficient services that better meet their needs.
Currently, the operating costs for insurers working within the London Market are between
30-40% which means that of every £100 of premium received between £30-40 is spent on
running the business and this is making the market uncompetitive with other equally secure
markets which have leaner operating models. Those leaner operating models can lead to
cheaper premiums, as less of that income has to be spent on running the business – which
will be appealing for a client.
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.
The market has developed its own electronic placing system which is called Placing Platform
Limited (PPL). The system can handle the whole process from quote, through binding the
final risk and post bind endorsements. The system also provides a full audit trail and the
opportunity to tie in with back office systems.
The issues caused by the pandemic in 2020 have led many participants in the market to
realise that electronic placing can be used for even complex risks and that business can
continue when difficult circumstances mean that the previous ways of working are just not
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possible.
Activity
Find out more about PPL here: placingplatformlimited.com/about-us.
Activity
If you work for a broker or insurer think about the benefits that your business has obtained
from being able to trade electronically with little or no interruption when the whole country
went into lockdown in March 2020. How well prepared was your business to move into
completely electronic trading?
What is the current proportion of electronic trading being done in your organisation today?
Still 100%, more than 50%, or something else? Whatever the proportions are, consider
what the drivers for that might be.
Be aware
One of the key market projects linked to electronic trading is to move away from a data +
documents set up to the world of computable contracts which can, if required, generate a
document. However, please note, the document is not necessarily the primary evidence of
the contract.
The London Market has started this work by agreeing the first set of Core Data Record
standards that will ultimately form the input into the future Intelligent Market Reform
Contract (iMRC). More about this project can be found in Market Reform Contract (MRC)
on page 8/11.
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
Refer to LM1, chapter 8 for more on agency
Presuming that a broker is involved in the placing process, the activity starts with the broker
taking 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.
Be aware
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 and insurers to be used. One of the determining factors for selecting an insurer is
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its security or ability to pay any claims in the future. (This is one of the main reasons for
buying insurance in the first place and also why regulation of the insurers is important).
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 four best-known rating agencies are A. M. Best, Fitch, Standard & Poors and
Moody’s.
Another often used is Kroll Bond.
B1A Basis on which they rate

Rating agencies do not only consider the financial position of any insurer; they also look at
the management and operation of the business as a whole. In addition, an insurer is
compared to its peer group in the market (i.e. insurers of a similar size and structure).
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
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. □
b. When the insurer was not in the London Market. □
c. When the insurer is a new start-up business. □
d. When the insurer writes only aviation business. □
B1C Why brokers are so concerned about ratings
Refer to
Refer back to Rating agencies on page 4/8 for more on the role of rating agencies
Remember that the broker is the agent of the insured, who will be relying on the broker to
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exercise due care to place their business with robust insurers that will also be there in the
future to pay claims. Should an insurer be unable to pay a future claim then the broker may
face a claim of negligence from their client. Therefore, to avoid that possibility, the broker will
consider only those insurers with high ratings which, while 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/about-lloyds/investor-relations/ratings/.
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:
• set good terms and conditions for the client; and
• be credible to other insurers so that a following market will support the leader, should the
leader 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.
It is part of an insurers' appetite analysis to not only decide what business to write, but also
whether they want to be a lead or follow market (given the choice). Within the Lloyd's market
for example, the expectations on the leaders are often more onerous than on the followers.
For example, in Principle 3 on underwriting profitability, there is an expectation that leaders
will conduct pre bind analysis on all risks, but for followers the expectation is that a sample
will be done.
However, a following underwriter is entering into an individual contract of insurance with the
client, and so should give due consideration to the risk, whoever the leader is and should not
accept a risk solely because of a particular leader's participation.
B3 Presentation of the risk
Refer to
Refer to LM1, chapter 2, for more information on the duty of disclosure
Having identified some possible leaders, the broker has to put together a presentation of the
client’s risk. The standard document used in the London Market for this purpose is the
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Market Reform Contract (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. This responsibility does not
change whether the risk is placed face or face or over an electronic system.
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?
a. London companies only. □
b. Lloyd's and London companies only – in equal share. □
c. Overseas insurers only. □
d. Anywhere – there are no restrictions. □
B4 Duties of underwriters and brokers to each other and

their principals
Refer to
Delegated underwriting on page 9/1
The broker’s fundamental duty is to their principal (or as they are better known: their client),
which is usually the insured; however, care must be taken if there is a situation where the
broker also owes a duty of care to the insurer as their principal. This can occur if the insurer
delegates any authority 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 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
Chapter 7
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. The ice cream supply is
reduced, while 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

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 New insurers are coming into the market.
the 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 losses for many insurers that do not have large reserves
more money than they are selling it and have no money as they have not been charging enough premium.
put aside.
Some ice cream sellers leave the market as they go out Some insurers leave the market altogether or at least
of business. the particular class of business.
The remaining ice cream sellers can increase their The remaining insurers can raise premiums to more
prices 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 the impact a catastrophe can have on the market participants is the
significant number of event cancellations due to the COVID-19 pandemic, which has had
a huge effect on the contingency market. From the cancellation of music festivals such as
Glastonbury, or cancellation or postponement of large-scale sporting events such as the
2020 Olympics, significant claims have been made and some participants in the market
decided to withdraw from that class going forward.
Chapter 7
Example 7.3
Another good (but rare) example of a trigger for insurers to leave the market is the impact
of regulators. Lloyd’s is a partial regulator and as part of its role it must agree business
plans for syndicates wishing to write business in any year of account. In 2018, Lloyd’s did
not agree the 2019 business plans (either in whole or in part) for several businesses,
which led to some shutting down completely and others heavily reducing their underwriting
in certain areas.
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.
Was your organisation impacted by the Lloyd’s clamp down in 2018? If you work for a
syndicate, has the business mix changed? If you work for a broker, have some of your
historic markets disappeared?
Question 7.4
If more insurers come into the market what is the most likely impact on premium
rates?
a. They will increase. □
b. They will decrease. □
c. They will stay stable. □
d. They will become more volatile. □
D Loss and exposure modelling

Refer to
Market security on page 4/1
While 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 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

Chapter 7
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 7.4
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 over 20,000 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. While a prudent insurer could
create their own ‘horror stories’, certainly for those insurers working in the Lloyd’s Market,
they are given some guidance using Realistic Disaster Scenarios (RDSs).
Chapter 7
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 windstorms in different areas;
• Gulf of Mexico windstorm;
• European windstorm;
• Japanese windstorm;
• California earthquakes in two areas;
• New Madrid earthquake;
• Japanese earthquake;
• UK flood;
• terrorism in two places in New York; and
• four different cyber attacks.
New Madrid
New Madrid is in fact a fault line (i.e. a place where sections of the earth’s crust meet). It
runs south-west 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.
In addition to those listed, syndicates need to identify and report on another two scenarios of
its own choice. These scenarios must have significant financial impact on the syndicate,
should they occur.
There are a further group of scenarios that are not compulsory, but are required if the
exposure to the syndicate is above the advised de minimis level. They include marine,
aviation, space, energy, liability and political risks.
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.
bit.ly/2FxB77U.
Chapter 7
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.
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 catastrophes occurring. For example, should a catastrophe occur, claims volumes
will increase greatly and the insurer has to be ready to deal with them. In the London Market
that means that those insurers which know they are leaders and therefore will be handling
the claims have to be ready when they arrive with sufficient numbers of skilled personnel to
handle them.
Refer to
Reinsurance on page 3/1
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 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 represents that insured’s contribution to the ‘common pool’. This contribution
must be fair and must 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:
• Premium rate – the hazards that are being faced with a particular risk or particular
insured.
• Premium base – a measure of the exposure.
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
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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 7.5
A vessel is valued at £10m. If the insurer wants to charge £2.00 per £100 of cover (2%)
then the premium calculation would be:
£10m ÷ £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:
£10m ÷ £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:
• 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/Public 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 possible to provide an estimate of what the premium base might be.
This would be the case in, for example, employers’ liability insurance. The insured is able to
estimate the total salary cost for the coming year. The rate is applied to the estimated figure
and at the end of the year the insured submits a 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 or public
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 obligation on any member of the following market to accept the premium rate that the
leader has set and they can choose to request a different rate (usually higher). If they do so,
the broker cannot return to the underwriters from whom they have already obtained
commitments to ask if they want to alter their agreement to the higher premium figure.
Chapter 7
The broker’s obligations in this regard originate from the European Federation of Insurance
Intermediaries (BIPAR) principles which were looked at briefly in LM1:
Refer to
Refer to LM1 for more on BIPAR
1. The intermediary shall, based on information provided, specify the demands and needs of
the client 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.
Be aware
Since the UK left the EU the BIPAR principles are no longer automatically applicable.
However, they do indicate good practice in general terms.
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 exposure that the risk brings to the pool. There are a number of other general
expenses which should also be considered; whether a premium is weighted with a proportion
of one or more of these expenses is a business decision made by the insurer.
• Operational costs. The costs of doing business, employing underwriters, claims
staff, etc. Are there certain types of business that might be more cost heavy than others,
e.g. delegated business where there are a lot of parties in the chain all wanting their
share of commissions? In these days of hybrid working, how large a presence in London
is now needed and can a reduction in office costs be achieved?
• 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. While 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. While 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
Chapter 7
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!
Be aware
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. □
b. Reinsurance costs. □
c. Entertaining costs for clients. □
d. Creating claims reserves. □
F Reserving
In this section, we will review the importance of reserving. Put simply, reserving means
making sure that there are sufficient funds available and allocated for the payment of any
claims that arise at any time in the future. This is not necessarily as straightforward as it
might appear at first glance and so the process will be reviewed in stages.
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 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 2019, however, the UK Government changed the basis on which insurers paid out
Chapter 7
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. The Government changed the discount rate to -0.25% to
reflect the drop in interest rates.
So what impact did that have on reserves? If a personal injury claim was considered to be
worth £1,000,000 then with the old discount rate the insurers could reserve £975,000 being
97.5% of the value as that would be what would be paid out.
Now they have to reserve £1,002,500 being 100.25% of the actual value.
Activity
If you work for an insurer, find out if your company had to amend its reserves following
these changes.
You can read more about the 2019 changes and the earlier changes in 2017 that were
then amended here:
www.abi.org.uk/products-and-issues/topics-and-issues/personal-injury-claims/discount-
rate/
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 insurer form part of the solvency calculation that we looked at in Solvency on
page 4/2.
The higher the reserves (the liabilities side of the equation) the more capital the insurer must
have available to balance the solvency equation. Hence, by appearing to be very
conservative in its reserving, the insurer has to tie up additional capital – which could be
used for other business purposes – to satisfy the regulators.
Refer to
Refer to Solvency on page 4/2 for more on the solvency calculation
Having said that, it is equally dangerous to hold insufficient reserves (known as ‘under-
reserving’).
If an insurer under-reserves, when claims are ready to be paid, the insurer will need to spend
funds from 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 account. For Lloyd’s, this always starts on 1 January, so that if a syndicate
starts up mid-year, their first year of account will be less than one calendar year.
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?
Chapter 7
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
2019 3,000 3,500 3,750 3,800
2020 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. □
b. Putting money aside in case premiums have to be paid back. □
c. Setting aside money for reinsurance payments. □
d. Correcting reserving mistakes. □
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 Is it safer simply to reserve the full policy limits? on page 7/16,
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.
G Reinsurance to close (RITC) and open

years management
Chapter 7
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.
Insurers will typically prepare financial statements using annual accounting rules (such as
UK GAAP) which sets out the position for an individual underwriting year.
Lloyd’s syndicates give the business three years to develop and at the end of that period the
premiums and claims are reviewed. The purpose of the review is to try to ‘close’ the year
which essentially means declaring a profit or loss for the year.
Therefore, the underwriting year 2020 will be reviewed at the start of 2023, but no figures will
be included under GAAP principles for the two open years of 2021/2022. This differs slightly
from the traditional syndicate three year accounting process, whereby the figures for the two
open years would also be included.
If it declares a profit, the insurer releases some funds to the 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 7.6
Syndicate 1234, 2020 year of account, would purchase a reinsurance from Syndicate
1234, 2021 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 liabilities as it is on this basis that the syndicate offering the RITC will work
out the premium that it will charge to take on those liabilities. This calculation should also
contain an element of IBNR in the same 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 while not making the financial position any worse than it is
already.
Lloyd’s has a chain of security which starts with the premium funds and ends with the
Central Fund. Lloyd’s pays very close attention to any situation which puts pressure on the
Central Fund.
Chapter 7
A syndicate which cannot close a year of account because of large claims outstanding may
well use up the premium funds and the members’ funds – thus exposing the Central Fund to
having to pay claims.
While that is of course what the Central Fund is there for, it should not be treated as a
bottomless pit of money.
Refer to
Refer to Lloyd’s chain of security on page 4/6 for more on Lloyd’s chain of security
Given the involvement of the Central Fund in this issue, Lloyd’s works with the managing
agents that have open years of account for syndicates under 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.
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 annual venture. Therefore, they do not need to transfer liabilities formally from
one year to the next.
However, it is important to understand that there are circumstances in which insurance

companies stop 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.
Chapter 7
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 has been conducted far more
online since 2020 due to COVID-19.
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.
Chapter 7
• Insurers might leave the market if they cannot obtain regulatory permission to continue
to operate.
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 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.
Key points
• 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, Lloyd’s 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
7.1 b. Risks can be shared with a number of insurers each taking a proportion.
7.2 a. When the insurer's peers in the market were also downgraded.
7.3 d. Anywhere – there are no restrictions.
7.4 b. They will decrease.
7.5 c. Entertaining costs for clients.
7.6 a. Making provision for claims payments where the claims are not known about yet.
Chapter 7
Self-test questions
1. For what main reason would an insurer would not choose to accept 100% of any
particular risk?
a. To allow it to accept shares of many different risks to spread its exposures. □
b. The price not being high enough. □
c. Not wanting to do too much business with the broker. □
d. Its reinsurers will not permit it to do so. □
2. Explain what is meant by 'leaders' in the London Market?
a. They vet the risk in the brokers office before the start the placement process. □
b. They offer the initial terms to the broker which other insurers can then support. □
c. They find all the other insurers necessary for the risk for the broker. □
d. They deal with all the regulatory approvals for the market. □
3. Why does a broker review an insurer's rating before placing a risk with it?
a. To ensure that the price they will be quoted is reasonable. □
b. To ensure that the insurer has a good reputation for that class of business. □
c. To ensure that the insurer has financial stability. □
d. To ensure that the insurer has good reinsurance protection. □
4. Why might a drop in ratings for the whole market not cause any issues for insurers?
a. Everyone has to reduce their prices. □
Chapter 7
b. Everyone has to offer greater brokerage. □

c. Everyone is in the same position so no competitive advantage for any insurer. □
d. Everyone will be forced to buy more reinsurance. □
5. What are the two main considerations for a broker when selecting a leader?
a. Good terms for the client and credible to the following market. □
b. Good terms for the client and a good price. □
c. Credible to the following market and a good price. □
d. Good terms for the client is the only criteria of interest to the broker. □
6. Explain what will happen next in the market cycle if insurers are seen to be making
profits in a particular class of business.
a. More capacity will be attracted, reducing prices. □
b. Capacity will leave the market raising prices. □
c. The market will remain stable. □
d. Brokers will demand more commission. □
7. Which of these is NOT an exposure modelling question for a property insurance

account.
a. Are there a number of buildings being insured in the same geographical area? □
b. What is the total sum insured of any combination of properties in a set area? □
c. Are the same perils being covered for all properties? □
d. Which of the properties are rented? □
8. What is the main reason for conducting Realistic Disaster Scenarios?
a. To advise the media about any particular event. □
b. To accurately see the gross and net impacts of certain loss events in an insurers □
book of business.
c. To buy enough reinsurance to cover the largest potential loss. □
d. The calculate the correct price for any individual risk. □
9. What are the two basic elements of a premium calculation?
a. Physical and moral hazard. □
b. Premium base and premium rate. □
c. Premium base and moral hazard. □
d. Premium rate and deductions. □
10. In addition to the two basic items of a premium calculation, what other main items
should an insurer factor into a premium calculation?
a. Operating costs and tax. □
Chapter 7
b. Just operating costs. □
c. Just tax. □
d. Only acquisition costs. □
11. What is the main downside of reserving every claim at the full sum insured?
a. Always being tempted to settle the claim up to that level. □
b. Needlessly tying up capital to balance the solvency equation. □
c. There is no downside - in fact it is best practice. □
d. The client will always expect a full indemnity. □
12. Describe what is meant by reinsurance to close (RITC).
a. Reinsuring one year of account into another one. □
b. Reinsuring a single claim. □
c. Reinsuring a single class of business. □
d. Reinsuring an insolvent insurer. □
Business process
8
outcomes
Introduction
A Formation and termination of the insurance contract 8.1, 8.2, 8.3, 8.4, 8.13
B Documents used in the London Market 8.1, 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
• explain the purpose and operation of contract certainty.
Chapter 8
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 Duty of fair Endorsement
termination underwriting presentation
Exclusion Fraud General Proposal form
Underwriters’
Agreement (GUA)
Quotation Wholesale/retail Service company Warranty
broker
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 quotation from each of them for their client to consider.
A quotation is a proposal or indication from the insurer as to the terms and conditions
(including premium) that it is suggesting for the risk put forward by the broker.
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.
Be aware
‘Aggregators’ in the insurance marketplace, such as confused.com and
Chapter 8
comparethemarket.com also present clients with a number of quotations based on the

information provided.
Refer to
Refer to LM1 for more on aggregators
Irrespective of whether the insurer is being asked only to provide a quotation, the broker and
client still 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?
• 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.
Chapter 8 Business process 8/3
• 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.
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.
Refer to
Refer back to LM1, chapter 2 for ingredients required for a valid contract
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. □
b. The quotation must be accepted exactly as issued, so the insurer is not bound to □
accept the client's changes.
c. The insurer is obliged to reissue the quotation, including the client's changes. □
d. The insurer must reissue the original quotation and the broker must persuade the □
client to accept it.
A2 Formation of the contract

Having considered quotations if provided, the client (with the help of their broker) selects
their preferred 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 meets with each insurer separately (electronically or otherwise) and obtains their
underwriters’ agreement to take a share of the risk, which 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
Chapter 8
which shows its company or syndicate, together with the name, if agreeing on a paper
document.
The underwriter then ‘scratches’ the slip (which means that they sign either their initials or
the initials of the insurer) and adds the date. Finally, they indicate the share of the risk that
they are taking. Each insurer will also state the specific underwriting 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.
If the risk is being placed electronically then the underwriters will agree their lines
electronically as well. Instead of putting down a rubber stamp with the insurer name and
reference, and then scratching the slip, the system records a timestamp and identification
code for the insurer/individual underwriter based on their logins to the system.
Be aware
The process of the client giving their broker formal instructions to proceed with the
placement is also known as the client giving a 'firm order'. Therefore you will often see the
insurers, particularly those who issued a quote in the first place acknowledge the
existence of the firm order by stating 'Firm Order Noted' or 'FON'. By doing this they are
committing to the contract (although will not yet be on risk if this is done prior to inception).
Activity
Find out what percentage of your business, either as a broker or insurer, was placed
electronically before lockdown and consider how your business has been impacted by the
changes to ways of working due to the pandemic.
The line that the insurer has agreed to here is known as their ‘written line’.
It might be that the risk is very popular and hence the total of all the written lines adds up to
more than 100%. We will discuss what happens in this situation shortly.
The broker might not have been asked to place the whole risk. They may only have a share
of the risk 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:
• 10% of the original 100% risk which means that the broker only has to find another
40% to make up their 50% 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 Market Reform Contract (MRC) on page 8/11.
A2A At what point are the insurers on risk?

Chapter 8
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, but they are committed
to the contract.
The point at which the underwriters are actually on risk depends on the inception date of the
policy. However, their precise share of the risk may even at that point, not be entirely clear.
One practical problem relating to this point is the fact that the risk may be oversubscribed –
i.e. as 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 later in the process (when the risk is entered into the market central
databases at Xchanging, for example) each insurer’s written line is reduced proportionately
so that the total lines add up to 100%. This reduced line size is known as the ‘signed line’.
Example 8.2
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’.
This can also be done on the electronic systems by ticking the appropriate field.
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
Chapter 8
Question 8.2
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%
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?
Question 8.3
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%. □
b. 6%. □
c. 18%. □
d. 54%. □
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. While 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. What might be included in the policy is something called a short
rate premium provision including a table showing the percentage of premium that the
insurers will be entitled to keep depending on how many days the policy was in force
before the cancellation took effect.
The insured could also invoke a term within their policy which is known typically as a
Chapter 8
downgrade clause. This clause provides the insured with the right to remove an insurer
from their policy if one of a stated set of circumstances occurs, the most typical of which
is that the insurers security rating (A+ A.M Best etc.) reduces below a certain level. Other
stated reasons might include the insurer going into run-off, being bought by another
insurer or even a certain underwriter leaving (although that is quite an unusual criterion to
see included).
• 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. When an insurer cancels a policy they should normally send
notice of cancellation in a form where evidence can be obtained of its receipt by the
insured, such as a recorded delivery letter. Where brokers are involved, the notice of
cancellation would typically be sent to them as the agent of the insured.
• 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
The insured is under a duty to present insurers with all the material facts about the risk that
they know or ought to know, or to give the insurers sufficient information to put a prudent
insurer on notice that it should ask further questions. The insured (and their broker) has to
provide information to insurers in a way that is reasonably clear and accessible – i.e. not
data dump.
In terms of what an insured 'knows', for a corporate insured the key parties are those who
are members of the senior management, and also those who are responsible for the
insurances, which might include an internal risk management/insurance department and it
can also include the broker.
In terms of what the insured 'ought to know' the Act talks about information that should have
been revealed by a 'reasonable search' of information available to the insured.
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.
If the insurer would have applied different terms and conditions then the remedy for the
breach is that the policy is now deemed to be rewritten from inception, including those new
terms. These terms might be an increase in the excess, or another exclusion, for example. If
claims have already been handled before the issue was discovered, then the insurer needs
to revisit those claims again and reconsider them under the revised policy terms. This might
result in a different outcome for those claims so will require careful consideration.
If the insurer would have applied the same terms and conditions but would have charged a
higher premium then the remedy is not that an additional premium should be charged but
that any claims are reduced by the same percentage as the premium was underpaid.
Chapter 8
An example would be:
Premium that was paid £80
Premium that should have been paid £100
Claim presented £1000
Claim paid £800
Breach of warranty
Rather than the insurer being automatically discharged from liability under the contract, the
contract is now suspended just for the period of the breach. If the insurer wants to rely on 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
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
Underwriting on page 7/1
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 current insurers for renewal terms.
While speaking to them and requesting a renewal quote is a matter of market courtesy, the
broker must try to obtain the best options for their client. For example, it is 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 Market cycles on page 7/8).
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 to the insurer. Therefore, its analysis of the risk is likely to be less time-
consuming (and hence less costly) than if it had never seen the risk before.
• The more stable the portfolio of clients, the more reliable the statistical data. Refer back
to What about those claims that are not known about? on page 7/17 where we discussed
how insurers tried to predict the way in which claims might develop over time, using
historic data.
Question 8.4
Which of these is not a valid reason for an insurer to refuse to renew an insurance
contract?
□
Chapter 8
a. It is no longer authorised to write that class of business.
b. It does not have sufficient capacity. □

c. The broker has approached other insurers looking for competing quotes which has □
offended the insurer.
d. The risk was loss-making this year. □
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.
FCA rules on renewal transparency for retail general insurances

New regulatory rules were introduced by the FCA in 2017 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’

‘Days of grace’ can best be described as a perceived ‘elastic’ end to the previous policy
which allows the insured some scope should they be late in renewing their insurance. Unless
the policies specifically make provision, then they do not exist. They are in fact an ‘urban
myth’ which can cause problems if a client is led to believe that they have them and they
think they can delay renewing a 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 the risk has already incepted.
Chapter 8
This might be because the placement process has been very drawn-out, or it could be that
the renewal process has not been quite as efficient as it might have been – perhaps 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? While 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 Market Reform Contract (MRC)
on page 8/11) so that all parties are clear about their position.
We will discuss warranties further in Warranties on page 8/23.
B Documents used in the London Market

In Formation and termination of the insurance contract on page 8/2, 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 as part of the
various processes.
B1 Proposal forms
Proposal forms are not widely used in the London Market but have a place in certain classes
of business such as yacht and professional indemnity insurance. Particularly in the case of
yacht insurance, the use 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 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
Refer to LM1, chapter 2 for a reminder of the duties relating to the sharing of information
during the placing process
Proposal forms include general questions such as:

• name, address, nature of business;
• information about past insurance history, including previous losses and claims;
• 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.
Chapter 8
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 Other ways to present the client’s risk to the

underwriter
There are many other ways in which the details of a client's risk and information about their
wider business can be presented to underwriters. Both the brokers and the clients
themselves can invite underwriters to actual/virtual presentations in which they can give
more information about who they are and what they do, or they can provide information in
the form of electronic/paper documents.
While face to face presentations and meetings have historically formed a large part of the
working practices in the London market, even before the impact of COVID-19 there were
many underwriters who handled far more business over email and telephone than face to
face, or even actual electronic placing systems such as PPL or Whitespace.
Activity
If you work for a broker or underwriter see if you can locate a copy of any paper
presentations that a client has created. Read them and consider what they are telling you,.
Is it all the 'material facts' about the risk, or the basis for more questions to be asked?
Speak to colleagues who might have been involved with either organising or attending
live/virtual client presentations to insurers and ask them what they believe the benefits are
of having those sessions to all parties.
B3 Market Reform Contract (MRC)

Although proposal forms are used in certain areas of the London Market, the most often
used document is one which we’ve mentioned a number of times in this study text: the ‘slip’.
This term has been 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.
Chapter 8
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;
• 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, lineslips and
binders. The reason for three slightly different documents is quite simply that the information
required by underwriters is subtly different and hence different fields are required in the
template.
Further information about these three ways of writing business can be found later in this
chapter. Meanwhile, a 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.
• Lineslip 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. It
is also possible to have lineslips where there is a group of insurers brought together by a
broker, but with each insurer agreeing to their own share of any risks being attached. This
is discussed in Delegation to another insurer (or set of insurers) on page 9/2.
• 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. The main difference with a lineslip or binder MRC is that for those
documents the risk details section of the open market MRC is removed and replaced with
the details of the delegation being given. All the other sections are the same as the open
market MRC.
This document should be used for all placements of open market business for insurance and
reinsurance undertaken by London Market brokers. It is mandatory in the Lloyd's market but
the company market does not have the same ability to mandate use, just highly recommend.
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
Unique Market Reference The UMR is a unique reference generated by the broker for each risk.
(UMR)
B/Broker code/Broker policy number
Chapter 8
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.
Risk details
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.
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.
A typical example clause used is the LSW3000. This clause provides that if the
premium has not been paid by a pre-agreed number of days after inception (or when
instalments are due if appropriate) then insurers can give 15 days' notice of
cancellation to the insured, which will be revoked if the premium is paid within that
15 days.
Tax payable by insured An example of this in the UK is insurance premium tax (IPT), which has to be added
and administered by to premium for certain insurances such as travel insurance. The client pays it to the
insurers 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 This field is not mandatory and is used mainly where there are data protection
and storing information issues.
Insurer contract The insurer has to decide whether a formal policy will be issued and whether a copy
documentation of 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.
Notice of cancellation This sets out the terms by which the insured or insurer can cancel the contract.
provisions
Activity Chapter 8
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.
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 £100m
and an underwriter takes a line of £10m, 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).
Refer to
See Claims handling on page 10/1 for more on standard market claims agreement
practices
Subscription agreement
Slip leader Can be anywhere in the London Market. It also possible to identify an overall leader
in the slip who in fact might be outside the London Market.
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.
Basis of agreement to This sets out the combination of insurers that can agree changes to the insurance
contract changes
Chapter 8
(not 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.
Subscription agreement
Basis of claims agreement/ There are standard market claims agreement practices which will be reviewed in
claims agreement parties chapter 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
agreement handling. Therefore, if any of the agreement parties have delegated to another party,
such as Xchanging or another provider, this must be set out here.
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 sometime 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
The word ‘fiscal’ means something relating to public money, for example taxes in this case. Regulatory does not
just mean relating to the UK regulator but to any regulatory authority. As we saw in chapter 2, the business being
written in the London Market comes from many different countries and hence many different regulators might have
an interest in 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.
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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.
Regulatory risk location This will capture the country or countries that might have a regulatory interest in the
risk. It is particularly important for any risks written through Lloyd’s Insurance
Company S.A. (Lloyd’s Brussels). There are a number of reasons why any country
might be interested in the risk such as it being the insured’s domicile, the physical
location of the risk or where a mobile asset such as a vessel is registered. Any splits
between countries will be shown on a percentage basis.
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.
Fiscal and regulatory
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
coding a 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
classification allocated. 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 which is deducted from the premium paid by the insured and retained by the broker which then sends
the balance to the underwriters.
Fee payable by the client As well as getting brokerage from the insurers, the broker might be obtaining a fee
for 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’.
Be aware
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,
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there are other fields required if the risk being placed is involving a lineslip 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:
lmg.london
B4 Core Data Record and the iMRC

As part of the ongoing work to digitise the London Market there is a programme of work
aimed at moving on from the data + documents world of current electronic placing to the use
of fully computable contracts. The first step has been to create and agree a Core Data
Record for direct and Fac RI business using ACORD standards.
The Core Data Record (CDR) will provide the critical transaction related data that must be
captured at the point of bind in order to complete the following four key sets of downstream
processing:
• Premium validation and settlement (Lloyd's and companies).
• Claims matching at first notification of loss ( Lloyd's and companies).
• Tax validation and reporting (Lloyd's only).
• Regulatory validation and reporting (Lloyd's only).
The CDR will be the irrefutable source of information on which digital processing is based.
The next step is the development of the Intelligent MRC (iMRC) into which this data will be
entered by the broker using a placement platform.
The CDR has 45 mandatory fields and a further 124 which are conditional depending on
class of business/territory etc. Only 80 of these 124 might be needed at point of bind, with
the remaining needed at the point of settlement.
On the Web
Use the following links to find out more about the CDR and the iMRC:
www.lloyds.com/conducting-business/requirements-and-standards/core-data-record
limoss.london/imrcconsultation
Activity
If you work for a broker or a carrier, try and identify the person in your organisation who
provided the feedback on the iMRC project and find out what the feedback was.
B5 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.
B5A General Underwriters’ Agreement
The General Underwriters’ Agreement (GUA) has a very distinct purpose which is to:
Chapter 8
• create an agreement between all the underwriters on a particular MRC as to who will deal
with any contract changes (effectively a mini contract of delegation);
• 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 by an insurance company as slip leader and this would bind the whole
Lloyd’s Market on that slip and 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.
• 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

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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.
Electronic systems such as PPL and Whitespace have functionality within them which can
notify followers of changes made, even if they are not an agreement party.
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:
lmg.london/document-library/
Tip: Look for GUA under category.
B5B Market Reform Contract Endorsement (MRCE)

As in the case with the MRC, the Market Reform Contract Endorsement (MRCE) document
is constructed in a set format into which the relevant information for the change that is being
requested is populated. The sections of the MRCE are:
• 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 sequential numbering
identification 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 Any changes to the sections of the MRC such as ‘subscription agreement’, ‘fiscal and
or advisory regulatory’ and ‘broker remuneration’ are shown here.
If the change requires premium to be either paid or refunded, then a settlement due date
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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 lmg.london and look at the information
available on MRCE and E-MRCE.
Speak to colleagues – does your organisation ever handle endorsements other than
electronically? That could be PPL/Whitespace or just email.
Write some notes regarding the benefits of E-MRCE to your organisation.
Question 8.5
For what does the General Underwriters’ Agreement (GUA) set out provisions?
a. Agreeing changes to the contract. □
b. Renewing the contract. □
c. Claims handling. □
d. Accepting premium under the contract. □
B5C Premium processing
Once the risk has been placed, or any time a change is made which has premium related
consequences, the broker has to prepare various documents:
• A document for the client showing how much premium they will be paying, together with
any tax that they might also have to pay such as Insurance Premium Tax (IPT). This will
typically take the form of a debit note from the broker to the client and the client will then
pay funds to the broker.
• Documents for any insurers who are not using the London Market central settlement
systems to show them how much premium they will receive and any deductions such as
brokerage that will be made. Any overseas insurers will require this to be done, but there
are some companies operating within the London Market who are also outside central
settlement.
• A London Premium Advice Note (LPAN) for those insurers who are using central
settlement. Typically one will be created for the Lloyd's market and one for the company
market, but more might be required if there are complex tax or other regulatory coding
splits needed.
Once the LPANs have been created the broker will use the Accounting and Settlement (A &
S) system to submit the slip, the LPANs and any other relevant documents such as tax
schedules to Xchanging/DXC. Once received they will be checked by Xchanging and if there
Chapter 8
are no queries, the risk data will be captured on the risk databases for both the Lloyd's
(LIDS) and company markets (POSH), together with premium information, including
amounts, deductions and timing of payments.
Once the data is captured, a signing number and date will be created or every premium
payment due, and overnight messaging will update the insurers systems. Additionally, at the
appropriate time the premium will be moved from the brokers' accounts into the insurers'
accounts.
This process will have to be repeated for any additional/return premiums during the life of the
contract.
Activity
Use this link to find out more about both how to use A & S and how to complete an LPAN
lmg.london/document-library/
Be aware
If the risk being handled is a marine risk subject to English law and therefore to the terms
of the Marine Insurance Act 1906 the broker should be aware of the terms of s. 53 of the
Act. This section states that where they are involved, the broker is responsible to the
insurers for the payment of the premium. Insurers do not generally take advantage of that
provision even if the client does not pay promptly.
If you work in a broker placing marine business, find out whether your colleagues
deliberately put anything in the slips to make clear that this section will not apply!
Be aware
As part of the market modernisation programme, projects are underway to replace all the
markets existing legacy technology including the LIDS and POSH databases with a single
risk/premium and claims system. Watch out for market information relating to IPOS, which
is the risk and premium solution and ICOS for claims.
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). Chapter 8

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.
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-marine insurance, insurable interest is required at the point of purchasing
the insurance as well as the point of the claim. If no insurable interest exists at the point of
purchase, the insurance contract is not 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 8.6
If a condition precedent to liability is breached, what is the most likely result?
□
Chapter 8
a. Underwriters cancel the policy.
b. Underwriters can refuse to pay a particular claim. □

c. The insured has to pay more premium. □
d. The insured has to refund any claims already paid. □
C2 Exclusions
An exclusion is a risk that the insurer will not cover under a particular policy. There are some
risks that are market exclusions such as radioactive contamination; however, some others
are exclusions that are present on individual policies, but the coverage may be purchased
separately from specialist 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. Historically there were restrictions on the amount of war on land business that a
syndicate could write as a proportion of its overall capacity. Those restrictions have now
been replaced 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
Refer to Terrorism and political violence insurance on page 2/24 and Reinsurance
programme construction on page 3/16
Government schemes also exist in a number of countries to cover terrorist attacks on

property and to provide a type of reinsurance to ensure that the commercial market still
provides this cover for its clients. Refer back to Terrorism and political violence insurance on
page 2/24 and Reinsurance programme construction on page 3/16 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 and they carry the heaviest penalties if breached. Examples of warranties
include:
• For a property risk – a warranty that there is a fully operational sprinkler system.
• 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-
Chapter 8
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
• 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. It is important to
appreciate that the burden is on the insured to show that the breach did not matter in the
context of the loss that happened, not for insurers to show the reverse.
The Act does suggest that the ability for the insured to argue that the breach had no impact
on the loss that actually happened 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.
Be aware
If the insurance contract is subject to anything other than English law, any warranties
within the contract may be completely unenforceable if the applicable law either does not
recognise warranties at all, or uses the term in a different way to the English law
interpretation.
Chapter 8
C4 Sources of wordings and clauses

There are many market bodies and organisations that draft wordings and clauses and make
them available for use, in addition to brokers and insurers creating their own.
The codes applied to clauses often indicate the origin of the wording and follow these
conventions:
• LSW – London Standard Wording;
• ISO – International Standards Organisation;
• LMA – Lloyd’s Market Association;
• NMA – Non-Marine Association (now part of LMA); and
• AVN – Aviation Market.
Standard wordings are freely changeable within the context of any individual contract as they
are treated as a starting point for specific negotiations. The parties that create wordings and
clauses and make them available make sure this is clearly stated.
Activity
Access the following links to the wordings and clauses pages for the Lloyd’s Market
Association, International Underwriting Association and the Aviation Insurance Clauses
Group. Consider the wordings and clauses that have been recently issued and think about
what may have triggered the need for additional language. Was it due to Brexit, COVID-19
or something else?
London Market Association: bit.ly/2nGsTpr.
International Underwriting Association: bit.ly/2IpmLHP.
Aviation Insurance Clauses Group: bit.ly/2M0rMMc.
If you work for a broker or insurer, speak to your colleagues and find out if they have
drafted any clauses that are now used in MRCs you have. Are they involved in any market
bodies or committees that might be involved in drafting and reviewing new clauses (such
as a market underwriting committee or brokers committee)?
C5 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. Chapter 8
• 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 network to obtain business. As a result they may have missed out on some good
business opportunities which have not come into the Lloyd’s Market. Reasons for this
might be:
• The business is being handled by regional or overseas brokers who are not prepared to
use Lloyd’s 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.
We will be discussing the various types of delegated underwriting in Purpose and types of
delegated underwriting on page 9/2. Meanwhile, we will be looking at one type of
delegated underwriting here: service companies. Service companies 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.
Chapter 8
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 countries.
As an example: the German regulator recognised the UK regulator before the UK left the EU,
and did not seek to re-regulate a UK insurer that was already subject to UK regulation.
This allows insurers working within the EU to operate in two different ways:
• 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.
As a result, UK insurers have lost that freedom and will require individual regulatory approval
from any EU country where they have clients.
Consider this…
What does Brexit mean in this context? Think about organisations you are familiar with
who have changed their head office into a European country (for example, Dublin or
Brussels) and why they have taken that step. Has your employer taken this step or was
their headquarters already within another European country?
Question 8.7
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. □
b. Establishment. □
c. Delegated. □
d. Legal. □
D3A Lloyd’s Brussels
Lloyd’s Insurance Company S.A., more often referred to as Lloyd’s Brussels, is a Belgian
insurance company which is a wholly owned subsidiary of Lloyd’s itself. It was set up to
ensure that when the UK left the EU, syndicates operating within the Lloyd’s market could
still enjoy the benefits of the mutual recognition by regulators that allows them to operate
cross border in Europe.
While risks will be written by Lloyd’s Brussels, the actual day to day underwriting activity is
outsourced to the Lloyd’s syndicates and each risk written is wholly reinsured back into the
Lloyd’s syndicates. The underwriting stamps that are used on any paper documents look
slightly different and all parties must remember that the primary risk bearer is now a Belgian
insurance company. However, the practical handling of the risk throughout its whole lifecycle
remains very similar to today.
Lloyd’s Brussels is authorised to write direct and reinsurance business in the EEA, as well as
Monaco.
Activity
If you work for a broker, find out whether you are placing risks with Lloyd’s Brussels.
Chapter 8
If you work for a Lloyd’s syndicate, see if you can find examples of your underwriters
putting down lines for Lloyd’s Brussels and look at the stamps being used.
Be aware
Certain underwriters working for managing agents are now seconded to the LIC UK
branch. For any risk which is written other than on a pure follow basis, they must be
involved in the underwriting of that risk as early as possible in the risk lifecycle.
A pure follow risk in LIC terms is one where the line is a follow line with no variations from
the leader's terms, so effectively no negotiation of the risk at all being done. These lines
can be put down by non secondee underwriters.
Read this useful FAQ looking at the secondee model and what can and cannot be
done:www.lmalloyds.com/lma/News/LMA_bulletins/LMA_Bulletins/LMA22-005-GD.aspx
D4 Delegated underwriting
Delegation means asking and authorising another party to do something on your behalf. The
London Market uses a significant amount of delegated underwriting to obtain business.
This will be discussed in more detail in chapter 9. In that chapter we will look at to whom the
authority is delegated, the documentation used and how the process must be managed.
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
Chapter 8
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 at the time that documentation
between the
complete and they enter into provided
insured and the
final agreement the contract promptly
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,
ensure that all terms are clear and unambiguous
must check.
by 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
• All terms must be clearly expressed, including WNKORL.
any conditions or subjectivities. If there is a subjectivity, make clear who is
responsible and the penalty for non-compliance.
A subjectivity would be an item such as the
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.
insured promptly.
‘Promptly’ is 30 calendar days after inception for
commercial business, but only 7 working days for
consumers.
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 Make sure that changes do not clash with rest of
documented properly. contract.
Give information to the assured promptly using a
copy of the MRCE, formal endorsement or BID.
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
The contract must include an agreed basis on which
of 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.
Chapter 8
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 although it is important to maintain the standards going forward.
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:qatool.cqttool.com/home
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?
Find out whether your organisation is using Structured Data Capture (SDC)
(limoss.london/structured-data-capture-sdc). Consider why contract certainty might be
important for this system to work.
Activity
Do some research into the various pieces of litigation including those involving the FCA
coming out of claims disputes linked to business interruption losses from COVID-19. To
what extent do you think any of that might have been avoided by clearer policy wordings?
Use this link as a starting place: www.fca.org.uk/news/press-releases/supreme-court-
judgment-business-interruption-insurance-test-case
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 lineslips.
• 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
Chapter 8
combinations of underwriters can agree changes to the risk.
• The Core Data Record and Intelligent MRC will move the market onto computable
contracts.
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.
• 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.
Key points
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. UK insurers no
longer have this flexibility.
• Insurers can also write business on an establishment basis in the EU, which will
involve them setting up offices there.
• Lloyd’s Brussels is a Belgian insurance company set up by Lloyd’s to allow services
business to be written by the Lloyd’s market after the UK left the EU.
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
8.1 b. The quotation must be accepted exactly as issued, so the insurer is not bound to
accept the client's changes.
8.2 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%.
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%.
Chapter 8
8.3 b. 6%.
8.4 c. The broker has approached other insurers looking for competing quotes which
has offended the insurer.
8.5 a. Agreeing changes to the contract.
8.6 b. Underwriters can refuse to pay a particular claim.
8.7 a. Services.
Self-test questions
1. What is meant by a 'quotation' in insurance?
a. The presentation of the risk by the insured. □
b. An indication from the insurer of potential terms. □
c. The passing of information between insurer and insured by the broker. □
d. The acceptance of terms by either party. □
2. What is the insurer's obligation if the quotation is accepted exactly as offered within
the stated timeframe?
a. To finalise insurance on those exact terms offered. □
b. To review the offer within 24 hour and see if any changes need to be made. □
c. The insurer is under no obligation relating to quotations. □
d. To agree to certain amount of brokerage. □
3. For a risk placed on a subscription basis, at what point is the contract concluded
between each insurer and the insured?
a. When the insurer receives the premium. □
b. When the insured agrees the terms. □
c. When the insurer confirms their formal commitment to the contract on the slip or □
an eplacing system.
d. When the risk data is submitted to Xchanging/DXC. □
4. What is meant by 'signing down'?
a. The insurer reducing the line they are prepared to write. □
b. The broker reducing the insurers lines proportionately. □
c. The presentation of the risk information to Xchanging/DXC. □
□
Chapter 8
d. The point at which the insurer signs the contract document.
5. Which of these is NOT a way in which a contract of insurance can terminate

naturally?
a. Cancellation by the insurer. □
b. Cancellation by the insured. □
c. Fulfilment (i.e. paying a total loss on the subject-matter of the insurance). □
d. Insolvency of the insurer. □
6. When will an insurer put 'Warranted no known or reported losses' (WNKORL) on the
Market Reform Contract (MRC)?
a. When the risk is being placed after the intended inception date. □
b. When the risk has a poor loss record. □
c. When the insured is not known to the insurer. □
d. When there are several brokers between the insurers and the insured. □
7. Which of these is NOT one of the three main purposes of the Market Reform
Contract?
a. The document on which the broker summarises their client's risk for underwriters' □
consideration.
b. The document on which the insurers formally agree to accept a share of that risk. □
c. The document which is sent to the tax authorities to evidence tax payment. □
d. The document which can be sent to the client as their copy of the insurance □
contract.
8. What is the role of the General Underwriters' Agreement?

a. To set out who will agree claims. □
b. To set out who can agree cancellation of the policy. □
c. To set out who can agree post bind changes. □
d. To set out who can agree delegation of authority. □
9. What is meant by a 'condition precedent to liability'?
a. Something that must be done otherwise the contract will suspend. □
b. Something that must be done before insurers will be liable. □
c. Something that must be done before the contract comes into force. □
d. Something that must be done or insurers will come off risk. □
10. What is the difference between 'services' and 'establishment' business? Chapter 8
a. Services business can be written from another country while establishment □
business will require a physical presence in the country.
b. Establishment business can be written from another country while services □
c. Services business is written only by Lloyd's insurers and establishment business □
by companies.
d. They are different terms for the same thing. □
Delegated underwriting
9
outcomes
Introduction
A Purpose and types of delegated underwriting 9.1, 9.3
B Operation of delegated underwriting contracts 8.14, 9.1
C Controls over delegated underwriting 9.2
D Outsourcing of other activities by insurers 9.1
Key points
Question answers
Self-test questions
Learning objectives
• examine and explain the purpose of various types of delegated underwriting;
• explain the controls exercised by Lloyd’s over binding authorities; and
• explain 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 Auditing Binding authority Bordereau

coverholder
Conflict of interest Consortium Coverholder Coverholder
undertaking
Declaration Delegated authority Lineslip 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 activities. Brokers can also delegate some of their activities, such as
document production.
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
Chapter 9
contracts are known as a consortium and a lineslip.

Consortium
A consortium is a group of insurers which have formed an agreement to accept risks
together, in a set proportion.
If five insurers group together they might agree to accept all risks 20% each, or they might
agree that one will always take 50% and the other four take 12.5% each. Whatever they
agree, 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.
Chapter 9 Delegated underwriting 9/3
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.
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.
Lineslip
The concept of the lineslip is very similar to that of the consortium; the key difference is that
the lineslip consists of a set of insurers that have been brought together by a broker,
rather than creating their own group. The broker finds a number of insurers which are all
interested in writing similar business on similar terms. The lineslip can be put together using
a Market Reform Contract – MRC (there is a specific MRC form for lineslips). Within the
lineslip 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 lineslip on
behalf of the other insurers.
Be aware
You can come across lineslips 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.
You can also come across contracts labelled as lineslips, even though they only have one
insurer on them. For brokers and insurers, the main benefits of doing this are the ability to
process risks through Xchanging in a bulked or aggregated form, rather than individually
like they would have to be for open market risks.
If you work for a broker or an insurer, see if you have either of these types within your
business.
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
Chapter 9
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: unlike a consortium arrangement it is possible, but less usual, to have commissions or
fees for leaders within lineslips – meaning fewer advantages for a lineslip leader.
Question 9.1
What, if anything, is the key difference between a lineslip and a consortium?
a. A consortium can involve only Lloyd's syndicates whereas lineslip can involve □
Lloyd's and companies.
b. A consortium is set up by a broker whereas a lineslip is set up by the insurers □
themselves.
c. There is no difference between them. □
d. A lineslip is set up by a broker whereas a consortium is set up by the insurers □
themselves.
Lineslip terminology
Note the following terminology concerning a lineslip:
• Declaration: The individual risk that is being presented for agreement by the broker so
it can be attached to the lineslip.
• Bulking lineslip/non-bulking lineslip: These terms indicate whether the broker can
aggregate premium presentations into Xchanging (bulking lineslip) or whether the
premium for each risk declared under the lineslip must be presented individually (non-
bulking lineslip). Clearly, a bulking lineslip 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 lineslip.
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 altogether. This type of contract is known as a ‘binding authority’ or ‘binder’.
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…
Chapter 9
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 lineslip?
a. Declaration. □
b. Statement. □
c. Endorsement. □
d. Binding. □
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

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 of the arrangement for the insurer. The term used for this partner is a
‘coverholder’.
The type of business that an insurer targets when seeking a coverholder is one with a good
professional reputation which is already well-known in its home market – often with expertise
in niche products and/or territories.
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 4,200 individual coverholders, writing business on behalf
of Lloyd’s syndicates, which represents about 30–35% of Lloyd’s premium income. As
different offices of the same entity are recorded separately, the actual number of separate
entities will be slightly less than 4000.
Chapter 9
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 coverholder finds itself in a strange position whereby its client base no longer
comprises only insured 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 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.
Be aware
The term coverholder is an umbrella term particularly used in the London market for any
external (non-insurer) party who holds authority under a binding authority. This can include
entities such as brokers who already have responsibilities to other principals (i.e. their own
clients).
The term Managing General Agent is used for an entity with authority under a binding
authority who has no other clients than insurers – i.e. they only have one set of principals,
and no potential for conflict of interest with their original clients as a broker might.
MGAs therefore are a subset of the wider term 'coverholder'.
MGAs can be part of a wider corporate group including brokers as long as their business
is completely separate.
Use this link to find out more about DUAL, who are a large MGA but part of the Howden
Group, which also includes brokers.
www.dualgroup.com
B3 Setting up a new coverholder

Before an insurer can start to delegate authority to a new coverholder, the latter must obtain
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approval from Lloyd’s. Lloyd’s undertakes the approval process as part of its role in
managing and supervising the Market.
Potential new coverholders are usually sponsored by a broker and their application
supported by the 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 ‘ATLAS’. The prospective coverholder is given access to ATLAS to finish the
application form online and to upload the necessary documents such as professional
indemnity insurance certificates and financial statements. If all of the required information is
submitted, the application should be considered by Lloyd’s 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:
assets.lloyds.com/media/ab3543ec-e4a9-4c3e-a49a-3e72383c1635/Coverholder
%20Undertaking.pdf.
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.
b. An insurer takes on a second coverholder. □
c. A coverholder is approached by two brokers to place different risks for the □
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same insured.
d. A broker approaches two coverholders to place proportions of the same risk. □
The information held on the coverholder on ATLAS is centrally available to all parties who
have a relationship with that coverholder. Core information such as updated PI certificates
and financial information are provided to Lloyd's centrally once a year.
Additionally, coverholders are asked annually to review their details on ATLAS and to provide
up to date information if anything has changed, or to sign a coverholder annual attestation
confirming no details have changed.
The current ATLAS system will be replaced eventually by a new system called Delegated
Contract Oversight Manager (DCOM). Ultimately, this system will provide an single end-to-
end compliance check both for new and existing coverholders but also those parties with
delegated claims agreement who are now coming under the regulatory umbrella.
As at August 2022, only the binder registration element of the DCOM system had been rolled
out. This replaces a system called BARs, on which individual binding authority contracts
have to be registered, and which integrates with the ATLAS data about coverholders.
According to Lloyd's, for coverholders and delegated claims administrators, the advantages
of the DCOM system should include:
• Only having to provide information once and only relevant questions will be asked.
• Less rekeying should be involved with the use of consistent data feeding into other
systems.
• Better quality data will be available, enabling more effective decision making.
• The approval process should be more efficient with the time being taken being
proportionate to the complexity of the approval.
For the brokers the advantages should include:
• Less time having to be spent on coverholder administration.
• Single source of data which is fed into other systems, requiring less rekeying and higher
quality data for analysis and decision making.
For the managing agents, the advantages should include:
• Less time to be spent on administration.
• Better quality, more consistent data which is fed into systems requiring less rekeying.
• Approval times are proportionate to complexity.
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. Where business is being written within the EEA on behalf of
Lloyd’s Brussels, Lloyd’s coverholders have had to obtain additional approvals from Lloyd’s
Brussels as their correct principal for those risks.
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
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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:
lmg.london
From the document library: choose binder templates and then click on search documents.
Look for the LMA3114 template on which the following chapter extracts is 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;
• Non-Marine Binding Authority (excluding USA and Canada) Non-Marine rest of
the world; and
• Lloyd’s Brussels Coverholder Appointment Agreement.
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.
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
Reference Number: London market, not just binding authorities and always follow the same format:
B/four-digit broker code/broker policy reference.
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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] A broker is often involved in a binding authority, sitting between the insurer and the
Broker: 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 NARRATIVE
SECTION 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:
This is an individual employed by the coverholder. 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 3.2 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):

This identifies the nature of the business that the coverholder can write. This can be as
wide 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
state regulators which restrict the business that coverholders in certain US states
can write.
Sub-section 9.1 RISKS LOCATED IN:

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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 £50m. 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:

The insurer puts a limit or total on the amount of premium that the coverholder can
accept, which is a way of controlling the amount of risks that are being written.
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, 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.
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Sub-section 20.1 WORDINGS, CONDITIONS, CLAUSES, ENDORSEMENTS, WARRANTIES AND

EXCLUSIONS APPLICABLE TO INSURANCES BOUND:
This is an important section as it makes clear to the coverholder any specific terms and
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
Signing down on page 8/4).
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 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

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The time limits for submitting monies either from the coverholder to the insurer or
vice versa.
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
Lloyd’s updated its rules in 2015 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 All binding authorities, other than restricted binders have to be registered
date and number with 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 published a set of Principles for doing business at Lloyd's, which represent
the fundamental responsibilities of any organisation within the Lloyd’s market.
Chapter 9
The Principles include the material relating to delegated authorities in a number of areas,
including:
Principle 1: Underwriting profitability
• Expects: that the underwriting strategy sets out the appetite for use of delegated
authority;
• processes and controls are in place for approval of delegated authority;
• the business written under delegation to align with the main business plan;
• reporting to be suitable to enable challenges to be made;
• visibility of costs incurred by use of delegation;
• that the pricing done under contracts of delegation aligns with that done by the syndicate;
and
• that guidance is given to any delegated authority partners concerning ESG matters.
Principle 4: Claims management

• Expects: a clearly articulated appetite for outsourcing of claims; and
• detailed reporting from any party to whom claims are outsourced and oversight of them.
Principle 5 – Customer outcomes
• Expects: that the conduct culture set by the board promotes good customer outcomes;
and
• that third party service providers are engaged, managed and overseen properly.
Principle 11 – Regulatory and financial crime
• Expects: that systems and controls implemented by coverholders to deliver contracted
activities are at an appropriate standard and that financial crime training is done;
• that all actions arising from any financial crime audits under delegated authorities are
completed;
• that the annual financial crime report considers risks posed by delegated authorities and
that annual MI is gathered; and
• that documented policies and procedures exist for identification and mitigation of financial
crime risk, including from delegation.
On the Web
Details of the Principles can be found here: assets.lloyds.com/media/
9cc45b1c-8121-46b1-ae91-e7a4e24abd04/Principles-for-doing-business-at-Lloyds.pdf
It is important for an insurer to remember that it will normally have vicarious liability for the
actions of its agent, so it will retain responsibility even if not aware of the actions being taken.
This is particularly the case in terms of managing agents evidencing compliance with these
Principles, particularly those around customer outcomes.
In addition to the Principles, Lloyd’s also has a code of practice for delegated authority, which
covers all forms of delegation, and sets out (in far more detail) the expected behaviours and
activity.
On the Web
To review the Lloyd’s Code of Practice in more detail see:
bit.ly/2E2ZiiK.
C1 Clarity of agreement setting out the levels of authority
Refer to
Refer to Contract certainty on page 8/28
We discussed contract certainty in Contract certainty on page 8/28 and it’s important to note
that it applies equally to delegation contracts.
The lineslip and binding authority MRC formats are mandatory for use in the London Market;
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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 all binding authority agreements (except restricted authority agreements).
Registration is performed using an online system called Delegated Contract Oversight
Manager (DCOM).1 This allows Lloyd’s to capture information about the contracts being
entered into with each coverholder, including the types of 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.
Be aware
The roll out of DCOM to replace BAR is the first phase of a wider programme of work
which will eventually also involve the current ATLAS system being subsumed into DCOM.
Monitor progress of this project via: www.lloyds.com/conducting-business/delegated-
contract-and-oversight-manager
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.
The challenges of receiving, analysing and interpreting large quantities of data received from
those with delegated authority cannot be underestimated, whether relating to risks or claims.
The introduction of the Delegated Data Manager (DDM) system attempts to provide a
solution to some of those issues.
Delegated Data Manager is a central bordereaux management system for the London
Market. The idea behind the work was to make business simpler by providing a single set of
market approved delegated data and reducing the need for different parties to duplicate the
data entry.
On the Web
Use these links to find out more about DDM: limoss.london/ddm or
www.lloyds.com/conducting-business/delegated-data-manager
Chapter 9
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.
This documentation will typically be known as a certificate, and the insurer should have
agreed a template document at the time the original binding authority was set up.
1 The previous system was called the Binding Authority Registration (BAR).
Reinforce
As we saw in Evidencing the binding authority agreement on page 9/8, 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 concern and if the binding authority is written by more than one insurer, the
audit report should be shared by the leader with the following market.
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? □
b. Is the coverholder capable of attracting new business? □
c. Is the coverholder preparing documents correctly? □
d. Are the coverholder's accounting systems working as they should? □
Chapter 9
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 choose to outsource, or delegate.
The concept of outsourcing and delegation are in fact the same. One party is requesting and
empowering another to perform tasks on their behalf subject to an agreement as 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.
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 DXC/Xchanging company (Xchanging Ins-sure
Services).
D2 Claims handling
Refer to
Claims handling on page 10/1
There are a number of ways in which an insurer can delegate underwriting authority such as
a consortium, lineslip 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.
Lineslip The attachment of the risks to the lineslip 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, although it is possible that the claims handling is delegated
to the lineslip leader.
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 Experts on page 10/7), or third party administrator/delegated
claims administrator.
As we will see in Insurer’s role in the claims process on page 10/4, there are specific
claims handling rules for both the Lloyd’s and Company Markets which have significance for
the leading insurer. However, a leading insurer can decide to outsource claims handling to
another organisation if it chooses. There are a number of options for the insurer to choose
from. They can choose to outsource to Xchanging as a claims decision maker 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:
Chapter 9
www.charlestaylor.com/en/claims-solutions/
www.crawco.co.uk/services/third-party-administration.
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.
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 lineslip 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 lineslips can be found with no
delegation involved.
• A binding authority is delegating authority often to a non insurer separate party. This
party is known as a coverholder. Brokers can be coverholders.
• The term managing general agent (MGA) is used for a coverholder who has no other
clients than insurers. A broker cannot call itself an MGA, however an MGA might be a
sister company to a broker in a large corporate structure.
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.
• Lineslips are agreed on a specific form of a MRC. There is also a consortium template
available for insurers to use.
• 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.
Chapter 9
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 (DXC/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.
Question answers
9.1 d. A lineslip is set up by a broker whereas a consortium is set up by the insurers
themselves.
9.2 a. Declaration.
9.3 a. A broker that usually acts for insured clients only, now holds a binding authority
from an insurer.
9.4 b. Is the coverholder capable of attracting new business?
Chapter 9
Self-test questions
1. Explain what is meant by 'delegating' a task.
a. Specifically asking someone else to do something for you. □
b. Being forced to do a task. □
c. Creating a new task. □
d. Hoping that someone will pick up a task you have not done. □
2. To whom might an insurer delegate tasks such as underwriting?
a. Brokers, other insurers or separate third party organisations. □
b. Just other insurers. □
c. Brokers and separate third party organisations. □
d. Only third party organisations. □
3. Explain the difference between a consortium and a lineslip.
a. A consortium involves insurers grouping together to write risks as one unit, but a □
lineslip is a group of insurers brought together by a broker.
b. A consortium is when insurers delegate to a third party and a lineslip is when they □
group together themselves.
c. A lineslip involves insurers grouping together to write risks as one unit, but a □
consortium is a group of insurers brought together by a broker.
d. They are the same thing, but different terms are used in different markets. □
4. What is the main benefit of participating, to an insurer which is not a consortium or
lineslip leader?
a. Larger premium income. □
b. Less brokerage to be paid. □
c. Participating in risks they might not otherwise see. □
d. Less regulatory oversight. □
5. What is meant by a 'declaration onto a lineslip'?
a. New insurers joining the group. □
b. Insurers leaving the group. □
Chapter 9
c. Individual risk being presented for acceptance by the group. □

d. Claims being made. □
6. If delegated underwriting authority is given to a broker what is their most important

consideration in terms of internal business practice?
a. How to calculate the commissions. □
b. How to ensure conflicts of interest are managed. □
c. How to ensure the right people are involved. □
d. Where to source the business from. □
7. If a new coverholder is being presented to Lloyd's for approval, which party or parties
have to support the application?
a. Broker and MA. □
b. Just MA. □
c. Just broker. □
d. Broker, MA and the regulators. □
8. What relationship does a service company usually have with the insurer?
a. Sister company in the same corporate group. □
b. Branch office. □
c. Subsidiary company of the capital provider. □
d. They will not be related at all. □
9. Which of these is NOT one of the four key points within the Minimum Standards that
relate to delegated authority?
a. Having a clear strategy for writing and managing delegated underwriting. □
b. Engaging in due diligence. □
c. Ensuring good return on investment. □
d. Proactive management. □
10. Which areas should be covered in a coverholder audit?
a. Review of due diligence items, compliance with contract and file review. □
b. Just a review of due diligence items. □
□
Chapter 9
c. Just compliance with the contract, file review and financial checks.
d. Review of due diligence items, compliance with contract , financial checks and file □
review.
Claims handling
10
outcomes
Introduction
A Role of claims in the insurance process 10.1
B Roles and responsibilities of various parties in the claims process 8.14, 10.1, 10.2
C Practical claims handling 10.3
D Regulation of claims handling 11.2
E Complaints handling, the Financial Ombudsman Service (FOS) and 11.3, 11.4
the Financial Services Compensation Scheme (FSCS)
Key points
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
Compensation handling agreements
Scheme (FSCS)
Proximate cause Regulation in the UK Reservation of
and 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 insurance will of course hopefully pay attention to their insurer at the time of
purchase, and they might even read the policy wording and associated documents that are
provided to them. It is at the time of a 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?
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 • MI should liaise with Claims to get its input on any system designs or
Information (MI) 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).
Finance • Ensure early warning given of large individual payments being made.
• Liaise in cases of high volumes of claims (for example, after a catastrophe
loss to ensure no cash flow issues).
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 out about any claims from the insured. This point in the claims process is known
as ‘first advice’, or ‘first notification’. At this stage, the broker’s role is to gather as much
information as they can about the loss 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 Practical claims
handling on page 10/9 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 combinations of insurers that make decisions on claims and can bind the rest of the
market. Added to this is the involvement of any overseas insurers, which, in some cases,
can be the decision-makers where the London Market insurers are bound by their decisions.
When we reviewed underwriting in Leaders and followers on page 7/3, we discussed the
concept of leading and following underwriters and again in Market Reform Contract (MRC)
on page 8/11 we saw how in the MRC/slip there is 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 following table.
Chapter 10
Table 10.2: Claims agreement rules

Market Basis of rules
Lloyd’s Market Lloyd’s Claims Schemes
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 combination of requirements:
• Marine business (not excess of loss). If there is Lloyd’s involvement, only one
company can bind the 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.
Think of an example of each one.
Chapter 10
B2C Lloyd’s Market
Refer to
Refer to LM1, chapter 5
Claims handling within the Lloyd’s Market is governed by documents called the Lloyd’s
Claims Scheme (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
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 £500,000 (or £1,000,000 for energy or property treaty classes): handled by
leader only.
Complex claims
• Claims above £500,000 (or £1,000,000 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.
On the Web
Use this link to find out more about the claims scheme:
www.lloyds.com/resources-and-services/claims-for-market-participants/claims-scheme.
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. □
b. Rules for claims handling in the London Market. □
c. Rules for claims handling for binding authorities. □
□
Chapter 10
d. Rules for appointing experts on claims.
B2D Single claims agreement party

The Single Claims Agreement Party (SCAP) was a project promoted by the broking
community who wanted to try and streamline the handling and agreement of smaller, less
complex claims on business placed within the London Market.
A new clause (LMA 9150) has been issued which sets out the basis for the agreement and
can be put into open market and lineslip MRCs. It is not to be used on proportional treaty
reinsurances or binding authorities. However, if under a binder a coverholder is putting a line
down on open market subscription business SCAP can be within that open market contract.
If a Lloyd’s leader agrees to allow the clause in the slip, then all other Lloyd’s participants on
that slip are bound by that underwriting decision. However, Company Markets are free to
make their own individual decisions. Brokers will obviously be trying to get everyone to agree
to be bound for eligible claims, otherwise the claims process is not made any more efficient.
If the clause is in the insurance contract, one carrier is identified as the ‘slip leader’. They
can be a Lloyd’s syndicate or a UK authorised insurer (not necessarily an IUA company).
A claim is potentially eligible for handling under SCAP if the financial value is less than
£250,000 or equivalent to the slip and the claim is neither complex nor controversial.
Discretion is given to the slip leader to decide whether a claim is complex or controversial
and they have the final decision on whether any claim is handled under the rules, not the
broker.
If the claim is being handled under the SCAP rules, then the slip leader binds all the other
insurers on that slip (who have agreed to SCAP), irrespective of whether they are Lloyd’s or
company market, or even outside the London Market if they have agreed to SCAP applying
to them too.
Reinforce
Under this process only one insurer has the decision making authority. However, until the
completion of a project to fully integrate the market's current electronic claims handling
systems (Electronic Claim File), some manual intervention is required to ensure that the
data flows seamlessly through the Lloyd's and company market systems properly.
Currently, this manual intervention is being outsourced to a specialist service provider, but
increasingly technology (such as robotics), is being used to facilitate this activity.
Activity
If you work for an insurer or broker, find out if you have any contracts with SCAP in them.
Consider what the pros and cons might be for the parties involved.
B3 Role of DXC/Xchanging in the claims process

XCS – which is a DXC company – 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 (as well as to other specialist organisations)
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.
Activity
Research the Volume Claims Service which allows leaders to delegate some claims
handling to specific outsource providers:
www.lloyds.com/vcs/
Chapter 10
B4 Experts
Not every claim requires the use of an expert. However, insurers in the London Market
consider the use of appropriate experts, not only to investigate the claim, but also in the case
of liability matters to defend the insured against any legal action that commences
against them.
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.
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;
• loss assessors who perform a similar role to a loss adjuster but their client is the insured
and they assist the insured with the preparation of their claim;
• surveyors to evaluate loss or damage;
• third party administrators (or delegated claims administrators to use the new Lloyd's term)
– these are organisations to whom the entire claims process can be delegated by an
insurer;
• 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;
• average adjusters who specialise in marine claims and will assess, calculate and present
claims for particular and general average to all interested parties;
• translators and interpreters; and
• subrogation/recovery specialists.
Expert management is a very important concept in the London Market; in practice this
means firstly that the party (usually the insurer) employing the expert should ensure that the
expert is properly briefed and that they understand what is required of them. Secondly, the
insurer should hold the expert accountable 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. □
b. Making claims decisions. □
Chapter 10
c. Appointing experts in respect of claims. □

d. Checking compliance by the Company Market with their claims handling □
procedures.
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. Where there
is reference to a paper file (i.e. not being handled via the Electronic Claims Files system),
this can also refer to communications using email.
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.
An insurer should consider whether it has a conflict of interest. If they can manage the conflict
internally by ensuring separate claims personnel are involved, then that is OK. If, however, an
insurer feels that they have a wider organisational conflict, then they should consider handing
For Lloyd’s only, XCS enters the claims data onto the XCS claims system to be sent to
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 through a chain of brokers, or directly from the insured. However, there are some
types of insurance 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
Chapter 10
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 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. □
b. They have been written into the policy as the notification party. □
c. Their office is local to the insured. □
d. They know the broker. □
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 where they are potentially serving two masters. Interestingly, an insurer can also be
challenged by potential conflicts of interest.
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.
If there is a potential conflict then the insurer has to consider whether that conflict can be
appropriately managed internally by, for example, having separate claims personnel handling
the different claims, and making sure that they have no visibility of each others' files. An
insurer who can do this will retain their involvement in the claim as an agreement party.
If the conflict is more substantial, or there are not enough knowledgeable claims personnel to
be able to separate the claims, then the insurer might have to consider declaring an
organisational level conflict. This will involve them giving up any agreement party role and
the broker asking another insurer on the risk to take this role over. The conflicting insurer, of
course, will still pay their share of the claim and any expenses – but will not be involved in
the decision making.
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.
Use this link to see the regulators' requirements in terms of handling conflicts in the
Insurance: Conduct of Business Sourcebook Rule 8.3.3. See the use of the term 'fairly'
and the expectation that the broker/intermediary will take 'all reasonable steps' to identify
and deal with conflicts of interest and think what that means to brokers in real terms.
www.handbook.fca.org.uk/handbook/ICOBS/8/view/chapter
C2 Advising the insurers

Chapter 10
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 or email presentation. The processes are effectively the same irrespective of the
medium of presentation.
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/email and electronic claims
handling is quite simple: instead of presenting insurers with a paper file or email to consider
and comment on, the broker submits the relevant information (including documents)
electronically. So how does it work?
ECF comprises two components:
• data messaging system/database called CLASS; and
• 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 (UMR), which is essentially a policy number with the broker’s ID code at the
start of the reference which identifies it within the premium database. This also serves to
identify the policy in both the 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 or attached to an email.
– The broker can send this electronic message from their office (which does not
necessarily need to be in London anymore).
– The CLASS data messaging system has built-in routing mechanisms, so that the
message is sent to the leaders first. It is sent simultaneously to leaders in the Lloyd’s
and Company Markets and they can view each other’s comments on the system as
they would have been able to do on the 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
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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 leader releases or 'circulates' the
message, the system feeds the data into all company insurers' databases
overnight. There is no involvement of XCS in this part of the process.
– 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 syndicates.
The electronic claims system can cope with changes in agreement parties (for example,
brought about by conflicts of interest) and has functionality to deal with both organisational
and individual conflicts.
Note that owing to logistical issues, a pure paper file has no place for overseas underwriters;
therefore, they will often receive their communications by email with attached documents.
Paper/email file process - file creation
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 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 file, if it is paper/email then the broker contacts 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/email 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 paper or email 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, or sent back in an email if that is how the
information was presented.
Consider this…
With everyone working remotely during the COVID-19 pandemic – even the paper file will
have had to be sent to London based insurers over email.
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.
Chapter 10
Having left the leader, the broker takes their file/sends an email to XCS where they will enter
data for the Lloyd’s market.
As mentioned earlier, all of the agreement parties visited by/emailed 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 claim and so the role is passed on to the next insurer on the list. Of course,
the conflicted insurer still has to pay its share of any claim – conflict does not impact on
its position as an insurer, just on its 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/send requests for response to 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. □
b. Any situation where the insurer has more than one claim to consider for the □
same broker.
c. Any situation where the insurer or broker is involved in more than one □
interest from the same loss.
d. Any situation where Lloyd's and an IUA company are on the same risk. □
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/email submission for more information, see IUA
Company Market (non-marine) on page 10/5. In this case, the data submitted by the broker
(once it has been cleared by the company market leader) 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/email submission, 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/email rather than ECF to London Market insurers.
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.
Chapter 10
Table 10.3: Comparing the paper and electronic claims processes

Paper/email Electronic
A broker creates a physical paper file which is held by All data and documents are held electronically and can
them and carried/sent around to the various insurers. If be accessed by all insurers simultaneously as long as
any insurers are outside London or working remotely, they have internet access and logins to the CLASS
they must use email or other communication methods. system.
Insurers have to wait their turn to see the physical file
but email can be simultaneous. 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 and can be accessed by insurers whenever required.
hours for brokers to visit.
Email can be looked at any time.
Paper can get lost from a file. Hopefully this should not Once loaded on the system, documents cannot be
be an issue with email. deleted.
Depending on the size of the claim, a file might run to All data and documents are held in one central location
two or more volumes. If emailed insurers will all have to so everything is available to review.
create centralised claims files within their own systems.
Once a leader has dealt with the file, a broker has to Once the leader has dealt with the transaction, the
take it physically to the next agreement party. This is not system automatically routes it to the next agreement
an issue with email. 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 they should carry the file (or files) with them. The claim, knowing that all documents and information are
insurer may not be prepared to make a decision ‘on the already there. The insurer would have had a chance to
spot’ and may want to keep the file for a while. consider them before the meeting and can make
reference to the information afterwards.
If email is used, the information can be sent and an
appointment will have to be made to discuss later.
Paper is a familiar medium for reading information. Scanned documents take some practice to read and the
system takes time to learn to use.
The same issue with scanned documents/email
attachments as with ECF but no systems issues.
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. □
b. Set up electronic messages; telephone the insurers to tell them about the claim. □
c. Email the insurers; load documents to the repository. □
d. Load documents to the repository; take a paper file to the insurers for reference. □
Be aware
A project is under way to replace the current three versions of ECF that operate within the
market with a single cross market claims system. Look out for references to ICOS in any
market information that you see.
C3 Further claims handling

Each time a broker receives more information, whether from their client or perhaps in an
Chapter 10
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.
Be aware
If insurers want to bypass the broker for expert advice on those claims which the broker is
running on a paper/email file, the insurers will simply keep their own internal files.
C4 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? While 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 document is the insured’s formal confirmation that the amount of money
being claimed is accepted in whole or partial settlement of the claim being made. This
document is very important as it seeks to prevent repeat claims being made.
• 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, an implied term that
claims will be settled in a reasonable time is in any insurance contract subject to English law.
In practical terms this means that 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
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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.
C5 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).
Be aware
In the Lloyd's market the term Delegated Claims Administrators is now being used for
TPAs, but they are the same thing.
This term includes Third Party Administrators who hold delegated claims authority for
insurers. It also includes entities such as medical assistance companies who provide
claims related services but do not hold authority to make coverage decisions.
As such, the term DCA is slightly wider than TPA.
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 directly from the insured. They handle claims within their authority (which can
include financial and factual limits) and refer anything outside their authority to their
principals (the agreement parties under the binding authority). These referrals go via the
London broker and can be done via a paper file or ECF as we saw earlier.
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.
Be aware
The new Lloyd's Faster Claims Payments solution removes the need for coverholders or
DCAs to hold loss funds as it facilitates the ability for DCAs or coverholders to draw
directly on managing agent funds held within a specific platform. This removes the link
between the monthly bordereaux submission and the regular replenishment of funds held
by the DCA/coverholder and will ultimately remove the need for loss funds completely.
Find out more here:www.lloyds.com/conducting-business/delegated-authorities/systems-
and-tools/faster-claims-payment
C6 Practical considerations when handling claims
Refer to
Business nature of the London Market on page 1/1
Notwithstanding the class of business there are various issues that claims adjusters and
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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 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.
Insurers also have to consider the concept of underinsurance – where the subject
matter insured is not insured for its full value so insurers have the right (unless the
contract says otherwise) to reduce the claim by an equivalent proportion.
Be aware: Underinsurance in non-marine insurance is known as average.
However, in marine insurance, the word average just means loss, and the term
underinsurance is used instead!
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 reason, the insurer should be thinking about subrogation from the
moment of first advice. Its legal rights do not arise until it indemnifies the insured;
however, many policy wordings now contain clauses which indicate the need for
the insured to co-operate with the insurer before final settlement of the claim
either by formally making claims against the third parties or ensuring that
evidence is preserved.
Failure to obtain a recovery where one was potentially available is a good example of
claims leakage. Leakage is any over payment of claims which could be hard; for
example, forgetting to apply a deductible at all or soft; failing to obtain a full recovery;
or paying more in experts' fees than necessary because experts were not being
properly managed.
Failure to monitor leakage can lead to overall larger claims costs which have an
Chapter 10
ultimate impact on profits.


Contribution Contribution is the concept of two insurers covering the same subject-matter
(physical item or liability) against the same risk. Here, the insurers should share any
claims made, rather than one policy having to pay the whole claim and the other not
have to pay anything at all.
It is not as easy as splitting the claim 50/50 between the two policies; the most
commonly used approach to the calculation of liability is what is known as the
‘independent liability’ method.
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 cause Insurance policies do not cover every loss that occurs in respect of the
subject-matter:
• there has to be fortuity;
• there may be a set of named perils; 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 happened before the loss.
For example, a ship is damaged by a torpedo which causes a hole in her side; she
then sinks during a storm. What is the proximate cause of the loss: the torpedo
causing the hole or the storm? Why does it matter? It matters if loss by storm is
covered and loss by torpedo is not.
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/excess These are the first amounts of any loss that have to be paid by the insured.
In many London Market 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.
Failure to apply the correct deductible or excess is a good example of claims leakage
which all claims personnel should be watchful for.
Chapter 10

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.
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).
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 have ever caused issues with claims they
have handled.
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.
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.
Chapter 10
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?
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.
b. It enables the insurer to determine whether the insured has an interest in the □
subject-matter of insurance.
c. It determines which experts are required by the insurer to investigate a claim. □
d. It helps the insurer to detect fraud. □
C7 Insurance fraud
Insurance fraud is a major problem which prevails throughout the insurance market,
including the London Market. In fact, fraud can be on a much bigger scale in the London
Market, since larger claims are more common and this is reflected on the potential scale of
fraud. All claims personnel (both in 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!
Failing to spot and prevent fraudulent claims is another example of claims leakage, which
needs to be identified and prevented as much as possible.
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.
Chapter 10
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
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.
Reinforce
In Consumer Rights Act 2015 on page 5/7, 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 certain key areas of insurance law such as non-disclosure and misrepresentation
without showing that fraud has occurred. Fraud is notoriously difficult to prove in the English
Courts and insurers have 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…
Chapter 10
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 as discussed earlier:
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.
D2 Anti-money laundering training
Refer to
Refer to LM1, chapter 7, to remind yourself of the laws and offences concerning money
laundering
Under current UK regulatory rules, regulated firms are required to ensure that adequate
processes are in place to minimise the risks of the firm being used by criminals to commit
financial crime (including, but not limited to money laundering).
While the majority of the indicators for money laundering are spotted in the claims handling
process, it is important that all personnel working in regulated firms are adequately trained to
spot signs of potential money laundering activity and report them.
D3 Overseas regulation
Refer to
Business nature of the London Market on page 1/1
Chapter 10
Given that such a large proportion of the business coming into the London Market is from
overseas, it is perhaps not surprising that this has had a regulatory impact as well. In
International licences on page 1/11, 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 of these is California, but a number of other states (e.g. Florida) also have
them. While these regulations were originally created to temper the behaviour of local
insurers and protect the innocent insured from 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 DCAs/TPAs), are certified annually.
D4 Sanctions
International businesses need to be aware of the existence and application of ‘sanctions’. A
sanction can be quite simply defined as a ban. Governments around the world can ban all
parties (governments, businesses, individuals) from doing business with certain individuals,
businesses, governments or even whole countries/regimes. Insurers are required to comply
with these sanctions.
Refer to
Refer to LM1, chapter 7, section B for a reminder of the use of sanctions
Sanctions are imposed as a way of controlling the access to funds for regimes, companies or
persons who are felt to be less than desirable – maybe because they have links to terrorism
or other unlawful behaviour.
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.
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.
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
Chapter 10
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/publications/financial-sanctions-consolidated-list-of-targets.
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 insurance but also to whom any claims were paid. In recent years another problem
has arisen whereby 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.
Activity
Visit the Office of Foreign Assets Control (OFAC) website to find out more about US
sanctions:
www.ustreas.gov/ofac
Chapter 10
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.
Be aware
The FOS acts as the final arbiter in relation to complaints, should an insured, eligible to
use their service, remain dissatisfied having gone through the insurer's own complaints
process.
If, however, the insured is unhappy with the FOS decision, they are still able to trigger the
formal dispute resolution process within their insurance contract whether that be litigation
or arbitration.
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.
In fact the existence of an insurer's complaints process should be made clear to clients
before any contract is concluded under FCA ICOBS requirements, as of course complaints
can arise as much from the sale process as the claims process.
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 with the complaint itself. All complaints which are upheld against the 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 UK regulation on
page 10/20. This requires the insurer to consider the relative sophistication of its clients
Chapter 10
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 unresolved disputes. Membership is compulsory for all authorised firms, including
intermediaries.
The full rules and guidance relating to the handling of complaints, and on the operation of the
FOS, are contained in the FCA Handbook in the Dispute Resolution: Complaints (DISP)
Sourcebook. The FCA requires all firms to have a written complaints procedure. This
procedure must include a notification to the complainant that they have the right to take the
complaint to the FOS if they are not satisfied with the firm’s final answer.
The FOS only deals with disputes from eligible complainants. The list of eligible
complainants includes:
• consumer;
• micro-enterprise with fewer than ten employees and a turnover or balance sheet total of
no more than €2m*;
• charities with an annual income of less than £6.5m;
• trustees of trusts with a net asset value of less than £5m;
• small businesses with an annual turnover of less than £6.5m and fewer than 50
employees or a balance sheet total of less than £5m; or
• guarantors.
*(This value is in euros as ‘micro-enterprise’ is an EU-defined term.)
Before a complainant can take their complaint to the FOS they should have exhausted the
internal complaints procedures within the organisation or intermediary, and still be
dissatisfied with the outcome. Any legal proceedings that are under way must be withdrawn
prior to the complainant approaching the FOS as the FOS will not become embroiled in legal
proceedings.
The complainant can refer their complaint to the FOS within the earliest of:
• six months of the date on the firm’s letter advising the claimant of its final decision
regarding the complaint;
• six years after the event complained about; or
• three years after the complainant knew, or should have known, that they had cause for
complaint.
Once these have expired, the organisation or intermediary can object to the FOS taking on
the complaint on the grounds that it is ‘time-barred’. The FOS is able to consider complaints
outside these time limits in exceptional circumstances, such as cases involving pension
transfers and opt-outs. It can also review cases outside the time limits if the organisation
agrees.
The FOS can require the parties to the complaint to produce any necessary information or
documents and failure to do so can be treated as contempt of court. All authorised firms
must cooperate with the FOS. The FOS must investigate the complaint and aim to answer
the complaint within three months. It may give the parties an opportunity to make
representations and then hold a hearing. Most disputes handled by the FOS are resolved
through mediation or informal adjudication by a caseworker or adjudicator. However, both
parties have a right of appeal to the initial outcome, in which case one of the panel of
ombudsmen will make a final decision.
The FOS will reach a decision based on what is fair and reasonable in all the circumstances,
taking into account the law, FCA rules and guidance and good industry practice, including
relevant ABI statements and codes of practice. The FOS is not bound by the law or legal
Chapter 10
precedent and will make a judgment on the merits of each case. The aim is to ensure that
customers are treated fairly and that the law is not used as an excuse to avoid paying fair
claims. However, the FOS does aim to be consistent in the way it deals with particular types
of complaints.
Redress can be awarded in two ways:

• A ‘money award’, telling the firm what specific sum of money it should pay the customer
to cover any financial losses they have suffered as a result of the problem they have
complained about. The maximum monetary award the FOS can require a firm to make to
a complainant is:
– £375,000 for complaints referred to the FOS on or after 1 April 2022 about acts or
omissions by firms on or after 1 April 2019; and
– £170,000 for complaints referred to the FOS on or after 1 April 2022 about acts or
omissions by firms before 1 April 2019.
The FOS may recommend a higher figure, if appropriate, but this will not be binding on
the firm. Lower figures exist for complaints arising from earlier dates.
On the Web
You can view the figures here: www.financial-ombudsman.org.uk/consumers/expect/
compensation.
• A 'directions award', telling the firm what actions it needs to take to put things right for its
customer. This could include, for example, directing the business to:
– pay an insurance claim that had earlier been rejected;
– calculate and pay redress according to an approach or formula set by the regulator;
and/or
– apologise personally to the customer.
The decision (with reasons) must be notified in writing to the complainant and the
respondent (the firm about which the complaint is made). The complainant must then accept
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.
To try to assist insurers in understanding their position on certain topics, the FOS issues
guidance information on them.
On the Web
The FOS issues ‘Ombudsman news’ as one way of providing information to the market.
Look at edition 169 online to find out more about their online guidance relating to storm
damage claims.
www.financial-ombudsman.org.uk/news-events/ombudsman-news-169
Lloyd’s has its own complaints department for policies written at Lloyd’s, which acts as an
interface between the FOS and individual managing agents. This team can only handle
complaints from insureds who would be otherwise eligible to go to FOS, not every Lloyd's
policyholder.
Chapter 10
The Lloyd’s complaints department may receive notification of a complaint either from the
FOS or directly from the client. The Lloyd’s complaints department works with the syndicates
and the insured in trying to resolve the complaint; however, if it cannot be resolved, eligible
insureds still have the option of referring the matter to the FOS.
A London Market insurer can receive a complaint from an overseas client, as well as a UK-
based one. If they receive a complaint via an overseas regulator then the response must
follow the rules applicable for the part of the world the complaint originates.
On the Web
Visit the Lloyd’s website to find out more about the workings of its complaints department.
www.lloyds.com/complaints.
Activity
If you work for either an insurer or a broker, review your own internal complaints policies. If
you work for an insurer, find out from a colleague how your insureds are advised of their
next steps if a claim is denied. Do you put some particular language in the
communications?
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?
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 Market, it has had its share of financial crises – so what is its secret? Syndicates
sometimes cease to do business and claims still need to be paid.
The ‘secret’ is the Central Fund. As we saw in Lloyd’s chain of security on page 4/6, the
existence of what is known as the Lloyd’s chain of security means that claims can be settled
within the marketplace. This means that if an 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.
Chapter 10
Lloyd’s is a member of the FSCS. 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.
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 via electronic claims handling or (more
rarely) by paper files or email.
• 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, small businesses,
charities and trusts.
• The FOS can bind insurers up to £375,000 but not the insured.
• Lloyd’s has a complaints department that gets involved in certain complaints against
Lloyd’s insurers.
• The FSCS compensates policyholders for valid claims which cannot be paid because
Chapter 10
the insurer has gone into default.

Question answers
10.1 a. Rules for claims handling in the Lloyd's Market.
10.2 a. Entering data on the central claims database.
10.3 b. They have been written into the policy as the notification party.
10.4 c. Any situation where the insurer or broker is involved in more than one
interest from the same loss.
10.5 a. Set up and send electronic messages; load documents to the repository.
10.6 a. It enables the insurer to determine whether the claim is covered since some
perils are excluded from the policy.
Chapter 10
Self-test questions
1. With which teams within an insurance organisation should a claims department
interface?
a. Underwriters only. □
b. Underwriters, outwards reinsurance, complaints only. □
c. Underwriters, outwards reinsurance, legal, compliance, marketing and senior □
management/board only.
d. All of the above. □
2. Which of these is NOT one of the three main roles of a broker in the claims process?
a. Advising the underwriters and being a conduit for communications. □
b. Negotiating for their client. □
c. Receiving settlement monies. □
d. Funding the claim if the insurers are slow to pay. □
3. In which part of the market is there typically no delegation of claims authority
between insurers?
a. Non marine company market. □
b. Marine and aviation company market. □
c. Lloyd's market. □
d. All of them. □
4. What are the main roles that Xchanging Claims Services (XCS) primarily perform in
relation to all claims in the Lloyd's Market?
a. Entering claims data and moving funds. □
b. Entering data only. □
c. Moving funds only. □
d. Entering claims data, making claims decisions and moving funds. □
5. What was the Claims Transformation Programme?
a. A project to streamline the claims process within the Lloyd's market. □
b. A project to make claims totally digital in the London market. □
c. A project to remove brokers from the claims process. □
d. A project to reduce overall claims spend in London. □
Chapter 10
6. Which of these different types of experts would not typically be instructed by

insurers?
a. Lawyers. □
b. Surveyors. □
c. Loss assessors. □
d. Accountants. □
7. What purpose do 'Terms of Engagement' serve?
a. Give experts instructions on a particular claim. □
b. Set out the general basis of the relationship between insured and insurers. □
c. Set out the general basis of the relationship between experts and insurers. □
d. Set out how often claims should be reviewed. □
8. Which of these would not be a conflict of interest for insurers handling claims?
a. 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.
b. Marine casualty – where the insurer insures both vessels involved in a collision; or □
a vessel and the cargo on board the vessel where the cargo owner might sue
the vessel.
c. Aviation – two aircraft colliding where the insurer insures both. □
d. Products liability – writing the primary and excess layers of a products liability □
policy for a manufacturer.
9. What is the key document that must always be in the claims file, whether paper or
electronic?
a. Slip or other evidence of the insurance. □
b. Premium advice notes. □
c. Tax breakdowns. □
d. Underwriting notes. □
10. Why should an insurer's complaints process always be clearly explained to the
insured either in documentation or verbally?
a. To ensure that even when thinking about making a complaint the insured feels □
positive about service received.
b. To try and make the insured go away if the process appears complicated. □
c. To ensure that the regulators will impose small fines. □
d. To try and persuade the insured to accept whatever claims offer is being made. □
Chapter 10

i
Chapter 1
self-test answers
1 c. Any business shared between two or more insurers.
2 a. Premium income limit.
3 d. Reinsurance pricing.
4 c. An insurer which is wholly owned by its non insurance parent company.
5 b. Access to Lloyd's licences.
6 b. An insurer who has permission to operate as a domestic insurer in a particular
country.
7 a. Permission is granted at state level, not at federal/country level.
8 d. Price.
ii LM2/October 2022 London Market insurance principles and practices
Chapter 2
self-test answers
1 b. First party insurance will involve claims triggered by the insured only, and third party
insurance claims will be triggered by an outsider claiming something from the
insured.
2 a. Personal accident.
3 b. The few months after handover where the contractor retains responsibility to sort
out problems.
4 c. Responsibility for any additional damage or liability that arises during the
reinstatement period.
5 d. There must be forced entry or exit.
6 a. Claims made by shareholders that a particular activity has reduced the value of
their shareholding.
7 b. An injured party having a share of the blame for their own injury.
8 a. Between arrival at the airport and boarding.
9 c. Aviation loss of licence.
10 d. Insolvency.
11 c. Loss of hire.
iii
Chapter 3
self-test answers
1 b. To be able to offer cheaper prices to its own clients.
2 a. To access business it is not allowed to write direct from a particular territory.
3 b. Claims co-operation means that the cedant just has to keep the reinsurer informed
but the cedant maintains control of decision making.
4 b. To cover a risk that does not fit within the terms of the treaty reinsurance.
5 b. The insurer can choose which risks to cede.
6 c. Retention.
7 d. To present a request for funds to a reinsurer, typically under XL reinsurance.
8 c. There is no limit subject to there being sellers offering the reinsurance.
9 a. The facultative.
10 c. The whole account including all classes of business written.
iv LM2/October 2022 London Market insurance principles and practices
Chapter 4
self-test answers
1 c. Assets ≥ paid claims + unpaid claims + operating costs.
2 b. Claims that are not yet known about but need to be factored into overall reserve
calculations.
3 a. The risk that a business partner does not pay you what they owe.
4 d. Improved profitability.
5 c. Qualitative requirements.
6 c. Having enough assets but they are not easily accessible.
7 a. Central Fund.
8 a. They might not see business from brokers.
v
Chapter 5
self-test answers
1 c. Nuclear liability.
2 c. To protect innocent injured parties.
3 c. The insurer cannot decline a claim because of a breach of the duty in compulsory
insurances.
4 d. Anyone buying insurance outside their business, trade or profession.
5 c. Something that causes an imbalance between the parties, to the disadvantage of
the insured.
6 d. Anyone not a party to the insurance.
7 c. The insurer.
8 d. Ensuring profitability.
9 d. Head of Claims.
vi LM2/October 2022 London Market insurance principles and practices
Chapter 6
self-test answers
1 a. Where they also hold authority from insurers under a binding authority.
2 d. A wholesale broker is closer to the insurers and a retail broker is closer to the client.
3 b. Assumption.
4 d. When the client receives the funds.
5 b. A risk transfer TOBA allows the broker to hold funds for insurers, a non risk transfer
TOBA does not.
6 c. Clients, insurers and producing brokers.
7 d. Brokerage, commission and fees.
8 a. Disclosure of the basis and nature of any remuneration.
9 b. They can fund premiums and claims without having received specific funds first.
10 a. FCA.
vii
Chapter 7
self-test answers
1 a. To allow it to accept shares of many different risks to spread its exposures.
2 b. They offer the initial terms to the broker which other insurers can then support.
3 c. To ensure that the insurer has financial stability.
4 c. Everyone is in the same position so no competitive advantage for any insurer.
5 a. Good terms for the client and credible to the following market.
6 a. More capacity will be attracted, reducing prices.
7 d. Which of the properties are rented?
8 b. To accurately see the gross and net impacts of certain loss events in an insurers
book of business.
9 b. Premium base and premium rate.
10 a. Operating costs and tax.
11 b. Needlessly tying up capital to balance the solvency equation.
12 a. Reinsuring one year of account into another one.
viii LM2/October 2022 London Market insurance principles and practices
Chapter 8
self-test answers
1 b. An indication from the insurer of potential terms.
2 a. To finalise insurance on those exact terms offered.
3 c. When the insurer confirms their formal commitment to the contract on the slip or an
eplacing system.
4 b. The broker reducing the insurers lines proportionately.
5 d. Insolvency of the insurer.
6 a. When the risk is being placed after the intended inception date.
7 c. The document which is sent to the tax authorities to evidence tax payment.
8 c. To set out who can agree post bind changes.
9 b. Something that must be done before insurers will be liable.
10 a. Services business can be written from another country while establishment
ix
Chapter 9
self-test answers
1 a. Specifically asking someone else to do something for you.
2 a. Brokers, other insurers or separate third party organisations.
3 a. A consortium involves insurers grouping together to write risks as one unit, but a
lineslip is a group of insurers brought together by a broker.
4 c. Participating in risks they might not otherwise see.
5 c. Individual risk being presented for acceptance by the group.
6 b. How to ensure conflicts of interest are managed.
7 a. Broker and MA.
8 a. Sister company in the same corporate group.
9 c. Ensuring good return on investment.
10 d. Review of due diligence items, compliance with contract , financial checks and file
review.
x LM2/October 2022 London Market insurance principles and practices
Chapter 10
self-test answers
1 d. All of the above.
2 d. Funding the claim if the insurers are slow to pay.
3 a. Non marine company market.
4 a. Entering claims data and moving funds.
5 a. A project to streamline the claims process within the Lloyd's market.
6 c. Loss assessors.
7 c. Set out the general basis of the relationship between experts and insurers.
8 d. Products liability – writing the primary and excess layers of a products liability policy
for a manufacturer.
9 a. Slip or other evidence of the insurance.
10 a. To ensure that even when thinking about making a complaint the insured feels
positive about service received.
xi
Legislation
B
Bank of England and Financial Services Act
2016, 5D1
C
Companies Act 1985, 1A2A
Consumer Insurance (Disclosure and
Representations) Act 2012, 8C3
Consumer Rights Act 2015, 5B, 5B1, 10D1
Contracts (Rights of Third Parties) Act 1999,
5B, 5B2
D
Data Protection Act 2018, 6D1
E
Employers’ Liability (Compulsory Insurance)
Act 1969, 5A1
Employers’ Liability (Compulsory Insurance)
Regulations 1998, 5A3
Employers’ Liability Act 1880, 5A2
EU General Data Protection Regulation (EU
GDPR), 6F3
G
General Data Protection Regulation (GDPR),
6D1
I
Insurance Act 2015, 7B4, 8C3
Insurance Distribution Directive (IDD), 6F1
Insurance Mediation Directive (IMD), 6F1
L
Lloyd’s Act 1982, 1A5
Longshoreman and Harbour Workers
Compensation Act (LHWCA), 2A2E
P
Public Order Act 1986, 2A1E
R
Riding Establishments Act, 5A1
Road Traffic Act 1988, 5A1
T
Terrorism Risk Insurance Act 2002 (USA), 3C
Terrorism Risk Insurance Program
Reauthorization Act of 2015 (USA), 3C
The Solvency 2 and Insurance (Amendment,
etc.) (EU Exit) Regulations 2019, 4B
xii LM2/October 2022 London Market insurance principles and practices
xiii
Index
A broker (continued)
wholesale, 6B
ACCORD (Association for Co-operative brokerage, 6E, 8B3
Operations Research and Development), bulking lineslip, 9A2A
7A4 Business interruption (BI) insurance, 2A1F
agency
by agreement, 6A
by necessity, 6A
C
by ratification, 6A capacity, 1A, 1A3, 1C, 3A1, 7A1
law of, 6A captive insurance companies, 1A2C
aggregates, 1A, 7A1 CAR (contractors’ all risks) insurance, 2A1E
monitoring, 1A cargo insurance, 2C1B
agricultural crop and forestry/hail insurance, cash in transit insurance, 2C3D
2A1A CASS (client asset rules), 6F2B
airline liability insurance, 2B2A catastrophe modelling, 7D2A
airport operator’s liabilities, 2B2A CBI (contingent business interruption)
alternative risk transfer, 3B insurance, 2A1F
anti-money laundering training, 10D2 cedant, 3B
approved persons, 5D cede, 3B
Association for Co-operative Operations Central Fund, 4C, 7G1, 10E3
Research and Development (ACCORD), 7A4 cession, 3B
ATLAS, 9B3 claims
aviation process
insurance, 2B broker’s role in, 6C
repossession insurance, 2B3D reserves, 4A, 7F
war insurance, 2B3A contribution to, as part of premium
calculation, 7E2
B under excess of loss (XL) reinsurance, 3B2A
Claims
betterment, 10C6 Co-operation Clause, 3B
BI (business interruption) insurance, 2A1F Control Clause, 3B
binder, 9A2B handling
binding authority, 9A2B outsourcing of, 9D2
claims handling under, 10C5 overseas regulation of, 10D3
evidencing the, 9B6 regulation of, 10D
registration of a, 9C2 under binding authorities, 10C5
BIPAR (European Federation of Insurance process
Intermediaries), 7E1 broker’s role in, 10B1
bloodstock insurance, 2A1B expert’s role in, 10B4
bond risks insurance, 2C3G insurer’s role in, 10B2
bordereau, 10C5 role of, in insurance process, 10A
branch offices, 1A, 8D2 CLASS database, 10C2A
brand, Lloyd’s, 1A3 client
breach of asset rules (CASS), 6F2B
the duty of fair presentation, 8A3B influence of, 1A
warranty, 8A3B money rules, 6F2B
broker, 6A collecting note, 3B
consortium advantage for, 9A2A collision liability insurance, 2C1A
deductions, 8B3 commission, 6E
EU legislation for, 6F ‘collecting’, 6E
influence of, 1A common pool, 7E
Insurance Document (BID), 8B3 companies
lineslip arrangement advantage for, 9A2A captive, 1A2C
Lloyd’s, 6B Lloyd’s service, 1A2E
non-Lloyd’s, 6B mutual, 1A2B
producing, 6B propriety, 1A2A
regulation of a, 6F2 complaints handling, 10E
relationship with an underwriter, 7B compliance
remuneration, 6E, 8B3 systems and controls to ensure, 1B2C
retail, 6B comprehensive general liability insurance,
role in 2A2F
claims process, 6C, 10B1 compulsory insurances, 5A
placing process, 6C FSCS protection for, 10E3
surplus lines, 6B in other countries, 5A4
UK regulation of, 6F conditions, 8C1
xiv LM2/October 2022 London Market insurance principles and practices
conditions (continued) establishment, 8D3

precedent to contract, 8C1 estoppel, 10C6
precedent to liability, 8C1 European Federation of Insurance
Conduct Risk, 9C, 10D1 Intermediaries (BIPAR), 7E1
conflict European Insurance and Occupational
individual, 10C2A Pensions Authority (EIOPA), 4B1
of interest, 9B2, 10C1 European Union, 2C3E, 4B, 4B1, 8D3
organisational, 10C2A legislation of brokers, 6F
consortium, 9A2A excess, 10C6
construction insurance, 2A1E of loss
offshore energy, 2C1C (XL) reinsurance, 3B2
vessels, 2C1A claims under, 3B2A
contamination insurance, 2A3B exclusions, 8C2, 10C6
contingency insurance, 2A1C expert’s role in the claims process, 10B4
contingent exploration (offshore energy), 2C1C
business interruption (CBI) insurance, 2A1F exposure modelling, 7D1
hull, liability or war insurance, 2B3E external member, 1A5
contract extortion/malicious product tamper/
certainty, 8E contamination insurance, 2A3B
formation of, 8A2
frustration insurance, 2C3F
termination of, 8A3
F
contractors’ all risks (CAR) insurance, 2A1E facility, 9A2A
contribution, 10C6 facultative
Control of well (COW) – offshore energy, 2C1C obligatory reinsurance, 3B1A
controlled functions, 5D1 reinsurance, 3B, 3B1
coverholder, 9B2 fair presentation, breach of the duty of, 8A3B
approval process, 9B3 fidelity guarantee insurance, 2A1E
approved, 9B4 Financial Conduct Authority (FCA), 1A3, 6E,
audit of a, 9C5 6F2, 10D1, 10E
documentation, 9C4 client money rules, 6F2B
reporting, 9C3 risk framework, 6F2A
service company, 9B4 financial guarantee insurance, 2A3A
types of, 9B4 Financial Ombudsman Service (FOS), 10E
undertaking, 9B3 Financial Services Compensation Scheme
credit risk, 4B (FSCS), 10E
Crystal, 1B2B, 5C, 8B3, 10D4E fine art insurance, 2C3C
first
D advice, 6C2
notification of loss, 10C1
Day One party classes, 1C
Average Memorandum, 2A1E flat fee (broker remuneration), 6E
Reinstatement, 2A1E follower, 7A2
days of grace, 8A4A and the premium, 7E1
declaration, 9A2A consortium advantage for, 9A2A
deductible, 10C6 lineslip arrangement advantage for, 9A2A
delegated underwriting, 8D4 FOS (Financial Ombudsman Service), 10E
choice of partner for, 9B2 franchise Board, 1A5
controls over, 9C Franchise Board, 1B2C
operation of, 9B fraud, 8A3B, 10C7, 10D1
directors’ and officers’ (D&O) liability FSCS (Financial Services Compensation
insurance, 2A2A Scheme), 10E
document repository, 10C2A Full Follow Clause, 3B
E G
EAR (erection all risks) insurance, 2A1E general
ECF (Electronic Claims File), 10C2A average, 2C1A
electronic liability insurance, 2A2F
claims Underwriters’ Agreement (GUA), 8B3, 8B5A
file (ECF), 10C2A geographical limitations, 1A
notification and agreement, 10C2A glass insurance, 2A1E
placing/presentation, 7A4, 8B5B Goshawk v. Tyser (2006), 6D1
employers’ liability insurance, 2A2E, 5A1, 5A2, governance of the Lloyd’s market, 1A5
5A3, 7E group and capital risk, 4B
endorsement, 8B5
enterprise risk, 4B
erection all risks (EAR) insurance, 2A1E
errors and omissions (E&O) insurance, 2A2B
xv
H Lloyd’s (continued)
registration of binding authorities, 9C2
hail/agricultural crop and forestry insurance, service companies, 1A2E, 8D1, 9B4
2A1A LMA (Lloyd’s Market Association), 7A4
hangar-keepers’ liability insurance, 2B2A LMG (London Market Group), 7A4
homeowners’ insurance, 2A1G London Market
hull, marine, 2C1A brand, 1C
capacity, 1C
claims service in, 1C
I flexibility/entrepreneurial spirit of, 1C
IBNER (incurred but not enough reported), Group (LMG), 7A4
7F5A international nature of, 1B
IBNR (incurred but not reported), 4A, 7F5A knowledge, 1C
incurred but not licences, 1C
enough reported (IBNER), 7F5A quality of brokers in, 1C
reported (IBNR), 4A, 7F5A reputation, 1C
indemnity, 10C6 long-tail business, 7F4
insurance premium tax (IPT), 5C loss
Insurance: Conduct of Business sourcebook fund, 10C5
(ICOBS), 6E, 10D1 modelling, 7D2
Insurers’ Market Repository, 6C1 of earnings insurance, 2C3A
intermediaries of hire insurance, 2C3A
independent, 6B of licence insurance, 2B3B
types of, 6B of use insurance, 2B3C
international licences, 1A, 1B2A, 3A2
USA, 1B2B M
International Underwriting Association of
London (IUA), 1A3, 1B1 malicious product tamper insurance, 2A3B
claims handling agreements, 10B2 managing agent, 1A1
IPT (insurance premium tax), 5C marine
cargo, 2C1B
hull, 2C1A
J insurance, 2C
jeweller’s block insurance, 2C3B liability insurance, 2C2
market, 1A
cycles, 7C
K risk, 4B
Market Reform Contract (MRC), 6C1, 7B2,
key functions, 5D1
8B3, 10B1
kidnap and ransom insurance, 2A1D
binder MRC, 8B3
Endorsement (MRCE), 8B5B
L lineslip MRC, 8B3
Open Market MRC, 8B3
leader, 7A2, 7B2 medical malpractice insurance, 2A2B
consortium advantage for, 9A2A members’
legislation relating to insurance contracts, 5B agent, 1A1
liability insurance, 2A2, 2B2, 2C2 Funds at Lloyd’s (FAL), 4C
for dangerous wild animals and dangerous minimum capital requirement (MCR), 4B
dogs, 5A1 money
licences, international, 1A, 1B2A, 1C, 3A2 insurance, 2A1E
USA, 1B2B laundering, 10D2
limitation, concept of, 2A2B motor insurance, 2D, 5A2
line third party, 5A1, 5A3
to stand, 8A2B MRC (Market Reform Contract), 6C1, 7B2,
lineslip, 9A2A 8B3, 10B1
liquidity risk, 4B binder MRC, 8B3
livestock insurance, 2A1B Endorsement (MRCE), 8B5B
Lloyd’s lineslip MRC, 8B3
and Solvency II, 4B2 Open Market MRC, 8B3
brand, 1A3 multi-tied agent, 6B
broker, 6B mutual
Central Fund, 4C, 7G1, 10E3 companies, 1A2B
chain of security, 4C, 7G1, 10E3 indemnity associations, 1A2D
complaints department, 10E2
coverholder approval process, 9B3
governance of the market, 1A5 N
Market Association (LMA), 7A4
Names, Lloyd’s, 1A1
members, 1A1
nominated member, 1A5
Names, 1A1
non-bulking lineslip, 9A2A
xvi LM2/October 2022 London Market insurance principles and practices
non-Lloyd’s broker, 6B quotations, 8A1

non-proportional reinsurance, 3B
non-schedule agreement, 9B6
non-statutory trust account, 6F2B
R
rating agencies, 4D, 7B1
O RDSs (Realistic Disaster Scenarios), 7D2
re-drilling – offshore energy, 2C1C
offshore energy insurance, 2C1C Realistic Disaster Scenarios (RDSs), 7D2
onshore energy insurance, 2A1E reinstatement, 2A1E
open in reinsurance, 3B2
cover, 7E memorandum, 2A1E
market correspondent (OMC), 6B reinsurance, 1A, 1B2A
years management, 7G costs, as part of a premium calculation, 7E2
operational excess of loss (XL), 3B2
costs, as part of a premium calculation, 7E2 claims under, 3B2A
risk, 4B facultative, 3B, 3B1
order, 8A2 obligatory, 3B1A
outsourcing, 9D non-proportional, 3B
over redemption insurance, 2A1C programme construction, 3C
own risk and solvency assessment (ORSA), proportional, 3B
4B stop loss, 3B2C
to close (RITC), 7G
treaty, 3B
P line, 3B3B
passenger liability insurance (aviation), 2B2A quota share, 3B3A
pecuniary insurance, 2A1E surplus, 3B3B
personal accident and health insurance, 2A1D renewals, 8A4
physical damage to aircraft insurance, 2B1A Reservation of Rights (ROR), 10C6
placing reserves, claims, 4A, 7F
electronic, 7A4 contribution to, as part of premium calculation,
process, broker’s role in, 6C 7E2
Steering Group, 7A4 retail broker, 6B
PML (probable maximum loss), 7D1 retrocedant, 3B
political risks insurance, 2C3E retrocession, 3B
Political violence insurance, 2A3E retrocessionaire, 3B
ports liability insurance, 2C2C risk
premises liability insurance, 2B2A credit, 4B
premium enterprise, 4B
base, 7E group and capital, 4B
calculation, 7E liquidity, 4B
processing and risk data recording, market, 4B
outsourcing of, 9D1 operational, 4B
rate, 7E transfer, 3A1
principle (in agency), 6A RITC (reinsurance to close), 7G
prize indemnity insurance, 2A1C ROR (Reservation of Rights), 10C6
probable maximum loss (PML), 7D1
producing broker, 6B S
product recall insurance, 2A3C
products liability insurance, 2A2D, 2B2A, 7E salvage, 2C1A
professional sanctions, 10D4
indemnity insurance, 2A2B, 5A1, 7E satellites
negligence insurance, 2A2B, 2C2B, 5A1, 5A2 liability risks for, 2B3F
profit margin, as part of premium calculation, seepage and contamination/pollution
7E2 (offshore energy), 2C1C
property insurance, 2A1E senior management functions (SMFs), 5D1A
for airport buildings, 2B1B Senior Managers and Certification Regime
proportional reinsurance, 3B (SM&CR), 5D1
reinsurance Certification Regime, 5D1B
proportional, 3B3 Rules of Conduct, 5D1C
proposal forms, 8B1 Senior Managers Regime, 5D1A
proprietary companies, 1A2A service companies, 8D1, 9B4
proximate cause, 10C6 services, 8D3
Prudential Regulation Authority (PRA), 1A3, settlements, 10C4
4B1, 6F2 shipowners’ liability insurance, 2C2A
public liability insurance, 2A2C, 5A1 short-tail business, 7F4
signed line, 6C1, 8A2B
signing down, 8A2B
Q single tied agent, 6B
quota share treaty reinsurance, 3B3A
xvii
slip/MRC (Market Reform Contract), 6C1, Unique

7B2, 8B3, 10B1 Claims Reference (UCR), 10C2A
binder MRC, 8B3 Market Reference (UMR), 8B3, 9B6, 10C2A
Endorsement (MRCE), 8B5B
lineslip MRC, 8B3
Open Market MRC, 8B3
V
solvency, 1A, 4A, 4B2, 6C1, 7F3 vessels, 2C1A
capital requirement (SCR), 4B, 4B1 physical damage to, 2C1A
margin, 4A
Solvency I, 4B
solvency II W
role of the regulators in, 4B1
war insurance, 2A3D
Solvency II, 4B
aviation, 2B3A
and Lloyd’s, 4B2
warranty, 5A3, 8C3
space insurance, 2B3F
breach of, 8A3B
specie insurance, 2C3B
wholesale broker, 6B
statutory trust account, 6F2B
workers’ compensation insurance, 2A2E
stock insurance, 2A1E
working member, 1A5
stop loss reinsurance, 3B2C
written line, 6C1, 8A2
subrogation, 10C6
subscription
agreement, 8B3 X
market, 1A, 7A1, 8A2
sue and labour, 2C1A Xchanging, 1B2B, 5C, 6C1, 7B2, 8A2B, 8B3,
surplus 9A2A, 9C2, 10B3, 10C2A
line treaty, 3B3B Ins-sure Services, 9D1
lines broker, 6B XL (excess of loss) reinsurance, 3B2
treaty, 3B3B claims under, 3B2A
syndicate, 1A1, 1A2E, 1A3, 1B1, 1B2A, 1B2B,
2A3D, 4C, 7D2, 7F5, 7G, 8A2, 8C2, 8D, 9B4,
10B2C, 10E3
T
taxes, as part of premium calculation, 7E2
Technical Processing service, 10B3
terms and conditions used in policy wordings,
8C
Terms of
Business Agreements (TOBAs), 6D
Engagement, 10B4
terrorism insurance, 2A3E
theft insurance, 2A1E
third parties other than passengers (airline),
2B2A
third party
administrators (TPAs), 10C5
classes, 1C
TOBAs (Terms of Business Agreements), 6D
trade credit insurance, 2C3F
treaty reinsurance, 3B
trust
account
non-statuary, 6F2B
statuary, 6F2B
funds, 7F6
U
underwriter
following, 7A2
and the premium, 7E1
consortium advantage for, 9A2A
lineslip arrangement advantage for, 9A2A
lead, 7A2, 7B2
consortium advantage for, 9A2A
relationship with a broker, 7B
writing a risk post-inception, 8A5
underwriting, delegated, 8D4
xviii LM2/October 2022 London Market insurance principles and practices
Chartered Insurance Institute
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London EC3M 3BY
tel: +44 (0)20 8989 8464
customer.serv@cii.co.uk
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London

Updates and amendments

© The Chartered Insurance Institute 2022

Using this study text

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

Consider this: stimulating thought Reinforce: encourages you to revisit a

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

London Market insurance

Summary of learning outcomes Number of questions

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. 3

4. Understand market security. 3

5. Understand the regulatory and legal requirements applicable to the transaction of 6

6. Understand insurance intermediation in the London Market. 6

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

Published October 2022

Published October 2022 2 of 3

10. Know the handling of claims in the Reading list

Exam technique/study skills

Published October 2022 3 of 3

Syllabus learning outcome Study text chapter

Syllabus learning outcome Study text chapter

2: Risks written in the London Market

5: Legal and regulatory requirements

10: Claims handling

Branch office Brand Capacity Captive insurer

A1 Structure of the subscription market

Where subscription placements are the exception

A2 Different types of companies

A2B Mutual companies

A2C Captive insurance companies

A2E Lloyd’s service companies

Example of Lloyd’s service companies

A3 Insurers operating as both insurance companies and

Brand The Lloyd’s brand is recognised and respected internationally.

A5 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

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

Table 1.3: Qualities of the London Market that attract clients

Subdividing classes of business

The main ideas covered by this chapter can be summarised as follows:

International nature of the London Market

Appeal of the London Market

1.2 d. Any market – there are no restrictions.

1.3 c. Cheapest prices.

Aviation insurance Claims made Diversification of risk Environmental,

A Non-marine classes of business

A1D Personal accident and health insurance