Page | 1

INSURANCE BROKING PRACTICE AND MANAGEMENT

Insurance Institute of Uganda

Page | 2

INTRODUCTION

The purpose of this book is to provide an outline of the features of Insurance Broking Practice.

Insurance of complex risks require consideration of alot of

issues. The decisions of the proposer need to start from an informed point of, and this[U1][U2] is what makes a broker an important element in this cycle.

This manual cannot in itself be regarded as the sole source of information on Insurance Broking Practice. Research articles

appear in the press and other publications dealing with aspects of Insurance Broking. These are well worth reading in order to keep up to date with new developments in the market and with legislative changes.

Page | 3

ACKNOWLEGMENT

Page | 4

FORWARD

Elvis Khisa

CEO

Insurance Institute of Uganda

KAMPALA

Page | 5

PURPOSE: To provide knowledge and understanding of the skills an insurance broker

needs in order to effectively manage a broking firm and provide quality services to their clients.

Expected learning outcomes:

1- Understand the legal and regulatory environment under which insurance brokers operate.

2- Understand the role played by insurance brokers in meeting clients’ needs.

3- Understand how brokers negotiate, select insurer and place insurance business.

4- Understand how brokers manage insurance programmes.

5- Understand the importance of brokers in the claims processes. 6- Understand the range of other services that a broker may provide and

how they impact on the client 7- Understand how the brokers’ office is organised.

Page | 6

TABLE OF CONTENTS 1. Introduction

1.1 Historical background 1.2 Role of the brokers

1.3 Insurance Act 1.4 Types of brokers

2. Legal Environment 2.1 Law of Agency

2.2 Common law tort 2.3 Statute law

2.4 Non specific regulation 2.5 Financial crime 2.6 Contract law

3. Regulation of Insurance Brokers

3.1 Insurance Act 2002 3.2 Licensing and Compliance with Regulation

3.3 Worldwide Requirements for Licensing Brokers

4. Understanding the Clients requirements (Meeting clients needs)

4.1 Establishing what the client wants and what they need 4.2 Written agreements with clients i.e. Service level agreements

4.3 Complaints , Errors and Omissions 4.4 Customer service

5. Negotiating and Placing a Risk 5.1 Material facts

5.2 Compiling indemnity information 5.3 Using other brokers

5.4 Presenting a risk to insurers and terms 5.5 Confirming terms to the client

5.6 Post placement activity 5.7 Midterm administration

6. Selecting Insurers to use 6.1 Selecting insurers to deal with

6.2 Insurers’ security 6.3 Selecting insurers for a particular risk

7. Programme designing and operation

7.1 Insurance programme design 7.2 Risk retention

7.3 Looking at global programmes

8. Related services 8.1 Risk management

Page | 7

8.2 Risk financing and transfer 8.3 Specialist risk consultancy service

9. Claims 9.1 Brokers Duties in Respect to Claims

9.2 Methods of dealing with claims 9.3 Claim records

9.4 Insurance fraud 9.5 Role of broker with other service providers

10. Use of IT 10.1 Need For IT

10.2 Types of IT Systems to Acquire 10.3 Quality IT System

10.4 E-mails

11. Organization of Broker’s office 11.1 Organisational Structure

11.2 Compliance with Regulation 11.3 Accounting System and Maintenace of Records

Page | 8

CHAPTER 1

INTRODUCTION

Learning objectives:

After studying this chapter one should be able to:

Define an insurance broker;

Trace the development of broking;

Differentiate between an insurance broker and agent;

Understand the functions of a broker

Introduction An insurance broker is defined by C Bennett in the Dictionary of insurance as: “A full time specialist insurance intermediary offering a service on the basis

of a reasonable standard of professional expertise and competence” The broker offers advice and arranges the insurance normally as agent for the

insured but is usually remunerated by a commission from the insurer. The key words in the above definition are professional, expertise and competence and these should always come out whenever an insurance broker is involved in a

transaction.

Key terms This chapter will explain the following key terms;

- Insurance

- Reinsurance - Agent

- Broker

1.1 Historical background of insurance

broking One of the earliest references to insurance intermediaries was in 1575 in the UK. At that time the drafting of policies was recognised as a specialised legal task and

was undertaken by persons referred to as “notaries”. Those seeking insurance could either go directly to an underwriter or employ an intermediary. If the proposed insurance contract was relatively simple and the underwriter was known,

then a direct approach could be made and terms agreed. However, if the venture was hazardous or the proposed contract complex, then services of an experienced

intermediary would be sought. As Britain’s trade developed by the early 1700s

Page | 9

insurance brokers had became an established part of the commercial scene in London.

Insurance of ships and their cargoes had become a major part of insurance market. The hazardous nature of marine insurance meant that no one would risk more

than a fraction of his fortune on any particular venture. Therefore, someone had to run around to assemble underwriters to provide insurance for each venture.

Thus arranging insurance was a matter of hawking a policy round the city by an intermediary for subscription by anyone with sufficient means to take a share of the risk in return for a percentage of premium.

The insurance broker had a particular skill of ensuring that policies were

underwritten only by persons of sufficient financial integrity to meet their share of claim to their full extent.

1.2 The role of Brokers The basic role of a broker is to ensure an insurer and an insured reach a

contractual agreement in a binding and transparent way. Where a buyer is not very knowledgeable about insurance and the options available, or simply has no

time to attend to all these complexities, the broker comes in handy. In this process the broker is able to offer kndependent, impartial advice as well as represent the

insured in all communication with the insurers.

This whole relationship is based on trust, between the insured and the broker, and between the broker and the insurer

Basic reasons why the broker’s services were used are as follows:

Expertise: A broker understood the market and could match customer’s needs to what was available.

Convenience: It was easier to have access to a wider range of the insurance market through a broker than the insured could have through direct access. Cost: The broker could achieve the lowest cost commensurate with quality of

service and security. Service: A broker would offer other services such as assisting in the claims

process.

Over time, brokers started offering other “value-added” services to clients in such areas as loss analysis, loss control, and self-insurance. This was in addition to traditional insurance placement services.

At present, brokers have developed skills in specialised areas and are making

extensive use of information technology to ensure efficient service to their clients.

1.2.1 The coming of insurance brokers to Uganda The first insurance broking firm came to Uganda in about 1951 when the

construction of Owen Falls Dam (Nalubale) was starting. The dam was constructed from 1951 to 1954.

Page | 10

As the construction of the Dam was about to start, the services of a professional insurance person/firm were sought. Two gentlemen who were near the scene, having been in Nairobi–Kenya for sometime landed on this deal and were awarded

the contract to handle the insurance during construction of the Dam. The gentlemen were Mr. Colinhood and Mr. Couplecure. These were shortly after that

joined by another one known as Mr. Hog Robinson, who together formed a proper insurance broking firm. This metamorsphosized into different names to finally

become AON Uganda Ltd. AON Uganda has recently changed to Minet.

1.2.2 Difference between an insurance agent and an insurance broker

Basically, the insurance agent represents his principal, namely the Insurer. The Insurer engages an agent mainly to procure business for him. The agent’s main function being procuring of business for his principal, his performance is assessed

by the amount of business he procures. Some of the agents can be primarily engaged in trade or occupation other than insurance such as motor trade, travel

agency, investment consultancy etc and they do insurance agency as a part-time occupation to supplement their income. They may not possess in-depth knowledge

of insurance products and services, though it is possible that some of them may have acquired specialised knowledge and skills, particularly those who are full-time agents. But in any case, the agents essentially represent the Insurer and by

and large they act on behalf of the Insurer.

On the other hand, the insurance broker represents his client, namely the Insured, and for all purposes he acts on behalf of the Insured though the broker is

remunerated by the Insurer by way of commission for procuring business for him. The broker is a full-time professional with in-depth knowledge and skills as regards

the whole range of insurance products and services available in the market. As mentioned earlier, he also provides “add-on” services related to insurance and risk

management. Being the representative of the Insured, he is expected primarily to take care of the Insured’s interests.

While the agent can place insurance business only with the Insurer who has appointed him, the broker can place business with any insurer whom he considers

most suitable for placing a particular risk. To sum up, the following points must be noted;

Agents are appointed by an insurance company on an exclusive basis

while Brokers are independent intermediaries and can approach any insurance company

Agents represent a particular insurance company and its products,

whereas a broker seeks to get the best deal mutually acceptable to the Insured and the Insurer from the market.

Page | 11

Brokers are required to possess certain professional qualifications, adequate capital, proper infrastructure and they are professionally liable for deficiency of service.

Agents are not required to comply with capital and infrastructure requirements and their primary function is to sell their insurer’s products and provide after-sales service. On the other hand brokers

must have a minimum capital and a prescribed structure

Brokers are required to provide several pre-sale services like risk analysis and assessment, product design and negotiation of

competitive price for the client. The agents are required to identify insurance needs.

Brokers are required to assist their client in the presentation

negotiation and recovery of claims. The Agents may not provide such assistance.

1.4 Types of brokers i. Direct broker

ii. Wholesale broker iii. Reinsurance broker iv. Direct / Reinsurance broker (composite)

“Direct broker” means an insurance broker who for the time being licensed by

the Authority to act as such, for a remuneration, carries out the functions as specified above either in the field of life insurance or general insurance or both on

behalf of his clients. “Wholesale broker” are brokers, other than direct (retail) brokers, who have no contact with the insured but are engaged by the direct broker to access preferential

markets and policy coverage.

“Reinsurance broker” means an insurance broker, who for remuneration, arranges reinsurance for direct insurers with other insurance companies and

reinsurance companies. “Composite broker” means an insurance broker who for the time being licensed

by the Authority to act as such, for remuneration arranges insurance for his clients with insurance companies and / or reinsurance for his client(s).

1.4.1 Functions of a broker The functions of a direct broker shall include any one or more of the following:

a. Obtaining detailed information of the client’s business and risk management philosophy;

b. Familiarising himself with the client’s business and underwriting information so that this can be explained to an insurer and others;

c. Rendering advice on appropriate insurance cover and terms;

d. Maintaining detailed knowledge of available insurance markets as may be applicable;

e. Submitting quotation received from insurer(s) for consideration of a client;

Page | 12

f. Providing requisite underwriting information as required by an insurer in assessing the risk to decide pricing terms and conditions for cover;

g. Acting promptly on instructions from a client and providing him written

acknowledgements and progress reports; h. Assisting clients in paying premium;

i. Providing services related to insurance consultancy and risk management; j. Assisting in the negotiation of the claims and

k. Maintaining proper records of claims.

Questions 1- Who is an insurance broker?

2- What is the difference between an insurance broker and an agent? 3- State 4 functions of an insurance broker.

4- Explain 2 types of brokers

Page | 13

CHAPTER 2 LEGAL ENVIRONMENT

Learning objectives After studying this chapter one should be able to:

1- Outline the duties of an agent under the law of agency

2- Define the Principal and Agent as defined in the law of agency 3- List other laws that affect a broker

4- Explain the provisions of Anti-money-laundering Act 2013

Introduction The life of an Insurance broker and broking firms depend on the practical skills that one has in order to be a successful broker. However, these practical skills need to be used in a way that is compliant with the law and regulations. Therefore, we

should consider the legal and regulatory environments in which brokers carry out their trade in Uganda. Brokers are agents - therefore, it makes sense that we

should start this chapter with a consideration of the law of agency.

Key Terms This Chapter will explain the following key terms;

- Agency,

- Agent - Principal, - Contingent commission

- Binding Authority, - Indemnity,

- Money Laundering, - Nominate officer,

- Conflict of interests[U3]

2.1 Law of agency Although a broker in Uganda is more worried about their relationship with

Insurance Regulatory Authority due to the powers vested in the Authority, their biggest worry, as the public gets more sensitised, should be elsewhere. A broker as

Page | 14

Retail Broker Wholesale

Broker Reinsurance

Broker

an “agent” can be subjected to the laws in the way one carries out their duties. Whether under the general law of agency, under statute or by contract, a broker can be subjected to the judgement of courts.

Liability of an employee of a broking firm

At this stage it is important that we take note of the fact that talk of “duties and responsibilities” is not just an issue for employers and the broking firm itself. The

employee of a broking firm as an individual is still liable and has a duty to uphold, meaning one can be sued individually because we are all personally liable for the consequences of our own actions. Refer to the case of Merrett v. Babb (2001) in the

British Insurance Industry.[U4]

This however balances with the principle of vicarious liability, because employers are also liable for the acts of their employees committed in the course of their

employment. Establishing the Broker-Client Relaionship

The key question that a broker must answer before embarking on any activity is, 'who is my client?' This is because the law of agency imposes specific duties on a

broker towards their client that are in addition to their liabilities at common law.

The law of Agency gives specific names to each of the parties: The Client = The Principal The Broker = The Agent [U5]

The broker must be clear at this point so that they can assess the duties and

responsibilities they have to each party involved. The figure below shows that many people can be involved in an activity:

Figure 1

It is a rule of long standing and universal application that an insurance broker is

the agent of the principal who employs him to carry out a specific piece of business i.e. the placing of his insurance.

However, answering the question ‘who is my client? is not as straightforward as it may seem.

Is my client the insured?

A retail broker is usually acting on behalf of the insured. The position of the retail broker in the chain is illustrated in Figure 2.

Figure 2: Insurer

The insured is therefore the retail broker's client. In law therefore: • The retail broker is the Agent. • The insured is The Client – “The Principal”

The Insured

Insurer

The Insured The Insurer Broker

Reinsurance

Page | 15

A wholesale broker is usually acting on behalf of retail or producing broker. The retail producing broker is therefore the broker's client. This is illustrated in Figure

3

Figure 3:

On this occasion, in law:

• The wholesale broker is The Agent. • The retail producing broker is The Client - The Principal.

A reinsurance broker is usually acting on behalf of a ceding insurer. The ceding

insurer is therefore the reinsurance broker's client. This is shown in Figure 4 Figure 4:

We can see that in this scenario: • The reinsurance broker is The Agent.

• The ceding insurer is The Client. Question 1

Mega Plaza Uganda ask Aon Brokers Uganda to place their property insurance. Aon asks Slip & Co, a firm of Lloyd's brokers, to place the business in the

London market. Slip & Co places the business 50% with Lloyd's Syndicate 123 and 50% with the insurance company, SuperCover. SuperCover asks

LondonRe to arrange Fac R/I for them. Give the three Principal Agent relationships. [U6]

Is my client the underwriter? The insurer with whom a broker places a risk is not the broker's client. The broker's

duty at law is therefore the standard duty of care as codified at common law.

Is my client the insured AND the underwriter? Despite what we have just said there are, however, a number of instances where a broker can be working for both the insured and the underwriter on the same risk.

Thus they have additional responsibilities to the insurer under the law of agency. Figure 5:

Let us look at some examples where this is the case.

• Motor cover notes. A broker issuing a cover note is performing this task on behalf of the insurer. They therefore need to ensure that the relevant law and the

insurer's requirements (that cover notes and books are properly logged and securely stored etc.) are complied with when the cover note is issued.

• Underwriting binding authorities. Operating a binding authority is one of the key ways in which a broker can be the agent of an insurer. This is particularly true

The Insured Retail Broker Wholesale Broker Insurer

Insurer Reinsurance Broker Reinsurance

The insured Broker Insurer

Page | 16

where the broker is said to 'have the pen', i.e. they have the authority to underwrite and accept risks on behalf of the insurer.

• [U7]Claims - delegated authority: Brokers are acting as the agents of the insurer when they settle claims under delegate authority arrangements.

• Completing proposal forms: Where a broker operates binding authority or other

facility, they would be acting on behalf of the insurers if they assisted an insured to complete a proposal form or completed it on their behalf.

Example Aon Uganda Brokers place Mega Plaza Motor policy on a binding authority

they operate on behalf Sanlam Uganda. In this scenario, Aon Uganda Broker’s have two potentially conflict principals

Mega Plaza - on whose behalf they are arranging cover; and

Sanlam Uganda - on whose behalf they are operating a binding authority In operating binding or delegated authority, the broker is clearly acting as the agent

of the insurer. A broker should take extreme care when acting as the agent of both the insured and the insurer as the practice is not condoned or supported by law.

These agencies need to be separated to give a clear division between the agent of the insured and the agent of the insurer.

Is my client the insured AND reinsured? If a composite broker arranges for insurance and reinsurance in the policy, then

he owes a duty to each of the principals as we can see in figure below Figure 6.

2.1.1 Requirements of the law of agency

In legal terms, an insurance broker is 'an agent' and a broker's legal duties to their Client - their principal - arise primarily under the law of agency.

The general law of agency requires a broker to:

• perform all their principal’s lawful instructions in a timely fashion; • exercise reasonable skill and care in the performance of their principal's instructions;

• act at all times in the best interests of their principal, to avoid conflicts of interest and to disclose to their principal fully any circumstances which may give rise to

the appearance of a conflict; • make full disclosure to their principal of their personal interest in any transaction

•account to their principal for all monies they may have received on their principal's behalf.

These are the main requirements of the law of agency in principle. Now let us look at the requirements in more detail to see how they apply.

The insured Retail broker JLT Insurer Reinsurance Broker JLT Reinsurer

Page | 17

Personally follow the lawful instructions of their principal One of the prime duties owed by agents to their principal is the duty to obey instructions (though agents are under no duty to perform a void or illegal act). If

the instructions are unclear, the broker has a duty to obtain clarification. As a general rule, brokers must perform the duties imposed on them by the agency

relationship themselves. This is because agents are not entitled to delegate their duties to someone else, except with the permission of their principal. They are

however, allowed to delegate tasks that are purely mechanical and involve no question of judgment, advice or discretion.

This is a critical point if a broker needs to access a market via a placing/wholesale broker, e.g. at Lloyd's, or via a broker who manages a specialist scheme, e.g. ATI

for political risks. The broker must get their client's agreement to use the external placing broker or scheme manager before engaging the wholesale or sub-broker.

Exercise reasonable skill and care The duty to exercise reasonable skill and care reinforces a professional's duty of

care at Common Law. Insurance brokers, like any other professional, are legally responsible to their principal (or other party) in the event that they fail to use

reasonable care. They must be certain of the advice they give, in addition to carrying out specific and required acts on behalf of their principal. Moreover, as the client’s agent, brokers are under a continuing duty of care. This

can be particularly important, for example, if the security of an insurer changes mid-term. It can even apply after the brokers have lost the client and the contract

is terminated (for example, when running off the claims which have arisen).

Conflicts of interest Agents must always act in their principal's best interests. They must not act for their own benefit, unless they make a full disclosure to the principal and receive

their permission to do so. Brokers must therefore, avoid conflicts of interest and must fully disclose to their client any circumstances that may give rise to the possibility of a conflict.

Fiduciary duties Agents stand in fiduciary relationship with their principal and must therefore not

use their positions for their own benefit. (The term ‘fiduciary’ relates to holding something in trust for another).

Brokers must account to their principal for all money they receive on behalf of their

principal, and must keep a proper record of all transaction. This duty extends beyond ‘money’ to any property they receive for example policy documents.

Brokers have a duty to take reasonable care to maintain proper and adequate records. Let us see how this works looking at the case of Equitas v. Horace

Holman (2007)· In this case it was held that the brokers (Horace Holman) had a duty to be constantly ready with correct accounts of the transactions they had

carried out on behalf of their principal. It was also held that the brokers had a fiduciary duty provide Equitas with copies of their internal records, where these

related to transactions they had undertaken as agent.

Page | 18

Secret profits

As we have seen, brokers are the agents of insured or the reinsured in a contract of insurance or reinsurance, but they commonly receive payment from insurers in

the form of brokerage. Here there is no issue of secret profits, as 'insurance brokerage' is both a standard market practice and a matter of common knowledge. However, if there is any secret profit or commission, this can be recovered by the

principal. Also, the receipt or giving of secret commissions can, in certain circumstances, be a criminal offence under' the Prevention of Corruption Act

1906.

Therefore, brokers who operate on a fee basis must not take any brokerage or commission in addition to their fee, unless they have declared the fact and the amount to their client, and obtained the client's permission to retain the additional

income. A secret profit will become a bribe (and thus a criminal offence) if it is money paid to an agent, without their principal's knowledge, in order to cause the

broker to exercise their powers of agency in a particular way.

Confidential information Brokers routinely deal with confidential information which is not freely available to

the public. Examples include a client's business plans, profit forecasts, security arrangements etc. They may not make use of the confidential information they

acquire in their capacity as agent for either their capacity or for the benefit of a third party. This duty continues after an agency has terminated.

Question 2 Why does the law impose such onerous duties on those who act as an agent of

another?

Managing conflicts of interest An agent can only have one principal at any one moment in time and therefore has a duty to manage any potential conflicts of interest.

Situations where a conflict of interest can arise

Let us look now at some of the situations in which there is potential for a conflict of interest to arise.

Close link with a particular insurer The potential for conflicts of interest are obvious where a broker is owned by or

owns an insurer.

Personal conflicts Most firms have a formal policy on trading in the shares of clients or insurers by members of the firm. However, it is only when the shareholding is very significant

that a conflict would be considered to arise.

Insurance and reinsurance

Page | 19

Many of the large brokering firms have both insurance and reinsurance broking operations. Some firms that do not undertake reinsurance as a particular specialism may place facultative reinsurance (Fac R/I) for the insurer with whom

they have placed the direct business. Often such arrangements work in the client’s favour in terms of efficiency and speed of settlement, but they may lead to a

potential conflict of interest.

It is therefore advisable that the Fac R/I placements be managed separately. This is done by separating the management of the two, for example by creating a barrier between those broking the direct risk and those placing the facultative reinsurance.

In more practical cases, the Fac R/I brokerage is made a separate legal entity to ensure proper barriers are in place.

Contingent commissions / overrides

Brokers sometimes receive additional income in the form of contingent commissions or overrides. These are payments made to the broker in the form of additional commissions or profits shares that are contingent (i.e. dependent) upon

the broker. Generally these payments come from an insurer, but they could also come from a premium financier or, more rarely, loss prevention equipment

suppliers or replacement property suppliers and claims management companies.

There are obvious implications of receiving such commissions or overrides, such as:

The broker may allow decisions on where business is to be placed to be

directly influenced by their own income, in conflict with their primary duty to place the interest of the client first;

The broker may select insurers that are unsuitable for the client, merely

because they generate more income;

Effectively the broker is being paid by two different parties which presents a potential conflict as soon as the contract is in force;

The totality of the broker’s earnings is concealed from the client and

The broker may become more focused on churning an account to generate income, than on meeting a client’s needs.

Where brokers receive payments under these arrangements, they continue to need

to reconcile the potential conflicts of interest.

Other inducements Examples of other inducement-related conflicts:

• Premium finance: a broker may own or participate in a premium finance provider. Alternatively, they may have interest and/or administration charge sharing arrangements with such a provider. The risk here is that brokers may feel

tempted to over-encourage their clients to use premium finance and when they do use premium finance, oblige them to use the broker's preferred supplier.

• Soft loans and cash gifts: product providers may be willing to make large gifts

or uneconomic ('soft') loans to intermediaries. Such gifts or loans may be construed as being in return for the provider's products being placed on the broker's panel or recommended list of insurers. In some cases the gift or loan is given on condition

of a target being met for the sale of the provider's products.

Binding authorities/Claims handling authorities

Page | 20

There is an inherent conflict when a broker operates a binding authority with a profit commission. The broker may direct business they know to have a good loss history to the binding authority, whilst sending business whose history is less good

to other markets. Similarly, a profit commission may provide the broker with an incentive to handle

claims in a way that is contrary to the best interests of policyholders. These conflicts can be reduced by operating the binding authority on an 'arm's-

length' basis e.g. in a separate unit divorced from the team servicing the insured. Question 3

When a broker is operating a binding authority, assessing and accepting risks, who are they the agent of?

A broker acting for two or more clients with similar interests Conflicts may arise when two or more clients are:

• involved in the same claim where the broker is acting for more than one party; • involved in a transaction such as the acquisition or disposal of a business; • competing for the same contract, as may happen with building contractors or

advertising agencies and • are 'competing' for limited capacity in the market.

Identifying and resolving conflicts Some conflicts are inevitable. Some clients do prevent their brokers from acting for

competitors, but this is now rare. A broker cannot control the possibility that two of their clients become involved in the same contract or accident. In these 'accidental' conflicts, the obvious resolution

is clear disclosure and the agreement of each client to a course of action that is acceptable to all parties.

2.1.2 Duties owed by principals to their agent The duties owed by a client to their broker essentially fall into two areas:

• remuneration, and • indemnity

Remuneration Agents have a right to the remuneration agreed by their principal. Where none has been fixed, the agent has a right to what is customarily considered reasonable in

the particular business, or to what is appropriate in the circumstances. Traditionally the remuneration consists of commission and to earn it, agents must prove that they were the effective cause of any transaction.

Brokerage is earned on inception of the contact. However, when the broker actually

'earns' the Commission has been the subject of legal argument. As we shall see:

• In Pryke others, and then again in Velos Group Ltd & Others v. Harbour Insurance Services Ltd (1997), it was held that the broker earned all of the commission when the contract was formed. This meant that the broker could keep

all of the commission, even if the policy was subsequently cancelled or the premium was reduced.

The 2007 case involving the reinsurance brokers Carvill America and their client XL speciality reinforced this position. Carvill claimed that it was due unpaid brokerage when XL cancelled their appointment mid-term. The judge endorsed

the principle that brokerage was earned on the inception of the contract. He stated that the slips signed by the reinsurers established a contract with Carvill

Page | 21

in which the reinsurers committed to pay commissions on the entire premium. He went on to say that this was the case even if the intermediary was terminated mid-term by the reinsured.

This fact is not always understood by clients. This is why, as we will see, it is good practice for brokers to make this fact clear in their terms of business agreements

with both their clients and their insurers. In practice, when a return premium is allowed, say under a property policy when

a building is sold, the broker returns the relevant proportion of its brokerage to the insurer. However, such custom and practice does not generally influence the law, as can be seen from the cases we have just looked at.

Indemnity Subject to any express terms in a formal contract, agents have a right to claim an

indemnity from their principal against all expenses or losses incurred when acting on the principal’s behalf.

Agents cannot claim indemnity in respect of unauthorised actions unless they are

subsequently ratified, nor can they claim for losses caused by their own fault or negligence.

Agents may claim an indemnity for illegal acts done on their principal's behalf if the agents were unaware of the illegality.

Liability for breach of duty

Under contract law, a breach of a contractual term may give rise to a right to terminate the contract and/ or to damages. In the same way a breach of any of the duties under the law of agency may give rise to the right to terminate the agency

relationship, and/or to receive a money payment.

Breach by principal If a principal fails to remunerate or indemnify their agent, the agent can take legal

action to recover the sums owed. In addition, the agent will usually have the right to refuse to continue to act as agent for that principal.

If the agent is lawfully in possession of goods belonging to the principal, they can hold on to the goods and claim a right over them in respect of the money owed it.

When an agent acts in this way it is said to be exercising a lien over the goods.

Lien does not apply to 'goods' only. The right of insurance brokers to have a lien over an insurance policy is enshrined in the Marine Insurance Act 1906 s.53 (2) 'unless otherwise agreed'.

This is with regard to the payment of premium and to the balance of any insurance account due to them from their principal. In practice, this right is confined to

marine polices where the custom and practice is that the policy document itself has to be produced by the party making a claim under the policy.

Breach by agent When an agent is in breach of their obligations, the principal will usually have the

right to terminate the agency. In the case of a contractual agency, the principal will also be able to sue the agent for breach of contract. When a principal has exercised

this right to terminate, the main difficulty is determining the agent's right to

Page | 22

remuneration for past services. This is particularly true if the broker is remunerated on a fee basis.

2.2 Common law - tort The law of agency is the main law under which brokers operate. However, there are other aspects of the law and pieces of legislation which also have a significant of

impact on the way brokers operate. We will now consider the first of these: the broker’s common law duty under the principle of tort.

Principle of tort relates to the obligations that we all have to one another, despite the absence of a contractual or other legal relationship between us. For instance, we all have an obligation to ensure that no-one is hurt as a result of our negligent

behaviour.

Duties to clients Insurance brokers like any other professional are legally responsible to their

principal (or other parties) in the event that they fail to use reasonable care. Unfortunately, there is substantial law case dealing with the duties of a broker. However, the main case that defined the duties of a 'professional' was Hedley

Byrne v. Heller (1963). This case involved the legal profession and it was held that care has to be exercised when advice is given, even where there is no formal

contract in place.

Case law Let us now consider some other cases, some of which are quite recent, which have

defined or clarified the duties of a broker. Youell v. Bland Welch and Co (1990) In this case it was held that an insurance broker owes a duty of care in negligence

towards his client whether the broker is bound by contract or not' - thereby reinforcing the decision in Hedley Byrne.

Harvest Trucking v. Davis (1991) The court held that it was a broker’s duty to warn their client if the policy contained

any 'unusual, limiting or exempting provision’. Tudor Jones and Marsh McLennan Inc v. Crowley Colosso Ltd (1997) The Court of Appeal held that it was a broker's duty to warn its client if the cover

placed did not meet their requirements.

Alexander Forbes Europe Limited v. SBJ Limited (2002) Brokers acting for sophisticated insurance buyers or other brokers cannot apply

different standards. In this case the judge rejected the suggestion that SBJ was allowed to be less vigilant than it would be with clients in other professions. 'Brokers' duties go beyond those of a post-box' and there was not a lower standard

of care. HIH Casualty and General Insurance v. JLT Risk Solutions (2006)

Known as the film financing case, this case primarily concerned with what information should be passed to HIH's reinsurers. When the broker placed both

direct business with HIH and HIH's reinsurance. It was confirmed that it was the broker’s duty to alert its reinsured client to ‘any matters of at least potential concern on coverage issues' and extension, to any possible defences under the

direct policy and under the reinsurance. Moreover, it was not appropriate for the broker simply to act as a post box on reports’. (See also Alexander Forbes above.)

Page | 23

GNER v. JLT Corporate Risks (2006) The duty to be proactive was re-enforced in this case from 2006. Here the judge confirmed that a broker owed a continuing duty after placement of cover to ensure

that the client's insurance requirements were carried out or, alternatively, to warn the client prompt if they could not be achieved.

These cases are a useful reminder to brokers to ensure that their clients are fully

informed as to matters relating to their insurance and reinsurance requirements, not just at the time of placement, but during the currency of the policy.

Duties to the underwriters The responsibility a broker has to the underwriter is essentially a duty of care. This

means that the broker must honour any undertaking given to the underwriters and not withhold any material information. Therefore, the broker must present, to the

underwriters, all the information at their disposal that the underwriters need to make a fair and reasonable assessment of the risk offered.

Broking chains and the duties of sub-brokers There will rarely be a contract between the insured and the wholesale brokers

engaged by the retail or producing broker. The original retail broker usually remains liable to the insured for any defaults of the sub-brokers / placing brokers.

Figure 7 shows such a broking chain. Figure 7:

1n the case of Pangood v. Barclay Brown & Bradstock (1999) the insured (Pangood) brought an action against their brokers (Barclay Brown) for failing to

advise about a particular warranty in the policy. The brokers brought the placing or wholesale brokers (Bradstock) into the action, claiming they had contribution. The Court of Appeal held that, on the facts of this case, the placing brokers did not

owe the insured a duty of care. An instruction to obtain a quotation, and subsequently to effect cover in accordance with the terms of the quotation, was

insufficient to amount to an assumption of direct responsibility to the insured. For the placing brokers to be liable, the cause of the loss had to be the insured's

reliance on the placing brokers, either exclusively or in combination with the producing brokers. Nevertheless, there are various cases in which the courts have assumed that there

was a duty of care owed to the insured by the wholesale brokers. Let us consider some of these now.

Fisk v. Brian Thornhill & Son (2007) The Court of Appeal confirmed that the placing broker (Thornhill) was in breach of

his duty to the insured in not making clear (via the producing broker, Fisk) that a new policy with different insurers and on different terms and conditions was being suggested by him. Breach of duty to the insured was found on the part of the

placing broker for: • failing to obtain a satisfactorily completed proposal form, as required by insurers,

before placing cover; • providing warranties on behalf of the insured, without authority, that the building

was of standard construction, when in fact it was of timber construction; and • failing to warn insured of new insurers and different policy terms and conditions.

The Insured Retail Broker Wholesaler Broker Insurer

Page | 24

European International Reinsurance Company Ltd v. Curzon Insurance Ltd (2003) The insured, Turner & Newwell (T&N), instructed their brokers, Sedgwick, to find

insurance cover for a potential asbestos liability in the USA. It was agreed that Sedgwick could sub-contract the work if necessary, and the negotiations were in

fact conducted by employees of two subsidiaries of Sedgwick. A third Sedgwick subsidiary (SRS) prepared and presented the policy documentation.

It was proposed that Turner & Newell's captive insurer, Curzon, should front the risk and obtain 100% reinsurance on a facultative basis. Reinsurers subsequently sought to avoid the reinsurance contract on the grounds of material non-disclosure

and the three Sedgwick, sub-brokers applied to the court to have the Part 20 proceedings against them struck out.

The Court of Appeal confirmed that the subsidiaries owed a duty of care to Curzon, in addition to that owed by Sedgwick itself. In undertaking broking work, two

subsidiaries had assumed responsibility (either directly or vicarious) and, in broking the risk, SRS was acting on its own behalf (involving an assumption of responsibility) and not merely as agent for Sedgwick.

Tudor jones and Marsh McLennan Inc v. Crowley Colosso Ltd (1996) The Court of Appeal held that the blame for not checking that the policy wording

in (particular an exclusion clause) was in accordance with the client’s instructions should be apportioned equally between the producing and the placing brokers.

Pryke and others v. Gibbs Hartley Cooper Ltd (1990) As we saw earlier, the brokers voluntarily undertook to investigate a problem with a binding authority in the U.S.A. They were not obliged to do so, but as they

volunteered, they assumed a responsibility to the underwriters to investigate and report back. The failure to report resulted in an expensive judgement.

Even in situations where the broker is not known to the insured, there is no

guarantee that a duty of care will not be found. In theory, any communication with the insured might result in a court finding an assumption of responsibility by the brokers. As happened in the case of BP v. Aon Limited (2006), BP Texas was a

client of Aon Texas who engaged Aon Limited in the UK as a wholesale broker. Aon Limited had direct contact with BP Texas and was held liable for the losses incurred

by BP Texas. (There was a contract between BP Texas and Aon Texas, but no contract between Aon Limited and BP Texas)

2.3 Statute law As an individual, a broker is required to abide by the law of the land in which they are operating.

In this section we look at some of the main statutes that may impact on the way a broker carries out their tasks.

2.4 Non Specific Regulations 2.4.1 Insurance related statutes

Marine Insurance Act, 1906 A. Material facts

The Marine Insurance Act, 1906 does not just apply to marine insurance. It’s particular importance is that it codified the common law of the time and set out

Page | 25

the circumstances in which an insurer could avoid an insurance contract. More specially, it clarified the duties of brokers regarding the provision of ‘material facts’. The act provides that insurers can avoid an insurance contract if, before it was

concluded, the insured or the insured’s agent ‘fails to disclose every material circumstances known to them or misrepresents the facts in a material way’. Section

19 states that the brokers must disclose:

Every material fact known to the brokers, including facts which in the ordinary course of business ought to have been communicated to them and

Every material fact which the insured is bound to disclose, unless it comes to the insured’s attention too late to communicate to the brokers.

The prudent underwriter The Court of Appeal in CTI v Oceanus (1984) brought in the concept of ‘a prudent underwriter’, the judge in this case interpreted the act as saying that something

was material if the prudent insurer would have wanted to take it into account in deciding whether to accept the risk and, if so, on what terms. The views of the

actual underwriter were considered to be irrelevant. There is an argument that this test of materiality will allow insurers to get out of a

bad bargain, even where full and accurate disclosure would in fact have made no difference to an underwriter.

Inducement Some of these criticisms were subsequently addressed by the House of Lords in

Pan Atlantic v. Pine Top (1994). The court stated that:

A circumstance or misrepresentation is material if the prudent insurer would have wanted to take it into account

However, it was made clear that, even if materiality is established, the court must also be satisfied that the non-disclosure or misrepresentation ‘induced’ the actual

underwriter to accept the risk on those terms.

Pin Top therefore adjusted the test of what is ‘material’ by implying a further requirement in the Marine Insurance Act 1906: that the non-disclosure of misrepresentation ‘induced’ the actual underwriter to accept the risk

2.5 Financial crime The Anti - Money Laundering Act, 2013 gives power to make and enforce rules relating to prevention of money laundering and applying them to licensed firms.

Hence, one of the Authority’s statutory objectives is the reduction of financial crime.

Although the Authority considered general insurance to be a low risk overall when it comes to financial crime, there are two particular areas that present potential for

risk. These are money laundering and fraud. In both these areas the individual employee, as well as the broking firm, can be prosecuted for offences under the

relevant legislation.

Page | 26

World view On the international scene, the main legal provisions dealing with money laundering and fraud include:

Anti-Terrorism Crime and Security Act, 2001

Proceeds of Crime Act (POCA), 2002

Money Laundering Regulations, 2007

Serious Organised Crime and Police Act, 2005

We need to watch these carefully because we are always following what the worldwide considerations hold.

2.5.1 Money laundering In regard to Money Laundering, the active legislation is the Money Laundering

Regulations, 2007. However, industry guidance is provided by the International Standards on

Combating Money Laundering and the financing of terrorism & Proliferation. This is made active by The financial Action Task Force (FATF)

Definitions Let us first establish what we mean by money laundering

Money laundering is defined as: the process of concealing, arranging and acquiring or using criminal property;

Criminal property is property that the alleged offender knows, or suspects constitutes, or represents benefit from criminal conduct.

Proceeds of Crime Act, 2002 Under the proceeds of Crime Act (POCA) 2002, individuals’ personally - not their

employer or their firm commit a criminal offence if they:

Conceal, disguise, convert or transfer criminal property;

Enter into or become concerned with an arrangement which they know or

suspect may facilitate a money launderer to acquire, retain, use or control criminal property

Know, suspect or have reasonable grounds to suspect that a person or transaction in the course of their business involves money laundering but fail to report it as soon as reasonable practicable; and

‘tip off’ a suspected money launderer The penalties for assisting money launderers in any way include fines or

imprisonment or both. Prison terms range between five years for tipping off to 14 years for assisting money launderers.

How money is laundered ‘Dirty’ money comes from a wide range of criminal activities, from street crime

through to highly organised crime syndicates. However, criminals cannot use this money out of fear that it will link them to the original crimes and lead to possible

prosecution. Financial services companies are rightly suspicious of large sums of cash being

paid into accounts or used to purchase financial products. Consequently, the criminal’s first steps is to turn ‘dirty’ cash into other forms of financial instruments.

Page | 27

Step 1:

Placement

The first step involves getting cash into the financial system and turning it into other financial assets such as

cheques, postal orders, bank accounts, travellers’ cheques or property.

Step 2:

Layering

However, it would be relatively simple still to track the

money back, so the next step is to move money between as many different types of transactions as necessary to

conceal its true origin.

Other parts of the financial services market are more

frequently targeted, with complex stock and commodities deals and electronic funds transfers to overseas locations

being common strategies.

However, insurance policies can be used as part of this process, with policies being taken out and then cancelled

to obtain a refund of premium. Alternatively, fraudulent claims are made to obtain cheques or other financial instruments from reputable companies.

Step 3:

Integration

Having got cash into the financial system and changed it

into a more usable asset that concealed its true origins, the money launderers now have access to the money

within the legitimate economy.

Implications for firms and individual brokers

Both the regulations and the associated legislation impose heavy responsibility upon broking firms and their employees. These responsibilities are designed to

ensure that the money they process is not, nor is suspected of being, the proceeds of crime.

Nominate officer The Act requires regulated intermediaries to have a nominated officer with specific

responsibilities with regard to money laundering. They are responsible for receiving information on suspicious transactions and, when appropriate, making a report on

these to the relevant Authorities i.e. the Police or the Authority itself

Confidentiality It is vital that the identity of the person making the report is not disclosed to the client under suspicion. If a suspicious transaction report form is completed, it

cannot be used as evidence and the person cannot be called as a prosecution witness.

Investigations will be confidential and discreet, so as not to reveal to the possible

money launderer that they are being investigated. This is also important if the investigation concludes that the actions / transaction were entirely legitimate - honest clients never need know about the suspicions.

Precautions

There are a number of precautions that can be taken in the battle against money laundering. We will consider these here:

Customer Due Diligence (CDD)

Page | 28

It is not only good practice for firms to establish that they are dealing with genuine people or organisations - and not aliases or fronts - it is a legal obligation. When proof of identity is required, it must be obtained as soon as reasonably practicable

after the application for insurance, and preferably before the contract is complete. If proof of identity cannot be obtained when required, the transaction should not

proceed.

Proof of identity should be the best available evidence in the circumstance, for example, a passport. Addresses should also be checked. Copies should be kept of the evidence for at least five years from the ceasing of the business relationship

(i.e. termination of a policy)

Recognise abnormal behaviour Familiarity with a client’s normal business transactions can be a sound base for

spotting suspicious changes. Things that could arouse suspicions include things such as:

An expensive product is readily accepted when better deals are available;

The client appears more interested in the short-term cancellation rates than the policy cover itself;

The client makes substantial overpayments and requests refunds - possibly to a third party

A client seeks the best value cover for three years and then, for no apparent reason, chooses the most expensive in the fourth.

This could be entirely innocent or a cause for concern; and

Suspicious transactions made by a client who was introduced by agents in countries noted for drug production or terrorism.

Be aware

Any suspicious transactions should be reported to the firm’s nominated officer who will inform the relevant authorities where necessary.

Question 8 Under which act would you be committing an offence if you told a client that

you suspected them of money laundering?

2.5.2 Fraud Under Fraud it is stated that a person is guilty of fraud if they commit offences of

False representation;

Failing to disclose information; and

Abuse of position False representation

We have already looked at the issues around false identity in connection with money laundering. Identity theft or fraud occurs when a person's personal information is used by someone else without their knowledge. It is often used to

obtain goods, services or benefits without paying for them - leaving the victim to pay.

The need to protect your clients from identity fraud reinforces the importance of

abiding by data Protection law and your firm's business rules. Doing so will help you to ensure that your client's personal information is not inadvertently passed on to someone else. Similarly, you should pay close attention when a client alleges

Page | 29

that they have not signed a document or received a cheque and this does not match your records.

Failing to disclose information This offence is defined as:

Dishonestly not providing information which a person is legally obliged to provide in order to make a financial gain for yourself or someone else or to cause someone

else to lose money or to be exposed to the risk of losing money Be aware 'Failing to disclose information' is at the heart of most insurance fraud. An

example of such a fraud would be failing to disclose drink driving accidents when applying for motor insurance.

Abuse of position

Brokers should be aware of the potential abuses of position in their organisations. Not only should individuals not engage in such activity but, if such behaviour is encountered, it should be reported,

either through the usual channels or using the firm's 'whistle blowing' process.

Potential abuses of position include: • Inappropriately accepting services from or supplying them to colleagues, friends

or relatives; • not accounting for all money received – premiums, refunds or claims; • misappropriation of client money or money held under risk transfer agreements;

• falsifying customer details to obtain insurance business that would otherwise be turned down or be

more expensive; • issuing false cover notes or false certificates of insurance;

• accepting inducements to favour one insurer or service provider over another: • falsifying expense claims or records; • misusing company assets, property or intellectual property: and

• falsifying company records to conceal wrong doings. [U8]

2.6 Contract law

The last area of law that we will consider in this chapter is the law of contract. This is an elaborate topic, but considering that this text is not about law as a subject,

we shall limit ourselves to areas that tauch Broking practice.

Contracts with clients Most broking firms will have formal contracts with their clients (Terms of business

agreements (TOBAs) that will include, amongst other things: • details of the services the broker is performing;

• the broker's remuneration - whether fee, brokerage or a combination of the two; • a statement that brokerage is earned in full on inception of the policy;

• terms of payment for premiums; • a restatement of the client's duty to notify all material facts;

• details of the firm's data processing activities, and • clarification of, or restrictions on, the broker’s liability.

Page | 30

Contracts with underwriters When a broking organisation contracts with underwriters they do so through a

Terms of Business Agreement. These documents, also commonly known as TOBAs, contain all the details of the agreements made.

TOBAs will restate the legal position that brokerage is earned by the broker, in full,

on inception of the policy. They are agreed between the respective firms and the details impact on the individual broker by way of business rules e.g. standard payment credit terms.

Questions 1- For whom is the broker acting when placing insurance?

2- What five things does the law of agency require of a broker? 3- What is the difference between commission and fees when it comes to

earnings of brokers? 4- List instances where there would be conflict of interest in insurance. 5- How does common law- tort affect the operations of a broker?

6- What information would a TOBA with a client generally include?

Page | 31

CHAPTER 3 REGULATION OF INSURANCE BROKERS

Learning objectives After studying this chapter one should be able to: 1- Understand the provisions of the Insurance Act 2002

2- State the requirement from IRA for one to be licensed, 3- List other important documents needed for one to be licensed

Introduction Having looked at the legal environment under which a broker operates in chapter

two, let us now look at how brokers are regulated.

Every insurance broker is concerned with “Insurance Act 2002” and he must be

fully familiar with this act and all the subsequent regulations. The full text of this act is given in the appendix. All insurance brokers are expected to thoroughly study the act and all the amendments. Besides this, insurance brokers are expected to

possess fairly good knowledge of other laws and regulation having a bearing on insurance business. Some of these are outlined below and others appeared in the

previous chapter about legal environment.

Key Terms This chapter will explain the follow key terms

- Insurance Act 2002 - Licensing, - Compliance

- Regulation

3.1 Insurance Act 2002

The Insurance Industry in Uganda regulated by the the Insurance Act (Cap 213) Laws of Uganda.

Page | 32

The Act states that “This Act shall apply to all insurance and reinsurance companies, insurance and reinsurance broking companies, insurance and reinsurance brokers and agents, loss adjusters and assessors, risk inspectors and

representatives of foreign companies engaged in such activities”.

The Act defines an Broker as “a person—

(i) not being an agent; and

(ii) acting as an independent contractor for commission or other

remuneration,

who solicits or negotiates insurance business on behalf of an insured or

prospective insured other than himself or herself”.

This Act was passed in 2002. The insurance Act and subsequent regulations has

become the Authority to perform many tasks required to be done under this Act, like issuing licences, monitoring compliance with the provisions of the Act, issuing

directives and regulations, laying down norms etc. The important provisions of the Act, as amended, are briefly outlined as follows: 1- Every broker is required to obtain a licence. This licence is required to be

renewed annually after satisfying all the laid down requirements and having paid licence fees;

2- Every broker is required to have a security deposit equivalent to 12.5% of the required paid up capital. Originally, this would be deposited with the central

bank but now this can be invested by the Brokers association or by the individual but with firms approved by insurance regulatory Authority of Uganda- IRA;

3- Every broker is required to pay 1.5% of the commission income made to IRA every year;

3.2 Licensing and Compliance with regulation

In all insurance markets, brokerage business is regulated and there are Acts, laws and regulations that regulate the operation of brokers operations. Insurance

brokerage in Uganda is governed by the Insurance Act 2002 and Insurance Act Cap (3) 213 of 2011.

The salient points of the Act with relationship to the organisation of brokers are:

a. All brokers have to be licensed by the authority and licence is renewed

annually. b. No employee of an insurance company can be employed as a broker

c. No person can use the name of the broker if not licensed by the authority d. All brokers must be body corporate incorporated under the companies

Act e. A broker should not be a director of an insurance company f. Should be of sound financial standing

g. Principal officer should have knowledge, skill and experience in insurance

Page | 33

h. The broking firm should have a professional indemnity policy i. The principal officer should be of sound mind j. should not have been convicted of an officer relating to fraud or

dishonesty k. should not be declared bankrupt.

l. the Broker by Regulation should have a registered physical office.

3.3 Worldwide requirements for licensing Insurance Brokers In UK Insurance Brokers are regulated under two bodies- The Prudential Regulation Authority and The Financial Conduct Authority. These look at at

the prudent operation of the Financial services and ensuring confidence in Financial services and Markets respectively.

In Europe, regulation of brokers is taken care of by a number of Directives, key of these being the EU Insurance Mediation Directive (2002/92/EC)

USA on the other hand has a unique system of regulating Brokers. Each state is

responsible for regulating insurance (including broking activity) within its own Jurisdiction. The McCarran- Ferguson Act 1945 declared that states should

regulate the business of insurance and affirmed that the continued regulation of the insurance industry by the states was in the public’s best interest.

Questions 1- What are the provisions of the Insurance Act 2002? 2- Not everyone can be given a licence as an insurance broker. Discuss?

3- State the capital requirements for a broking firm. 4- List the qualifications of a principal officer of a broking firm.

Page | 34

CHAPTER 4

UNDERSTANDING THE CLIENT REQUIREMENTS

Learning objectives After studying this chapter one should be able to:

1- Demonstrate an understanding of why brokers are engaged?

2- Show the difference between wants and needs as applied to insurance. 3- Explain some of the documents made between brokers, clients and

insurers.

Introduction In chapter two and three we set a background under which a broker operates. Now

let us put the broker at his work. What does the broker need to do to serve his clients? What does he need to understand of his clients?

Key Terms The following terms will be explained by this chapter - Features and benefits

- Demand and needs

Page | 35

- Written agreements, - Complaints - Errors

- Omissions

4.1 Establishing what the client wants and what they need The starting point of broking practice has to be an appreciation of why someone

uses an insurance broker at all. There are a variety of distribution channels available, ranging from face- to- face, through contacts to the internet, so why don’t

people go directly to insurers and cut out the middlemen? Isn’t accessing internet the easiest way to search a variety of insurers and establish the cheapest quote? In addition to presupposing that everyone has access to the internet, this assumes

three fundamental things about clients:

That they know what they want and what to ask for;

That they know what price they should pay for the product;

That they understand the complexities of the product and fully understand their own demands and needs;

That they know which insurers to go to for the product or service they want; and,

That they can recognise when a product or service offered by an insurer does indeed match their requirements and when it does not.

Even in personal lines, where direct marketing by insurers has the greatest impact, there have been problems with the complexity of household policies covering

buildings and contents. Consequently, many customers will use the services of other adviser.

A client may have many questions about their insurance needs, and they may well go to their broker for answers.

Examples I am going out of the country- what insurance do I need?

Which insurance will cover my workshop in Kisenyi? The bank says I have to insure my house, does this cover my belonging?

Clients use the services of an insurance broker because they do not know or

understand insurance. They are unclear about what they need and they need help in understanding how the policy they have or are considering buying will help them.

Brokers respond to this in specific ways:

They identify and clarify a client’s requirement – their demands and needs;

They identify an insurance product/ service that best matches these requirements using their in-depth skills and knowledge of the industry;

They provide information and advice on the products/ solutions available;

and

They explain the result to their client in terms the client can understand.

In this chapter we take a detailed look at:

Page | 36

Getting behind to what the client wants to what they actually need;

Documenting the terms on which the broker will deliver what the client want; and

What to do when things go wrong.

4.1.1 Features and benefits

One of the core principles underlying sales and marketing is the difference between ‘features’ and ‘benefits” and the need to sell on ‘benefits”. Let us look at a couple of

examples. Examples Powder soap contain ZP875

So What? This means colours won’t run when washed at high temperatures

Modern machines are manufactured from Zygron metals So what?

This means that they are lighter and cheaper Benefits are the answer to the question, “so what”

People buy on benefit

Features Benefit

Organic No poisonous chemicals, kinder to the environment, taste

better

4x4 vehicle Makes me feel good, goes anywhere

Sales and marketing staff know that they must sell on benefits, not features Think

Consider the features and benefits of some of the producers you have seen advertised.

Consider why you buy one product and not another. Consider some recent purchases you have made? Why did you not go for an alternative product?

4.1.2 Features and benefits in insurance With insurance the need to interpret benefits from features often works the other

way around We have a language all of our own to describe the features of insurance that few

outside the industry understand. Clients will tend state the benefits they want, as they do not know the features that will deliver that benefit. Rarely will they come

to a broker requesting the addition of an ‘indemnity to principal clause’ under a public liability policy. They are much more likely to say something along the lines of: The contractor I am working for says that my public liability policy needs to

cover their firms as well as mine when I am working for them.’

Benefits are what a client wants: features are what they need. Let us look at some client wants and see how insurance can address the client’s

needs.

Examples

Benefits: wants Features: Needs

Page | 37

If I have an accident on holiday, I want cover for medical treatment

Travel insurance

I want cover if the firm gets sued for injuring

a member of the public

Public liability insurance

We want cover whilst builders are in our factor working on the new extension

‘Property being worked upon’ extension to the property

policy. Contractors all risks insurance

I want cover for any damage to my contents Material damage insurance

Examples

Benefits: Wants Features: Needs

I want comprehensive cover on my house and content

The “obvious” answer may be a Household policy, covering buildings, contents and

liability. But, does the client mean ‘All Risks’ cover on the

buildings and contents rather than “Specified

Perils”? And don’t forget, ‘All Risks’ does not mean all risks

This example shows us how fundamentally important it is for the broker to ask questions - and for them to keep doing so until they can establish the need

underlying their client’s request Some clients will give seemingly clear instructions, for example please double my

existing sums insured’. However, a broker needs to explore behind this: why does the client want to double their sum insured?

Have they bought additional premises? If so, where are they? How are they constructed

Is it a seasonal increase in stock? What protections are in force?

Have they just had the premises professionally valued? What is the basis of the valuation-is it selling price or rebuilding costs?

Flashback Have another look at the examples at the beginning of this section. The features we have identified may not be specific enough. What other questions would you

ask to uncover the client’s underlying needs?

Demands and needs Once it has been established what the client actually wants, you will have a clear

idea of their demands and needs. The broker in our case must provide their client with a copy of their demands and needs or discuss. Once these are agreed, this will form the basis of the search for the most suitable insurance policy.

4.1.3 Explaining Insurance

Page | 38

Risk consultancy

Service

Insurance policy

Price

A broker’s purpose does not come to an end once they have established what the client is actually looking for. It is up to them to translate the insurance jargon back into plain English. They need to explain the insurance they are recommending (the

‘feature’)-how it will and will not deliver the benefits the client wants-in a way that the client can understand.

This is particularly important when the insurer’s response is not the one expected,

for example they refuse to give specific cover or impose additional and perhaps unpalatable terms. The insurer may say:

‘You are covered for theft’ –but what is the definition of ‘theft’ used on the

policy?

‘You are covered while you are away from home’ –but what does covered mean and against what perils are you covered.

‘There’s an alarm warranty’-can the client comply with the warrant? Do they understand the implications for cover to apply?

Although we may often feel reluctant to pass on bad news to a client, it is important that we advise them of the precise terms on which the insurer is providing cover or otherwise, we need to be completely transparent with our

clients. Do not put off telling the client because you are hopeful of changing the insurer’s mind. Keep them updated always. Deflating (unrealistic) expectations

is always worse than the client knowing the ‘bad’ news in the first place. It also builds the client’s trust in your firm as they can see that you are acting with

honesty and integrity. If you do manage to negotiate an improvement, then this is positive news for

you to impart to your client.

Clients and brokers As we have seen, most people do not just come to a broker for insurance. They

use brokers for advise around insurance, for arranging the policy with insures and for help and assistance on any claims.

Different sized clients will be looking for different services. A client at the smaller end of the scale who is looking for personal motor cover will focus more on the actual insurance policy. A large, multinational corporation, on the other hand,

is going to be more interested in the advice the broker can give them or risk management and alternative risk financing strategies. Figure 4.1 gives a graphic

illustration of this contrast.

Figure 4.1

Page | 39

Simple Client’s need Complex

In the meantime, it is essential where on this scale your individual client is, and what it is the client wants from you. You will need to confirm what you have agreed

to do for your client in writing. Question 4.1

What should a broker take into account when assessing if an insurance policy meets a customer's demands and needs?

4.2 Written agreements with clients Traditionally, brokers relied upon very basic agreements with their clients -. However, this has changed. The requirement that certain information be given to the client has led most broking firms to move to formal written agreements with

their clients. This has brought in its wake service level agreement (SLA) The SLA defines what the broker has agreed to do for the client. It will contain

details under each of the following areas: i) General Services that will be provided

ii) What policies and programs the broker is providing iii) What is not covered

iv) How claims will be delt with v) Defining the service standards vi) Measuring the service standards

vii) Any fees and remuneration

Brokers also prepare service plans and diarize then accordingly. These will show scheduled activities such as claims review meetings, renewal negotiations and any

other activities deemed necessary in the course of the policy period. Broker Remuneration

There are two main ways in which a broker can be paid for the services it provides

to the client:

i) The broker can be paid by the insurer – by commission as a percentage of the premium

ii) The broker can be paid by the client – in form of a fee paid directly to the

broker by the client. It is calculated based on time and value added by the broker and any premiums chaged then must be net of any brokerage

commissions.

The broker is required to disclose to the client and agree before the conclusion of the contract on how he will be remunerated, and any other interest the broker may have in the transaction.

Page | 40

4.3 Complaints and errors and omissions claims Making mistakes is a fact of life. If this were not true, then insurance could not exist. For the broker, mistake may lead to dissatisfied client, or worse, an

uninsured loss and an errors and omissions claim. How Complaints and E&O claims arise

Most problems arise when a policy does not do what the client though it would and this usually involves two points

• what the policy wording says; and • what the broker said the policy would do

Policy wordings An insurance policy is a legal document evidencing the contract between the insured and the insurer(s). It documents a promise to pay should a specified event

take place. You 'will recall that a contract does not have to be in writing, but documentary evidence will definitely help both the insured - and the insurer -

confirm their agreement and obtain support at law.

'What the broker said the policy would do' Problems will arise if there is a loss where there is no relevant policy wording. Does the policy cover the loss or not.

This leads us to our second point. What did the broker say about how the cover

would operate? Here we have the issue of contract certainty and the need to issue policy document ‘promptly.’ Good practice and prudent risk management should

encourage brokers to ensure that their clients have an accurate policy document, evidencing their agreement with the insurer (s), as soon as possible. Moreover, all comments, advice and confirmation about how, and in what

circumstances, the policy would operate should be confirmed to the client in writing. If information is not put in writing then it is difficult to prove that what it

is being talked about actually happened.

Be aware If it is not in writing, you cannot prove it happened. Example of mistakes that led to E&O claims

Most brokers will fortunately never experience an E&O claim. This is because when mistakes come to light - either they are spotted internally or a client queries the

position (or makes a complaint) - corrective action is taken.

Mistakes are all too common and we include some here and more in appendix 1. However, most are discovered and rectified before they become a real problem.

Later we will consider the techniques that we can use to prevent errors and enhance service. However, before we do so, it would be helpful if we looked at some concrete examples of mistakes that did go on to become E&O clams. It would be

impossible to describe every type of error that can occur but there are some common themes. The examples are based on real life events, although they have

been subtly altered, and will help us to see the type of problems that do occur.

Each example 'claim' started with a mistake. At some point the mistake became a 'circumstance that 'might give rise to claim’ under an E&O policy

Page | 41

Activity While you are looking this example • identify the original mistake;

• identify when the mistake became a 'circumstance' that had to be reported: • Think back through the events to see what changes to the business you would

make to avoid these errors in the future;

Example 1: Documentation failures A business interruption policy has had its indemnity period increased from twelve

months to 24 months. No clear record of this change has been made on the file and the revised policy document has not been issued. Subsequent correspondence on

unrelated subject has buried the letter confirming cover in the middle of the file. At the next renewal, the client submits an estimate of gross profit based on twelve

months. The account broker sends to the insurer and omits to adjust this amount to reflect the new 24-month indemnity period. After renewal, a loss occurs, resulting in 15 months’ interruption.

A loss adjuster is appointed and they quickly discover that there is underinsurance

because the sum insured is based on twelve month figure, not the 24 month. The insurer continues to deal with the loss but on the basis of making a reduced

settlement. The client understandably looks to the broker for compensation. Think

Have there been any examples of these types of problems in your own experience? Can you identify any positive examples of good service and procedures?

Preventing complaints and E&O

Now we have seen how easily mistakes can happen and lead to E&O claims, we need to consider how we can reduce both the likelihood of them occurring and their impact when they do. Preventing complaints and errors and omissions claims is

not complicated. In fact it can be broken down into three simple steps,

Do it right - first time 'We make no apologies for stating the obvious. All complaints and E&O claims arise

because something was not done correctly. Focusing on doing things 'right first time' will 'mean that you do not have to do work again because a mistake has been made, so saves time overall.

Take care when correcting mistakes under pressure. More speed has an unnerving

habit of making matters worse. Keep calm and think the correction through fully before starting.

Ask if you don’t Know If the problem is outside your knowledge or competence, you should refer to a more

experienced member of staff. If you don't know, say so. Find out the correct answer and go back to the client or insurer promptly. Never guess, especially in front of a

client or underwriter just because you feel under pressure.

Put it in writing

Page | 42

Always record all conversations and instructions in writing and send a copy to the client or the insurer promptly. In this way, if there has been any confusion, it will come to light quickly and remedial action can be taken.

Similarly, make sure that the file is completed and keep a record of all

conversations and actions. Then, if things do go wrong, it will be easier for the reviewing manager to identify where things went wrong and how to put them right.

Remember, if it is not in writing, you cannot prove it happened’. A file should read like a book telling the history from the beginning including all the actions and issues that have arisen. The file must also be kept up to date at all times, otherwise

someone assisting may not have all the facts and make judgements based on out of date information.

Dealing with complaints and E & O Claims

Insurance brokers are human beings, so we make mistakes. The professional response is to admit it and rectify it. There are three fundamental rules that apply when dealing with a complaint, a

‘circumstance’ or a formal E&O claim.

Follow your firm’s procedure for dealing with a complaint or E&O circumstances / claims-to the letter-as soon as you are aware of any

potential issue which could lead to a complaint or E & O

Do not try and conceal the problem or think that you can resolve it before it is discovered. You must raise the issue as soon as possible. The longer the

issue is not dealt with through the right channels the more potential there is for a larger problem to develop; and

Do not lie or conceal anything as this will always come out

4.4 Customer Service

The word Cusomer Service is almost synonymous with the services a broker gives his client. Otherwise what is the use of appointing a broker if he is not going to add

value to the client? The slight addition is that the activities of a broker go beyond just customer care because the client will not have just appointed “legs and Hands

but also Brains” and, the “brains” of a broker are not just brains because broking is a whole technical area.

This chapter is not going to concentrate on customer care because it is covered

ably elsewhere. It is only important to note that if the client gets dissatisfied with the services of the broker, then the client can change to other brokers.

Changing brokers As an aside to the main topic of this chapter, you need to be aware that on occasion

a client may decide that they wish to change their broker. If you are the broker who is being replaced you have obligations to the incoming broker. You need to

understand what the ramifications are of handing over documents to the new broker.

An incoming broker has no right to the outgoing broker's records but, as we have seen, the client has. If the client requires the outgoing broker to pass the files to

Page | 43

the incoming broker, the outgoing broker must comply. However, they must take care to review each document on the files, individually, to ensure that: • only the records to which the client has a right are transferred;

• the outgoing broker's papers, i.e. all internal documents, are removed and retained; and

• copies are taken and retained of all documents passed to the incoming broker.

Before passing any documents across, it is prudent to review the documents. Are there any errors or areas of concern? If so, these can then be promptly resolved.

The main Ideas are summarised as follows • Clients use an insurance broker because they do not know about or understand

insurance. Establishing what the client wants and what they need • There are differences between features that benefits. Benefits are what a client

wants, features are what they need. • Clients will often ask for benefits as they do not understand or know about the features that deliver those benefits.

• Once a broker has established the client’s needs and demands the suitability statement will show what they are and how the cover being recommended meets

them. • The broker will also need to explain insurance being offered to the client

• Different sized Clients will be looking different services

QUESTIONS

1- Do insurance customers express their request for cover in terms of features

or benefits? 2- Why is it important for a broker to ask questions of the client’s insurance

needs? 3- Why is it important to explain jargon and insurance terms clearly?

4- Name four areas that a service agreement can cover. 5- What three main points do you need to bear in mind when you receive a

complaint?

6- Who has the right to see at least some of the documents held by you on the placing file? Why?

CHAPTER 5

NEGOTIATING AND PLACING A RISK

Page | 44

Learning objectives

After studying this chapter one should be able to: 1- Explain the role of the insurance broker in the negotiation and placing of

insurance contracts. 2- Demonstrate an understanding of the duty of disclosure as it applies to broker’s

submissions. 3- Give examples of good practice in presenting terms to clients. 4- Explain what material is in as far as insurance contracts are concerned.

Introduction Having established the client wants, we need to go out into the market and

establish what the insurers are willing to take. We need to know the appetite of insurance companies so that we are able to advise our client properly. What is it

for example that we should take from our client and sell to insurers?

Key Terms This chapter will explain the following key terms

- Marine Insurance Act 1906 - Material facts - A proposal form

- Questionaires - Survey report

- Post placement activities

5.1 Material facts As you will remember, insurance contracts are contracts of utmost good faith (uberrimae fidei). They depend on both sides observing utmost good faith,

supported by complete transparency on all material facts. Question 5.1

What is the standard definition of materiality?

It is the broker's duty to make a fair presentation of the risk to insurers, containing all material facts, to enable the insurer to provide terms.

The first step is to collect all material information. As we have seen, a broker is jointly responsible, with their client, to see that

insurers are fully informed of all material facts necessary to underwrite the risk.

Under s.19 of the Marine Insurance Act 1906, brokers must disclose

Every material fact known to the brokers, including facts which in the ordinary course of business ought to have been communicated to them; and

Every material fact which the insured is bound to disclose, unless it comes to the insured’s attention too late to communicate to the brokers.

Page | 45

Generally, the most of the insurance buying public are not of the unique application of the law of material fact to insurance contracts. Therefore, a vital function of the broker is to explain those facts that are material and those that are

not.

This requires professional judgment and experience and sometimes it will be difficult. One of the problems is that the frequency, with which this aspect of the

law comes before the courts, means that there are no clear guidelines. Rather like the aphorism about art: ‘I don't know what art is but I know What I like; material facts cannot easily be defined. However, you will know one

when you see one.

Most insurers, of course, say that they would never use a strict interpretation of material fact to avoid a claim unreasonably. Whilst in broad terms this is probably

true, as the majority of insurers will generally look ways to pay a claim. It does leave the client exposed to a capricious decision by an insurer.

You should also remember, especially if you are dealing with global or foreign business, that for example, UK law is unique in this interpretation of material fact.

Different approaches are taken, particularly in the USA, Canada, Australia and Mainland Europe.

For example, in the U.S.A the scope of the information that needs to be disclosed is generally deemed to be set by the proposal form. It is up to the insurer to make

further enquiries if necessary.

Guidelines on material facts Recognising these difficulties, here are some general guidelines

If you are in doubt as to whether information is material, it is best to disclose it with clarity and urgency.

Its always worth discussing it with an experienced colleague and insurers, but if you are not certain about their responses, disclose.

Rarely will disclosure prejudice your client, whereas non-disclosure certainly will

Where applicable, loss information must include details all losses

Deciding not to show certain very large losses in a claims experience because they are ‘old’ say more than five years, is naïve. The passage of items does not necessarily render a fact ‘immaterial’. Moreover, most seasoned

underwriters will be aware of the majority of large losses in their sector over the past, say, ten years, so omission simply makes the broker look foolish. Obviously judgment is required to decide what is and is not a large loss and

what is and what is not ‘old’. What examples of materials facts can you think of?

5.2 Compiling underwriting information

There are a variety of methods that can be used to obtain and collect underwriting information, the most common being a proposal form.

5.2.1 Proposal forms

Page | 46

Formal proposal forms are required for certain specialised risks and the majority of medium-sized and smaller risks such as: • small package risks

• personal lines such as motor, household and craft insurance • fidelity guarantee crime

• professional indemnity and errors and omission covers; and directors’ and officers’ liability and employment practices and pension trustee

liability. The function of the proposal form is to present standardised information that will enable the insurer to underwrite the risk. We will not consider the actual content

of individual proposal forms here as this is beyond the scope of this syllabus.

The key issue is that the client has to sign the proposal form and warrant the truth of the information, thereby satisfying the client’s obligation regarding disclosure of

material facts. The insurer can then rely on this warrant in the event of a claim.

5.2.2 Questions to consider at this point include: Have you explained to the client what their duties are in disclosing all

material information?

Have you explained what a ‘material fact’ is?

Have you explained the consequences of failing to disclose all material facts? We are concerned here with the broker’s role, and that can include providing

personal assistance in the completion of the form. This does not mean that the broker completes the proposal, but that they provide advice on the meaning of the

questions. They will also advise on what information is relevant on what is a material fact in the view of an insurer, and on any further information that might

be required as a result of the answers given. Brokers should advise their clients that proposal forms basis of the insurance contract and that errors or omissions, whether innocent or deliberate, could invalidate cover.

A broker must never sign the proposal, even if requested to do so by the client

The only exception will be where they acting with the express authority of the client under a written power of attorney, which in itself would be very unusual. A broker

who signs a proposal form could find themselves facing both an expensive legal action and accusations of bad practice.

However, when assisting clients with proposal forms, particularly for motor and household and small commercial business, it is not unknown for the broker to

complete some or all of the questions and then ask the client to sign the completed form. In these circumstances, it is vital that;

Each question is explained clearly and without ambiguity, for example on a household and small commercial business, it is not unknown for the broker to complete some or all of the questions and then ask the client to sign the

completed form. In these circumstances, it is vital that:

Before asking the client to sign the proposal, each of the questions is reviewed again with the client

The client’s obligations and duties in signing the proposal are made clear; and

Page | 47

A copy of the completed proposal is given to the client immediately, preferably together with a written commentary of any important points described during completion and advising the client of the obligations under the proposal.

Think Can you think of any other examples where a question on a proposal form may need explaining to a client?

There are other reasons why offering such personal assistance is a good idea

despite it being time- consuming and costly. These include

It reinforces the relationship with the client and emphasises the value of personal service;

It gives the broker the opportunity to explain the cover in detail and thus ensure that they have an educated buyer; and

Questions may stimulate other possible areas of risk, thus generating more

business. For example, completing a public and products liability proposal may reveal a need for product guarantee or professional liability indemnity.

In some cases, brokers may have special proposal forms printed with their own names, often in connection with special schemes. It is essential, where this is the

case; the form makes it clear that the contract is between the client and the insurer and what the client’s obligations under the contract are.

Other means of collating information Proposal forms are not the only means by which information can be obtained. For many large and complex risks, proposal forms are often impractical and are

replaced with specific questionnaires tailored to the needs of that particular client and risk. Supplementing these will be survey reports, detailed loss analysis,

accounting and product information on the client etc. Insurers' questionnaires

An insurer's supplementary questionnaire, for example an additional drivers' form for motor insurance, will often have the same function as the proposal form and the comments we've made on proposal forms also apply.

Brokers' questionnaires Some brokers prepare their own questionnaires as a means of gathering

information from a large or multinational risk, where there are many individual sites or subsidiaries involved. These forms will vary from the prosaic, asking for

straight forward information such as turnover, payroll, building values etc., to much more complex forms asking for more detailed information on risk exposures, changes in business activities etc.

There is more than one school of thought as to how these forms should be used. They may merely be a simple and efficient way of collecting the basic information

needed for renewal. On other occasions they can replace a face-to-face meeting with a subsidiary, perhaps to save costs. Such economies may be justified.

Arguably however, relying solely on questionnaires in this way means the broker is failing in their duty to client. They are exposing themselves to an accusation of poor service.

There are other problems with this approach, such as:

• in losing touch with subsidiaries, the broker may lose an important source of information on future developments;

• inadequately completed forms may result in more costs than the savings made by not making a service call in the first place and • questionnaires cannot cover any eventuality.

Page | 48

Sending the form to the client in advance and reviewing the content with them, preferably face-to-face, can overcome most of these problems. This ultimately saves

time, is a more professional approach and reduces potential errors. Cost is an important issue, but the broker has to remember that the function of

obtaining the right information is a prime part of their service to the client.

Survey reports The underwriting survey provides the broker with a valuable source of information and is important in obtaining favourable terms. insurers feel more confident in

providing their best terms when they have the fullest understanding of the risk.

Having said all this, brokers can face a number of problems: • not all insurers will accept brokers' surveys, or will only quote subject to their

own survey; • insurers' 'standards' on information can change • individual insurers have different requirements in terms of the depth of

information that the survey has to contain. Nevertheless, it is essential that the broker can demonstrate an in-depth knowledge

of the client's risks and their approach to risk management - if they are to obtain the best terms.

5.3 Using other brokers We saw earlier that the law of agency always gives the broker a duty to the client. However, as we also saw there, there are different forms of client in the market. One example of an alternative agency relationship is that between a wholesale

broker and another broker.

A wholesale broker will deal with other brokers who need assistance to place the full cover for their client. In this instance therefore, the wholesale broker is the

agent and the other broker is the client or principal. This situation is best illustrated looking at an example.

Example A broker needs to place a remaining capacity of 60% because their local market

does not have the capacity at the price needed to place the entire risk. It therefore approaches a London market broker for assistance.

When this is done, the first broker becomes the client for the London Market Wholesale broker. A sub broking agreement will be put in place between them to confirm the duties of either side and to legalise the contract between the two

companies. The sub broker can be a different company to the main broker as long as an

agreement is put in place to define the terms of business. Alternatively, our imaginary first broker may choose to approach an introducer for

help to place the risk. In this scenario the introducer will place none of the risk but will introduce the client to the broker who will place the business. The introducer will then take a fee

for its part of business essence dealing with the client and the sub broker will take a fee for broking the risk to the various markets.

Page | 49

When this is done, various stringent checks will be performed on every new client, whether wholesale broker or introducer, to make sure they are properly regulated and to make sure the sub broker is happy to deal with them.

Where wholesale brokers are used, the sub -brokers have the same duty of care to

their client. In these circumstances, the producing broker as they would to any other client, they will have a TOBA agreed between the two parties to make sure

both companies fully understand and appreciate the service being provided and the details of contract. In this way both companies should be absolutely clear as to their own responsibilities,

The sub broker, however, cannot owe a duty to the original insured as this is the

placing broker's client. It is only if the placing broker goes into liquidation and cannot service the original insured, will the sub broker start dialogue with the

original insured.

5.4 Presenting a risk to insurers and negotiating terms. The task is now to present the risk to insurers, documenting: • the cover required: the class of business, sum insured, limits of indemnity and the wording that is to apply; and

• all material underwriting information to support that request. Specification of cover

One of the principal functions of the insurance broker is to devise and obtain cover that meets the needs of their clients and matches the client's exposures. The

complexity of this task varies with the nature of the original risk. For the majority of smaller risks adequate cover will be given by standard policies, Large multinational companies will require bespoke cover.

A significant source of problems is the inadequate specification of cover during negotiations before cover is bound, at the very least; it leads to inefficiencies in the

process, imprecise specification of cover at the time of placing leads to confusion in drafting and the need for frequent meetings to agree the wording.

5.5 Confirming terms to the client

It has become common practice for brokers to attach a long list of cover items, extending over two or even three sides of paper marketing submission. The problem with such lists is that, although many of the clauses may be relatively standard,

there could be subtle variations in approach from insurer to insurer. And insurers may regard some clauses as being worth an extra premium or in need of further

information. For example, requesting a transit limit of 500m without further information will draw a negative response. There is also the potential for a lack of

a clarity. For example, is loss of metered water intended to be an exclusion or a policy extension? The situation will be complicated further if the insurer responds with a quote

‘subject to its standard wording.’ The broker will need to compare this wording with the cover requested to identify any important differences.

The principle of contract certainty makes it rule that cover should be agreed before

inception. Some approaches that will help ensure that this happens include:-

Page | 50

Using agreed wordings with insurers

Specifying all clauses in full

Separate clauses into those that will affect the premium, those that can largely be regarded as standard and those that will require specific negotiation; and

Making negotiating the wording an integral part of the placing negotiation with insurers

5.6 Post placement activities and Mid-term administration Dairy system

Effective diary systems are essential to perform the following tasks:

To alert the broker that a renewal is due;

To ensure the tasks passed to another party, for example a request for an extension of cover, are acted upon in good time

To ensure that premiums are collected from clients and paid to the market within agreed timescales and

To ensure that any warranties applied to the contract are handled prior to

their requirement date Brokers should employ mechanised system to organise their main diaries, typically lists of pending renewals, outstanding policies, and outstanding premiums and so

on. For general correspondence, a simple bring –forward system using paper wallet files can often be more effective, and economic, than using computer diaries. Many

staff mark their own desk diaries to ensure that they follow up on things. Whatever is your chosen method, it is vital that you have an effective diary and reminder

system. It is also vital that others know what your diary system is and how to use it in case

you are taken ill. In a lot of companies, they have a computer diary system which works well and is coordinated throughout the division, enabling the manager to

see the workflow and allocate any diaries accordingly. Filing systems

The file must be functional and cost effective. it is important to recognise how effective bringing order to filling of documentation can be. Many errors occur because documentation is not filed chronologically, a file is missing, is distributed

in a haphazard manner amongst files or there is no system for controlling the movement of files. The advent of email has compounded filing problems. 'The file'

must be complete so that, where a proper -based filing system is used; hard copies of all emails and attachment must be printed out and attached to the paper file.

Where an E-filling system is used, it must be documented. What is filed in the E-

filling and what is filed on any paper based file must be indicated. Either way it is imperative that a file is complete and should be easy to read: no matter whether it is a claims’, placing or accounts file, all should read like a book.

Questions 1- Under s. 19 of the Marine Insurance Act 1906, what should brokers disclose? 2- When is it deemed that the broker is acting for both the insured and the

insurer? 3- Why is it important to avoid conflict of interest?

Page | 51

4- Why it important that a broker has an efficient diary system? 5- What must a suitability statement record?

CHAPTER 6

INSURERS

Learning objectives After studying this chapter one should be able to:

1- Explain what to take into account when selecting insurers, 2- Define the role of brokers in the process of selecting insurers,

3- Describe the operation of schemes. 4- Be able to assess the security of insurers.

Introduction

Page | 52

Chapter five gave us skills to prepare how to meet insurers. We know what we need to come with to insurers. This chapter gives us what we need in order to select good insurers to deal with and insurers to handle a particular risk.

Key Terms This chapter will explain the following key terms

- Schemes,

- Facilities - Binding authority

- “Power of the pen” - Deligated authority - Financial security

6.1 Selecting insurers to use There are over 30 insurance companies in Uganda, and no broker is able to deal

with all of them. Some insurers are also not keen on having all the brokers on their books, when some brokers cannot provide a good reasonable income to them.

Except for big household names, clients might also be uncomfortable being placed with some insurers. Therefore it is prudent that a broking firm has a policy on how

insurers are selected from which they select the ones to handle particular risks. Schemes, facilities and binding authorities

There are two main ways in which a scheme can operate depending on whether the broker:

• has underwriting authority - the 'power of the pen'; or • has to obtain the agreement from the underwriter on each risk.

Facility only - no 'power of the pen' Even without underwriting authority, there are a number of benefits to a scheme

or facility. A broker can establish in advance with insurer or a group of insurers, that they will write a certain class of business, within defined limits and cover.

Often the broker will be allowed to 'hold covered' overnight or over the weekend, subject to ratification by the underwriter on the next working day. Such facilities

are particularly useful for: ????? Information missing Binding or Delegated authorities - 'the power of the pen'

Many risks are placed through schemes negotiated exclusively by certain brokers and other -intermediaries, or by specialist agencies. Shed more light on this!

6.2 Financial security This is the main consideration when selecting an insurer to work with. The large

broking firms maintain their own security departments to monitor insurers. Other Firms will have procedures in place to consider the following:

setting a standard for the insurers that they will generally deal with for the majority of their business, this might be a combination of the rating given to

the insurer by one or more of the specialist agencies together with, say, its head office location and overall size;

Page | 53

comment and information in the financial press and on relevant websites

Changes in an insurer’s underwriting policy, e.g. a move to ‘buying in’ policies-underwriting risks at below cost to obtain cash flow; and

Paying particular attention to the speed at which the insurer settles claims and returns premiums. None of these measures is foolproof; in fact no system is foolproof.

In addition, not all companies are rated, and many companies that have failed were reasonably rated before disaster struck.

6.2.1 Support and sales literature Large brokers have the resources to generate their own support services including

sales and technical literature, but this is more difficult for medium-sized and (particularly) small brokers

A number of insurers understand this and have produced technical sales guides

in such areas as business interruption, employers’ liability claims and fidelity guarantee.

6.2.2 Service Brokers and insurers are both in business to make a profit and to do this each

must not only retain the business they have, but must seek new sources of business. However, there will be neither retention nor acquisition of business

unless each supplies a good service.

Think What are the aspects of service that you would look for from an insurer? Think of examples you have seen of poor service and examples of excellent service.

The levels of service that should be looked for when considering an insurer are

Fast and comprehensive

quotations

Suggestions for the improvement of cover

An efficient system of documentation

Prompt notification of proposed changes in market practice

Responsiveness to broker’s and client’s needs particularly in

preparing claims experiences and renewal terms in good time

Timely payment of claims and good claims service throughout the life of the claim

A competent survey system Specialist service

Efficient account Web-based quotation and document production

Page | 54

6.3 Selecting an insurer for a particular risk 6.3.1 Breadth of cover At these times the broker's role is to obtain the cover that is critical for the client. They should advise on any additional areas that mayor” may not be available and at what cost, and also the implications of not having certain areas of cover.

The year 2001 saw the start of just such hard market conditions on the

international level, and these got much tighter Following the World Trade Centre disaster, Typically, insurers introduced restrictions and limits that reduced their

exposure to unexpected accumulations of loss, These-restrictions related to suppliers' and customers' extensions to business interruption policies and saw the introduction of 'event' limits on personal accident policies, Previously, such

restrictions had only applied in specific circumstances, for example aircraft accumulation,

The broker also needs to understand the premium implications of providing additional cover. Additional cover is that which the insurer would consider to be beyond the standard cover defined in its printed policy form. There is little point in

negotiating the very widest form of cover at an additional premium cost, when some of the 'additional' cover may be of little importance or value to the client. This is

why it is so .important: for the broker to understand their clients' needs and their appetite for risk retention.

In conclusion, we can see that a balance has to be drawn between the breadth of cover to be provided, what the client needs, their risk retention appetite and, of course, the cost.

6.3.2 Flexibility The flexibility shown by an insurer in the terms and conditions of its policies, its willingness to adapt quotes to clients' specific needs and a general approach that

is sympathetic to the client, are all important.

6.3.3 Innovation Innovation does not necessarily mean inventing brand new products, although that

can be important. It could equally mean stepping outside a conventional approach or adapting established techniques, specifically to meet the needs of an individual

client. Examples could include offering differing deductibles to a retailer who is concerned about a serious fire, but less so about storm damage, or packaging

covers together in a bespoke manner, or writing a self-insured programme rather than a 'convention ' one.

6.3.4 Capacity Capacity requirements will differ according to circumstances. However, for larger risks capacity will definitely be a factor in decision-making.

An insurer's capacity is determined by:

Page | 55

• its perception of the risk (for example, good, bad or indifferent); • the risk itself (for example, the trade, construction etc.); • the insurer's size;

• its willing1ess to use, and the availability of, reinsurance; and • the actual value of the risk presented and how the insurer chooses to evaluate

the maximum possible loss.

6.3.5 Geographical spread The geographical spread of an insurer's offices will be an influencing factor where

the client has Interests throughout the country, region or worldwide. They will include:

• sufficient spread of operations nationally or worldwide to support the local activities of the insured;

• an understanding of the procedures involved in the management of global insurance programmes;

The ability of the central underwriting area to mandate its overseas operations

An ability to provide specialist local claims handling facilities and coordinate claims at a global level

Experience in the insured’s business sector;

Where relevant, an ability to write local covers outside of the terms of the global programme

The ability to be flexible in the allocation and distribution of premiums around the world

Efficient internal accounting operations; and

Sufficient capacity to write worthwhile limits

In effect we are looking for all of the qualities described here to be available in each overseas territory where the client has operations

6.3.6 Claims service Many wordings in common use have never been the subject of legal interpretation, therefore, the broker naturally will tend to favour an insurer whom they feel is Likely to give their client the benefit of any doubt when a loss occurs, rather than

indulge in detailed semantics. An important point is the quality of the liaison between the underwriting and

claims functions. It is frustrating for a client (and their broker) when an issue they have discussed at

length with an underwriter is completely unknown to the claims function, either through poor communication or basic incompetence. Issues of policy interpretation may be rare,

but in large claims are not unusual. A failing of many insurer is the time they take to dispatch a claims settlement

cheque once they have received the insured's signed (Discharge voucher).

6.4 Other qualities that should be sought include: • the appointment of adjusters; writing them into the policy or claims procedures; • accuracy of documentation, especially settlement cheques;

Page | 56

• rapid decision making; and • openness.

6.4.1 Technical advice and specialist expertise In theory, all insurers should be able to provide technical advice in respect of their

own policies. Yet in many insurers, technical specialists remain locked away, inaccessible to smaller brokers. Thus the insurer who is willing to support the

broker's technical service to clients gains a competitive advantage.

More importantly, some insurers have deeper specialist expertise in a given subject or class of risk. This means they will have experience of the special features of the risk and how these relate to the breadth of;

policy cover and the handling of claims. Examples include: • media risks, particularly libel; • employers' liability for heavy engineering risks;

• construction.

6.4.2 Surveys and risk control An insurer may provide a quotation subject to survey. In these circumstances, it is

important that the insurer can carry out the surveys quickly.

The granting of provisional cover can be a useful facility. However, this may create

problems if the insurer's surveyor then requires improvements that either exceed the value of the premium saving, or are impractical for that particular client to implement.

It is thus preferable for the broker to arrange surveys before cover is granted.

Alternatively, they could give the insurer enough information to allow them to anticipate any possible improvements they may

require. In most cases the broker should accompany the insurer's surveyor.

Smaller brokers do not generally employ their own surveyors, so the quality of the risk control advice provided by the insurer is important. it is also important that

the advice given reflects an understanding of a client's needs and is practical. This can often be a fraught area, particularly for smaller commercial risks, and is

an example of where the broker's skill in selecting insurers is vital. Different insurers have different standards as to, for example, the quality of security. This

can be especially difficult where you have a panel of insurers.

6.4.3 Continuity It important to consider how the claims experience has been. The broker can

recommend continuing the cover with existing insurer who is able to take into account previous profits and by assessing the rate of return for the future.

6.4.4 Reputation and experience

Page | 57

Irrespective of whether an insurer writes a broad range of risks or is a specialist in a few niche areas, within each market, insurers will develop a reputation of certain types of risk. This may be as diverse an in depth knowledge of fire risks in, say, the

chemical industry to an in-depth knowledge of the motor trade. When explaining substantial or difficult risks, the participation of certain insurers may be essential

in securing the extent of cover required. This may often be beneficial to the insured, but the broker has to guard against complacency. Good markets are to be

encouraged and nurtured.

Questions 1- What should a broker consider when selecting an insurer to use?

2- What are advantages of a broker using is many insurers? 3- Why might a broker not wish to obtain the widest form of cover possible?

4- How can one determine the insurer’s capacity?

CHAPTER 7 PROGRAMME DESIGN AND OPERATION

Learning objectives

After studying this chapter one should be able to: 1- Describe the general approach to the design and operation of insurance

programme, 2- Show how self insurance works in an insurance programme.

Page | 58

3- Explain the use of global programmes. 4- Explain how captives work in Global programmes.

Introduction

Most client needs for insurance cover can be dealt with by means of one 'standard' policy. This applies at both consumer Level - a household policy or a motor policy

- and for many small businesses.

However, as a clients’ risks become more complex and increase in value, it becomes necessary to explore other options for covering their total exposures and to take a more considered approach. This involves looking at the client's total expenditure

on risk - both retained risk and insurance premiums- to see whether there is a better, more cost effective way to achieve the protection the client wants.

For most commercial clients, other than the very smallest, this will involve

designing an insurance programme.

Key Terms This chapter will explain the meaning of the following key terms.

- Risk retention - Packages - Combined policies

- Programme term - Excess

- Deductible - Adimitted policies

- Non- admitted policies - Multi year policies - “Evergreen” policies

- Difference in Clauses - Defference in limits

7.1 Insurance programme design

Designing a programme is the expert matching of the client's risk needs, risk appetite and budgets with insurer capabilities and preferences in the context of

what is available in the market at the time. It links to the broker's obligation to provide 'fair advice' to clients and determines the strategy for broking the risk. As we have seen in earlier chapters, this requires a good understanding of:

• the client's business and its markets;

• the client's exposures, loss experience and risk profile (Frequency, severity etc.), • the client's ability and appetite to retain risk and the market's expectation of

imposed levels of self insurance; • how the client values services surrounding the insurance contract, for example risk management, claims handling/ loss administration, global coordination etc.;

and • the client's organisation and management style, for example centralised versus

decentralised.

Page | 59

There is no one 'correct' programme design. The objective of any programme design is to deliver what the client wants- so each programme programme will be different

and bespoke. Additionally, each programme will be different because each client will have their own individual approach to the risks they face. Each will have their

own view on managing and financing those risks and, specifically, on the role they want to play in the overall risk transfer programme. The programme design will

evolve throughout the broking process, as certain knowledge replaces initial assumption as to what the market will do and how the client will respond.

7.1.1 Key issues in Insurance programme design The key issues in programme design are likely to include the following:

- Risk retention What level of risk does the Client wish to retain? What level of

retention will insurers Impose (Excess, deductibles, etc)? - Packages and combining policies Can economies of scale - premium savings -

be achieved by packaging some or all of the risks? If the risks are packaged, can some of the premium savings be traded for additional cover?

- Programme term Can an Insure be locked into a programme? If one of the client's objectives is stability in pricing can this be achieved by a long-

term agreement or through a multi-year programme? - Limits How can the programme be structured to achieve the limits the client

needs? - Specialist cover How can the programme be best structured to include special cover considerations, such as terrorism.

- Insurers. What markets are interested in writing the risk and how they respond to the proposed programme structure?

7.2 Risk retention

Terminology

Firstly, let us take a brief look at the terms one will meet in programme design Excess is the term used by both the insurance industry and the insuring public,

to describe the amount of a claim that the insured has to pay. The effect is that the total policy limit is inclusive of the excess.

Deductible was originally the US term for an excess, but it has now passed into

common use in the insurance industry and the words excess and deductible can be interchangeable. (Care should be taken as the term 'deductible' is generally unknown and not understood by the insuring public.)

However, there is an alternative way for a deductible to operate, that is, that the

policy limit sits on top of the deductible (or excess).

You will see, therefore, that it is essential when using these terms that it is made perfectly clear which method of operation applies.

Example

Page | 60

‘The insured shall be responsible for the first xxx million Ush of each and every claim' - the policy limit is inclusive of the excess/ deductible. ‘The limit of indemnity shall apply in excess of xxx million Ush each and every

claim' - the policy limit sits on top of the excess/ deductible. ‘The limit of indemnity is ushsxxx million in excess of xxx million' (the common

way limits of indemnity are expressed on excess layer) - the policy limit sits on top of the excess/deductible.

7.2.1 Objectives of risk retention

From an insurer’s point of view, the higher the level of risk retained by the insured

in form of excess/ deductible, the further away the insurer is from being called upon to pay a claim. Meanwhile, the client wants to obtain as much cover as at the

lowest cost. There is thus a trade-off between the level of deductible or excess that the client is prepared to accept, and the premium discount the insurer is prepared to offer.

7.3 Packages, combining risks and account underwriting

The packaging of risks together, into a “household” or “office combined” policy, is a common practice in personal lines and small commercial insurance. The primary

reasons are for administrative convenience, and to achieve economies of scale for all parties - the insured, the insurer and the broker.

With commercial clients, a common approach is to put the property programme on an 'all risks' basis. This may make it possible to put separate, theft, money, goods

-in-transit and glass policies etc.

A related option is to combine risks, particularly to make a high-risk more attractive to insurers.

In commercial business, a common policy combination is to combine the employer's liability with the third party liabilities and possibly motor. Taking this

approach still further is the option of placing all a client's separate insurances with one insurer. This is called account underwriting.

The debate on whether to use packages or combined policies or not, or whether to

put all the policies with one insurer, has gone on for years.

7.3.1 The advantages of packages and combined policies include: • For smaller businesses, most insurers will only offer covers on this basis, for a mixture of economic and marketing reasons;

• Combined policies facilitate broader cover; • Premium saving through economies of scale and greater efficiency of debiting;

• Enables more difficult risks to be placed;

Page | 61

7.3.2 The disadvantages of packages and combined policies include: • they cause' an over-reliance on one insurer -leaving the client potentially exposed

to bad service, difficulties when the insurer imposes significant premium or cover amendments, and in the worst case, severe problems if the insurer becomes

insolvent (which is not an improbable scenario • many insurers are better at some classes than others; • once placed, such cover possibly reduces the need for the broker; and

• they are often insurer driven, that is the insurer will only quote a 'difficult' class if it can package with the motor or general liability cover.

7.4 Programme term There are two main reasons for looking at a policy term beyond the standard one

year: • commitment to low pricing-term programme

• continuity and premium stability.

'Stability' is not necessarily the same as 'static'. Rebooking a large commercial insurance portfolio every year is not just impractical, it is unwise. Indeed, many

commercial clients are more interested in accurate budgeting of costs. They prefer a smooth change in pricing rather than swinging between taking immediate

advantage of each available reduction in premium and then getting caught on sharp increases on a short-term lower Premium.

7.4.1 The following are some of the programme terms:

1- Long-term agreements (LTAs) This is where a client is “locked” into a long

term programme.

2- Multi- year policies. As talked about above, re- broking policies every year can be counter productive. Some insurers will decline to quote for a risk they keep seeing but never win. Similarly, some insurers willnot incur the cost of

acquiring an insured that may likely leave them at first renewal. Most brokers will therefore encourage their clients to confine broking to three or

five years. 3- “Evergreen” policies. An “evergreen” policy takes this one stage further.

Here, the policy does not have a “renewal date “ The premium is either paid by monthly direct debit, or there will be an anniversary date on which the premium for the next twelve month is payable.

7.5 Global programmes The largest multinational companies may operate in as many as 10 countries and the major international insurance brokers can claim operations in a number of

Page | 62

countries. Most businesses with a turnover in excess s of shs10 billion are likely to have operations in more than one country. Many of these multinational companies have a global view of their business

operations and have adopted a similar approach to their insurance needs. Thus a demand has arisen for both brokers and insurers that are capable of providing a

comprehensive service in many different territories, throughout the world. Designing a global programme involves a number of additional issues, but before

we look at these, it would be useful to examine the features and benefits of a global programme,

7.5.1 Why a global programme? There are a number of reasons why a multinational organisation, operating in a

number of different countries, would want to consolidate its insurance arrangements around the world into one global programme,

7.5.2 The advantages of a global approach are: It offers consistency of cover

It provides central control of cover and cost

Savings are obtained through group buying

It offers simpler identification of losses worldwide

It can act as a vehicle for a global approach to risk management

It facilitates controlled participation in Its own risk by the parent for instance through a captive

Premium allocations can be adjusted for claims experience and used as a tool to encourage better risk management

7.5.3 The disadvantages are:

The parent company needs to control from the centre which may conflict with

established management style

It could upset local relationships

it may cost more in aggregate terms

It can cause legislative problems

It reduces choice of insurers

The premium invariably has to be allocated between subsidiary and may need to be paid locally

Often the allocation process require careful negotiation between subsidiaries,

especially those who do not like impositions from head office or who feel their risk is better than others

Subsidiaries may be forced to buy' cover that either does not apply or has

limits that are considerably In excess of i their individual exposure I

However, while the programme will always have to be justified in cost terms, the

main driver tends to be the desire for effective corporate management and control across the organisation,

7.5.4 Global, regional or divisional?

Page | 63

There are a number of ways in which global control and consistency of cover can

be achieved. What is an appropriate design will depend primarily on corporate culture or management style of the client. Is it a highly centralised organisation, run by head office? Or is it a collection of autonomous business units or countries

with a small head office?

7.6 Important terms in Global programmes:

- Admitted policies. An adimitted policy is one under which an insurer can

pay claims and/ or defend an insured in a particular country - Non-admitted policies. Many countries insist on locally issued policies,

meaning that a global policy issued elsewhere will be no- admitted

- Difference in condition (DIC). These (DIC and DIL) go hand in hand. These

clauses allow the master policy to indemnify the insured where a locally issued policy provides less cover.

- Difference in limits (DIL) clauses. Explained above.

Questions 1- List three main considerations in designing an insurance programme. 2- What is the difference between excess and deductible?

3- What is the difference between Admitted and Non- admitted policies? 4- What is the difference between DIC and DIL?

CHAPTER 8

OTHER SERVICES Learning objectives

After studying this chapter one should be able to: 1- Detail the range of services available from insurance brokers. 2- Explain the fundamental of risk and risk transfer.

3- Explain the risk management process.

Introduction Insurance brokers do not only place cover and handle claims on behalf of the client

but can also offer other services. This is the difference between an insurance broker and an insurance agent.

Page | 64

The larger brokers should have the ability to offer a wide range or risk assessment facilities in- house. Smaller brokers will either make use of insurers’ own risk

assessment facilities or hire the services of specialist risk assessment and risk management companies. These services will include surveys, actuarial expertise,

etc. However the main service is risk management.

Key Terms This chapter will explain the following Key terms

- Risk

- Risk management

- Alternative Risk Transfer

- “Cat” Bond

- Funded Risks

- Unfunded risks

- Conventional Insurance Market - Captive Insurance Companies

8.1 Risk management Traditionally, the main role of a broker was to provide advice on the selection of

insurers and provide insurance cover. However this is changing. There is more advice that a broking firm should provide clients. After all, insurance- risk transfer

mechanism- is but one process in the whole chain of risk management.

You will be surprised to find out that some clients have built up their own risk management departments and rely on outside services only to a limited extent. It is only the small and medium organisations that tend to rely more on services of

brokers and others

The role of the broker therefore should be to assist the client organisation in achieving its risk management objectives. Thus the broker should be involved in

one or all of the basic function of identification, evaluation, control and transfer. The services described above are functions of risk management. What most

businesses, large or small, look for in brokers, as we have said above, is help and assistance in developing a programme of risk

Management.

Risk management is about securing the most economic and efficient management of risk. Therefore, it has to be realistic and reflect the philosophy of the business.

In this context, a broker can only succeed by obtaining a full understanding of a business and the risk it faces. The broker must not dictate:

Successful risk management comes from within the organisation. However the broker must be frank and willing to give impartial advice.

One should find about the following:

Knowledge of the client’s plans, future projects and general philosophy regarding the development of the business;

Page | 65

Awareness of developments and issues in the client’s business sector;

Offering advice on solutions to present financial problem areas, including liaison with, and the recommendation of, other professionals;

Monitoring existing business through regular visits and discussions, both on site and with the client's management team;

recorgonisation and co-operation with other professionals retained by the client, including awareness of special projects on which their advice has been

sought;

discussions and feedback from both the client's employees and the broker's own staff, including relationships developed at a junior level that can

frequently bring to light problem areas or exposure to risk of which the management team had not been aware; and

being aware of trends in the client's trade through reading trade journals or

other press publications. Question

Why does a broker need a thorough understanding of the business when offering risk management advice?

The risk management process

.A thorough understanding of the subject of risk management requires the study of specialist material that go beyond this paper. However, here below are some of

the main components of risk management and the role of the insurance broker in the risk management process.

The risk management process can be described as:

The identification and evaluation of risk, its control or elimination and financing or transfer to another party.

8.1.1 Risk identification Risk identification can be defined as:

• a combination of techniques brought together to make all activities of a firm

and their interrelationship apparent, and to help to identify potential losses; or

• the examination of the activities of an organisation in order to ascertain features which may prove hazardous to the furthering of its objectives.

Traditionally the first step in the risk identification process was a physical survey.

Whilst surveys retain an important role, a modern programme of risk management will start with the identification of the main risks that threaten a business. Some

of these risk will no doubt seem obvious. For example, fire is often seen as the physical risk with the greatest potential for damage and interruption, although the World Trade Centre disaster changed that view. This will vary from business to

business.

Page | 66

The purpose behind identifying the main risks to the business, before undertaking a physical inspection, is to ensure that one risk is not emphasised at the expense of another. This can be done by speaking to senior management of the business.

This can be followed by discussing and brainstorming.

8.1.2 Risk evaluation Risk evaluation looks at frequency and severity. In other words, it considers how often a loss is likely to occur and how much is likely to be involved in monetary

terms. The evaluation process includes the following functions:

• quantifying the effect that potential losses will have on the business:

• evaluating a 'worst-case scenario' with relation to its effects on the business and future plans:

• reviewing the effect of previous losses both significant and minor, and measuring their effect on the business with special consideration given to cash-flow and

amended projects;

• measuring the estimated 'down time' following loss, including any knock-on effect to other branches or any seasonal variations; and

• evaluating of the business's ability to respond after serious loss, including any contingent crisis management planning.

In the evaluation of risk, it is necessary to build up a detailed risk profile of the

organisation, showing specific areas of exposure, including assets, income, liabilities and personnel. Each of these areas may then be analysed to show the extent to which the management functions of purchasing, production, transport,

distribution, sales, finance and administration affect it.

In summary, the evaluation process is required in order to assess the following:

the financial value of a given risk;

Probability;

The impact of self-insurance and deductibles:

The possibility of the cost effectiveness of loss elimination, reduction and control measures: and

The viability of risk transfer to insurers or to a facility such as captive.

Risk control and elimination

Risk control is often mistakenly described as risk management. However, this is only one of the techniques used as part of the overall process. Under here we shall

include;

RISK

Avoidance

Reduction

Prevention

Minimization

transfer

Page | 67

Risk avoidance

Risk avoidance is action taken to avoid entirely any possibility that an undesirable

event will happen. Such total avoidance is rare if not impossible, whether in your personal life or in the decision- making of a large business. Risk avoidance has to be practical and indeed has to recognise that some risk is inevitable.

Risk avoidance decision may include:

• a decision not to sell a new drug as the potential ill-effects outweigh the financial

benefits; • not allowing your children to travel in a relative's car which has inadequate child

restraints; and

• a decision not to buy a company because its pollution liabilities are too great.

Risk reduction Risk reduction is the process of taking active steps to reduce the degree of hazard

presented by a risk that cannot be eliminated, or to reduce the frequency with which it may result in loss.

Examples are as, follows:

• the introduction of an improved system of maintaining machinery and equipment;

• limiting the quantity of flammable liquids brought into a factory each day from the main store;

• mandatory use of seat belts to reduce the risk of driver and passenger injury; and

• replacement of naked-flame space heaters by hot water radiators.

Risk prevention

Risk prevention Involves the introduction of physical controls to minimise or prevent the possibility of a loss occurring. The following are some examples of loss

prevention: • elimination of ignition sources in areas where flammable vapours may collect;

• prevention of work above a certain height without special precautions; and

• substitution of flammable solvents for non-flammable solvents in cleaning

processes.

Page | 68

Risk minimisation Risk minimisation requires physical measures that, while not preventing the loss

from taking place, will lessen the extent of the damage as far as possible. Examples of this include:

• the introduction of automatic sprinkler systems;

• the employment on site of skilled first-aid staff; and

• the compartmentalisation of hazardous areas by fire break walls and fire break doors.

Risk transfer

Risk minimisation also includes non-physical measures, such as transferring risk to others outside the business. This includes more than just taking out insurance,

i.e. transferring the risk to an insurance company.

There are a many ways to transfer a risk to non-insurers. The main method is through making other contracts. For example:

• a contract may state that the risk of injury to the employees of a contractor coming onto a building site is wholly the responsibility of the contractor; or

• the owner of a building may make a tenant responsible for the risk of damage to

the premises.

Many firms, because they cannot eliminate the risk they try to:

Reduce the likely hood of loss occurring- risk prevention;

Reduce the severity and frequency of a loss- risk reduction;

Reduce the amount a loss will cost- risk minimization.

8.2 Principles of risk financing and risk transfer

We have now reached the final stage of the risk management process. Having:

• identified all the risk exposures;

• evaluated their impact on the business; • controlled and eliminated them wherever possible; and

• put in effective risk prevention measures;

. a client is left with two options:

• either retain the risk themselves; or

• transfer it to someone else, e.g. an insurer.

Page | 69

We have already ascertained that a broker will often take a part in a firm's risk management assessment. The broker will also be active in helping their clients

decide how much, and what, risks to retain. This is what we mean by 'risk retention studies'.

8.2.1 Risk retention Risk retention means that an organisation will itself meet, in whole or in part, the

cost of losses resulting from a particular risk. This can take place in two ways:

1- Passive risk retention

This is where the organisation is unaware that a risk exists or, alternatively, where

the existence of a risk is recognised but no active plan has been evolved to deal with it

2- Active retention of risk

This is where an organisation takes a conscious decision to bear the cost of any

losses resulting from a recognised risk

8.2.2 Funding of risk retention The first step in assessing the most appropriate funding mechanism is for the

business to decide how much loss it can afford within its own operations. This will involve calculating:

• the single largest amount the business can afford to retain; and

• the aggregate of losses the business can afford to retain over a given time, ignoring low-level, common, frequent losses.

The business will also reed to consider:

• the value of losses it already retains under existing policy excesses or deductibles;

• the savings it may obtain by assuming certain levels of risk, for example in the form of a reduction in premium from insurer; and

• the nature of the risks being retained:

The business will also need to decide whether the projections of the future cost of retained risks can be made. A number of techniques are available to make such projections including:

• probability analysis; and

• extrapolation of past loss data,

How are risks funded?

Page | 70

Unfunded risks- unrefunded risks are actively retained risks. Funded risks- on the other involve self insurance where a fund is built out of which

claims are paid

The reason for dealing with risks in this manner are many:

To reduce the cost of risk transfer, for example insurance;

To obtain greater control of risk;

To reduce administration; and

To increase emphasis and awareness of the need for loss control,

Question A client is considering retaining some of the risks it faces, In making this

decision, what two things does it need to take into account in deciding how much to retain in money terms?

8.2.3 Risk transfer

This can be done through conventional market- insurance, captive insurance companies or through alternative risk transfer (ART)

Conventional insurance market

Good risk management, put together with good risk financing strategy, will enable a broker get the best terms - both premium and cover - from the conventional

insurance market. .

Captive insurance companies

A captive is either a wholly owned subsidiary of the client's business or a 'rent-a-captive'. A rent-a-captive' is an arrangement designed to fund risk, which the business does not own or control. In the developed markets Brokers own and or

manage many of these rent-a-captives.

The benefits of a captive are;

• fund retained risk in a structured manner; • act as a focus of risk management effort;

• deal with claims in a more efficient manner;

• retain premium in-house thus retaining money otherwise going to an external

insurer in the form of profit, margin and overheads; • provide cover for certain risks that the conventional market is unwilling to write

or unwilling to write at an acceptable premium;

• move in and out of the external market whenever they want;

Page | 71

• access the possibly cheaper, more flexible reinsurance market; • control the amount ceded to the market against the retention amount for the

company; and

• benefit from lower tax rates, depending on where the captive is based.

Alternative Risk Transfer (ART) - accessing the capital markets

The CII's online insurance dictionary defines alternative risk transfer as:

a generic phrase to denote various non-traditional forms of (re)insurance and techniques where risk is transferred to the capital markets. More broadly, it refers to

the convergence of (re)insurance, banking and capital markets. Transferring risk into the world's capital markets by means of cat bonds (see below)

and other financial instruments is the ultimate in sophistication and complexity - and risk. This confines this activity to the specialist or largest broker, who will have

dedicated teams, qualified in handling securities and investments.

Please remember Cat bonds and other securities available in the capital markets are financial instruments, not 'insurance'. They do not follow insurance principles. e.g.

insurable interest, proximate cause, indemnity etc.

Cat bonds

Cat bond, which is a short form for catastrophic bonds is the new measures where brokers find extra capacity from insurers, reinsurers and other parties by transferring risk to Capital markets. These are mainly very large risks that are of

low frequency/ high cost events that will be very expensive to pay for. These are mainly arranged from three to five years and the main buyers are reinsurers and

non insurance bodies such as governments.

8.3 Other services brokers can offer/ Specialist risk consultancy services

Some brokers can offer other services related to risk management if they think this will help either to obtain underwriting information- own benefit or to help identify

and manage the clients’ risk. The following are some of the specialist risk consultancy services:

8.3.1 Property surveys

This is the original risk consultancy service provided by brokers and, where provided, for the most part it is generally an 'in-house' service. This could be:

1- underwriting surveys; or 2- risk management surveys;

Page | 72

8.3.2 Business continuity plans This is usually carried out as an extension of its property surveyor as a dedicated service, encompassing a range of non-property matters. This is mainly to

understand the risks that could have an impact on their business. e.g. a

8.3.4 Business Interruption reviews This will examine a client's business model and assess the dependence on customers and suppliers etc, Taking into account continuity work/plans the client

has in place.

8.3.5 Health and safety in the workplace This is to check the conditions at work with the aim of advising before the organisation gets in trouble with authorities

8.3.6 Liability surveys This will further investigate where liability cases may come firm.

8.3.7 Motor fleet risk management

This can look driver handbooks and fleet risk management procedures;

Defensive driving training - advanced driving skills training for fleet drivers,

focusing on how to avoid accidents and safe driving;

“at work” assessment;

The use of telematrics

8.3.8 Environmental risk surveys This involve assessing the environmental impact of client’s premises and occupation, This can include operational and historical exposures and is

particularly useful in the acquisition and disposal of premises,

8.3.9 Post loss control services

This goes beyond processing a client's claim with insurers to providing active assistance in the event of loss

8.3.10 Disaster recovery services This is carried out mainly after a major loss.

Page | 73

Questions 1- Give one definition of risk management.

2- What is the risk evaluation process designed to assess? 3- What is a cat bond? 4- State 4 functions of an insurance broker.

5- Name three specialist services a broker may offer.

CHAPTER 9 CLAIMS

Learning objectives After studying this chapter one should be able to:

1- Explain the role of brokers in negotiating claims. 2- Describe the different methods of dealing with a claim. 3- Show the provisions of the Anti-money-laundering ACT 2013

4- Explain the impact of fraud on the claims process.

Introduction

Claims, it is often said, are the main way an insurer displays its wares. But what part do claims play in the image of the broker?

Many insurers outsource claims handling to loss adjusters and/or claim administration companies. Also developments in technology mean that many

insurers now handle claims directly with the client over the telephone or the internet.

Page | 74

At first sight these developments could appear to spell the end of a broker's involvement in claims, but this is far from the case as we shall see, although a lot of brokers have also outsourced their claims services as well.

Key Terms This chapter will explain the following key terms

- Brokerage

- Fees

- Claims log

- Claims analysis

- Oportunistic claims

- Organised claims

9.1 A broker's duties in respect of claims A broker can be remunerated by either brokerage or fees. Depending on how he is

remunerated will determine his role in how claims are handled. Let us look at some of the issues here.

9.1.1 Brokerage For a broker, who has been paid by brokerage or commission, the legal position is clear: they are responsible for handling claims under the policy they have arranged.

This is irrespective of when the claim arises and irrespective of whether policy holder is still their client. The way around this would be if the broker put a

disclaimer into the terms of business agreement (TOBA) allowing them to charge for the ongoing claims service or advising the client to take the claims run off to

the new broker. The problem comes if a claim arises many years after the policy was arranged, for example:

• claims under liability policies written on an occurrence or causation basis involving industrial

deafness, pollution etc.: and • more recently, where the injury or damage does not manifest itself until many

years after it was caused.

Remember: 'if it is not in writing, it is impossible to prove it happened', Some of the larger brokers have set up specific teams to deal with these 'legacy'

claims. Others outsource the handling of such claims to one of the new specialist companies operating in this field.

Activity Have a look at your contract of employment. It is likely to contain a term allowing

your employer to contact you after you leave for your comments and your memory on a major problem or issue.

9.1.2 Fee It is a different situation, however, for a broker who is paid by client fee. It is only where the fee/service agreement clearly specifies that this is the case, will such a

Page | 75

broker be responsible for dealing with claims under policies they have arranged. We saw earlier how crucial it is that the fee/service agreement contains a term clarifying who is responsible for claims, after termination of the broker's contract

with the client.

Nevertheless, there are two potential problems: • the client's expectations, particularly if the service agreement is unclear; and

• the broker's desire to protect their position if the policy is unclear and there is any suggestion of an E&O claim.

Even where the agreement is clear that the broker's responsibility for handling claims ceases on termination of the contract between the client and the broker, it

would be prudent to allow for access to records in the event of a possible E&O claim. It is also prudent to give the new broker taking over the claims as much

assistance as possible to provide a smooth transition.

9.1.3 Summary of a broker's activities where they

are dealing with claims An insurance policy is a promise that the policyholder will be indemnified for losses resulting from a specified event. It is the responsibility of the broker to ensure that

this promise is kept. Throughout all claim negotiations it is the broker's job to see that the insured is

treated fairly, so that they receive a true indemnity in accordance 'with the terms of their policy. Whatever the type of claim, broker should monitor it closely and,

so far as they are able, guide the progress of the parties towards a fairly and acceptable to both.

The basic activities of the broker in relation to claims include

Advising the client as whether the loss is insured or not

Giving immediate notification of losses to insurers

Advising the client of their rights and obligations under the policy

Arranging for the completion of appropriate claims forms

Ensuring that, where necessary, adjusters are appointed and briefing the client on the role of the adjuster;

Assisting the client in preparing the necessary documents and information in support of the claim to best present the claim to the market

Collecting claim payments from insurers and

Especially when a major loss occurs, attending site meetings with the adjuster and the insurer’s personnel.

Large brokers may also provide additional specialised services to clients, such as

Carrying out post-loss surveys;

Helping the client prepare and present the claims documentation needed by the adjuster; and

• making staff available who are experienced in the adjustment of complex

claims, such as business interruption, to assist the client in their negotiations with the insurer.

Broker receivers a claim

No authority to handle Broker does act for customer

Page | 76

9.2 Methods of dealing with claims Traditionally, brokers handled all claims on their clients' behalf, dealing with both the claims processing activities and acting as the client's advocate where there are

problems and issues. However, there is now a gradual retreat to a more focused approach, depending on the type of claim and the client's requirements. Dealing via a broker

Brokers continue to handle all claims, no matter what size, for their smaller clients or for those who rarely have claims, combining claims management and claims

advocacy.

9.2.1 Dealing direct with the insurer

However, among many brokers, and not just the larger ones, there is a gradual withdrawal from day-to- day in claims processing, particularly on volume claims

such as motor and employers' liability. Here, the client notifies the claim directly to the insurer and the broker only becomes involved on individual claims if there are problems or issues - claims advocacy.

There are main reasons for this approach.

Questionable value Other considerations

Brokers are not perceived to be

adding any value to the process and, indeed, that as another link in the

chain, they are slowing things down. Moreover this involvement increases

both costs and the possibility or errors and miscommunication

These ushered in a series of protocols that

must be followed in the event of a legal claim against a third party. The essence of these

protocol is to encourage active dialogue between the claimant and the defendant

(and their insurer) to resolve the issue expeditiously, thereby avoiding recourse to the courts

Insurers must now conform to strict timelines within which they must respond to a notice of claim. There are financial and legal penalties for non-compliance.

Insurers have therefore been encouraging brokers to withdraw from handling liability claims. They desire total control of the process to ensure they can respond

within the timelines laid down by the protocols.

9.2.2 Broker handled claims

Must pass notification

to the insurer promptly

Must inform client

they cannot deal with

the claim

Must act with due care, skill

and diligence in accordance

with the Principles for good

Business

Page | 77

Where a broker is involved in all areas of claims handling, their first action on receiving advice of a claim will be to confirm, from their records, that the loss falls under a policy they have arranged. However, it is the insurer who will have the final

say. What they do next varies according to the nature and probable size of the claim.

Whatever the claim, however, the insurer must be notified immediately in all cases.

Unless there is a special arrangement between the broker and the underwriter, notification to the broker is not deemed to be notification to the insurer as required by a policy condition.

The skill and knowledge of the broker are required when there are questions about

the validity of a claim or the extent of the loss. The broker should negotiate with the insurers to find a fair and amicable solution.

We will now look more closely at the role of the insurance broker in respect of certain aspects of claims negotiations.

9.2.3 Major Property losses Major property losses will require the appointment of a loss adjuster by the leading

insurer. The adjuster will visit the insured premises to examine the damage. After detailed discussions with the insured and the receipt of repair or rebuilding

estimates they will, in due course, issue a report as approved by the leading insurer. This will indicate the settlement as agreed by the insured.

The broker may accompany the adjuster on visits and may participate in the negotiations to ensure the satisfaction of the client.

Where a number of co-insurers are involved in the loss, a copy of the adjuster's

report will be sent to each. The report indicates each insurer's proportion of the settlement and establish a date for simultaneous payment to the broker. Any related consequential loss claim will have its own, separate report.

9.2.4 Claims notified direct to insurers Where a client 'deals direct' with an insurer on claims, the broker usually retains a claims advocacy role. Claims advocacy means simply assisting and advising the

client if there are any problems with the individual claim or the policy cover. The insurer will, therefore, still need to advise the broker of any major or contentious

claim if the client has not already done so. In addition, on policy basis, the broker will arrange for the periodic production of

full claims statistics from the insure. They will review these in detail, in conjunction with the insurer and the client. This will highlight trends and problem areas so they can be addressed,

Activity

What is your firm's policy on administering claims?

9.3 Claims records

Page | 78

9.3.1 Claims logs: details

The broker will maintain a register of those claims they handle for each client containing full details of the agreed settlements and current outstanding figures. This will be of assistance when considering extensions or improvements in cover,

and will be of value when negotiating future premium terms, since the claims experience necessarily has a bearing on rating levels.

9.3.2 Claims analysis

All claims need to be looked at in context. Claims statistics should be reviewed,

amongst other things, against the following,

Premium To determine the loss ratio and to evaluate trends over time

Rating base i.e. turnover, wage roll, number of vehicles, total sum insured

etc-to determine the claims rate and to evaluate this against the actual rate

Previous loss estimates

‘triangulation

It is particular useful to keep continuing records, called

triangulations, of past claims experiences for liability risks

specifically employer’s liability risks. At renewal the value of paid

and outstanding claims for the period can thus be reviewed. A development patterns will emerge

showing how quickly insurers are settling the claims and the claims

and the difference between the amount the insurer has set aside to

meet a claim and how much the claim actually cost.

Client structure e.g. claims by business unit. Location, products etc

Type of loss What type of claims are arising, e.g.

a high proportion of property claims are due to theft, or under an EL policy most claims are for the

industrial deafness

Time i.e. to identify trends-whether claims by volume or amount are

increasing / decreasing-and to determine whether there are any emerging trends, e.g. stress claims

etc to enable remedial risk management action to be taken

Page | 79

Many larger brokers offer a computerised claims analysis system, which is often essential for the proper operation of a risk mar agreement programme, Such systems may be operated by the broker, operated by the client through direct entry

to the broker's system, or take the form of software which the client can ~Jn on their own Pc.

9.4 Insurance fraud Fraud is a criminal offence: insurance fraud is 'fraud'.

The law of agency does not override a broker's duty to comply with the law. A broker who pursues a claim on their client's behalf when they know it is fraudulent, is committing an offence.

9.4.1 insurance fraud is of two main types.

Opportunistic fraud Organised fraud

This is where individuals or firms exaggerate or inflate genuine claims

to increase the value of a payout. In a minority of cases. Opportunistic

fraudsters will fabricate an entire claim, including, for example,

deliberately causing damage so as to be able to claim

This is where criminal gangs take out insurance policies with the specific

intention of committing fraud

The most costly frauds are those which are either entirely bogus or staged. Invented

or staged claims are relatively low in volume, but higher in cost, because the costs of the claims are generally higher.

Who are the likely fraudsters?

• people over 45 are less likely to commit insurance fraud than average; • those who paid annual insurance premiums of over USH. 5,000,000 are 50% less

likely to have committed fraud than average; • homeowners are less likely to have committed insurance fraud than average;

• those who admitted committing other crimes are almost five times more likely than average to have committed insurance fraud.

9.5 Role of Brokers with other service providers

As mentioned before, brokers will not stop at only placing insurance and handling claims. They can provide an advocacy role, depending whether they earn brokerage

or fee. However they might even do more when it comes to other services they provide their client when dealing with other service providers.

As long as the clients interests are at stake, a broker should come in as a professional firm and represent the client. We can talk about many services where

this situation arise, however for this text we limit ourselves to mentioning that brokers should ensure services are not in the way of the client interest. The broker

Page | 80

for example should coordinate the activities of the loss assessors, adjusters, investigators, e.t.c. The broker is appointed for his professionalism and as such should prove that that is so.

Questions 8.1

You have reason to believe that your client's claim is fraudulent. What do you do?

Questions 1- What is the legal position with regard to handling claims when a broker is

paid by commission or brokerage? 2- List of activities of a broker on receipt of a claim.

3- Explain advocacy role in respect of claims. 4- Why is it important that fraudulent claims are identified?

CHAPTER 10 USE OF INFORMATION TECHNOLOGY RECORDS

AND QUALITY

Learning objectives

After studying this chapter one should be able to: 1- Show the need for an IT system.

2- List the requirement of a good it system. 3- Demonstrate the importance of emails.

Introduction The need for IT can not be re-emphasized as far as running a broking firm is concerned. As such, we have to talk about its importance at this point. If one does

not want to be left out, then IT will number one on th list of priorities

Page | 81

Key Words This chapter will explain the following key words

- Need for IT

- Quality system

- Email

10.1 Need for IT For the broker gone are the days when you world relied on simple normal or semi automated office. Whether you are a big or small broker the need for an efficient

and effective IT system is key to the success of your business and utimedity your services, your delivery and profitability.

Why IT information. a). In all markets, the insurance brokerage business in heavily regulated and with regulations comes a duty to provide timely information reports to the regulation

b). The C.E.O and senior management need reliable and timely information to know how the business is performing, the customer trends, the renewal and retention

levels so as to make informed decision to enable their business to survive and grow.

c). The finances cannot be run without a proper system. You should effectively collect, know which payments to make and track the commission due to you on an

accurate and timely manner. The broker will also need to generate client statements to enable guide collection of premium due and outstanding.

d). Clients data is important to ensure that you monitor trends and also trace you client details in terms of change in contracts addition and deletions, renewals and

at times maintain good customs relations for you.

All the above are made easy when you have an effective in system.

10.2 Types of IT system to acquire One of the toughest challenges the broker will face will be the type of IT system to

acquires and the effectiveness and successful implementation of the same. It may start with a modest investment in a website to a fully integrated broking,

management and accounting system. As you source for the right system you will be promised fabulous system which will do everything promising a paper free office,

but is this all?. The market has a lot of examples of expensive IT projects that promised much, cost a great deal and finally did not deliver. However, it is

important to note that not all IT projects fail and some can be really successful. If all IT project failed then, you would not use your email, use your mobile phone

for mobile money, what’s app, face book and so many other tasks that we take for granted today.

The challenge will be to identify a good IT system and get it implemented and successfully deliver to the expectations.

Page | 82

To therefore ensure that an IT system services your business you will need to look at the following components.

i. IT should be aligned to the objectives and goals of the business

ii. Review all the business processes you wish the IT system to address iii. Define the scope of the project

iv. Document all the requirements and involve the users v. Do not be over ambitions

vi. Accept that some processes will be kept normal and will only be automated later

vii. Be ready to make reasonable investment nothing good comes free. Cheap

things are expensive in the long term. viii. Select the right project team to lead the project and identify good team

leader for the project. The team should have the knowledge, skills, time, and interest to have the project successfully implemented.

ix. Have time lines for the project x. Do pilot tests and have a parallel run before you completely go live xi. Training the employees / the users

xii. Select the right supplier with proven trade record of delivery. Do as supplier background search and get reference. Avoid small firms with

untested software. xiii. Have a contract with the supplier in place and ensure that the scope of

work is clearly stated on what the project price is and what would be extra

10.3 Quality system All businesses make mistakes and therefore, mistakes should be a concern. However, for insurance brokers whose main duty is professional advice, there

is no room for mistakes as such mistakes touch on the professionalism of the broker and can be costly in terms of losing business and possible legal cases

through a claim for negligence .

Therefore the need for quality systems should be to support the business to achieve the highest quality of output in the most efficient way with a minimum or no errors. Quality control is a vital ingredient to long term business.

Clients expect a high level of technical knowledge, and advice and outstanding

service delivery from their brokers. Indeed this is the reason that makes brokers different from the agents. It therefore follows that brokers who fail to do this run

the real risk of losing business to the competition, setting reduced margins and incurring costs of the mistakes.

The broker should ensure they have quality systems in place to avoid; a). Financial costs as a result of inefficient work process

b). Loss of reputation and referrals as a dissatisfied client would damage the brokers reputation with other clients and insurers

c). Waste of management time spent in resolving mistakes and errors and complaints from the clients d). Regulation action and fines due to client complaints.

The following are some of the quality features which a broker would maintain. Some if not most can be automated by use of IT

a. Incoming mail routines

b. E-mail handling procedures

Page | 83

c. Meeting schedules d. Broking procedures and client handling e. Claims and complaints procedures

f. Telephone procedures g. Filing systems and filling procedures

h. Premium remittance and payment system

10.4 Email Email offers very low-cost, instant communication, capable of transferring

considerable quantities of information to many people. All business now publish their email and web addresses on business cards, nearly everyone has access to email at work.

Of attachments and proof of receipt-although the real risk is probably small. And then there is the question of viruses.

Email’s prime benefit, i.e. the simplicity with which messages can be forwarded, is

also its weakness. It is easy to send them to the wrong person, either deliberately, or worse, inadvertently. It is also a relaxed, informal media to use which can lull people into unprofessional behaviour. We must remember that every email

completed can be admissible as evidence in a court of law.

On balance the benefits probably far exceed the risks and a few simple procedures

can keep these manageable. These includes

Setting the email system to send acknowledgements of receipt-most systems offer a choice of either acknowledging all receipts, which would probably

causes a flood of replies, or just advising failure to deliver.

For important messages, checking by phone to ensure the message has been received

Sending all attachments and / or cover confirmations in PDF format so that the content be altered

For any messages concerning cover, printing emails for placing on the file; and

Making sure that you have auto spell check switched on, this means all your outgoing emails will be automatically checked for spelling and will save some

embarrassment on your part.

And lastly, remember that for all its informality, an email is just a written

communication. Apply the test: ‘would you be happy for the contents to be read out in public, to your boss or even in court?

Questions 1- What does a good IT system require?? 2- What the procedures that can make email use efficient?

3- Why is important to balance the cost of IT with the rest of the company’s activities?

4- State 4 functions of an IT system.

Page | 84

CHAPTER 11

LEGAL STRUCTURE AND ORGANISATION OF THE BROKER’S OFFICE Learning objectives

After studying this chapter one should be able to: 1- Explain the structure of a typical broker’s office

2- Show the requirements for licensing on insurance brokers. 3- Compare the conditions of broking houses in different parts of the world.

Introduction We can not conclude the broking practice without talking about how a broker’s

office should be organized. This is what this office deals with so that we are clear as to how the whole organisation work.

Key Terms This chapter will explain the meaning of the following key words

- Organisational structure

Page | 85

- Accounts system - Maintainance of records

11.1 Organisational structure The structure of a broker’s organisation depends on the size and type of operation. A broker would structure their business along the following lines:

a. Organisation of departments by lines of business, say personal lines, motor, life medical, engineering, re-insurance, energy and oil

b. Organisation of department by client accounts namely; financial services (Bank Finance companies), institutions (schools, churches), individuals,

Non-government of organisation. (NGO’s) government institution, retail etc.; c. Organisation by client size client size namely, large / global, SME, individual. A broker may limit his organisation to the direct / local market or he may

extend his activities to the foreign or international markets (some organisations arrange themselves entirely around clients and do away with classes of

business). In Uganda the broking industry including reinsurance brokers numbers less

than 40, Kenya about 140 and Tanzania about 30 firms and in the East African Region the total number of brokers is just over 200 as compared to U.K with about 4,000 brokers, South Africa about twice what East Africa has and U.S.A

about 15,000. Even in large broker markets like the U.K the majority of brokerage firms employee less than ten people. The brokers can be categorised

as

Large global companies that employ hundreds of staff around the world for example: Aon, Marsh, Grassvoye, Willis, and Bartlett.

Medium, Regional companies; Chancery Wright, Clarkson, Avenue

Local brokers

Re-insurance brokers Management structure is a function of size and you find that the larger global and

regional companies employing more than ten employees having formal management structures. The smaller companies with less than ten employees do

not have or see the need for formal management structure. The owners who are normally the top management put their efforts and energies in looking for business, client relations and retention and delegate the other tasks of running the office,

including claims follow-up to the junior employees. As the companies grow larger, they realise the need to introduce structures to

ensure that the business is managed effectively. They will then introduce departmental function seen in larger companies such as finance and

administration, human resource, marketing, IT and legal. Suffice to note that because most of the broker organisations are small to medium size, they have adopted the structure around clients’ activities, only adding

accounts to this department to handle accounts, IT and marketing. The advantages of this structure are;

i. Reduced costs as less people are needed and there is no need for specialised divisions because everything is centralised.

ii. More consistency in communication to the client as information is centralised

iii. The client team deals with property, indemnity, claims and servicing rather than passing work to another division.

iv. There is consistency of service as one person handles the client all through

ensuring account history and relationships are kept

Page | 86

Typical organisational chart of A small broker

11.2 Compliance with regulation In all insurance markets, brokerage business is regulated and there are Acts, laws

and regulations that regulate the operation of brokers operations. Insurance brokerage in Uganda is governed by the Insurance Act 2002 and Insurance Act

Cap (3) 213 of 2011. The salient points of the Act with relationship to the organisation of brokers are:

- All brokers have to be licensed by the authority and licence is renewed

annually. - No employee of an insurance company can be employed as a broker

- No person can use the name of the broker if not licensed by the authority

- All brokers must be body corporate incorporated under the companies Act

- A broker should not be a director of an insurance company

- Should be of sound financial standing

- Principal officer should have knowledge, skill and experience in insurance

- The broking firm should have a professional indemnity policy

- The principal officer should be of sound mind

- should not have been convicted of an officer relating to fraud or dishonesty

- should not be declared bankrupt.

- the Broker by Regulation should have a registered physical office.

11.3 Account system and maintenance of records The Insurance Act requires that:

a). The accounts of every insurance broker have to be handled annually by

an audit affirmed by the authority. b). The broker should submit, with in the three months from the end of each

financial year Financial annual reports. c). The broker should during the year in accordance with international

financial reporting standards keep proper books of accounts for all the income and expenditure. d). The authority shall inspect the affairs and books of the broker from time

to time e). The broker shall keep records of all insurance transactions undertaken.

Board of Directors

Managing Director/ C.E.O

Operations/ Broking Manager Accounts/Administration

Manager

IT

assistant Account

Handle Account

Handle

Account

Handle

Account

Assistant/

Cashier

Front office,

delivery clerk

Page | 87

Whereas the statutory financial reporting requirements are annual, the insurance regulations require that the broker should submit quarterly

reports. The returns should show; a. The gross premium written

b. The premiums remitted to insurers c. The commissions earned

d. The outstanding premiums due to insurers Given the level of information and reports required, it is critical that brokers maintain:

a). A robust accounting department b). An I.T system that can accurately generate the required reports

Questions 1- Draw an organisational structure of a broking form showing the important

areas of focus. 2- Why is it important to consider size in determine the structure of a broking

firm?

3- Why is crucial to mention a robust accounting system in a broking firm?

Page | 88