P81 Oct 2012 April 2013

Front 1

1. State seven guidelines/headings for the presentation of renewal terms to significant
commercial clients. (7)

Back 1

Last year’s terms with last year’s values.
• Last year’s terms on this year’s values.
• This year’s terms on this year’s values.
• Competing or alternative terms on this year’s values.
• Percentage differences by line and in total.
• Key differences, if any, in insurers’ terms and conditions or cover if material.
• Where terms are being presented with different deductibles, show analysis of the financial impact.
• Summarise the scope of the remarketing exercise making reference, if applicable, to any objectives
previously agreed with the client.

Front 2

2. (a) Explain briefly the function and characteristics of a managing general agent and
why insurers create these facilities. (6)

Back 2

a) A managing general agent (MGA) is usually a corporate entity that has been given delegated
underwriting authority from an insurer, but otherwise acts as if it was the insurer. MGAs can be
independent or owned by either an insurer or broker. Insurers create these facilities typically
because the MGA personnel have specialist expertise meaning the insurer can access a revenue
stream quickly without the expense of committing its own resources.

Front 3

(b) List four key areas that a delegated authority typically specifies in setting the
boundaries of the operator’s authority. (4)

Back 3

(b) • What risks can be covered and what cannot.
• Rates.
• Limits.
• Cover/wording.

Front 4

3. (a) List ten steps in the insurance market cycle. (10)

Back 4

(a) • Capital markets invest in insurance.
• New insurers and underwriting vehicles emerge.
• Insurers’ capacity increases.
• Insurers write more business.
• Competition lowers rates.
• Claims exceed premiums.
• Capital markets withdraw from insurance.
• Insurers’ capacity reduces.
• Competition for restricted capacity increases rates.
• Premiums exceed claims.

Front 5

(b) Identify four ways of minimising the impact of a hard market on clients. (4)

Back 5

(b) • Is it possible to get a long-term agreement or a multi-year policy?
• Can the client put in place an enhanced risk management regime?
• Can the client retain a higher level of risk e.g. via a higher deductible?
• In the case of liability increases would a combination or split of the employers’ liability/public
liability elements help?

Front 6

4. Explain briefly six general guidelines on the disclosure of material facts to insurers. (12)

Back 6

Any six of the following:
• Any doubt as to whether information is material should result in disclosure with clarity and urgency.
• Consult with experienced colleagues and insurers but disclose if their responses are uncertain.
• Remember that disclosure will rarely prejudice a client but non-disclosure certainly will.
• Where applicable, loss information must include details on both insured and uninsured losses.
• Large losses should be disclosed even when they are old e.g. over five years ago.
• If neither the relevant insurer nor the client can give information about losses before the standard
experience period, this fact itself should be disclosed.
• It is unwise to remove the losses from sold businesses as an underwriter may judge that it reflects
on the management of the current business.
• In judging the significance of size of loss, context matters in relation to the size of the business

Front 7

5. Describe briefly the differing aims of the risk management services provided by brokers
in respect of business continuity, business interruption and disaster recovery. (6)

Back 7

The aim of business continuity services is to assist the client in understanding the risks that could have a
major impact on their business and help them put a plan in place to get the business up and running as
soon as possible afterwards. Business interruption reviews a client’s business model with the aim of identifying the key business risks and dependencies in order to set the correct sum insured. The aim of disaster recovery services is to provide specific assistance in the event of a major loss, ranging from access to specialist public relations support to a full crisis management capability

Front 8

6. State six data protection principles in the Data Protection Act 1998. (6)

Back 8

Any six of the following:
• Data must be processed fairly and lawfully.
• Data must be obtained only for specified and lawful purposes.
• Data must be adequate, relevant and not excessive.
• Data must be accurate and kept up-to-date.
• Data must not be kept for longer than is necessary.
• Data must be processed in accordance with the rights of data subjects.
• Data must be held securely.
• Data must not be transferred to a country outside the European Economic Area, without adequate
protection.

Front 9

7. (a) Define the four categories of ‘client’ set out in the Financial Services Authority’s
Insurance: Conduct of Business Sourcebook. (8)

Back 9

(a) • Policyholder – Anyone entitled to make a claim directly to the insurance undertaking.
• Customer – A policyholder or a prospective policyholder who makes the arrangements
preparatory to concluding a contract of insurance.
• Consumer – Any natural person who is acting for purposes which are outside his trade or
profession.
• Commercial customer – A customer who is not a consumer.
.

Front 10

(b) State the client category a broker should apply when:
(i) the status of a customer is unknown; (1)
(ii) a customer is covered in both a private and commercial capacity. (

Back 10

(b) (i) A firm must treat the customer as a consumer.
(ii) The customer is categorised as a commercial customer

Front 11

8. Outline four examples where a domestic client, with a non-motor claim, should be
advised of action they need to take or documents that may be required.

Back 11

• In the event of a death claim, under a personal accident policy, the insurers will require a death
certificate or other acceptable proof of death.
• In the event of a personal accident or sickness claim, medical certificates must be obtained.
• In the event of a household or travel theft claim, the client should be instructed to give immediate
notification of the incident to the police and obtain a crime reference.
• In the event of accidental damage to a household item that is un-repairable, the client should be
advised not to dispose of the item until told to do so, as appropriate, by the insurer.

Front 12

9. (a) Describe briefly four reasons why a client may wish to secure a higher level of
retention. (8)

Back 12

(a) • Insurers offer more flexibility to insureds who demonstrate their commitment by retaining more
risk.
• To control claims the insured may be best placed to manage certain types of claim, for
example a business imperative to defend liability claims when the insurer may be more willing
to compromise.
• To control risk improvement measures, because a higher retention means that insurers are more flexible about risk improvement.
• To save money insurers grant reductions in premium for higher levels of retention.

Front 13

(b) Identify four other influences on the level of retention applied. (4)

Back 13

(b) • The client's view on the probability of loss differing from that of the market.
• The client's risk appetite.
• Facilitation of a risk funding mechanism.
• Market conditions – position in the cycle.

Front 14

(c) Explain briefly why the premium reduction for a higher retention is normally lower
than the actual increase in deductible.

Back 14

(c) The reduction is limited by the fact that the insurer still has to allow for the cost of capital (to
provide capacity) and the provision needed for total loss or catastrophe risk.

Front 15

10. (a) Explain briefly the difference between unfunded and funded risks. (4)

Back 15

a) Unfunded risks are actively retained risks where current revenue is used to meet the cost of
losses as they arise. Funded risks are where the firm allocates an amount out of its current
revenue towards meeting anticipated losses, hoping the amount allocated will be sufficient to
meet such losses over a specified period.

Front 16

(b) Identify four reasons for dealing with risks in these ways. (4)

Back 16

(b) • To reduce the cost of risk transfer, for example insurance.
• To obtain greater control of risk.
• To reduce administration.
• To increase emphasis and awareness of the need for loss control.

Front 17

11. Some brokers use their own questionnaire to gather information, from a large or
multinational risk with multiple sites or subsidiaries, rather than make a service call to the subsidiaries concerned.
Explain briefly four potential disadvantages of this approach.

Back 17

The broker may be exposed to an accusation of poor service if it relies solely on the questionnaire.
• The broker may lose touch with subsidiaries as an important source of information on future
developments.
• Inadequately completed forms may result in more costs than the savings targeted by not carrying
out a service call.
• Questionnaires cannot cover every eventuality and the function of obtaining the right information is a
prime part of a broker’s service to the client.

Front 18

12. Explain briefly three possible implications for brokers who accept income in the form of
contingent commissions or overriders, for example, from insurers and premium
financiers. (6)

Back 18

Any three of the following:
• It could influence decisions on business placement in conflict with the primary duty to place the
interest of the client first.
• It could lead to the selection of insurers that are unsuitable for the client, merely because they
generate more income.
• The broker could become more focused on churning an account to generate income, than on
meeting a client’s needs.
• The totality of the broker’s earnings is not fully disclosed to the client.

Front 19

13. Describe briefly the Financial Services Authority’s three requirements for a long-term
insurance contract to be designated a ‘pure protection contract’. (6)

Back 19

• The benefits under the contract are payable only on death or in respect of incapacity due to injury,
sickness or infirmity.
• The contract has no surrender value, or the consideration consists of a single premium and the
surrender value does not exceed that premium.
• The contract makes no provision for its conversion or extension in a manner which would result in it
ceasing to comply with the first two conditions.

Front 20

14. (a) Identify the four required areas of pre-contract information stipulated by the
Financial Services Authority for general insurance contracts. (4)

Back 20

(a) • The law applicable to the policy.
• The arrangements for handling complaints.
• The head office address or, if appropriate, the branch of the insurer.
• If applicable, the cancellation rights with details.

Front 21

(b) Define when cancellation rights come into effect. (2)

Back 21

(b) The later of the date of the conclusion of the contract and the day on which a consumer receives
their policy.

Front 22

(c) Identify the category of clients where cancellation rights apply and for what
durations. (3)

Back 22

(c) Cancellation rights apply only to consumers and extend to 14 days for general insurance
contracts and 30 days for pure protection and payment protection policies.

Front 23

15. Explain briefly the three conditions applied in the Financial Services Authority’s guidance
for advertisements that make pricing claims, such as indicating a firm can reduce the
premium, provide the cheapest premium or reduce a customer's costs.

Back 23

• Claims must be consistent with results expected by a majority of customers, unless the proportion
likely to achieve the claims is stated prominently.
• Promotions must state prominently the basis for any claimed benefits and any significant limitations.
• They must comply with other relevant legislative requirements, including The Control of Misleading
Advertisements Regulations 1988.

Front 24

2013

Back 24

APRIL

Front 25

1. Identify four potential issues a client may face in contemplating a switch of insurer
mid-term following the downgrading of the credit risk rating of the original insurer. (4)

Back 25

Any four of the following:
• Alternative cover could be more expensive.
• The original insurer may cancel but without return of premium, consequently again adding to costs.
• Dual cover may exist leading to contribution complications on claims.
• Cancelling mid-term can lead to awkwardness around existing claims.
• For losses reported after cancellation, the original insurer may insist on strict interpretation of claims
conditions.

Front 26

2. Explain briefly what a broker should do in order to comply with the Financial Services
Authority's guidance document Responsibilities of Providers and Distributors for the Fair
Treatment of Customers in the area of post-sale responsibilities. (8)

Back 26

• Comply with any contractual obligation it has to the customer, for example to provide ongoing advice
or periodic reviews and consider its responsibility to maintain adequate systems and controls to
deliver on such reviews.
• Consider any implied or express representation it made (e.g. during meetings, correspondence or
promotional material). Where a customer has reasonable expectations based on the statements
made by a broker, the broker should meet these expectations.
• Where involved in handling claims the broker should meet any reasonable expectations created in
the customer's mind with regard to how the process would be handled.
• Establish, implement and maintain effective and transparent customer complaint-handling systems.
• Pass any communications received from customers (intended for or suited to insurers to act upon)
to insurers in a timely and accurate way.

Front 27

3. Outline the seven contract certainty principles

Back 27

• A. When entering into the contract – insurer and broker must ensure all terms are clear and
unambiguous by the time the offer is made or accepted including any conditions or subjectivities.
• B. After entering into the contract – contract documentation must be provided to the insured
promptly.
• C. Demonstration of performance – insurers and brokers must be able to demonstrate their
achievement of principles A and B.
• D. In respect of contract changes – contract changes need to be certain and documented promptly.
• E. When entering into the contract – the contract must include an agreed basis on which each
insurer’s final participation will be determined. The practice of post-inception over-placing
compromises contract certainty and must be avoided.
• F. After entering into the contract – the final participation must be provided to each insurer promptly.
• G. Where the contract has not met the principles – the insurer and broker have a responsibility to
resolve exceptions to any of the above principles as soon as practicable and without undue delay.

Front 28

4. (a) Explain briefly how group policies are defined by the Financial Services Authority and
the rules for providing contract information. (4)

Back 28

(a) • They are policies which have more than one policyholder.
• They are single policies which provide benefits to a group of people, e.g. employees of the
same company.
• Brokers must provide appropriate information to their customer to pass on to other
policyholders.
• They need to tell their customer that the information should be given to each policyholder.

Front 29

(b) Explain briefly the Financial Services Authority rules and guidance relating to the
provision of policy summaries. (2)

Back 29

(b) Insurance: Conduct of Business Sourcebook (ICOBS) 6.1.10G states that a firm may wish to
provide information to a consumer in a policy summary. ICOBS 6.4.4R makes them mandatory
for payment protection and pure protection contracts only

Front 30

5. Outline four actions a broker should take to protect their firm when they complete any of the
questions on a proposal form for a client. (8)

Back 30

Model answer for Question 5
• Each question should be explained clearly and without ambiguity.
• Before asking the client to sign the proposal, each of the questions should be reviewed again with
the client.
• The client’s obligations and duties in signing the proposal should be made clear.
• A copy of the form should be given to the client immediately, preferably accompanied by a written
commentary of any important points described during its completion.
Model

Front 31

6. Explain briefly, with reference to difference in conditions and difference in limits clauses:
(a) the main aim of the clauses and provide an example of how they work in practice; (4)

Back 31

(a) • To top up the cover available under a local policy to the same global standard that the
master policy provides.
• For example, a master property policy may include cover for accidental damage whereas a
local policy covers fire and perils only. In the event of an accidental damage incident in the
local territory, the master policy will step down to provide indemnity.

Front 32

(b) the actions needed where there is no underlying local policy.

Back 32

(b) • It is essential that the insurer agrees, and/or includes, a statement which allows the master
policy to act as a local non-admitted primary policy where there is no specific local policy in
force.
• It is important to clarify what is deemed to be a local primary policy. Most insurers make a
distinction between one issued by themselves or their local representatives and one issued
by another insurer.

Front 33

7. Explain briefly, in reference to the Contracts (Rights of Third Parties) Act 1999:
(a) the Act's importance when there is a chain of brokers involved in a given transaction; (4)

Back 33

(a) • The insured is not party to the contract between a producing broker and a sub-broker,
however, it can be argued that such a contract is intended to confer a benefit on the insured,
as locating appropriate insurance cover for the insured is the reason behind the contract.
• The Act requires that the third party is identified in the contract by name, as a member of a
class or by answering to a particular description. Most insured’s would be able to satisfy this
requirement.
• The insured cannot rely on the Act where the two brokers have agreed that the contract will
not be enforceable by the insured. Even if the Act does assist the insured, the onus will still
be on the insured to prove that the sub-brokers breached their duty of care and that the
breach was the cause of the insured’s loss.

Front 34

(b) the circumstances surrounding the case of Crowson v HSBC Insurance Brokers Ltd
(2011) and what is generally the illustrated outcome for brokers. (6)

Back 34

(b) • HSBC Insurance Brokers Ltd (HSBC) were contracted to arrange cover for all of the risks
covered by a firm’s previous brokers.
• HSBC failed to arrange directors and officers cover as the previous brokers had and the
firm's managing director, Crowson claimed that he was entitled to its benefits.
• HSBC’s response was that it was not in a contractual relationship with Crowson and it did
not owe him a duty of care.
• The court found that a broker can be liable in tort where it is instructed to arrange insurance
for both the instructing person and others, and where the policy is intended to benefit a third
party.
• The court found that even if its conclusion were incorrect, this situation fell within the Act
giving Crowson the right to enforce the contract.
• Generally, brokers can be found liable to third parties despite the absence of a direct
contractual relationship if they are aware that third parties are to benefit from any insurance
obtained.

Front 35

8. (a) Describe briefly the common measures of exposure for the following classes.
(i) Employers' liability. (2)

Back 35

(a) (i) Employers' liability – payroll subdivided between degrees of hazard, typically, clerical
and manual and higher hazard, such as offshore or work at height, and ordinary manual;
and headcount (or full time equivalent) divided between the degrees of hazard
described.

Front 36

(ii) Public liability. (3)

Back 36

(ii) Public liability – turnover split by activity or division, a subdivision between the UK, USA
and the rest of the world. For the USA, the difference between exports and work
undertaken there.

Front 37

(iii) Motor.

Back 37

(iii) Motor – vehicle numbers converted into vehicle years sub-divided between private cars
and commercial vehicles, with the latter sub-divided as necessary to reflect the risk, for
example, light vans, mobile plant and heavy goods vehicles.

Front 38

(b) Explain briefly how this exposure data can assist in the analysis of claims experience. (3)

Back 38

(b) To adjust historic claims frequency to reflect changes in the size of the organisation concerned.
Claim numbers can be converted to frequency per unit of exposure so that we can identify
frequency trends independently of changes in the size of the organisation.

Front 39

9. (a) State six benefits a client would gain from setting up a captive insurance company. (6)

Back 39

(a) Any six of the following:
• Ability to fund retained risk in a structured manner.
• Acts as a focus of risk management effort.
• Can deal with claims in a more efficient and timely manner.
• Can retain premium in-house avoiding money otherwise going to an external insurer in the
form of profit and overheads.
• Ability to provide cover for certain risks that the conventional market is unwilling to write/at
an acceptable premium.
• Ability to move in and out of the external market according to the insurance market cycle.
• Ability to access the possibly cheaper, more flexible reinsurance market.

Front 40

(b) Where a client opts for a captive:
(i) list the four main planning considerations for its establishment on which a broker may offer advice; (4)

Back 40

(b) (i) The domicile.
The set-up.
The capitalisation.
The structure.

Front 41

(ii) identify the two key ongoing related services that a broker may provide the client.

Back 41

(ii) Managing the day-to-day operations.
Acting as the captive’s underwriters.

Front 42

10. Outline four ways brokers typically monitor the financial well-being of the insurers it deals
with. (8)

Back 42

• Subscribing to the information services provided by the rating agencies – Standard & Poor’s, A.M.
Best, Moody’s etc.
• Reviewing comment and information in the financial press and on relevant websites/in the market
place.
• Being alert to changes in an insurer’s underwriting policy, e.g. a move to ‘buying in’ policies –
underwriting risks at below cost to obtain cash flow.
• Paying particular attention to the speed at which the insurer settles claims and returns premiums.

Front 43

11. Explain briefly the differing aims and purposes of underwriting surveys compared to risk
management surveys. (6)

Back 43

• Underwriting surveys determine the risk information needed by insurers to underwrite the risk, e.g.
the construction of the buildings, occupation, protections, sprinklers, housekeeping etc.
• The availability of good quality, up-to-date surveys, is crucial to obtain the most competitive terms,
particularly in a hard market.
• Risk management surveys provide the client with an expert assessment of the risks inherent in the
premises and their occupation, together with practical recommendations for controlling and
eliminating those risks.

Front 44

12. List eight topics that may be included in a broker/client terms of business agreement. Your
answer should exclude: the broker’s own information and regulatory status; and matters
related to data protection, confidentiality and money laundering. (8)

Back 44

• Duration of the contract and termination.
• Client’s duty of disclosure.
• Insurer security.
• Payment terms.
• Client money.
• Conflicts of interest.
• Claims against the firm.
• Limitation of liability.
• Law and jurisdiction.

Front 45

13. Explain briefly six actions a broker may take to ensure the most positive review by insurers
of a large client's insured losses at renewal. (12)

Back 45

Any six of the following:
• Always retain claims experiences from previous years to enable the progress of claims to be
tracked.
• Check claims listings for duplications and claims shown as outstanding that have been settled.
• Ask insurers for the experience well in advance, at least two months before expiry.
• Try and agree a claims ‘cut-off’ date so that losses after that date do not affect renewal negotiations.
• Seek reviews of large losses and do this in good time.
• For large losses ensure that the circumstances are clearly understood including remedial steps
taken or changes in risk that may have eliminated the cause of the loss.
• For cases with large numbers of claims, present tables of losses with clarity and in a way that
enables you to analyse the losses by values, after the application of different levels of deductible, by
type or location and so on.
• Ensure that any factors that may have a special influence on loss/claims statistics are identified and
explained, for example closure of premises, changes in working practices and the like.

Front 46

14. (a) The Financial Services Authority (FSA) rules state that a broker must provide
information on their ‘scope of service’ to the customer prior to the conclusion of a first
policy.
Explain briefly the three types of ‘scope of service’ that are defined by the FSA. (6)

Back 46

(a) • The broker is giving advice on the basis of a fair analysis of the market.
• The broker is under a contractual obligation to conduct insurance mediation business
exclusively with one or more insurers.
• The broker does not give advice on the basis of a fair analysis of the market and is not under
a contractual obligation to conduct insurance mediation business exclusively with one or
more insurers.

Front 47

(b) One way a firm may give advice is by using an insurer panel.
Explain briefly the two key continuing compliance requirements for the use of an
insurer panel. (4)

Back 47

(b) • The broker's analysis of the market and the available contracts must be kept adequately
up-to-date.
• The selection of insurers should be based on product features, premiums and services
offered to customers, not solely on the benefit offered to the firm.

Front 48

15. A broking firm, when deciding what records it should keep, should consider the evidence it
would need to produce in order to comply with requests from the Financial Services Authority or when dealing with queries and complaints from customers.
State the three examples of such evidence that are given in the Insurance: Conduct of
Business Sourcebook (ICOBS) as guidance. (6)

Back 48

• The reasons for any recommendation.
• What documentation was provided to the customer?
• How claims have been settled and why.