EP1TB3 2023 Reference

Insurance, legal
and regulatory
(EPA)
EP1: 2023 Study text
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2 EP1/October 2022 Insurance, legal and regulatory (EPA)
© The Chartered Insurance Institute 2022

All rights reserved. Material included in this publication is copyright and may not be reproduced in whole or in part
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written permission must also be obtained before any part of this publication is stored in a retrieval system of any
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Every attempt has been made to ensure the accuracy of this publication. However, no liability can be accepted for
any loss incurred in any way whatsoever by any person relying solely on the information contained within it. The
publication has been produced solely for the purpose of examination and should not be taken as definitive of the
legal position. Specific advice should always be obtained before undertaking any investments.
Print edition ISBN: 978 1 80002 591 2
Electronic edition ISBN: 978 1 80002 592 9
This edition published in 2022
Updater
James Gillin, ACII has over 15 years' experience in the commercial insurance industry through various senior roles
in claims, change programmes, underwriting and audit. James currently works in Head Office Underwriting and
Pricing for a commercial insurer and is responsible for delivering a UK wide audit and controls programme for
delegated underwriting authorities. James took part in the CII's 2020/2021 New Generation programme.
Acknowledgements
The CII would like to thank Charlotte Warr, LLB (Hons) FCII for her assistance with the Lloyd's and London Market
sections of this study text.
The CII thanks the following for their involvement with previous editions of the study text: Patrick Hayward, ACII;
Angela Darling, FCII, Chartered Insurance Practitioner; David Ransom, FCII, Chartered Insurance Practitioner; Mike
Cranny, FCII; John Moffatt, FCII.
The CII thanks the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for their kind
permission to draw on material that is available from the FCA website: www.fca.org.uk (FCA Handbook:
www.handbook.fca.org.uk/handbook) and the PRA Rulebook site: www.prarulebook.co.uk and to include extracts
where appropriate. Where extracts appear, they do so without amendment. The FCA and PRA hold the copyright for
all such material. Use of FCA or PRA material does not indicate any endorsement by the FCA or PRA of this
For reference only

publication, or the material or views contained within it.
The CII thanks the Association of British Insurers for its kind permission to draw on material that is available on the
Association of British Insurers website: www.abi.org.uk and to include extracts where appropriate. Where extracts
appear, they do so without amendment. The ABI holds the copyright for all such material. Use of ABI material does
not indicate any endorsement by the ABI of this publication, or the materials or views contained within it.
While every effort has been made to trace the owners of copyright material, we regret that this may not have been
possible in every instance and welcome any information that would enable us to do so.
Unless otherwise stated, the authors have drawn material attributed to other sources from lectures, conferences, or
private communications.
Typesetting, page make-up and editorial services CII Learning Solutions.
Printed and collated in Great Britain.
This paper has been manufactured using raw materials harvested from certified sources or controlled wood
sources.
3
Using this study text

Welcome to the EP1: Insurance, legal and regulatory (EPA) study text which is designed
to support the EP1 syllabus, a copy of which is included in the next section.
Please note that in order to create a logical and effective study path, the contents of this
study text do not necessarily mirror the order of the syllabus, which forms the basis of the
assessment. To assist you in your learning we have followed the syllabus with a table that
indicates where each syllabus learning outcome is covered in the study text. These are also
listed on the first page of each chapter.
Each chapter also has stated learning objectives to help you further assess your progress
in understanding the topics covered.
Contained within the study text are a number of features which we hope will enhance
your study:
Activities: reinforce learning through Key points: act as a memory jogger at

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

Consider this: stimulating thought Reinforce: encourages you to revisit a
around points made in the text for which point previously learned in the course to
there is no absolute right or wrong embed understanding.
answer.
Examples: provide practical illustrations Sources/quotations: cast further light

of points made in the text. on the subject from industry sources.
In-text questions: to test your recall of On the Web: introduce you to other
topics. information sources that help to
supplement the text.
At the end of every chapter there is also a set of self-test questions that you should use to
check your knowledge and understanding of what you have just studied. Compare your
answers with those given at the back of the book.
By referring back to the learning outcomes after you have completed your study of each
chapter and attempting the end of chapter self-test questions, you will be able to assess your
progress and identify any areas that you may need to revisit.
Not all features appear in every study text.
Note
Website references correct at the time of publication.
For reference only
5
Examination syllabus
Insurance, legal and

regulatory (EPA)
Objective
To provide knowledge and understanding of the basic principles of insurance, including the main legal
principles related to insurance contracts, the main regulatory principles related to insurance business
and the key elements to protect consumers.
Summary of learning outcomes Number of questions

in the examination*
1. Understand the nature and main features of risk within the insurance environment. 9
2. Know how to apply the main features of risk and risk management to a given set of 2
circumstances.
3. Understand the main features of insurance. 8
4. Know the structure and main features of the insurance market. 14
5. Understand contract and agency. 9
6. Understand the principle of insurable interest. 5
For reference only

7. Understand the principle of good faith. 11
8. Understand the doctrine of proximate cause and its application to non-complex 2

claims.
9. Understand the principle of indemnity and how this is applied to contracts of 7

insurance.
10. Understand the principles of contribution and subrogation. 4
11. Understand the main regulatory and legal requirements applicable to the transaction 15
of insurance business.
12. Understand consumer protection and dispute resolution. 6
13. Know the main methods of preventing, handling and resolving consumer complaints. 4
14. Understand the CII Code of Ethics and be able to apply the principles to non-complex 4
scenarios.
* The test specification has an in-built element of flexibility. It is designed to be used as a guide for study and is not a statement of actual
number of questions that will appear in every exam. However, the number of questions testing each learning outcome will generally be within
the range plus or minus 2 of the number indicated.
Published October 2022

©2022 The Chartered Insurance Institute. All rights reserved. EP1
Important notes
• Method of assessment: 100 multiple choice questions (MCQs). 2 hours are allowed for this
examination.
• This syllabus will be examined from 1 January 2023 until 31 December 2023.
• Candidates will be examined on the basis of English law and practice unless otherwise stated.
• This PDF document is accessible through screen reader attachments to your web browser and has
been designed to be read via the speechify extension available on Chrome. Speechify is an
extension that is available from https://speechify.com/. If for accessibility reasons you require this
document in an alternative format, please contact us on online.exams@cii.co.uk to discuss your
needs.
• Candidates should refer to the CII website for the latest information on changes to law and practice
and when they will be examined:
1. Visit www.cii.co.uk/qualifications
2. Select the appropriate qualification
3. Select your unit from the list provided
4. Select qualification update on the right hand side of the page
For reference only
Published October 2022 2 of 5

©2022 The Chartered Insurance Institute. All rights reserved.
7
1. Understand the nature and main features 5.6 Describe the duties of an agent and the duties of a
of risk within the insurance environment. principal.
1.1 Describe the concepts of risk and risk perception. 5.7 Explain the consequences of an agent’s actions on
the principal.
1.2 Explain the risk management function and process.
5.8 Describe what should be included in a Terms of
1.3 Describe the various categories of risk.
Business Agreement (TOBA) between insurers and
1.4 Explain the types of risk that can be insured and the intermediaries.
types of risk that cannot.
1.5 Describe the components of risk. 6. Understand the principle of insurable
1.6 Understand the relationship between frequency and interest.
severity and how they are applied. 6.1 Define insurable interest and its components.
1.7 Explain the difference between a peril and hazard as 6.2 Explain the timing of insurable interest.
they relate to insurance. 6.3 Explain how insurable interest can arise.
2. Know how to apply the main features of 6.4 Explain the application of insurable interest to
property and liability insurance contracts.
risk and risk management to a given set
of circumstances. 7. Understand the principle of good faith.
2.1 Apply the main features of risk and risk management 7.1 Explain the principle of good faith and how this
to different sets of circumstances/scenarios. applies to contracts of insurance.
7.2 Explain how the duty of fair presentation operates in
3. Understand the main features of
insurance policies and how it can be altered in terms
insurance. of the policy.
3.1 Explain the need for insurance.
7.3 Define material circumstances.
3.2 Explain the basis of insurance as a risk transfer
7.4 Identify and distinguish between physical and moral
mechanism.
hazards in relation to a proposal.
3.3 Describe how insurance benefits policyholders and
For reference only

7.5 Explain an insurer’s right to information.
society in general.
7.6 Explain material circumstances that do not require
3.4 Explain the term coinsurance and how this is used in
disclosure.
two distinct ways in the insurance market.
7.7 Explain the consequences of non-disclosure or a
3.5 Describe what is meant by dual insurance and self-
breach of the duty of fair presentation.
insurance.
3.6 Describe the main classes of insurance. 8. Understand the doctrine of proximate
3.7 Explain the purpose of Insurance Premium Tax, the cause and its application to non-complex
current rates and how it is collected. claims.
8.1 Explain the meaning of proximate cause.
4. Know the structure and main features of
8.2 Apply proximate cause to scenarios that relate to
the insurance market.
non-complex claims.
4.1 Describe the structure of the insurance market and
the five main groups of people. 9. Understand the principle of indemnity
4.2 Describe the main categories of insurer in terms of and how this is applied to contracts of
ownership. insurance.
4.3 Explain the structure of the Lloyd’s market and main 9.1 Define the principle of indemnity.
features.
9.2 Explain the settlement options available to insurers
4.4 Describe the London Market. which will provide the insured with the necessary
4.5 Describe the distribution channels used for the indemnity.
selling of insurance. 9.3 Identify and distinguish between indemnity and
4.6 Explain the purpose of reinsurance. benefit policies.
4.7 Describe the key roles of professionals in insurance. 9.4 Explain what is meant by agreed value policies, first
4.8 Explain the main functions of the principal market loss policies and new for old cover.
organisations. 9.5 Calculate a non-complex claim payment, subject to
the pro rata condition of average.
5. Understand contract and agency.
5.1 Describe the essential elements of a valid contract. 10. Understand the principles of contribution
5.2 Explain conditional and unconditional acceptance of and subrogation.
a contract. 10.1 Explain the principle of contribution and when and
5.3 Describe consideration which supports the contract. how it applies to the sharing of claim payments
between insurers in straightforward property cases.
5.4 Explain how contracts can be cancelled or
terminated. 10.2 Explain the principle of subrogation and why it may
or may not be pursued in simple circumstances.
5.5 Describe methods of creating an agent/principal
relationship.

11. Understand the main regulatory and legal Reading list

requirements applicable to the
transaction of insurance business. The following list provides details of further
11.1 Explain the reasons for compulsory insurance and reading which may assist you with your
describe the types of insurances which are studies.
compulsory in the UK. Note: The examination will test the
11.2 Explain the application of the Consumer Rights Act syllabus alone.
2015 in relation to insurance contracts.
The reading list is provided for guidance
11.3 Explain the Contracts (Rights of Third Parties) Act only and is not in itself the subject of the
1999 in relation to insurance contracts. examination.
11.4 Explain the role of the financial services regulators in
the authorisation, supervision and regulation of
The resources listed here will help you
insurers and intermediaries.
keep up-to-date with developments and
provide a wider coverage of syllabus topics.
11.5 Describe the financial services regulatory principles
for businesses and the Financial Conduct Authority
CII study texts
and Prudential Regulation Authority's regulation of
individuals in broad outline. Insurance, legal and regulatory (EPA).
11.6 Explain the importance of the fair treatment of London: CII. Study text EP1.
customers and positive customer outcomes, Books and eBooks
including Consumer Duty.
Insurance law: an introduction. Robert
11.7 Describe the consequences of non-compliance –
Merkin. London: Routledge, 2014.*
discipline and enforcement.
11.8 Explain the requirements for reporting, record Insurance law in the United Kingdom. 3rd ed.
keeping and training and competence. John Birds. The Netherlands: Kluwer Law
11.9 Describe the scope and effect of the Insurance: International, 2015.
For reference only

Conduct of Business sourcebook (ICOBS) in broad Insurance theory and practice. Rob Thoyts.
outline. Routledge, 2010.*
11.10 Describe the solvency requirements for insurers and
intermediaries and financial services regulatory risk-
Bird’s modern insurance law. 10th ed. John
based capital requirements in broad outline. Birds. Sweet and Maxwell, 2016.
MacGillivray on insurance law: relating to all
12. Understand consumer protection and risks other than marine. 13th ed. London:
dispute resolution. Sweet & Maxwell, 2015.
12.1 Describe the main provisions of the current data
protection legislation. The Insurance Act 2015: a new regime for
12.2 Describe the main provisions of the current Money
commercial and marine insurance law.
Laundering Regulations and their application to Malcolm Clarke, Baris Soyer (eds.).
insurers and intermediaries. Abingdon: Informa, 2016.
13. Know the main methods of preventing, Periodicals

handling and resolving consumer The Journal. London: CII. Six issues a year.
complaints. Post magazine. London: Incisive Financial
13.1 Describe the financial services regulatory Publishing. Monthly. Contents searchable
requirements in relation to handling complaints. online at www.postonline.co.uk.
13.2 Explain the services provided by the Financial
Ombudsman Service. Reference materials
13.3 Describe the main provisions of the Financial
Concise encyclopedia of insurance terms.
Services Compensation Scheme, including the Laurence S. Silver, et al. New York:
range of activities falling within its scope. Routledge, 2010.*
Dictionary of insurance. C Bennett. 2nd ed.
14. Understand the CII Code of Ethics and be
London: Pearson Education, 2004.
able to apply the principles to non-
complex scenarios. Financial Conduct Authority (FCA)
14.1 Explain the five main principles in the CII Code of Handbook. Available at
Ethics. www.handbook.fca.org.uk/handbook.
14.2 Apply the main principles in the CII Code of Ethics Prudential Regulation Authority (PRA)
and identify positive and negative indicators of Rulebook Online. Available at
ethical behaviour to non-complex scenarios.
www.prarulebook.co.uk
* Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only).

9
Examination guide
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the current examination guide is included
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study text. It is recommended that you only
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Exam technique/study skills

There are many modestly priced guides
available in bookshops. You should choose
one which suits your requirements.
For reference only

For reference only
11
EP1 syllabus
quick-reference guide
Syllabus learning outcome Study text chapter
and section
1. Understand the nature and main features of risk within the insurance environment.
1.1 Describe the concepts of risk and risk perception. 1A
1.2 Explain the risk management function and process. 1B
1.3 Describe the various categories of risk. 1D
1.4 Explain the types of risk that can be insured and the types of risk 1D
that cannot.
1.5 Describe the components of risk. 1C
1.6 Understand the relationship between frequency and severity and 1C
how they are applied.
1.7 Explain the difference between a peril and hazard as they relate 1C
to insurance.
2. Know how to apply the main features of risk and risk management to a given set of
circumstances.
2.1 Apply the main features of risk and risk management to different 1A, 1B, 1C, 1E
sets of circumstances/scenarios.
3. Understand the main features of insurance.
For reference only

3.1 Explain the need for insurance. 1F
3.2 Explain the basis of insurance as a risk transfer mechanism. 1A, 1F, 1G
3.3 Describe how insurance benefits policyholders and society in 1F
general.
3.4 Explain the term coinsurance and how this is used in two distinct 1H
ways in the insurance market.
3.5 Describe what is meant by dual insurance and self-insurance. 1I
3.6 Describe the main classes of insurance. 2J
3.7 Explain the purpose of Insurance Premium Tax, the current rates 2J
and how it is collected.
4. Know the structure and main features of the insurance market.
4.1 Describe the structure of the insurance market and the five main 2A
groups of people.
4.2 Describe the main categories of insurer in terms of ownership. 2B
4.3 Explain the structure of the Lloyd’s market and main features. 2C
4.4 Describe the London Market. 2C
4.5 Describe the distribution channels used for the selling of 2D, 2E, 2F
insurance.
4.6 Explain the purpose of reinsurance. 2G
4.7 Describe the key roles of professionals in insurance. 2H
4.8 Explain the main functions of the principal market organisations. 2I, 2N
5. Understand contract and agency.
5.1 Describe the essential elements of a valid contract. 3A
5.2 Explain conditional and unconditional acceptance of a contract. 3B
5.3 Describe consideration which supports the contract. 3C
5.4 Explain how contracts can be cancelled or terminated. 3E, 3D
5.5 Describe methods of creating an agent/principal relationship. 3F

and section
5.6 Describe the duties of an agent and the duties of a principal. 3F
5.7 Explain the consequences of an agent’s actions on the principal. 3F
5.8 Describe what should be included in a Terms of Business 3G
Agreement (TOBA) between insurers and intermediaries.
6. Understand the principle of insurable interest.
6.1 Define insurable interest and its components. 4A
6.2 Explain the timing of insurable interest. 4B
6.3 Explain how insurable interest can arise. 4C
6.4 Explain the application of insurable interest to property and 4D
liability insurance contracts.
7. Understand the principle of good faith.
7.1 Explain the principle of good faith and how this applies to 5A
contracts of insurance.
7.2 Explain how the duty of fair presentation operates in insurance 5B
policies and how it can be altered in terms of the policy.
7.3 Define material circumstances. 5C
7.4 Identify and distinguish between physical and moral hazards in 5C
relation to a proposal.
7.5 Explain an insurer’s right to information. 5B
7.6 Explain material circumstances that do not require disclosure. 5D
For reference only

7.7 Explain the consequences of non-disclosure or a breach of the 5E, 5F, 5G
duty of fair presentation.
8. Understand the doctrine of proximate cause and its application to non-complex claims.
8.1 Explain the meaning of proximate cause. 6A, 6C
8.2 Apply proximate cause to scenarios that relate to non-complex 6B
claims.
9. Understand the principle of indemnity and how this is applied to contracts of insurance.
9.1 Define the principle of indemnity. 7A, 7B, 7C, 7F
9.2 Explain the settlement options available to insurers which will 7A
provide the insured with the necessary indemnity.
9.3 Identify and distinguish between indemnity and benefit policies. 7A
9.4 Explain what is meant by agreed value policies, first loss policies 7D
and new for old cover.
9.5 Calculate a non-complex claim payment, subject to the pro rata 7F
condition of average.
10. Understand the principles of contribution and subrogation.
10.1 Explain the principle of contribution and when and how it applies 8A, 8B
to the sharing of claim payments between insurers in
straightforward property cases.
10.2 Explain the principle of subrogation and why it may or may not 8C, 8D, 8E, 8F, 8G
be pursued in simple circumstances.
11. Understand the main regulatory and legal requirements applicable to the transaction of
insurance business.
11.1 Explain the reasons for compulsory insurance and describe the 9A
types of insurances which are compulsory in the UK.
11.2 Explain the application of the Consumer Rights Act 2015 in 10B
relation to insurance contracts.
11.3 Explain the Contracts (Rights of Third Parties) Act 1999 in 9B
relation to insurance contracts.
13

and section
11.4 Explain the role of the financial services regulators in the 9H, 9I
authorisation, supervision and regulation of insurers and
intermediaries.
11.5 Describe the financial services regulatory principles for 9C, 9D, 9E, 9F
businesses and the Financial Conduct Authority and Prudential
Regulation Authority's regulation of individuals in broad outline.
11.6 Explain the importance of the fair treatment of customers and 7E, 9C, 9D, 9E, 9F
positive customer outcomes, including Consumer Duty.
11.7 Describe the consequences of non-compliance – discipline and 9G
enforcement.
11.8 Explain the requirements for reporting, record keeping and 9I, 9J, 9K, 10D
training and competence.
11.9 Describe the scope and effect of the Insurance: Conduct of 9J
Business sourcebook (ICOBS) in broad outline.
11.10 Describe the solvency requirements for insurers and 9H
intermediaries and financial services regulatory risk-based capital
requirements in broad outline.
12. Understand consumer protection and dispute resolution.
12.1 Describe the main provisions of the current data protection 10A
legislation.
12.2 Describe the main provisions of the current Money Laundering 9L
Regulations and their application to insurers and intermediaries.
13. Know the main methods of preventing, handling and resolving consumer complaints.
For reference only

13.1 Describe the financial services regulatory requirements in 10E
relation to handling complaints.
13.2 Explain the services provided by the Financial Ombudsman 10F
Service.
13.3 Describe the main provisions of the Financial Services 10G
Compensation Scheme, including the range of activities falling
within its scope.
14. Understand the CII Code of Ethics and be able to apply the principles to non-complex
scenarios.
14.1 Explain the five main principles in the CII Code of Ethics. 10C
14.2 Apply the main principles in the CII Code of Ethics and identify 10C
positive and negative indicators of ethical behaviour to non-
complex scenarios.
For reference only

15
Introduction
EP1 Insurance, legal and regulatory (EPA) provides an overview of the general insurance
market and its key elements. It will help you to develop a knowledge and understanding of
the basic principles of insurance, the main regulatory principles relating to insurance
business and the key measures in place to protect consumers.
We begin by looking at the concept of risk, the different types of risk that exist and how
insurance acts as a risk transfer mechanism. As well as exploring which risks are insurable
and the main classes of insurance we also look at the increasingly important area of risk
management and how risks are controlled. This is now a major focus for insurance firms.
The structure of the insurance market is complex and information flows between the various
players who interact in providing products and services to clients. As well as understanding
the nature of insurance and the operation of the insurance market there are a number of
special legal principles that apply to insurance contracts of which you need to acquire a
sound knowledge. The legal aspects of insurance are considered in relation to English law
although some insurance contracts may be subject to other jurisdictions, especially if they
are designed to provide cover for risks in overseas territories.
Over the years more and more legislation has been introduced into English law to protect
insurance buyers, particularly consumers (rather than commercial buyers). A number of EU
directives have also been introduced which have resulted in new or amended legislation and
have played an important role in shaping the regulatory environment for insurance firms.
We look in detail at the form that statutory regulation takes in the UK, examining the two
regulatory bodies responsible for general insurance, the Prudential Regulation Authority
(PRA) and Financial Conduct Authority (FCA), and their respective roles and approach to
supervision. We also look at the rules that govern the activities of general insurance firms,
For reference only

including their conduct when selling and administering general insurance contracts.
As part of this study text we review some of the key consumer protection mechanisms that
exist and examine the roles of the Financial Services Compensation Scheme (FSCS) and
Financial Ombudsman Service (FOS).
Finally we look at some of the ethical standards which apply to individuals operating in the
general insurance market including considering the Chartered Insurance Institute’s Code of
Ethics, which is designed for insurance and financial services professionals.
For reference only
17
Contents
1: Core principles of insurance
A Concept of risk and risk transfer 1/2
B Risk management 1/4
C Components of risk 1/6
D Categories of risk 1/9
E Features of insurable risks 1/11
F Reasons for buying insurance 1/12
G Pooling of risks 1/14
H Co-insurance 1/15
I Self-insurance 1/17
2: The insurance market

A Market structure 2/3
B Insurers 2/5
C Lloyd’s and the London Market 2/8
D Intermediaries 2/11
For reference only

E Insurance marketing and distribution 2/15
F Price comparison websites 2/18
G Reinsurance 2/19
H Insurance professionals 2/21
I Market organisations 2/24
J Classes of insurance 2/30
3: Contract and agency

A Contract law 3/2
B Offer and acceptance 3/3
C Consideration 3/5
D Renewal of insurance contracts 3/5
E Cancellation of insurance contracts 3/6
F Agency 3/8
G Terms of business agreements (TOBAs) 3/12
4: Insurable interest
A What is insurable interest? 4/2
B When must insurable interest exist? 4/3
C How is insurable interest created? 4/6
D How is insurable interest applied? 4/6
5: Good faith and disclosure

A Principle of good faith 5/2
B Duty of disclosure 5/3
C Material circumstances 5/8
D Circumstances that do not need to be disclosed 5/10
E Consequences of misrepresentation by consumers 5/11
F Consequences of a breach of the duty of fair presentation 5/13
G Compulsory insurances 5/15
6: Proximate cause
A Meaning of proximate cause 6/2
B Application to simple claims 6/5
C Modification by policy wordings 6/6
7: Indemnity
A Definition of indemnity 7/2
B Application of indemnity 7/5
C Measuring indemnity 7/6
D Modifying indemnity 7/9
For reference only

E Speed of indemnity – Enterprise Act 2016 7/10
F Limiting factors 7/11
8: Contribution and subrogation

A Contribution 8/2
B Applying the contribution principle 8/4
C Subrogation 8/7
D Insurers’ subrogation rights 8/8
E Insurers’ rights arising from the subject-matter 8/9
F Market agreements 8/10
G Precluded subrogation rights 8/10
19
9: Legal and regulatory environment

A Compulsory insurance 9/2
B Legislation concerning third parties 9/6
C Overview of the UK regulatory framework 9/7
D Prudential Regulation Authority (PRA) 9/8
E Financial Conduct Authority (FCA) 9/10
F Application of PRA and FCA rules 9/13
G Discipline and enforcement 9/20
H Authorisation and regulation of insurers 9/22
I Authorisation and regulation of intermediaries 9/26
J Insurance: Conduct of Business Sourcebook (ICOBS) 9/28
K Insurance Distribution Directive (IDD) 9/33
L Money laundering 9/34
10: Consumer protection and dispute resolution

A Data protection law in the UK 10/2
B Unfair contract terms and the Consumer Rights Act 2015 10/6
C Ethical standards 10/7
D Training and competence 10/11
For reference only

E Complaints procedures 10/13
F Financial Ombudsman Service (FOS) 10/15
G Financial Services Compensation Scheme (FSCS) 10/16
Appendix 1: Standard fire policy (material damage) A1/1

Appendix 2: CII Code of Ethics A2/1
Self-test answers i
Cases xi
Legislation xiii
Index xv
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Chapter 1
Core principles of
1
insurance
Contents Syllabus learning
outcomes
Introduction
A Concept of risk and risk transfer 1.1, 2.1, 3.2
B Risk management 1.2, 2.1
C Components of risk 1.5, 1.6, 1.7, 2.1
D Categories of risk 1.3, 1.4
E Features of insurable risks 2.1
F Reasons for buying insurance 3.1, 3.2, 3.3
G Pooling of risks 3.2
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H Co-insurance 3.4
I Self-insurance 3.5
Key points
Question answers
Self-test questions
Learning objectives
After studying this chapter, you should be able to:
• list the main components of risk;
• describe how risk is perceived;
• state the function of risk management;
• describe the process of risk management;
• demonstrate how insurance relates to risk;
• identify the categories into which risks are divided;
• compare insurable and uninsurable risks;
• describe the relationship between frequency, severity, risk and insurance;
• distinguish the terms peril and hazard as they relate to insurance;
• describe how insurance operates as a risk transfer mechanism;
• describe how the common pool operates;
• describe how insurance benefits policyholders and society;
• describe what is meant by co-insurance, dual insurance and self-insurance; and
• describe the main classes of insurance.
Chapter 1 1/2 EP1/October 2022 Insurance, legal and regulatory (EPA)
Introduction
In this chapter, we will look at the concept of risk and how it is perceived, as well as the
different categories of risk. We will go on to explain how insurance acts as a risk transfer
mechanism and how the common pool works. This chapter will also introduce the main
classes of insurance.
Key terms
This chapter features explanations of the following terms and concepts:
Attitude to risk Co-insurance Dual insurance Equitable premiums

Financial risks Fortuitous events Fundamental risks Hazard
Homogeneous Insurable interest Law of large Particular risks
exposures numbers
Peril Pure risks Risk management Self-insurance
Speculative risks
A Concept of risk and risk transfer

The term ‘risk’ is used in various ways in the insurance marketplace and, to develop a better
understanding of how it applies in different contexts, we need to look at each of these in turn.
Examining the term in its everyday sense soon reveals our first problem: there is no
universally recognised definition for the term.
A1 Risk perception
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If you were to ask a person in the street what the term ‘risk’ means to them you are likely to
receive a wide variety of answers – everything from a business owner being concerned
about the possibility of recession to parents’ worries about the dangers faced by their
children. Yet others may identify the risks inherent in running a business, perhaps the
demand for their products or obsolescence issues. The list of risks that we face is almost
endless.
In a personal sense we all take decisions based upon an assessment of risk. Most of this is
carried out informally. We assess the likelihood of rain occurring and decide whether to take
an umbrella with us when we leave our home in the morning. There may be some data
involved (a weather forecast from a reliable source) or we may have merely looked out of the
window to make a judgment about the likelihood of rain. This informality may be acceptable
in ‘low risk’ situations where the ultimate calamity is something like wet clothing. In other
contexts, however, we need better measurement tools, especially where the potential for
loss is significant.
Example 1.1
An individual’s perception of a particular risk can be significantly different from another’s.
For example, a lot of people will be more concerned about the risk of being involved in an
airplane crash than the possibility of a serious road traffic accident, even though the risk of
the latter occurring is significantly higher. This can in part be explained by the element of
control involved in driving, and therefore the perception that the individual has control over
the outcome.
However, someone that has recently been involved in a motor accident may in fact have
an inflated view of the risk of it occurring again, as a result of their own personal
experience.
Risk measurement and the means of attempting to deal with the risks we face are
collectively termed risk management. In a commercial context this is often a well-defined
and scientific process, attempting to answer questions such as ‘How much will it cost if
things go wrong?’ and ‘What are the chances of the risk becoming a reality?’ We will deal
with these issues in greater detail later in EP1.
Chapter 1 Core principles of insurance 1/3
Chapter 1
Most individuals make less precise calculations in their personal lives, preferring instead to
simply protect against those things that seem capable of inflicting financial disaster, such as
fire or theft.
A2 Definition of risk
Consider the following statements, each giving a different slant to the term ‘risk’:
• The possibility of an unfortunate occurrence.
• Doubt concerning the outcome of a situation.
• Unpredictability.
• The possibility of loss.
• The chance of gain (such as hoped-for benefit from a gamble or investment strategy).
Whichever definition we choose, we need to recognise the elements of uncertainty and
unpredictability or, in some of our definitions, danger. The term often implies something that
we do not want to happen. As we shall see later, not every type of risk is insurable.
Just think for the moment about owning a car. There are many risks associated with this,
including:
• the risk that the car will be stolen;
• the risk of a car accident with or without injury to the driver;
• the risk of injuring others as a result of a car accident; and
• the risk of damage to the car caused by another driver.
Each of these represents a risk so far as the owner is concerned. In each case it is possible
to insure (transfer) the risk. This is done by the owner paying a known premium to an insurer
in return for the insurer accepting the future unknown cost of the insured risk. The insurer
does this by promising to pay for loss, damage or liability as defined by the policy terms (see
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figure 1.1). Insurance therefore is a means of transferring the risk.
The accepting of an unknown future potential risk by an insurer for an agreed premium is a
way of defining insurance as a risk transfer mechanism. It brings peace of mind to the
insured because they have replaced the uncertainty of possible future loss with the certainty
of the agreed premium. We consider this aspect later in the chapter.
Figure 1.1: Risk of causing injury while driving a car
Risk transferred
Driver Insurer
Pays premium
A3 Other meanings of the term ‘risk’

There are three other ways in which the term is used in the insurance marketplace:
• The peril or contingency that is insured – the fire risk, the theft risk and so on.
• The thing (or liability) actually insured. In this context the ‘risk’ could be a factory or a
manufacturer’s liability to the public.
• When an underwriter quotes for ‘a risk’ an even wider definition is implied. The
underwriter will mean both the thing insured, such as the property itself, and the range of
contingencies or scope of cover required.
A4 Attitude to risk
Each person’s attitude to risk is different, so we all respond to risk in a different way. Some
people are willing to carry certain risks themselves and are termed risk-seeking, while
others lean more towards being risk-averse, feeling happier minimising the risk they are
exposed to (perhaps by transferring the risk, as in insurance). Very few individuals are in a
position to evaluate, with any accuracy, the risks to which they are exposed. However, as we
shall now see, many companies attempt to achieve this as part of their risk management
process.
Question 1.1
Which of these terms describes an individual who is keen to remove risk where
possible?
a. Risk unhappy. □
b. Risk-averse. □
c. Risk-seeking. □
d. Risk confident. □
B Risk management
There is a continuing trend towards taking control and developing a formal strategy for
managing the various risks that affect businesses. The appointment of risk managers in
industry and commerce is now commonplace. Many are members of the Association of
Insurance and Risk Managers in Industry and Commerce (Airmic). This organisation
has been influential in setting standards in areas of risk management and, with other
organisations, has published a Risk Management Standard that has been widely adopted.
Often, insurance is bought because certain aspects of cover are compulsory, such as third
party motor insurance. Alternatively, it may be that another party has a financial interest in
the item to be insured; for example, if an individual buys a house with a mortgage, a
mortgage lender may insist insurance is taken out on the property.
Commercial risk management
Commercial organisations often take a much more analytical view when deciding what to
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insure, attempting to answer questions such as 'How much will it cost if things go wrong?'
and 'What are the chances of the risk becoming a reality?'
The focus of good risk management is the identification and treatment of defined risks and it
should be a continuous and developing process embedded in a firm's strategy. It should
address methodically all the risks surrounding the firm's current, past and future activities.
Commercial risk management is important for several reasons:
• It reduces the potential for loss by identifying and managing hazards.
• It gives shareholders a greater degree of confidence in a company's ability to manage
its risks.
• It provides a disciplined approach to quantifying risks.
In order to make informed decisions about the risks that a business faces, there are three
key steps in the risk management process:
• risk identification;
• risk analysis; and
• risk control (including the possibility of risk transfer).
Let's look at these in more detail.
B1 Risk identification
Risk identification involves discovering the threats that may already exist, and the potential
threats that may exist in the future. Not all of these risks will be insurable but they must all be
managed. For the retail shop, petty theft and shoplifting may be real risks and will need to be
managed in some way or funding set aside to cover their costs. For many conventional risks,
an insurer may become involved in helping to identify existing and potential risks through
carrying out a physical examination or survey. Insurers also play a role in relation to risk
control when they provide reports following the survey.
B2 Risk analysis
Risk managers will examine past data to evaluate or analyse the risk. For example, they can
look at the past loss patterns of, say, motor accidents involving drivers under the age of 25,
and so predict what is likely to happen in the future for drivers who fall into this category.
Chapter 1
Equally, patterns of reported accidents in the accident register may be analysed for future
trends. Insurers will look at many of the same elements when considering the rating of a risk.
B3 Risk control
If the risk is seen to have the potential for adverse consequences, some course of action
should be put in place to control, reduce or even eliminate the risk. Elimination is the most
effective, but may be costly or impractical. For example, if a manufacturer carries out some
paint spraying activity that is highly hazardous, it may be possible to outsource that part of
the process and in so doing eliminate that element of the risk. The elimination of risk, or even
its reduction, will always be subject to the test of whether the cost of doing so is reasonable
compared to the cost of the feared event happening.
There are various aspects to the controlling of risk:
Physical control For example, putting specific locks on the doors of a factory to reduce the theft risk.
measures
Financial control Such as transferring the risk by either taking out insurance or by contract (e.g.
measures arranging for a security firm to accept responsibility for cash while in its control).
Developing a good risk Key to improving risk awareness and managing risk. This can be achieved by
culture educating employees or clients on how to avoid or reduce risks.
Depending on what they were designed for, internal controls are usually categorised as
detective, corrective or preventative.
• Detective controls detect errors or irregularities that may have occurred.
• Corrective controls correct errors or irregularities that have been detected.
• Preventative controls keep errors or irregularities from occurring in the first place.
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Insurers often assist commercial policyholders in the area of loss prevention and control.
They do so by imposing requirements and making recommendations designed to improve
the risk, following the completion of a survey. These are important parts of the surveyor’s
report and will either be aimed at improving the risk to an acceptable standard from the
insurer’s point of view, or will offer premium reduction as an incentive for worthwhile risk
improvements. Insurers may also offer risk management training, guidance or other literature
to help their policyholders avoid or manage risk.
Insurers have started to use more advanced technological capabilities to actively manage
policyholder risks, for example through the provision and monitoring of leak detection
devices as part of a property insurance proposition.
In a wider context, insurers are involved in researching areas of loss prevention and control.
A good example of this is the work carried out on their behalf by the Fire Protection
Association (FPA). The kind of work this body undertakes includes:
• researching new materials and methods of construction and seeing how they behave
in a fire;
• providing rules that set standards of construction;
• reporting on new industrial processes and machinery; and
• providing rules for the construction, installation and operation of fire extinguishing
appliances, e.g. sprinkler systems.
Motor insurers also rely on Thatcham Research Centre for testing vehicle safety and security
systems, and for testing seats for whiplash protection. The emergence of autonomous
vehicles has become a crucial part of Thatcham Research Centre's work.
The National Cyber Security Centre has been central to development of research that
supports the management of cyber risks and further developing security capabilities at a
national level.
Fraud is a key risk that insurers also need to manage and mitigate, and this has resulted in
the creation of various industry bodies and databases for use in the recording and detection
of fraudulent activity. As an example, the Motor Insurance Anti-Fraud and Theft Register
(MIAFTR) was formed through the participation of Association of British Insurers (ABI)
member companies to combat the increasing number of fraudulent claims. The register
records all details of vehicles and motorcycles that become total losses arising from any
cause, including fire and theft. Third party and insured losses are also recorded, and the
information is available to all companies as well as the Lloyd’s Corporation.
Insurers that place information onto the register relating to a new claim will be advised if the
vehicle, claimant or the claimant’s address matches existing data that is already present on
the register. Even if fraud is not discovered, previous claims may be disclosed that had not
been advised by policyholders when they took out their policy.
Other examples include the Claims and Underwriting Exchange (CUE), the National Fraud
Database, and the Insurance Fraud Register.
The Loss Prevention Research Council’s risk-based research and other initiatives also
help insurers to develop crime- and loss-control solutions.
Question 1.2
A factory installing sprinklers into its premises is an example of which activity?
a. Risk transfer. □
b. Risk modelling. □
c. Risk control. □
d. Risk analysis. □
C Components of risk
In order to gain a deeper understanding of the meaning of risk, we must now take a closer
look at the various components of risk. These include:
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• uncertainty;
• level of risk; and
• peril and hazard.
C1 Uncertainty
Uncertainty about the future is at the centre of risk. If we always knew exactly what was
going to happen, there wouldn't be any risk. Because we don't, we can't be certain of
anything.
C2 Level of risk
Risk is assessed by insurers in terms of frequency (how often something might happen) and
severity (how costly it would be if it did happen).
Risk is assessed by insurers in terms of frequency (how often something might happen) and
severity (how costly it would be if it did happen).
Consider this…
Imagine a house by a river that is known to flood. No-one knows if the river will overflow
again, but because the river is prone to flooding, the risk to the house is increased. Now
imagine a second house, 100 metres up a hill from the river. This house is less likely to be
at risk from flooding because of its position. But what about severity?
Imagine that the house further from the river is much larger. It should be insured for a far
greater amount because of the potential severity of loss, damage or destruction.
Frequency and severity will both be part of an insurer's risk assessment, but the relationship
between them varies.
Chapter 1
High frequency and low severity
An example of high frequency and low severity of loss could be motor insurance, which
usually entails a large number of small claims, for things like dented bumpers and cracked
windscreens.
Low frequency and high severity
This describes a small number of events resulting in very high costs, such as aircraft
accidents and oil spillages.
Figure 1.2: Relationship between frequency and severity
Frequency
Severity B
The left-hand side of the graph at point 'A' shows the high frequency/low severity claims
which, based on the law of large numbers, tend to be predictable.
The right-hand side of the graph at point 'B' shows the low frequency/high severity claims,
which are difficult to predict owing to their random nature.
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The relationship between these two dimensions is inverse, so as one increases in
prominence the other decreases, and vice versa. An insurer will often base its decisions on
how much of a risk it can prudently accept on factors relating to frequency and severity.
Insurers have various ways of dealing with a risk that is offered to them where the amount
involved exceeds their normal acceptance limits.
C3 Peril and hazard

This is the final aspect of risk and it relates to the cause of losses. But what is the difference
between the two terms?
• A peril can be defined as that which gives rise to a loss.
• A hazard can be defined as that which influences the operation or effect of the peril.
At first, the distinction between the two may not be that obvious. However, the following
example should help.
Example 1.2
Consider someone smoking a cigarette in a house that's insured against fire. Drop the
cigarette and it could start a fire. The fire itself is a peril. The act of smoking in the house is
the hazard – it affects the likelihood of a fire in the house.
Here are some other examples of peril:
Explosion This is the event insured against, which may give rise to loss.
Lightning When it occurs, this natural peril can result in damage.
Collision Whether between ships, aircraft or vehicles.
Dishonesty Either employees or external parties stealing from a company, for

example.
C3A Physical and moral hazard

Physical hazard relates to the physical characteristics of the risk and includes any
measurable dimension of the risk.
Examples include the following:
Security protection at a shop The greater the security protection, the better the physical hazard level as
it may even prevent a loss altogether.
The construction of the property The higher the standard of building construction, the better the physical
hazard for fire and similar risks, as the building will be more resistant to
damage.
The age of a proposer and type of These are factual, measurable factors.
car for motor insurance
Moral hazard arises from the attitude and behaviour of people. In insurance, this is usually
the conduct of the insured. Moral hazard also arises from the conduct of the insured's
employees and that of society as a whole. For example:
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Carelessness A driver's lack of care can increase the chance of an accident happening
and its severity.
Dishonesty A person who has previously made fraudulent or exaggerated claims

represents a poor moral hazard.
Social attitudes A person who regards insurance fraud as acceptable and not immoral.
The way in which a business is run is also an example of moral hazard. For example,
careless or lax management in a factory represents poor moral hazard. This is clearly
something relating to attitude and behaviour, but it may be evident because of unguarded
machinery or a lack of control of smoking by employees, for example.
We must guard against the tendency to jump to the conclusion that there is an adverse
moral aspect to a risk merely because the risk is an obviously heavy one. For example, a
fireworks factory represents a very heavy fire risk, but it does not follow that there is a poor
moral aspect to the risk.
Equally, a young driver who is driving a high-performance car certainly represents a poor
physical hazard. Statistics show that a disproportionately high number of accidents are
caused by young drivers. The car itself will be in a high rating group because of its value and
performance. These two aspects are physical because they are measurable. It is, of course,
possible that some other factor may point towards poor moral hazard – perhaps a poor
claims history or serious motoring convictions.
Chapter 1
Explosion The storage of dangerous chemicals or not ensuring that there is no
smoking in certain areas.
Lightning The construction of any buildings struck by the lightning or the

inadequacy of any lightning conductors being used.
Collision The hazards are in relation to speed, behaviour, extent of training for
example. Having a relaxed attitude to the speed limit as a driver is an
example of bad moral hazard.
Dishonesty Factors such as poor security in place or inadequate operational controls.

A lax corporate attitude to security is an example of bad moral hazard.
Question 1.3
A fireworks factory is inspected by insurers and found to have excellent safety
protocols and good training for the staff. What are the protocols and training
examples of?
a. Good moral hazard. □
b. Poor moral hazard. □
c. Good physical hazard. □
d. Poor physical hazard. □
D Categories of risk
Not every type of risk or eventuality is insurable. It will help our understanding if we look at
(and contrast) different types of risk to identify those that are insurable and those that are
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not. The groupings that we will look at are:
• financial and non-financial risks;
• pure and speculative risks; and
• particular and fundamental risks.
D1 Financial and non-financial risks

For a risk to be insurable the outcome of an adverse event must be measurable in financial
terms. Most general insurances are compensatory in nature – this means that the value
placed on the loss is not determined in advance.
Let us look at some examples of financial risks to help us understand this concept:
Loss What is insurable?
Accidental damage to a motor car The financial value of the risk is the cost of repairing or replacing the
vehicle.
Theft of property The financial value of the risk of theft of an item of jewellery is its current
market value. This is measurable in financial terms. It would not include
sentimental value because, as we have seen, this is not precisely
measurable in financial terms.
Loss of business profits This risk is measurable since comparisons can be made to similar trading
following a fire periods to devise a fair estimate of the loss to be paid by the insurer as
compensation.
Legal liability to pay compensation The courts measure the value of damages applicable for the loss of a leg,
for personal injury to others for example, against compensation payments made previously by the
courts. The courts calculate damages that will take account of financial
circumstances as well as the injury itself, for example covered future
medical payments or special equipment.
Benefit policies
Important exceptions to this general rule are personal accident and sickness policies. This
is because there is no way of valuing precisely the loss of a life or the loss of sight so
these policies are taken out in order to provide pre-agreed amounts in the event of an
accident or sickness and are known as 'benefit policies'. Similar considerations apply to
life insurance policies.
Some of the risks that we face are not capable of financial measurement – these are non-
financial risks. They may have a financial aspect to them, but it is incidental. The real risk
arises from decisions and actions motivated by other considerations. Take for example the
choice of a marriage partner or our enjoyment of a holiday.
In the same way, the value we might place on an heirloom that has been in the family for
years may be far beyond its intrinsic or market value. Insurance is not appropriate for such
risks. The heirloom could indeed be insured but only for its market value, not for the
sentimental value we place on it.
D2 Pure and speculative risks

Pure risks are those where there is the possibility of a loss but not of gain, and where the
best that we can achieve is a break-even situation. Travelling home in a car is a good
example. The best that we can hope for is a safe arrival. The possibility exists, however, that
there might be an accident and the car damaged or someone injured. It is these types of risk
that are generally insurable.
You may have already thought of these, but here are some examples of pure risks.
Pure risk Information
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Risk of fire This could damage or destroy property or cause an
interruption to the running of the business; both risks
are measurable in financial terms.
Risk of machinery breakdown This could lead to actual damage or business

interruption and is measurable in financial terms.
Risk of injury to employees at work If such injury is caused by the negligence of the
company, a court may award damages and costs.
These risks are measurable in financial terms.
Consider this…
Think of two other pure risks to which a company or individual might be exposed.
Speculative risks may involve three possible outcomes: loss, break-even or gain. Insurers
do not insure speculative risks, since they are undertaken voluntarily, in the hope that there
will be a gain. The risk element would be completely removed if the insured knew that the
insurer would cover any losses.
Obvious examples are the National Lottery or other forms of gambling. There are also
situations such as investing in the stock market or starting up a new business that fall into
this category, as well as pricing decisions and other aspects of marketing. With each activity
we aim to make a gain, but each carries the possibility of break-even or failure.
Consequently, although there are some aspects of business activity that can be insured, this
does not include things such as misreading the market or a business failing because of local
competition.
D3 Particular and fundamental risks

Particular risks are localised or even personal in their cause and effect. Sometimes the
cause may be more widespread (e.g. a storm over a whole region), but the effect is localised
or even related to an individual. Not all properties in the region will have been damaged.
Again, to help us understand let us look at some examples of particular risks:
Chapter 1
Particular risk Information
Factory fire This would cause localised damage to the factory and
possibly to its surroundings, but would not affect the
whole community.
Car collision Damage to the vehicles and any third party liability are
localised events affecting relatively few individuals.
Theft of personal possessions from a home An event that only affects an individual or family.
Fundamental risks rise from a cause outside the control of any one individual or group of
individuals and their effects are usually widespread. The loss associated with them is often
catastrophic. Such risks may arise out of social, economic, political or natural causes.
Examples include economic recession, war, earthquake and famine.
However, fundamental risks may have particular consequences for individuals which can be
insured. So, although it is not possible to insure against the general effects of economic
recession, insurance is available which would cover mortgage payments in the event of the
insured becoming unemployed.
Be aware
Earthquake is mentioned here as a fundamental risk, but we need to qualify this. It is
correctly classified as fundamental but it is insurable in areas that pose no great likelihood
of loss. For instance, there is no problem in obtaining cover in the UK. However, this may
not be the case in California or Japan which are subject to a much greater loss potential.
Similar considerations apply to storm damage which can be difficult to obtain in parts of
the USA adjacent to the Gulf of Mexico, although such cover is freely available in other
parts of the world.
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Consider this…
Think about some of the widespread natural disasters, wars and economic recessions of
the past 15 years. What might the claims impact have been on the insurance industry?
E Features of insurable risks

For a risk to be insurable, the following features must be present:
The event insured against must be fortuitous
There must be insurable interest
Insuring the risk must not be against public policy
E1 A fortuitous event
To be insurable, the occurrence must be a fortuitous event, i.e. accidental or unexpected.
In contrast, a non-fortuitous loss is a policyholder who deliberately damages their car. Not all
elements of loss or damage may be fortuitous.
Consider this…
Two apartments are burgled within the same week. The first apartment was properly
locked and the burglar managed to force open a window in order to steal contents from
the apartment. The second apartment had keys left in the door and several large windows
open, which allowed the burglar to enter the property and steal the contents. Which of
these two losses could be described as fortuitous? Which of these losses are likely to be
paid by insurers?
E2 Insurable interest present
Refer to
See chapter 4 for more on insurable interest
Insurable interest is the legally recognised financial relationship between the insured and the
object or liability that is being insured. For example, you can insure against the theft of your
own car because you suffer financial loss if it is stolen.
E3 Not against public policy

It is commonly recognised in law that contracts must not be against public policy or go
against what society considers to be the right or moral thing to do. Insurers should not,
therefore, cover risks that are against public policy.
For example, it would be against public policy to insure the risk of incurring a fine for a
criminal offence. The risk may appear to have all the features of an insurable risk, as the
event may be considered fortuitous (accidental) and the insured has an insurable interest,
since they suffer financial loss as a result of the fine. However, it is clearly unacceptable to
be able to insure against paying a fine, because the fine’s purpose is to punish the individual.
Providing insurance for it may encourage people to break the law.
Consider this…
Think of another risk which would be against public policy. What would be the effect on an
insurer's professional reputation if it were to insure such risks?
E4 Homogeneous exposures
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Given a sufficient number of exposures to similar risks, known as homogeneous
exposures, the insurer can forecast the expected frequency and likely extent of losses. This
is achieved by using the law of large numbers, a theory that determines that predictions
become more accurate as the base of data used increases in size. In the absence of a large
number of homogeneous exposures, the task is more difficult, as patterns and trends are
more difficult to determine.
Whereas fortuitous loss, insurable interest and not being against public interest are absolute
requirements for a risk to be insurable, the concept of homogeneous exposures is an ideal
and there are occasions when an insurer will need to use less than fully reliable historical
data when fixing premiums.
Example 1.3
A fire insurer receives a proposal for a timber warehouse situated in a busy city. In order
to arrive at an appropriate premium for the proposed risk, the insurer considers the likely
level of losses based on past experience of a large number of similar risks situated in the
same area.
F Reasons for buying insurance

An individual (or a business) will decide whether or not to purchase insurance based on:
• their attitude to the potential risk;
• whether insurance for the risk is a legal requirement;
• the price they are prepared to pay for the peace of mind insurance gives; and
• whether they feel they have a choice about insuring the risk.
Insurance has been meeting this need for a very long time. It has its origins in the different
kinds of situation where financial protection is required against the possibility of suffering
some misfortune or loss.
But how is peace of mind achieved? As we have seen, the primary function of insurance is to
act as a risk transfer mechanism between the insured and the insurer but of course the
Chapter 1
transfer of risk does not prevent the bad things from happening, but it provides a form of
financial security and peace of mind for the insured.
Insurance enables the risk of financial loss to be transferred in a variety of ways.
Examples include:
• The large unknown financial risk that an individual faces of their home burning down, for
example, is transferred to the insurer and replaced by the much smaller and certain cost
of the premium.
• The unknown and potentially unlimited financial risk of a claim for personal injury against
an individual following a road traffic accident, which without insurance could lead to
bankruptcy.
• For people travelling abroad, there is security in knowing that you are covered for the
costs of having to return home early to illness, or for having your medical costs covered
whilst you are in a foreign land.
• A business providing vehicle repair services may be unable to operate in the event that
its premises were damaged by flooding. With uncertainty as to how long it would take to
get up and running again, commercial insurance with business interruption cover
provides peace of mind to the owners of the business.
F1 Benefits of insurance
Insurance brings many benefits to policyholders, and to society as a whole. In addition to
peace of mind, and the enabling of risk transfer, there are some other key benefits to be
aware of:
Cash flow
For reference only

Social Expansion
benefits of business
Benefits of
insurance
Premiums Loss
invested control
• Improved cash flow – money does not have to be kept in reserve for potential losses,
which frees up capital and therefore improves cash flow.
• Expansion of business – enterprise is encouraged, since insurance makes it easier for
new businesses to start or for existing businesses to invest, innovate and expand.
• Loss control – is improved. Insurers have an interest in reducing the frequency and
severity of losses, not only to enhance their own profitability but also to contribute to a
general reduction in the economic waste which follows a loss. Also, the policyholder
suffers less business interruption and consequential inconvenience as the effects of the
loss are minimised or ideally, do not occur at all.
• Premiums invested – premiums can be invested to earn interest. Money is held until
claims have to be paid. This creates a 'premium reserve'.
• Social benefits – such as encouraging business activity and helping to keep people in
employment. Most commercial insurance policies will offer a business interruption
element which covers wages and the loss of trading income during a period of business
interruption and recovery.
G Pooling of risks
The basic principle of insurance is that the losses of the few are met by the contributions of
the many. An insurance company gathers together relatively small sums of money from
people who want to be protected from similar kinds of perils. The insurer sets itself up to
operate a common pool.
In fact, insurers operate a number of separate pools for different classes of insurance.
Contributions, in the form of premiums from all those insured, go into this pool. Out of the
pool come payments to compensate the losses of the few.
These contributions, or premiums, must be large enough in total to meet the losses in any
one year and, in addition, must cover the costs of operating the pool and provide an element
of profit for the insurer. The insurer endeavours to make sure that the premium which each
insured pays is fair in relation to the risk that they introduce to the pool.
Consider this…
Think of a policyholder who owns a large mansion and another who owns a small
apartment. Both require home insurance, though it is likely that the mansion will be
considered a larger risk than the flat, so the policyholder will be required to pay more
premium into the common pool.
G1 Law of large numbers

Applying the law of large numbers to insurance enables the insurer to predict the final cost
of claims in any one year fairly confidently. This is because insurers provide cover for a large
number of similar risks and the final number of actual loss events (claims) tends to be very
close to the expected number.
For reference only

This enables the insurer to calculate likely losses and thus charge a fixed premium so that
the insured knows the costs for the year, irrespective of the number or size of their own
particular losses. Nevertheless, competitive pressures and the business imperative to grow
or defend market share can affect the level of premium requirement put forward to the client.
G2 Equitable premiums
To operate a pooling system successfully, a number of pools must be set up, one for each
main group of risks. For example, an individual pool for, say, motor insurance and another for
household insurance must be set up. Each person wishing to join the pool must be prepared
to make an equitable (fair) contribution to that pool.
When deciding on equitable premiums (fair contributions), insurers take into account the
different elements of risk brought to the pool by each of the policyholders. These are often
referred to as discrimination factors. Arriving at a premium is a complex process and the
correct assessment of risk is extremely important. The correct assessment will ensure that a
fair premium is charged, and a fair profit can be made. This is the task of an underwriter
when considering an individual risk.
Question 1.4
When pooling risk, insurers use the law of large numbers to make reliable:
a. Claims payment predictions. □
b. Investment return predictions. □
c. New business predictions. □
d. Premium income predictions. □
Chapter 1
G2A EU Gender Directive
At the start of 2011, the Court of Justice of the European Union (CJEU) ruled that insurers
could no longer use gender as a premium calculation tool or in determining which benefits
could be offered. This led to the EU Gender Directive.
Be aware
The EU Gender Directive was transposed into UK law by the Equality Act 2010
(Amendment) Regulations 2012 so it continues to apply in the post-Brexit landscape.
The original ruling affected:
Private
Motor Life medical Income Annuities
insurance insurance insurance protection
Although insurers can no longer use gender as a rating criteria, there is some evidence
women continue to enjoy cheaper car insurance due to better claims history and less
exposure to high risk occupations.
H Co-insurance
Part of an insurer’s job is to manage the pool of money from which valid claims are to be
For reference only

paid. Each insurer will therefore decide upon the maximum limits of acceptance for particular
categories of risk. For commercial property insurances this will probably be a range of
acceptance limits, depending upon the trade being carried on in the premises and usually
linked to different construction standards. For example, an insurer will be comfortable
accepting a higher sum insured for an office risk than for a plant where plastics are
manufactured.
So what happens when a risk is offered to an insurer but the amounts at risk are greater than
the insurer’s retention limits for that category?
The insurer has two choices:
• decline to offer insurance for the risk; or
• find a way of sharing the risk with others – one of the principal ways of doing this is co-
insurance.
'Co-insurance' is used in two distinct ways in the insurance market:
• risk sharing between insurers; and
• risk sharing with the insured.
Reinsurance
Insurers occasionally come together to form a pool and agreeing to jointly underwrite
particular risks. This is known as reinsurance and usually designed to cover catastrophic
risks such as terrorism or earthquakes. We will look at reinsurance in Reinsurance on
page 2/19.
H1 Risk sharing between insurers

In this context, co-insurance is a risk-sharing mechanism which applies mainly, but not
exclusively, in the London Market (including Lloyd's).
For property insurance in particular, an insurer may agree the rating and terms to be applied
with other insurers ('co-insurers') and issue a collective policy. Each insurer receives a stated
proportion of the premium and pays the same proportion of any losses that occur. The 'lead
office' is the first named insurer in the policy and invariably carries the largest share of the
risk, and they are also responsible for issuing the documentation. Each time a change is
required the leading office issues closing instructions to each of the co-insurers, advising
them of the proposed change and requesting their agreement.
Although the lead office carries out these functions on behalf of the other insurers, each
insurer is separately liable to the insured for their proportion of any claim that becomes
payable. The policyholder has a direct contractual relationship with each individual co-
insurer. It is as if each had issued a policy for its own share.
In the event of a claim, the lead office will settle losses, within agreed defined limits, on
behalf of the co-insurers and recoup the sums from them afterwards although for substantial
losses, say in excess of £50,000, a payment is made to the policyholder by each co-insurer
and sent to the leading office for onward transmission to them.
The system is time-consuming to administer, but has the benefit of being entirely transparent
as far as the policyholder is concerned.
Similar sharing mechanisms operate within the London Market through Xchanging Ins-
sure Services. The broker will often undertake many roles, including the collection of
amounts due from co-insurers. Brokers may also be involved in settling losses on an
insurer's behalf, but this will depend upon any delegated authority granted by the insurer.
H2 Risk sharing with the insured

The term ‘co-insurance’ is also used in relation to the amount of a risk that the insured may
retain. A small fixed sum retained by the insured is called an ‘excess’; a large fixed sum
tends to be called a ‘deductible’. However, where an insured is responsible for a substantial
proportion of each loss, either through choice (in order to reduce premiums) or by necessity
(as part of an insurer’s terms for accepting the risk), the term co-insurance is used. An
For reference only

amount might be expressed as ‘Co-insurance 25%’, which would mean that the insured
would pay 25% of each claim under the policy.
One benefit of risk sharing for insurers is that the policyholder is deterred from making small
claims. They may also take more care to prevent damage or loss occurring if they are likely
to be financially impacted.
Dual insurance
The term dual insurance is used when there are two or more policies in force which cover
the same risk. This usually occurs inadvertently where an aspect of cover provided as part
of a package overlaps with a primary cover that has intentionally been purchased to deal
with a particular eventuality.
For example, a travel policy may be purchased before a holiday that includes some cover
for personal effects that are already covered under the personal possessions section of
the individual's household contents policy.
Special rules apply to such situations, and in chapter 8 we will look more closely at what
happens when there are two or more policies covering the same risk.
Chapter 1
I Self-insurance
The term self-insurance means that an individual or company has decided not to use
insurance as the risk transfer mechanism, but to carry the risk themselves. For example, a
company that has a number of shops and a predictable pattern of small claims for glass
breakages might set aside a regular sum each month to fund these losses.
The term can also be used when referring to the part of a loss that the insured retains,
although in this context it usually applies to substantial sums. For example, a manufacturing
company takes a decision to self-insure the first US$50,000 of each property loss that it
suffers. The amount is called the retention.
Self insurance Co-insurance
Transferred Transferred
to insurers to insurers
Whole risk Insurer Insurer
retained A B
Self-insured Insured’s
retention portion
as a %
The individual or The insured Risk is shared The insured is
company has retains part of the between several responsible for a
decided to retain loss – often insurers – each percentage of
For reference only

the whole risk referred to as a taking a stated losses – called
itself ‘self-insured proportion an excess or
retention’ deductible
Key points
The main ideas covered by this chapter can be summarised as follows:
Overview of risk and risk transfer
• Risk has an element of uncertainty, unpredictability and sometimes danger.

• The term risk is used in a number of different ways in the insurance market and can
mean the peril or contingency that is insured, the thing (or liability) actually insured or
both the thing insured and the range of contingencies or scope of cover required.
• Individuals can be either risk-seeking or risk-averse.
• The primary function of insurance is to act as a risk transfer mechanism; that is to
transfer a risk from one person, the insured, to another, the insurer. The insured
exchanges a large unknown financial risk for a much smaller certain premium.
Risk management
• The primary function of insurance is to act as a risk transfer mechanism, that is to

transfer a risk from one person, the policyholder, to another, the insurer. The
policyholder exchanges a large unknown financial risk for a much smaller certain
premium.
• Risk management seeks to identify, analyse and control risk.
• Risks can be controlled by physical means (taking measures to decrease the likelihood
of a feared event happening) or by financial means (transferring the risk to another by
insurance or by contract). They can be controlled by improving risk awareness through
cultural behaviour and training.
For reference only

Components of risk
• The insurer will consider the frequency with which a risk occurs, and the severity of its
impact when it does, when deciding how much of a risk can be prudently accepted.
• A peril is that which gives rise to a loss and a hazard is that which influences the
operation or effect of the peril. Hazard can be physical or moral.
Features of insurable risks
• In order to be insurable, risks must be financial (i.e. their impact be capable of financial
measurement), pure (i.e. not speculative) and particular (i.e. localised and personal in
their impact).
• An event insured against must be fortuitous or unforeseen, there must be insurable
interest and insuring against it must not be against public policy. Generally, too, there
must be homogeneous exposures.
Pooling of risk
• Pooling of risk is the principle that the losses of the few are paid for by the premiums of
the many.
• The law of large numbers means that where there are a large number of risks covered,
the actual number of losses occurring tends to be very close to what was expected.
• Each person contributing to the pool must pay a fair premium based on the amount of
risk they bring.
Benefits of insurance
• Insurance brings peace of mind for the policyholder and a number of economic
benefits to both businesses and society at large.
Risk sharing
• An insurer can deal with a risk that is too large through either co-insurance or
reinsurance.
Chapter 1
Key points
• Co-insurance often describes where the carrying of a risk is shared between two or
more insurers.
• It can also refer to the case where the insured agrees to retain part of the risk
themselves.
• Dual insurance is the existence of two or more policies covering the same risk.
• Self-insurance is where the policyholder decides to carry the risk themselves by setting
aside funding.
For reference only

Question answers
1.1 b. Risk-averse.
1.2 c. Risk control.
1.3 a. Good moral hazard.
1.4 a. Claims payment predictions.
For reference only

Chapter 1
Self-test questions
1. For a risk to be insurable it must be:
a. Financial, speculative and particular. □
b. Fundamental, pure and particular. □
c. Financial, pure and particular. □
d. Fundamental, financial and pure. □
2. Homogeneous exposures are:
a. Similar risks which help set premium levels. □
b. Identical risks which help set premium levels. □
c. Identical risks which help determine a pattern. □
d. Similar risks which help determine a pattern. □
3. Gary is starting a mobile bicycle repair business. He is concerned about the threat of
local competition. He should be aware that this is not insurable as it is a:
a. Pure risk. □
b. Speculative risk. □
For reference only

c. Financial risk. □
d. Non-financial risk. □
4. What are the three steps to managing risks?
a. Risk identification, risk monitoring and risk avoidance. □
b. Risk identification, risk analysis and risk control. □
c. Risk highlighting, risk analysis and risk monitoring. □
d. Risk highlighting, risk analysis and risk avoidance. □
5. An intruder alarm in a workshop is an example of a:
a. Physical control measure. □
b. Preventative control measure. □
c. Material control measure. □
d. Financial control measure. □
6. The pool of insurance premiums must be large enough to meet the losses in any one
year plus the:
a. Costs of operating the pool and an element of profit. □
b. Costs of operating the pool. □
c. Anticipated losses in the following year. □
d. Costs of operating the pool and an element of contingency. □
7. Mi Casa Home Insurance has issued a collective co-insurance policy with two other
insurance firms for a local construction company. It is true to say that:
a. The construction company only has a direct contractual relationship with Mi Casa. □
b. Mi Casa decides the terms and rating to be applied. □
c. Mi Casa is solely responsible for settling any claims made. □
d. The construction company has a direct contractual relationship with each of the □
insurers.
8. A taxi firm that regularly puts an amount of money aside to cover the costs of
accidental damage is an example of:
a. Co-insurance. □
b. Dual insurance. □
c. Self-insurance. □
d. Reinsurance. □
You will find the answers at the back of the book
For reference only

2
Chapter 2
The insurance market
outcomes
Introduction
A Market structure 4.1
B Insurers 4.2
C Lloyd’s and the London Market 4.3, 4.4
D Intermediaries 4.5
E Insurance marketing and distribution 4.5
F Price comparison websites 4.5
G Reinsurance 4.6
H Insurance professionals 4.7
I Market organisations 4.8
For reference only

J Classes of insurance 3.6, 3.7
Key points
Question answers
Self-test questions
Learning objectives
• discuss the operation and structure of the insurance market;
• explain the features of different types of insurance company;
• describe the structure and main features of the Lloyd’s and London markets;
• describe the different distribution channels used for buying and selling insurance;
• describe the basic purpose of reinsurance;
• describe the functions of underwriters, claims personnel, loss adjusters, loss assessors,
actuaries, risk managers and compliance officers;
• describe the main functions of the major market associations, professional bodies and
trade bodies; and
• describe the functions of the Motor Insurers’ Bureau (MIB).
2/2 EP1/October 2022 Insurance, legal and regulatory (EPA)
Introduction
The insurance market is a truly global market with buyers and sellers in every country. Many
Chapter 2
buyers of insurance are multinational companies operating in many countries, and their
suppliers of insurance (the insurers) are frequently also multinational, operating on a
global scale.
There are some restrictions on this apparently ‘perfect’ market. Some parts of the world
insist on risks within the country concerned being placed with a domestic or specific insurer,
or with an insurer authorised by the State to underwrite that form of insurance in that country.
For example, employers’ liability insurance in the UK must be placed with an authorised
insurer, while in some provinces of Canada the liability aspects of motor insurance must be
insured with the provincial government agency.
Example 2.1
A single modest-sized household insurance risk is placed directly with an insurer in the
same territory: the insurer retains the whole of the risk premium and is responsible for
every valid claim. The supply chain here appears very short and many risks around the
world will be placed on this basis. However, even in this apparently compact arrangement
we may find that there are complicating factors that tell us something about the nature of
the market. Let us assume that the insurer, when considering its whole household
account, is concerned that there are many risks in the same geographic area. This could
mean that, although individually the risks are all modest in size, collectively they present a
high potential exposure for a single incident caused by, say, the peril of flood.
The insurer may therefore seek some protection for this accumulation of flood exposures.
This can be done by means of reinsurance. To access this part of the market, the insurer
may employ the services of a reinsurance broker. The broker may organise the
For reference only

reinsurance in a different territory from that of the original risks. The reinsurer, when
considering its own accumulations of exposure, may decide to exchange part of its
portfolio of flood risks in one area with those insured by another reinsurer that covers flood
risks in different parts of the world. This can be achieved through mechanisms called
catastrophe exchanges.
From this example we can clearly see that elements of what appeared to be a simple,
straightforward local risk have become part of a much wider international arrangement. The
risk has been shared with a number of other parties. If this is what can occur even with the
most straightforward of risks, it is not difficult to imagine how the larger, more complex risks
will often be spread around this global market. The multinational company that has a
presence in many different territories may have very complex arrangements for their
insurances, involving the local insurance market, the international insurance market and the
reinsurance market. There may be a number of different intermediaries involved at different
stages in the process.
Fortunately, modern communications allow business to be conducted at times and places
convenient to the insured, intermediary and insurer. There are of course still certain
recognised centres for insurance, including the London Market which offers worldwide
capacity through Lloyd's, the International Underwriting Association of London (IUA) and the
company market in general.
Chapter 2 The insurance market 2/3
Key terms
Chapter 2
Actuaries Bancassurance Claims personnel Compliance officers
Consolidators Distribution channels Insurers Intermediaries
Lloyd’s London Market Loss adjusters Loss assessors
Managing agents Price comparison Reinsurance Takaful
websites
Underwriters
A Market structure
The insurance market is made up of five main components:
• Buyers (policyholders/insureds).
• Insurers (sellers).
• Intermediaries (those who bring buyers and sellers together).
• Comparison websites (aggregators).
• Reinsurers (a further means of spreading risks).
Consider this…
Think of any market you are familiar with and identify the different ways sellers compete
with one another. Would competition in this market differ from competition in the insurance
market? If so, in what ways?
For reference only

All of these different groups of people communicate with each other and with the many other
people who work in or around the insurance market. This interaction is easily illustrated by
the diagram shown in figure 2.1.
Figure 2.1: Information flow

Reinsurance Insurance
Buyers
Intermediaries
Insurers
Reinsurers
Let us now expand figure 2.1, so we can take a closer look at the people who may be
included under the main headings of buyers, intermediaries, insurers and reinsurers
(figure 2.2).
Figure 2.2: Interaction

Buyers Intermediaries Insurers Reinsurers
Chapter 2
Exempt Authorised Direct insurers

Corporate
customers Mutual indemnity
associations
Reinsurance
Captive insurance companies
Public bodies
Lloyd’s brokers companies
Lloyd’s
Associations Brokers
and clubs Lloyd’s
Appointed
representatives The State
Composite (terrorism
Private Agents and specialist and flood)
individuals ‘Other’ insurers
professions
The State
A1 Buyers
The buyers of insurance may be divided into five main types:
• Private individuals.
• Companies.
• Partnerships.
• Public bodies.
• Associations and clubs.
For reference only

A1A Private individuals
Many people buy insurance in their private capacity. Household buildings and contents
insurance will be high on the list, though motor insurance will tend to be the major item of
insurance expenditure for most individuals. Many other types of cover are purchased by
individuals.
A1B Companies
The range covered by this category of ‘buyer’ extends from the very largest multinational
corporation with a multi-million pound worldwide premium spend to the self-employed sole
trader working from home. Unlike partnerships, limited liability companies have a separate
legal existence from those who own the company.
A1C Partnerships
Partnerships do not have a separate legal existence, each of the partners being jointly and
severally liable. They are most commonly found in the medical, veterinary and legal
professions and their insurance needs, especially in the area of professional negligence (the
giving of poor professional advice that leads to loss), tend to be catered for by specialist
schemes.
A1D Public bodies
Public bodies are major buyers of insurance and include local authorities and schools. In
some cases, they may be large enough to have set up their own insurance fund through
which they insure some risks, while turning to the insurance market to cover other risks.
Some public bodies are exempt from compulsory insurance requirements. Police forces, for
example, do not have to insure their motor vehicles. However, most exempt bodies still
choose to insure risks where there is a real catastrophe potential – which would include the
liability for personal injury in connection with the use of motor vehicles.
A1E Charities, associations and clubs
There are many charities, associations and clubs that will have some insurance needs.
Whether it is the local football club or the local stamp collecting society, the management
team or organisers will usually buy insurance cover for liability risks and damage to owned
property. They may also act for members by arranging group covers or schemes.
In legal terms these are 'unincorporated associations' and have special requirements
because, theoretically, each member is liable for the association's actions. This is why, when
policies are issued for such organisations, you will see that the insured's name tends to be
Chapter 2
expressed as 'The committee and members for the time being of…'.
B Insurers
Any company wishing to transact insurance in the UK must be authorised to do so by the
Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
The PRA must be satisfied that the applicant complies with its conditions and retained EU
legislation, where applicable. In particular, insurance companies are required to maintain
defined levels of solvency margins. (A company’s solvency margin is the difference between
its assets and its liabilities.)
Insurers may be distinguished from one another in terms of ownership and function.
The FCA's strategic objective is to make sure that the relevant markets function well, which
includes the role insurers play in the insurance marketplace.
Refer to
The roles and objectives of both regulators are discussed further in Chapter 10
B1 Types of insurer as defined by ownership

There are a number of categories of ownership:
• Proprietary companies.
• Mutual companies.
For reference only

• Captive companies.
• Protected cell companies.
• Lloyd’s.
We will now examine these in more detail.
Refer to
Lloyd’s explained in Lloyd’s and the London Market on page 2/8
B1A Proprietary companies

Most of the insurance companies in this group are registered under the Companies Act
1985. These companies are owned by shareholders who, in buying shares, contribute to the
share capital of the firm. Therefore, company profits, after expenses and reserves, belong to
the shareholders.
Proprietary companies are limited liability companies. This means that a shareholder’s
liability for the company’s debts is limited to the nominal value of the shares they own (the
originally stated face value of the shares). Some are publicly quoted companies with a share
value stated in the recognised financial exchanges. This applies to many of the ‘household
names’ in insurance. They have the letters ‘plc’ after their name. Even these companies may
choose to operate under a brand: for example, Direct Line Group operates under various
brands, including Direct Line, Churchill, Privilege and Green Flag for roadside assistance,
and Royal and Sun Alliance plc continues to operate under the ‘MORE TH>N’ banner.
However, some insurance companies operating in the sector are private limited companies
whose shares may be owned by a few shareholders, or sometimes by only a single
shareholder. Their shares are not available to the general public. In the UK such companies
have the designation ‘Ltd’ after their names. Limited companies are more commonly small-
to medium-sized insurance intermediaries rather than insurers, simply because of the large
amount of capital required by insurers to conduct business.
B1B Mutual companies
In contrast to proprietary companies, mutual companies are owned by the policyholders. The
policyholders share in the profits of the company by way of lower premiums. In theory, these
policyholders are liable for any losses made by the company. However, in reality, mutual
companies are limited by guarantee, with a policyholder's maximum liability usually limited to
their premium. There has been a trend for insurers owned in this way to demutualise, which
Chapter 2
means they then become proprietary companies.

B1C Mutual indemnity associations
Mutual indemnity associations are self-managed pools of insurers and, similarly to mutual
companies, also owned by their policyholders. They are primarily active in marine insurance,
where Protection and Indemnity Associations (known as ‘P&I clubs’) insure certain aspects
of marine hull liability. The contribution (‘call’) is set initially and further calls are possible
depending upon the overall results.
B1D Captive insurers
A captive is an insurance company established by its parent company or group (usually a
large corporation) that provides insurance coverage primarily, if not solely, to that parent
company.
Captive insurance is a tax-efficient method of transferring risk and has become more
common in recent years among the large national and international companies. The tax
efficiency arises in two ways:
• Premiums payable to the captive may be tax deductible at source.
• The captive will be established in a territory with a favourable tax rate that will apply to
any trading profits. Many captives operate from offshore locations such as the Republic of
Ireland, the Channel Islands, Bermuda and the Isle of Man because of such favourable
tax regimes.
Apart from tax efficiency, there are other incentives. These include:
• the ability to get the full benefit of the group’s risk control techniques by paying premiums
For reference only

based on its own experience;
• avoiding the payment of extra premium designed to meet the direct insurer’s overheads;
and
• obtaining a lower overall risk premium level by being able to place certain risks in the
reinsurance market with its flexible products and lower overheads.
Captive insurers do not offer insurance to the general public.
Protected cell companies (PCCs)
In 1997 Guernsey created a new kind of captive insurer, the protected cell company
(PCC), that ‘ring fenced’ the assets of the participating cells and allowed them to operate as
distinct insurance entities. Since then PCC regulations have been introduced in a number of
other countries/areas, including Bermuda, Barbados, Gibraltar, Malta and the Isle of Man.
Gibraltar and Malta are able to offer the facility throughout the EU via EU ‘passporting’
provisions.
A PCC is a special type of captive insurer that operates in two parts with a core and an
unlimited number of cells. It ‘ring fences’ the assets of the participating cells and allowed
them to operate as distinct insurance entities.
A PCC operates in two parts with a core and an unlimited number of cells. A PCC is a single
legal entity, which has a single board of directors that manages the affairs of the PCC as a
whole. The PCC’s articles usually empower the directors of the company to create cells at
their discretion simply by resolving to create a new cell.
• Each prospective cell owner must enter into a cell management agreement with the PCC
board and will be bound by the PCC’s memorandum and articles of association.
• Entry to the PCC is subject to approval by the PCC board who will require details of the
proposed business plan and will agree the parameters within which the cell is to operate.
• A PCC files a single annual return, but regulatory approval is required for the business
plan of each cell.
• PCCs have many uses and are not just used as risk transfer vehicles. Some insurers use
their PCCs to offer ‘captive’ facilities to clients and some to offer niche products where
conventional cover is expensive or unavailable.
• There are a number of benefits to using a PCC, including the minimum establishment and
administration costs, and their creation in territories with favourable tax rates that will
apply to any trading profits.
Chapter 2
B2 Types of insurer as defined by function
So far we have classified companies according to their form of ownership. However, in terms
of the marketplace it is more relevant to classify them by function or type.
Composite companies These accept several types of business (called classes of business) and
represent the major part of the company market.
Specialist insurers These tend to issue policies for only one class of business.
Composite insurers usually accept property, casualty, motor, accident, life and marine
business as well as other types of insurance. With mergers and acquisitions, the six largest
composite groups account for over 60% of general premium income written by UK insurers.
Specialist insurers, on the other hand, have expertise in one particular niche area and so
they form a valuable addition to the market but in a narrow area.
B3 Takaful insurance companies

Takaful is a type of insurance that has its roots in the Islamic financial services industry. The
model has been developed over a period of time and is based on the rulings of Sharia law on
financial and commercial transactions. It works on the principle that in any transaction risk
and profit (and loss bearing) should be shared between the participants.
The reason for this business development is to meet a specific customer group, namely
insurers and intermediaries with a need for products to meet their particular religious
principles.
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Under Islamic (Sharia) law, traditional insurance policies are seen by Muslims to be contrary
to some of the fundamental principles of Islam. This is because they involve:
• Gharar (uncertainty) – Islamic law forbids sales where there is risk to the buyer, unless
the risk is of a normal or reasonable proportion. Some believe that traditional insurance
policies do not remove uncertainty because how much and when, if at all, a policy will pay
out remains uncertain.
• Maisir (gambling) – traditional insurance policies are seen to be a sort of gambling
because some policyholders receive claims payments while others do not. Gambling is
forbidden under Islamic law.
• Riba (interest) – Islamic rules also forbid making money from money, such as through
interest. Wealth can only be made through the trade of assets and investments.
Takaful is an Arabic word meaning ‘guaranteeing each other’. Takaful insurances embrace
the Islamic principles of:
• mutuality and cooperation;
• shared responsibility;
• joint indemnity;
• common interest; and
• solidarity.
Takaful ‘insurance’ products need to be approved by Islamic scholars to ensure they are
compliant, and many providers consult special Sharia advisory committees during the
development process.
While Takaful insurance has been in existence for over 30 years, it was only in 2005 that a
major high-street bank became the first to offer Islamic insurance policies for buildings and
contents. The sector has seen strong and steady growth since then.
B4 The State
In the UK the Government’s preferred method of ensuring adequacy of insurance coverage
is to legislate to make certain insurances compulsory. However, the State acts as an insurer
in a number of different areas, mainly in welfare benefits and pension provision. It also acts
as a guarantor (a kind of reinsurer) to the insurance sector for terrorism risks and flood risks.
Question 2.1
Which type of insurance company does not provide insurance to members of the
Chapter 2
general public?
a. Captive. □
b. Composite. □
c. Mutual. □
d. Proprietary. □
C Lloyd’s and the London Market

C1 Lloyd's structure and features
Lloyd's is not an insurer, but a marketplace. It is also a world-renowned insurance brand,
without ever actually providing any insurance.
Lloyd's is a Society of Members, and the Corporation of Lloyd's provides the infrastructure
for the marketplace.
Under the Lloyd's Act 1982, the Council of Lloyd's was created and is responsible for the
management and supervision of the Market.
Lloyd's is a dual regulated institution, with both the Society of Lloyd's and Lloyd's managing
agents being regulated by both FCA and PRA. Lloyd's brokers and members' agents are
solely regulated by the FCA.
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On the Web
www.lloyds.com
C1A Syndicates
Syndicates are the groups of private individuals or corporate investors who carry the risks
(i.e. they provide the financial backing). Both types of investor (individual or corporate) are
known as underwriting members or Names.
In the 1990s there were over 400 syndicates; however, at the end of 2021, there were
just 90.
This reduction does not mean that the Market has substantially decreased in size since the
1990s; in fact, the reverse has occurred. However, the individual organisations in the Market
are now much more substantial in size than they used to be. The size referred to is not their
employee head count but their capacity to accept risks.
C1B Managing agents
Syndicates outsources the day-to-day running of the insurance business to managing
agents. These are companies established to manage one or more syndicates on behalf of
the members that will provide the capital. Their responsibilities include employing the
underwriters and claims adjusters, and liaison with Lloyd's as well as other regulators.
As we touched on earlier, Lloyd's managing agents are dual-regulated, meaning they have to
be approved by the PRA to carry on PRA-regulated activities and any business conduct
activities are regulated by the FCA. At the end of 2020, there were 50 managing agents.
C1C Capital and members/Names
Capital is the term used for the investment put into the market by the investors known as
members or Names. In today's market, the vast majority of the capital is provided by
corporate Names rather than individuals, although individual members do still exist.
In order to invest in the Market, prospective members (of either type) must be able to show
adequate means in a form acceptable to Lloyd's. In practice, this means that Lloyd's needs
to be satisfied that the prospective member should be able to pay any claims made
against them.
Up until 1994, all members of Lloyd's were private individuals who had unlimited liability,
which is as it sounds, personal liability with no upper limit.
In the late 1980s, the Lloyd's market received a number of large claims relating to natural
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catastrophes such as Hurricane Hugo, some large physical losses such as the Piper Alpha
rig in the North Sea and a substantial value of claims arising from pollution, asbestos and
health hazard problems originating mainly in the USA. The sheer financial magnitude of
these losses hitting the market meant that many members were faced with very large
requests for funds from Lloyd's which, because the members had unlimited liability, could not
be capped.
The result of that period in the history of Lloyd's was a need to rebuild the market and this
was done through a process called Reconstruction and Renewal (R&R) whereby a
dedicated reinsurance vehicle called Equitas was created. The entirety of the Lloyd's market
for the 1992 year of account and prior was reinsured into Equitas and the 'new' Lloyd's
market started with a 'clean sheet' for the 1993 year of account.
Following this R&R, corporate capital or investors were brought into the market and the
amount of corporate capital in the market is now high. No new individual Names with
unlimited liability are permitted to join Lloyd's. Individual Names with limited liability are still
welcome although, in reality, many of the old unlimited liability Names have converted to
limited liability Names.
C1D Members' agents
A members' agent advises potential corporate and individual members Names on the
advantages and disadvantages of investing in the Lloyd's market. This advice will cover,
syndicate selection and performance, reserve requirements and compliance issues.
Members' agents also act as a communication channel between the member and the various
managing agents running the syndicates in which the member has invested, receiving the
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regular reports on the profits (or not) made by the syndicate.
There are currently only four active members' agents. These firms are approved by the FCA
and by Lloyd's specifically to advise on Lloyd's syndicate participation.
C2 Transacting insurance at Lloyd’s

The Lloyd's market is centred around a modern, purpose-built building in the heart of the City
of London. Each syndicate has a space on the trading floor with desks and chairs, still
referred to as 'boxes' reflecting the original style of furnishing, and traditionally brokers have
approached them there to negotiate their contracts.
C2A Lloyd's brokers

Although many brokers operating in the London Market are known as Lloyd's brokers, it is
not a requirement to hold this status in order to transact business in the Lloyd's market.
Many brokers however like to hold this status as a brand benefit to them, particularly with
overseas clients.
To become a Lloyd's broker, a broking firm (who could be based overseas) must firstly be
fully regulated by their own regulator (the FCA in the UK) and must then satisfy certain
requirements set by Lloyd's about capability, understanding of the market and ability to
transact business using the central market systems.
Lloyd's brokers are covered in more detail in Lloyd’s brokers on page 2/13.
C2B Placing a risk
The broker puts a summary of the risk to be placed and the suggested terms and conditions
onto a document called a Market Reform Contract (MRC) (still known as a 'slip'). The
nature and content of this document is governed by clear market rules – in an attempt to
achieve both standardisation and clarity as early in the process as possible.
Traditionally, much of the business at Lloyd's was still transacted by face-to-face negotiation
with brokers visiting the underwriters either in their offices or in the Underwriting Room in the
Lloyd's building. However, in recent years – in a drive towards better operational efficiency –
Lloyd's has taken increasing steps to encourage the market to start placing business
electronically.
Impact of COVID-19
The COVID-19 pandemic had a fundamental effect as Lloyd's closed the Underwriting
Room and brokers and insurers also closed their offices. This forced every corner of the
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market to use the electronic systems, with email as an emergency backup, or face not
being able to transact business.
However, the market did not grind to a halt and business – even the more complicated
risks – was placed and renewed successfully during the periods of closure before the
Underwriting Room and wider Lloyd's building reopened.
Steps in the process

• For those transactions that involve a broker, the broker obtains a quotation from an
underwriter recognised as a 'leader' in a particular class of business.
• This underwriter will indicate the percentage share that they will accept and the terms
that apply.
• Subsequently, the broker will approach other underwriters and will 'fill' the slip by
obtaining signatures for the shares that they are each willing to accept.
Subscription market
Many risks written in the Lloyd's market are large and have high financial exposures. This
means that it is not generally possible (or sensible) for a single underwriter to accept
100% of a risk. Each underwriter that the broker approaches will accept a percentage
share. This sharing of the risk between a number of insurers is known as subscription
underwriting.
• Once the MRC/slip is fully placed (in other words, the percentages accepted by each
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underwriter total the amount of cover required, usually 100%), the risk must then be
submitted electronically to Xchanging Ins-sure Services (XIS).
• The underwriters usually agree that the broker can deduct a certain percentage of the
premium (this deduction is called 'brokerage'). Therefore, the amount of money that is
taken from the broker account for transmission to the underwriters will be the net
amount.
• XIS records the risk and premium details on the central market database. It also
facilitates the payment of the premium to both Lloyd's and London Market underwriters
for the broker.
• If a formal policy document is required by either Lloyd's insurers or London company
market insurers for sending to a client, this can be requested from XIS who will prepare it
on the insurer's behalf.
• Once the data is recorded and the premium paid, both the broker and the underwriters
will get electronic messages from XIS with data about the risk.
Question 2.2
Which individuals provide financial backing for Lloyd’s syndicates?
a. Underwriters. □
b. Names. □
c. Managing agents. □
d. Member agents. □
C3 The London Market
Lloyd's represents only a part of the much wider London insurance market, which itself is a
distinct, separate part of the UK insurance and reinsurance sector.
The main providers in this market are insurance and reinsurance companies (many of whom
are members of the International Underwriting Association of London (IUA) (see
International Underwriting Association of London (IUA) on page 2/27), Lloyd’s syndicates,
Lloyd’s service companies (who effectively operate as branch offices of the syndicates in
places such as Singapore and Dubai), and protection and indemnity clubs (mutual insurers
which deal in marine liability risks). Much of the business is conducted internationally,
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including significant insurance and reinsurance arrangements.
The London Market is the place where many sizeable or complex industrial risks from all
over the world are placed. This market in general, and perhaps the Lloyd’s market in
particular, has been a focus for placing very unusual risks and is arguably unique in the
world in this respect.
To give you an indication of its size, Lloyd’s gross written premium income for the year 2021
was £39.2 billion (source: Lloyd’s Annual Report 2021). It is not possible to be precise about
figures for the London Market because some of the insurers that operate in this market do
not produce separate sets of figures for this aspect of their overall operations.
C4 Contract certainty
Both Lloyd's and the London Market, in general, have adopted specific procedures designed
to ensure that all parties are fully aware of the coverage and terms of the policy before a risk
starts to be covered. This is referred to as contract certainty.
The following definition for contract certainty has been agreed:
Contract certainty is achieved by the complete and final agreement of all terms
between the insured and insurers by the time they enter into the contract, with
contract documentation provided promptly thereafter.
Contract certainty does in fact involve three distinct but equally important elements:
• Certainty as to the details of the contract that has been agreed.
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• Certainty as to the final share of the risk that each insurer has agreed to take – an
underwriter's original written line (or share) that they agree to take might well be
proportionately reduced or "signed down" by the broker if the risk is popular and many
insurers want to participate. It is their final signed line which insurers need to have in their
records as soon as possible.
• The provision of contractual documentation to the client promptly, i.e. within 30 calendar
days for commercial customers, or seven working days for consumers.
If a broker is involved in the placement, then both the broker and the underwriters share the
responsibility for making sure that contract certainty is achieved, and both parties should
carefully check all the documentation (for example the slip/market reform contract) for
ambiguity/contradiction or missing information.
D Intermediaries
The structures and functions of intermediaries vary according to the status of the
intermediary and the terms of the business agreement with the insurance provider. However,
there are some general rules which we will summarise here.
An insurance intermediary is an agent, but many insurance intermediaries perform a wider
range of functions than simply bringing the two parties (the insured and the insurer) together.
In broad terms we can distinguish between the functions of independent intermediaries and
other intermediaries, who are more clearly linked to one or more product providers. In legal
terms an agent is one who is authorised by one party, termed the principal, to bring that
principal into a contractual relationship with another, termed the third party.
Refer to
Law of agency covered in more detail in Agency on page 3/8
The FCA is the regulator for all aspects of insurance sales, advice and conduct (in addition
to the authorisation and monitoring of intermediaries). The rules that relate to intermediaries
also apply to insurers in connection with their mediation activities, i.e. their advice, promotion
and sales functions, and complaints handling.
Under FCA rules all ‘persons’ (and this includes firms) engaged in insurance mediation
activities must be either directly authorised by the FCA or exempt. To be exempt means the
intermediary must adopt the status of an appointed representative (AR) or introducer
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appointed representative (IAR), or be a member of a professional body that has equivalent

rules to those of the FCA, termed a designated professional body. Broadly speaking this
means that an authorised person/firm will take responsibility for the activities of ARs
and IARs.
In addition to these, the Insurance Distribution Directive (IDD), implemented in October
2018 (see Insurance Distribution Directive (IDD) on page 9/33 for more information),
introduced a new category of intermediary: the ancillary insurance intermediary (AII). An
AII is person that distributes insurance on an ancillary purpose, and whose principal
professional activity is not insurance distribution. This could include travel operators that sell
travel insurance as part of their services, but not as a main part of their business.
D1 Authorised persons
An authorised person is an individual or firm authorised by the FCA to engage in regulated
activities.
An intermediary, whether a sole trader or a company, wishing to offer insurance must apply
for direct authorisation by the FCA, unless they have decided that the status of appointed
representative is more appropriate for them.
Once authorised, a firm is bound to abide by all FCA rules. These rules are demanding,
particularly in terms of financial accounting, training and competence, and reporting
requirements. Consequently, since their introduction there has been a great deal of
consolidation in the market place through sales and acquisitions. In addition, umbrella
organisations have been created that are known as broker networks. These vary in their
structure, but one model for this is that the umbrella organisation becomes the authorised
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person and each ‘member’ of the network becomes an appointed representative, thus
availing itself of the centralised facilities.
The FCA rules are in addition to any legal duty of trust that an agent owes to a principal.
D2 Appointed representatives
An appointed representative (AR) may be an individual or a company that is appointed by
an authorised person (the principal) under the terms of a contract. An AR may be acting for
an insurer or for an intermediary that is itself directly authorised by the PRA or FCA.
The contract which sets out the terms of business between the parties (called an Appointed
Representative Agreement) determines the AR’s role and responsibilities. The key feature is
that the principal takes responsibility for the AR’s activities in carrying on the business of the
principal.
An AR may act for more than one principal, provided that there is a suitable contract in place
with each one. Although there is no regulatory restriction regarding the number of
appointments held, market practice has effectively imposed a modest limit. This is because
of the complexity of operating under many different contractual arrangements with different
authorised persons. If a principal appoints an AR that is already acting for another firm, the
principal must enter into a written multiple principal agreement with every other principal the
AR may have.
As a category, ARs include organisations with a non-insurance main occupation, such as
motor garages, freight forwarders, and associations who sell relevant insurance products to
their members. They may also be full-time insurance agents that have decided to become
‘tied’ to one or more insurers rather than become authorised directly themselves.
Once appointed as an AR, the authorised person they are acting for is responsible for
ensuring they abide by all FCA rules in relation to any regulated activities they perform. The
authorised person must, therefore, have adequate oversight arrangements in place over
the AR.
Potential issues
Principals in the past have not always been able to demonstrate efficient control measures
and this was highlighted by an FCA Thematic review, 'TR16/6 Principals and their appointed
representatives in the general insurance sector', conducted in July 2016.
The review found significant shortcomings with principal firms' understanding of their
regulatory obligations. It identified that insurers could not demonstrate enough control and
oversight of their AR activities. As a result, the FCA took intervening action with five firms
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who took part in the review, limiting their appointed representative activities.
Be aware
In 2021, the FCA expressed concern that it continued to see a wide range of harm through
the use of ARs by firms, specifically:
• principals not performing adequate due diligence at the outset of the appointment; and
• inadequate oversight and control once the AR begins performing regulated activities on
behalf of principals.
In December 2021 a consultation paper was issued to the market proposing changes to
the AR regime. The consultation paper proposed strengthening the responsibility on
principal's using ARs and how principals monitor and control their ARs.
The consultation has now closed and a policy statement is due from the FCA.
D3 Introducer appointed representatives

An introducer appointed representative (IAR) is one whose scope of appointment by the
authorised person/firm is limited to effecting introductions and distributing what are termed
'non-real time financial promotions' – in other words supplying such things as brochures and
proposal forms.
The principal is responsible for the actions of its IARs, but a less demanding regime applies.
For example, the FCA's training and competence rules, which apply to ARs, do not apply
to IARs.
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We can see that this type of appointment would suit many who wish to act as a marketing
channel for an insurer (or authorised intermediary). Individuals and firms who provide no
advice, but simply act as a shopfront for an insurer’s products, fall into this category.
D4 Lloyd’s brokers
It is worth pointing out at this stage that the term ‘broker’ is frequently used in the insurance
market. At one time it was necessary to be formally registered to use this term. Nowadays, in
practice it tends to be only those offering truly independent advice that use the term in their
titles. The FCA makes no distinction between the term ‘broker’ and ‘independent
intermediary’.
However, although the term ‘broker’ may be freely used in the market, it is the Council of
Lloyd’s that registers insurance broking firms to act as Lloyd’s brokers. This title has been
retained, even though access to Lloyd’s has been granted to a wider range of intermediaries
under the Legislative Reform (Lloyd’s) Order 2008.
To be registered, brokers must satisfy the Council as to their expertise, integrity and financial
standing. Once appointed, the words ‘and at Lloyd’s’ may be used on letterheads and name
plates. The requirements of Lloyd’s are in addition to those of the FCA for authorised
persons.
An intermediary that is not itself a Lloyd’s broker and does not wish to pursue the new direct
routing possibilities, may access the Lloyd’s market by using the services of a Lloyd’s broker.
This effectively creates a chain of supply. In these circumstances the Lloyd’s broker is
termed a ‘wholesale’ broker and the originating intermediary a ‘sub-broker’ or ‘producing
broker’.
D5 Services provided by intermediaries

In the market, the main distinguishing feature of an independent intermediary, which includes
Lloyd’s brokers, is the fact that the intermediary is acting on behalf of the client when placing
business, not on behalf of the insurer.
The expertise of the independent intermediary is, in part, demonstrated by recommending
the most appropriate insurer with which to place the risk.
The intermediary must advise whether the product recommended is a personal

recommendation on the basis of a fair and personal analysis of the market. This does not
mean that they do so in every case. However, FCA rules oblige the intermediary to make a
Chapter 2
list of product providers available if they have not fully explored the market and only
approached a limited number of insurers.
Remuneration from the insurer is traditionally a percentage of the premium payable, though
increasingly there is a tendency in larger commercial insurance for intermediaries to charge
a fee for their services instead (in which case they would rebate the commission to the client
or agree a net premium with the insurer).
Services for clients
The services that intermediaries provide for their clients vary considerably. However, all
independent intermediaries:
• decide the best market in which to place the risk;
• negotiate terms and conditions initially and for mid-term changes;
• provide advice to the client regarding the detail of the policy wording;
• review client needs;
• negotiate renewals; and
• advise the client on the validity of claims.
There are further services that may be provided and these will be specified in the terms of
business agreement (TOBA) with the client. They include:
• risk management advice;
• assisting with the presentation of claims; and
• assisting in recovering any uninsured losses.
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Services for insurers
Other functions may be carried out by the intermediary on behalf of insurers, depending
upon the TOBA with the insurer. These could include:
• collecting the premium;
• committing the insurer to cover the risk (if authorised);
• settling claims on behalf of the insurer (if authorised); and
• issuing motor, or other cover notes to give evidence of cover.
If an intermediary operates as the AR of an insurer, they may only give advice in relation to
that insurer’s products. They do not, therefore, carry out the wider functions that relate to the
suitability of different markets. However, they continue to have a responsibility to match a
client’s demands and needs with suitable products from within their principal’s range or from
any wider product range available to them if they are the AR of more than one insurer.
They may also carry out functions relating to mid-term alterations and renewals. For these
purposes they are acting on behalf of the insurer from whom they receive their authorisation.
They may carry out any function, if they are authorised to do so by the insurer. This will be
set out in the TOBA between the insurer and the AR.
On the other hand, an intermediary may operate as the AR of an independent intermediary,
that is itself an authorised person. In this circumstance they may carry out the wider
functions that relate to the suitability of different markets, if authorised to do so by their
principal. The terms of authority will be contained in the contract between the intermediary
and the AR.
D6 Consolidation of the insurance sector

In recent years there has been considerable consolidation in the insurance broking sector.
There are many reasons for this consolidation, including the difficulty that many smaller
intermediaries have encountered in coping with regulation.
Other reasons relate to the age profile of many principals within the sector and pressures on
rates that inevitably led to reduced earnings.
Consolidation has taken a number of different forms.
D6A Broker networks

One way in which the market has consolidated is through broker networks. One business
model used is that of an organisation, authorised by the FCA, offering AR status to those
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joining the network. This means that firms who join retain ownership of their own broking firm
but acquire access to centralised services, which may include accounting, training and
development and other aspects of compliance. The network itself benefits from greater
purchasing power in negotiations with insurers and there may be cost savings arising from
the greater critical mass of the overall organisation.
This is not by any means the only model. There are other networks where all firms are
individually authorised by the FCA but join together in a formal alliance. This may be to
access a defined range of centralised services from the ‘senior’ firm in the alliance or to
obtain more favourable terms from insurers.
D6B Consolidators
A further development in the market has been the emergence of consolidators. These are
companies that are growing by the formal acquisition of others within the marketplace.
Insurers will naturally wish to transact business with such companies, both because of their
present size and their growth potential. However, some consolidators will demand
preferential rates and/or enhanced commission for the volume business they are able to
offer them. Such consolidation could lead to significant changes in the sector.
Some consolidations are blurring the traditional boundaries between insurers and
intermediaries. For example, one major insurer has acquired a significant-sized insurance
broking firm in recent years. The same largest consolidator just mentioned has both broking
interests and an underwriting agency arm.
In the Lloyd’s market the Legislative Reform (Lloyd’s) Order 2008 has removed the
‘divestment rule’ (this is where broking and underwriting activities must be completely
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separated), paving the way for more acquisitions and mergers. In doing this, the Government
is relying upon the effectiveness of FCA rules that insist on conflicts of interest being
managed and mitigated effectively.
E Insurance marketing and distribution

According to the Chartered Institute of Marketing, 'marketing' means the management
process which identifies, anticipates and supplies customer requirements efficiently and
profitably.
In insurance terms, the marketing process involves making decisions on product, price,
promotion and place (the latter two involving distribution). Together these are sometimes
referred to as the marketing mix.
The distribution of insurance is a very important component of the marketing mix, so far as
insurance companies are concerned. This is because the choice of distribution channel will
affect pricing and may even impact upon the shape of the product or its presentation. The
distribution channels used for insurance can be divided into two main types: direct and
indirect channels.
Direct – employees of the insurer sell Indirect – intermediaries paid by the

the insurance products or direct mailing insurer to promote products on the
techniques and websites are used to insurer's behalf.
promote sales.
Consider this…
Think about the other marketing variations that could be affected by the distribution
channel used.
The choice of distribution will determine the type of advertising used, e.g. whether it is to be
aimed at intermediaries or the general public. It will also have an impact on costs relating to
staff, premises and IT equipment. The following diagram illustrates this point more clearly.
Chapter 2
Insurance distribution channels
Direct marketing Indirect marketing

channels channels
Direct Company Agents Brokers Consultants Price

insurers sales or advisers comparison
staff websites/
aggregators
Insurers have to select the most effective channels for product promotion and distribution,
and these channels have many competing features. Equally, from a buyer’s perspective,
there are significant benefits and drawbacks to purchasing insurance through direct and
indirect channels.
E1 Direct marketing channels

The last diagram shows that, in addition to direct insurers, 'company sales staff', who will
often sell a range of policies, play a role in the direct marketing of insurance. Common direct
marketing methods include targeted mailings, telephone calls and social media messaging
directed at those categories of individual likely to purchase the product on offer. The mailings
are focused in many different ways, e.g. to the 'over 50s', to those owning a particular model
of car, those in designated job types and so on. Some companies have chosen to sell only
online or over the telephone; many private motor insurers fall into this category. Their other
methods of promoting their products and services are television, radio, newspaper/magazine
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advertising and through social media channels.
E1A Benefits and drawbacks
Benefits:
• Where products are marketed directly to the public, without involving paid sales staff,
there will be reduced costs for insurers (as they do not pay commission to
intermediaries). These savings can be passed on to the customer through more
competitive premiums.
• The customer can purchase insurance quicker and more easily. This means that
immediate cover can be obtained over the internet or telephone, subject to return of a
pre-printed proposal confirmation form or statement of facts duly signed or simply relying
upon the recorded voice responses to questions.
• The insurer can control the customer experience, and make improvements to its service
quickly without having to engage a third party.
Refer to
Refer to Price comparison websites on page 2/18 for more on price comparison websites
Drawbacks
• Only one company’s product is available, unless the customer makes several telephone
calls or reviews quotes on a price comparison website.
• Although savings are made by not having to pay an intermediary, there is usually a
significant advertising and promotion cost that has to be passed on to customers and
included in the premiums.
• No independent advice is available regarding suitability and no independent assistance
available in the event of a claim (this is, to an extent, balanced by the regulatory
obligation that insurers have to treat customers fairly at each stage of the value chain for
an insurance product).
E2 Indirect marketing channels

From an insurer's perspective there are many reasons why indirect marketing channels
could be beneficial. The intermediary will earn commission, so there is an incentive to sell
the product on the insurer's behalf and the insurer benefits from any promotional activity. The
insurer must decide what type of intermediary will be appointed. If it chooses to use an AR or
IAR, the insurer will, broadly speaking, be responsible for their actions in relation to advice
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and sales. However, the insurer will be aware of the extent to which an AR is tied to the
insurer by virtue of any agreements with other product providers. They must be aware of
these under FCA rules. Often, there is no competing insurer or product as far as such
intermediaries are concerned, because they choose to tie themselves to a single insurer.
Independent intermediaries will provide advice to their client (the buyer) about a whole range
of things, such as the best premiums available in the marketplace, the range of cover and on
the extent to which the product they are recommending meets their client’s demands and
needs. They may also provide other services to the insured, such as assistance in
completing a claim form or advice if a dispute concerning a claim arises. For many insurers
this is a helpful aspect. The responsibility for advice rests upon the independent
intermediary. The insurer must ensure that the intermediary is fully briefed on the scope and
nature of the product. FCA rules identify a specific range of features that must be provided
by the insurer and ultimately to the client.
Complex commercial insurances are particularly suited to this kind of arrangement.
E2A Schemes and delegated authority
Many insurers delegate authority to intermediaries to act on their behalf. Under a delegated
authority arrangement, the intermediary can be authorised to issue cover, provided that new
business or changes to existing policies fall within defined criteria. Some delegated
authority schemes (often called 'binders') give a great deal of flexibility to the intermediary
within defined limits. Often the policy wording will have been specially negotiated to fit a
particular category of client, e.g. haulage contractors, warehouse keepers and hoteliers.
The attraction of these schemes for insurers is a flow of business arising from the tailored
wording. There may also be an agreement on rating, but some schemes rely upon individual
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rates being provided by the insurer upon receipt of proposal information. From the
intermediary’s point of view there can be the ability to grant immediate cover, an ease of
operation, and sometimes profit-sharing provision, if the results of the scheme are good.
A managing general agent (MGA) is a specialist type of intermediary who also has delegated
authority to act for one or more insurers. MGAs are intermediaries that perform functions
ordinarily handled only by insurers, such as marketing, binding cover, underwriting and
pricing, appointing agents and loss adjusters, and handling claims. MGAs benefit insurers by
the specialist expertise they have to offer in their niche areas, and MGAs are able to
distribute and service insurance products while using the capacity provided by insurers.
E3 Bancassurance
Bancassurance describes the arrangement between a bank and an insurance company
whereby insurance products are sold to the bank’s customers – traditionally through its bank
branches. It is sometimes described as a distribution channel for insurance products, but
bancassurance is a business that involves a bank and an insurer, which may use several
distribution channels to achieve its goal.
The first bancassurance operations were established in Europe and have led to several
mergers and acquisitions across continents. The momentum has been building outside
Europe in recent years, as countries seek to replicate this success in their own financial
markets. Bancassurance offers the following advantages for banks and insurance:
• Access to each party’s ‘scale efficiencies’ (those benefits that a company enjoys purely
as a result of operating on a large scale).
• Lower risk to the business (through access to alternative sources of customer/products).
• Access to previously unavailable resources (from the other party’s company).
• Improving ‘value chain efficiency’ (deriving the most added value from the product
development process, which shows business efficiency).
• Opportunities for joint product development (pooled resources can reduce cost and time
for each party).
• Access to one another's brands and reputations in their respective sectors.
• Market development (increased percentage share of the available customers).
F Price comparison websites

Brokers and other intermediaries have traditionally searched the market for the most
Chapter 2
competitive quotation for a client. In the personal insurance area, many have subscribed to
quote engines that will provide a range of quotations from those with whom they hold agency
appointments.
However, the internet has facilitated different ways of comparing insurance prices. It has led
to the development of consumer-focused price comparison websites (PCWs), or
‘aggregators’.
A price comparison website uses web-based extraction tools to collect and analyse
('aggregate') information from different data sources. Aggregation is the term used for
information retrieval for goods and services on the internet. In theory, this may be with or
without the permission or knowledge of the underlying data sources.
Within insurance, price comparison websites tend to rely upon cooperation with brokers and
insurers to access their pricing for different risks. They aim to work with a number of direct
insurers and intermediaries, delivering a service to the proposer whereby the completion of
one question set provides quotations from a number of insurance providers. The proposer
can then approach that company and purchase their insurance at competitive rates.
Example 2.2
Aliyah has just moved into a rental property and wants to take out insurance for her
contents. As she does not want to spend time checking individual insurers’ products, she
uses price comparison website XYZ.com. To generate quotes from a number of insurers
and brokers, Aliyah goes through an application process on the XYZ.com website, which
has been designed to capture the data required for a number of providers.
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Once she has completed this, XYZ.com provides a list of insurance products, with details
of the provider, the price, and some high-level information regarding the policies. She may
decide to choose one of the quotes straight away based on the price, or there may be
other variables for her to consider before deciding, such as different excesses and
additional elements of cover, in which case there may be further steps to go through
before she can take out the policy.
The emergence and growth of price comparison websites has changed the landscape of the
insurance market.
Critics of the sites, however, point out that the imperative to save time and effort in
submitting personal details by limiting the number of questions, may affect the accuracy of
quotations. The results can be confusing as they are not always a true reflection of the
ultimate cost of insurance, once fuller details are submitted. It can also be difficult to
compare cover or terms offered by various providers.
Price comparison websites can, and do, cut across traditional boundaries. Direct insurers, for
example, by definition deal directly with the public, but the prices of many direct companies
may be accessed through this route.
Be aware
Some direct insurers, such as Direct Line, have refused permission to be included in
comparison websites, and they emphasise this in their advertising campaigns.
However, some of Direct Line Group's other brands, Churchill and Privilege, are sold
through comparison websites – this arguably demonstrates the importance of PCWs as
part of an insurer's distribution strategy.
Commercial insurance
Although PCWs initially focused solely on personal insurance products for consumers, there
has recently been a growth in some classes of commercial insurance being sold this way
as well.
G Reinsurance
Just as individuals, corporations and public bodies may feel the need to transfer risk, so too
do insurers. They achieve this by using the services of reinsurers that specialise in accepting
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business originally underwritten by insurers. Reinsurance may be on an individual risk basis,
an event basis or on a portfolio (wide range) of risks covering losses from the operation of
some catastrophe peril, for example.
Refer to
Risk transfer for insurers considered in Co-insurance on page 1/15
G1 Purpose of reinsurance
We could start by asking ‘Why reinsure at all?’ Each insurer could decide to insure only
those risks that it was able to accept within its own defined limits. This approach, however,
could carry its own problems:
• What about several losses to different insured risks that are all connected in some way,
e.g. storm damage to many insured properties at once?
• What about very large losses, e.g. a massive explosion or terrorist attack?
• What about the cumbersome nature of risk sharing if it is all is done by each insurer
taking a small direct share or even sharing by means of co-insurance?
An insurer is able to reinsure a risk that it holds because it stands to lose financially as a
result of any claim payment. The insurer is therefore able to pass any (or all) of the risk to
another insurer as reinsurance. Although in theory the whole of an individual risk could be
reinsured, this would make no sense, so insurers reinsure only part of a risk that they hold.
In this way reinsurance may be used to share losses on a risk-by-risk basis.
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One of the big differences between co-insurance and reinsurance is the fact that when an
insurer places part of a risk with a reinsurer, the insured need not know that this has
happened. Indeed it is rare for the insured to be aware of such arrangements. It follows that
there is no contractual relationship between the original insured and the reinsurer. If a claim
occurs the insured will look to the insurer to meet the loss in full; any subsequent recovery of
reinsurance monies is entirely a matter for the insurer to pursue.
In summary the purpose of reinsurance is to:
• smooth peaks and troughs in the trading results;
• protect the portfolio (class of business);
• provide improved customer service; and
• provide support for insurers entering new areas of business.
Let us look at these now in greater detail.
Consider this…
What type of catastrophe perils might a UK insurer wish to reinsure against?
G1A Smoothing peaks and troughs

Insurers are keen to ensure that their trading results each year show gradual trends, rather
than huge peaks or deep troughs. Investors prefer to see stability in insurance companies.
Reinsurance helps by spreading the cost of very large losses over a period of time. In their
pricing, reinsurer(s) will certainly require increases where there are adverse trends, but will
not try to recoup a very large payment all in one go. Instead they will spread the cost over a
number of years so this has the effect of smoothing out the highs and lows.
G1B Protecting the portfolio
It is possible to arrange reinsurance on a single known risk. When insurers do this it is
known as facultative reinsurance. However, it is equally important for insurers to protect
the pool of accumulated funds from the effects of very large losses or a series of losses
arising from a single cause. This is a type of catastrophe reinsurance and could apply to, for
example, weather-related claims.
Insurers arrange facilities to enable them to place a range of risks that fall within agreed
criteria. These arrangements are called treaties. It is also possible for reinsurance to be
effected to protect the portfolio (class of business) as a whole. Some specialist treaties are
Chapter 2
geared to pay out if the overall loss ratio (premiums v. claims) exceeds a certain figure.
There are many different types of arrangement, some of which provide a means of sharing
risks in agreed proportions and others that protect against losses exceeding agreed
amounts. The detail of these goes beyond the scope of this syllabus.
G1C Improving customer service
The practice of each insurer accepting only its own net share is one that would very quickly
create significant problems for the placing of insurance risks. The extra capacity provided,
particularly by treaty arrangements, enables insurers to accept much more than their own
net capacity. This makes the placing of risks much easier, especially for those independent
intermediaries that place extremely large risks.
G1D Entering new business areas
When insurers decide to begin to underwrite a new class of business they must register their
intention to do so with the PRA. Once agreed, they will usually need to have the support of
reinsurers. Special arrangements exist for such situations that provide an automatic facility,
and therefore extra capacity, while an insurer is gaining experience in a particular class of
business.
G2 Types of reinsurer
Reinsurers are often limited liability companies with substantial amounts of paid-up capital,
sometimes in excess of £100 million, due to the high risk attached to the business. However,
there are some reinsurers that have far less capital, meeting only minimum statutory
requirements. Many smaller reinsurance companies operate in specialist classes of
business. Captives usually only offer cover to companies owned by the same parent
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company.
The main types of reinsurer are:
specialist reinsurance
companies that do not insurance companies that
transact original (direct) Lloyd’s syndicates also act as reinsurers
insurance business
Reinsurers accept risks either directly from the insurer (also known as the reinsured) or
through a reinsurance broker. They provide reinsurance for:
• insurance companies;
• Lloyd’s syndicates; and
• other reinsurers.
Reinsurers are included in this list, as they too seek to transfer some of their risks to other
reinsurers. This is called retroceding and the risk placed in this way a retrocession.
The insurer who buys the reinsurance cover is known as the reinsured, cedant or the
ceding office.
Buys Buys
reinsurance reinsurance
Insurer Reinsurer Reinsurer
Reinsured/cedant/ Reinsuring Retroceding

ceding office
Reinsurance is an international business, and insurers usually spread their risks over a
number of reinsurance companies at home and abroad. Many Lloyd’s syndicates also buy
and sell reinsurance. The UK reinsurance market transacts most of its business in the City of
London.
The two main reinsurance centres are:
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• Lloyd’s; and
• the International Underwriting Association of London (IUA).
The IUA is responsible for representing its member companies, the provision of information
services and research. The IUA is not itself an insurer. It is the largest representative
organisation for international wholesale insurance and reinsurance companies in the world.
The organisation and most member companies are represented in the London
Underwriting Centre (LUC) in the City of London. One of the LUC’s most public functions is
to produce clause wordings for the London Market, notably for marine insurance. Many of
these are adopted internationally.
H Insurance professionals
Within the insurance marketplace there are a number of key roles. We continue our look at
the market by considering the particular functions of the professionals employed there.
H1 Underwriters
Insurance, as noted in chapter 1, is a common pool; the contributions of many people are put
into the pool and the losses of the few are met from it. In essence, the task of underwriters
is to manage the pool as effectively and profitably as possible.
The main functions of the underwriter are to:
• assess the risks that people bring to the pool;
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• decide whether or not to accept the risk (or how much of it to accept);
• determine the terms, conditions and scope of cover to be offered; and
• calculate a suitable premium to cover expected claims, provide a reserve, meet all
expenses and provide a profit.
An underwriter may be a:
• person employed by an insurance company to make decisions on acceptance and
premiums, and to apply the company standards;
• employee of an insurance broker, appointed representative or MGA servicing a delegated
underwriting authority;
• Lloyd’s underwriter, who accepts the whole or part of a risk offered on behalf of Lloyd’s
members and receives all or a portion of the premium paid in return for agreeing to meet
that proportion of each loss; or
• term used to describe an insurance company itself, fulfilling the role of an underwriter
because it accepts risks.
Refer to
See International Underwriting Association of London (IUA) on page 2/27
H2 Claims personnel
An efficient claims department, staffed by competent and professional claims personnel, is
vital to ensure the proper management of an insurance company's funds. The role of claims
personnel is to:
• deal quickly and fairly with all claims submitted;
• distinguish between real and fraudulent claims;
• determine the realistic cost of a claim prior to payment (reserving);
• determine whether others, e.g. loss adjusters and approved repair networks, need to be
involved; and
• settle claims with the minimum of wastage (e.g. expenses).
H3 Loss adjusters
Loss adjusters are experts in processing claims from start to finish and acts for the
insurer. Straightforward small claims are usually negotiated and settled by an insurer’s in-
Chapter 2
house claims staff. However, in the case of larger claims or complex policy wordings, the
services of a loss adjuster will be used. They:
• investigate the circumstances surrounding a claim;
• determine whether and to what extent the policy covers the loss;
• facilitate any emergency measures, e.g. for the protection of property;
• negotiate amounts claimed;
• negotiate with any specialist suppliers; and
• make a recommendation for settlement to the insurer.
The insurer will then consider the amount and, if satisfied, offer this sum to the insured.
Their aim is to negotiate a settlement, within the terms of the policy, which is fair to both the
insurer and the insured. Chartered loss adjusters are members of the Chartered Institute of
Loss Adjusters (CILA). Loss adjusters are independent, professionally qualified persons.
Invariably, their fees are met by the insurers who instruct them.
Refer to
Refer to Chartered Institute of Loss Adjusters (CILA) on page 2/28
H4 Loss assessors
Loss assessors are expert in dealing with insurance claims and act for the insured/
policyholder, preparing and negotiating claims on their behalf.
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Consider this…
Think about the differences between loss adjusters and loss assessors, to make sure that
you are clear about their roles.
H5 Surveyors and those providing forensic services

Surveyors carry out a variety of functions on behalf of insurers, many of which are relevant
to risk assessment. However, in this section we will concentrate on the surveyor’s role and
that of other professionals in relation to claims.
Forensic analysis is best known in crime scene investigation, where it is used to discover
and assess supporting physical evidence. In principle, experts will employ similar techniques
in insurance claims situations to determine the exact causes of loss or damage. Insurers will
employ specialists for different investigative areas.
These areas are very wide ranging and include:
• establishing the ‘seat’ of a fire and its origins (i.e. where and how it started);
• gathering evidence to suggest fraud or a deliberate act (e.g. multiple fires);
• determining whether any fire accelerant was used;
• determining whether any lack of maintenance contributed to the damage;
• determining the proximate cause of a loss;
• establishing evidence that suggests that a policy exclusion operates (e.g. the involvement
of employees in theft from a firm);
• establishing evidence to identify negligence of a third party to support subrogation;
• establishing whether a car had previous damage or engine failure before a fire occurred;
and
• examining accounting documentation in relation to a business interruption claim (refer
back to Pecuniary insurance on page 2/33).
You will note a similarity between some of these roles and the tasks performed by loss
adjusters. However, those undertaken by forensic experts tend to be more specialist and
their advice may be sought when initial investigation of the circumstances surrounding a loss
gives cause for concern. (It is worth noting that many firms offer what they describe as
‘forensic services’ to policyholders. These include claims handling and management
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services, independent advice, a review of the adequacy of insurance arrangements,
accountancy and dispute resolution services.)
A surveyor’s role (linked to a claims situation) may involve:
• giving advice on the immediate action necessary following a loss (e.g. employing a night
watchman);
• making recommendations as to any underwriting action necessary (e.g. reduction in theft
cover until premises are again adequately protected); and
• establishing whether previously advised requirements made by the insurer have been
complied with.
H6 Actuaries
Actuaries may be defined as a professionally qualified persons who apply probability and
statistical theory to problems of insurance, investment, financial and risk management, and
demography.
Actuaries have for many years been associated with life insurance companies, applying
mortality statistics and time value of money techniques to determine the adequacy of funds
to meet future liabilities. They are also employed by non-life insurance companies.
Techniques applied by actuaries will include the probability of loss and the prediction of claim
numbers and future values. Actuaries have a key role to play in pricing and reserving
methodology within an insurance company.
The company’s actuarial function has a key role to play in meeting Solvency II
requirements.
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Refer to
See Authorisation and regulation of insurers on page 9/22
H7 Risk managers
For many years, there has been a steady move by firms towards taking control of, and
developing a formal strategy for managing, the various risks that affect businesses. For
insurers, this approach has been necessary to demonstrate to the regulator their ability to
comply with the Solvency II risk-based capital requirements.
Where this is a formalised function within an organisation, particularly a large or diverse
company, specialist risk managers or risk management teams are appointed. Many risk
managers are members of the trade associations, the Institute of Risk Management (IRM)
and the Association of Insurance and Risk Managers in Industry and Commerce
(Airmic). You can find further information about these organisations in Institute of Risk
Management (IRM) on page 2/28 and Association of Insurance and Risk Managers in
Industry and Commerce (Airmic) on page 2/29 of this chapter.
The functions of risk managers may be summarised as follows:
• The systematic identification, analysis and economic elimination or control of risks that
threaten the business.
• Providing guidance on best practice in these areas to management.
• The transfer of appropriately identified risks by contract or insurance.
Consider this…
In what ways could a risk manager reduce the risk of fire in a company which prints
newspapers?
H8 Compliance officers
In regulating the insurance and financial services sector, the PRA and FCA have prescribed
a number of key roles that must be performed by a director or senior manager in financial
Chapter 2
services companies (including insurers and those involved in insurance mediation). One
such role is carrying out the compliance oversight function. The person performing this job is
known as a compliance officer and must report to the governing body (usually the board of
directors) of the authorised company. The exact scope of the duties of a compliance officer
will vary from one company to another. However, their main role is to ensure that their firm
abides by the rules and regulations set down by the regulator. As we shall see, the FCA has
issued detailed conduct of business regulations and guidance in a series of Sourcebooks,
which together form the FCA Handbook.
The role is vital to insurers and intermediaries because there are serious consequences of
failing to abide by legal or regulatory requirements. The range of functions undertaken by a
compliance officer will usually include:
• communicating the company’s policy to members of staff, setting up any associated
training;
• completing regular reports on governance, finance and complaints for the FCA;
• reviewing all stages of the business processes to ensure that they are appropriate and
compliant;
• maintaining the company’s compliance manual; and
• performing the role of money laundering reporting officer as required by regulation.
Depending upon the size of the company, the compliance officer’s role may be a ‘hands on’
role or it may involve oversight of some of the functions, with the work being carried out by
other individuals. It is permissible for the tasks themselves to be carried out by an external
compliance consultant. However, the responsibility and accountability of the compliance
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officer within the company cannot be delegated.
H9 Internal auditors
These work within firms to monitor and evaluate how well risks are being managed, the
business is being governed and internal processes are working. They provide an
independent and objective assessment of the effectiveness and efficiency of a company’s
operations, specifically its internal control structure. Unlike external auditors, they look
beyond financial risks and statements to consider wider issues such as the organisation’s
reputation. Internal auditors also advise management on how to improve systems and
processes.
Refer to
See Authorisation and regulation of insurers on page 9/22
Under the Solvency II regime internal auditors have a key role to play in assessing the
reliability of financial reporting and compliance with laws and regulations.
I Market organisations
In this section we will outline the membership and main functions of the principal trade
associations and professional bodies within, or related to, the insurance profession.
I1 Association of British Insurers (ABI)

The ABI is the largest of the insurance market associations. Formed in 1985, its has over
200 member companies that include UK insurers and foreign insurance companies operating
in the UK.
It is engaged in a wide variety of work, including the gathering of relevant market statistics,
framing of codes of practice and playing a major role in public relations, creating a greater
awareness of the role of insurance. The ABI also confers with the Government on matters of
interest to its members.
The objectives of the ABI are to:

• get the right people together to help inform public policy debates, engaging with
politicians, policymakers and regulators at home and abroad;
Chapter 2
• be the public voice of the sector, promoting the value of its products and highlighting its
importance to the wider economy;
• help encourage consumer understanding of the sector's products and practices; and
• support a competitive insurance industry, in the UK and overseas.
The ABI’s work falls under two councils: the General Insurance Council and the Life
Insurance Council. Much work has been carried out by these councils on fire prevention,
liability, fraud, motor accidents and life underwriting over the years.
Activity
Visit the ABI website ( www.abi.org.uk). Focusing on one line of business (e.g. motor,
home), try to identify some of the key issues on the ABI’s agenda, and consider their
approach to influencing change across the industry.
I2 British Insurance Brokers Association (BIBA)

BIBA is the major non-statutory trade association for insurance intermediaries, with a
membership of just under 2,000 regulated firms. Its code of conduct emphasises the need to:
• abide with all relevant laws, principles and regulations;
• act with integrity and honesty;
• act in the best interests of each client; and
• act with skill, care and diligence.
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BIBA seeks to maintain and improve the highest standards of business behaviour and to
protect and enhance the interests of its members for the benefit of the general public.
Its key roles include:
• promoting members’ views on proposed legislation;
• encouraging and provides training within the broking profession;
• nominating members to sit on joint committees;
• encouraging links with partner members from the leading insurance companies; and
• liaising with outside bodies, including regulators, the Government and the ABI.
On the Web
www.biba.org.uk
I3 Lloyd’s Market Association (LMA)

The LMA provides representation, information and technical services to underwriting
businesses (i.e. managing agents) in the Lloyd's market. It was formed by merging five
formerly separate organisations that were 'class of business-specific'. All managing and
members' agents are members and are actively involved in the association's work,
participating on its board, committees or business panels. The LMA has key partners: the
LIIBA, the LMRC and the IUA.
Refer to
Refer back to Lloyd’s and the London Market on page 2/8 for the role of managing agents
The stated purpose of the LMA is to identify and resolve issues which are of particular
interest to the Lloyd’s underwriting community, and working in partnership with the
Corporation of Lloyd’s and other partner associations to influence the course of future market
initiatives.
The LMA Board's long-term strategic objectives are to:

• increase the flow of profitable business into the market;
• maintain capital flexibility; and
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• reduce costs.
Through associate membership (available to trading partners of Lloyd’s managing agents or
members’ agents) the LMA offers an information service to brokers, lawyers and similar
businesses connected with Lloyd’s.
As part of its service to members, access is provided to insurance policy wordings. These
carry the LMA’s Copyright.
Activity
Go to the LMA website (www.lmalloyds.com) and research any class of business which
you are interested in. See what the LMA groups are doing in relation to market reform,
new wordings and education.
I4 London and International Insurance Brokers’

Association (LIIBA)
LIIBA is an independent trade body, representing the interests of insurance and reinsurance
brokers operating in the London and international markets. It effectively took on the role
performed by the LMBC from 1 January 2009. There is a clear overlap between the LMRC
and the LIIBA.
LIIBA’s mission is to ensure that ‘London remains where the world wants to do business by
continuing the transformation of market processes and maintaining the highest professional
standards’. LIIBA’s key priorities are to:
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• represent members’ interests to the Government, the regulators, the EU and international
bodies to establish a proportionate regulatory framework;
• modernise the London Market’s business processes to be competitive and efficient,
delivering an improved client service; and
• support members with regard to legislative and technical changes.
On the Web
www.liiba.co.uk
I5 London Market Regional Committee (LMRC)

The position regarding representation of London market brokers is currently slightly complex.
Up until the end of 2008 BIBA operated through a virtually autonomous trade body
representing the interests of Lloyd’s brokers operating in the London and worldwide
insurance and reinsurance markets. This was the London Market Insurance Brokers’
Committee (LMBC), which was the only representational body at the time. However, the
LMBC was disbanded at the beginning of 2009.
In June 2009, BIBA announced the formation of the London Market Regional Committee
(LMRC) as a replacement of the old LMBC. As a body it was integrated into BIBA’s existing
regional committee structure.
The LMRC consulted with members on the areas they wanted the committee to address in
order to develop its strategy and objectives. It intends to maintain a lobbying role and to
represent the sector to the FCA, Europe, the UK Government and other stakeholders. It aims
to work with other London Market bodies, including the London and International Insurance
Brokers’ Association (LIIBA), on areas of mutual interest and to avoid duplication of work.
I6 International Underwriting Association of London (IUA)

The IUA is the world’s largest representative organisation for international and wholesale
insurance and reinsurance companies. It came into being on 31 December 1998 as a result
Chapter 2
of the merger of The Institute of London Underwriters (ILU), representing marine companies,
and the London Insurance and Reinsurance Market Association (LIRMA), representing non-
marine insurance and reinsurance interests.
The IUA exists to protect and strengthen the business environment for its member
companies operating in or through London. It is a company limited by guarantee which has a
chief executive and is governed by an elected board, mainly comprised of senior market
figures. Much of the business of member companies is centred upon the LUC in the City of
London.
The IUA's objectives are to:
• transform business processes by driving a modernising agenda of digitisation and
automation;
• deliver knowledge and expertise for innovating underwriting and claims handling; and
• represent members on matters of public policy and regulation.
On the Web
www.iua.co.uk
I7 Managing General Agents’ Association (MGAA)

The MGAA was formed with an elected board in February 2012 to give the insurance
industry a better understanding of what an MGA is and what they contribute to the industry. It
represents its members’ interests and sets best practice guidelines as well as seeking to
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improve the sector’s professionalism, stability and competitiveness.
On the Web
www.mgaa.co.uk
I8 Chartered Insurance Institute (CII)

The CII has been at the forefront of insurance education and professionalism for over 100
years. Since the turn of the 21st century, membership has risen from 65,000 to over 125,000
throughout the UK and overseas.
The CII’s examination programmes and membership services ensure that members are
equipped with the knowledge and understanding of insurance needed to perform their roles
effectively.
The CII’s activities are extensive and include:
• setting a high standard for members in its code of conduct (see appendix 2 for the CII
Code of Ethics);
• promoting professional growth;
• offering a range of qualifications and the means to study for these;
• specialist societies for continuing education and development;
• faculties for different professional interest groups;
• training in technical subjects;
• library and information services;
• specialist publication production;
• careers information service;
• insurance education development overseas; and
• local institute educational and social programmes.
On the Web
www.cii.co.uk
Chapter 2
I9 Chartered Institute of Loss Adjusters (CILA)

As we have already seen, loss adjusters are impartial claims specialists. Those who are
members of the Chartered Institute of Loss Adjusters (CILA) must operate under the
terms of a code of conduct. The CILA was set up under a Royal Charter and it is a leading
authority on insurance claims issues. The Institute is recognised worldwide and embodies
core values of education, examination and professional standards.
The code of conduct states that members must at all times preserve impartiality. To maintain
standards, the CILA has its own complaints handling mechanism.
The membership of the Institute consists of individual loss adjusters, rather than the firms
that employ them. The CILA provides training and professional qualifications (including
associateship and fellowship) and encourages the sharing of technical information.
As a result of developments in the market, some members are now employed within
insurance broking firms, insurance and reinsurance companies, risk and claims management
companies, and also corporations and major policyholders.
On the Web
www.cila.co.uk
I10 Institute and Faculty of Actuaries (IFoA)

The Institute and Faculty of Actuaries (IFoA) is the UK's only chartered body dedicated to
For reference only

actuaries and has a membership of more than 12,000 fellows, associates, affiliates and
student members. For practical purposes they operate as a single entity.
The profession’s formal planning operates at two levels. The corporate plan is agreed each
year by the joint Faculty and Institute councils. This sets the strategic direction and activity
for a five-year period, identifying specific priorities to be delivered during the current year.
The Institute provides manuals of actuarial practice and issue guidance notes in particular
areas. In common with other professional bodies, the IFoA operates standards of conduct,
practice and ethics. This is designed to ensure quality and consistency in the application of
actuarial skills for the benefit of the public, and to protect the reputation of the profession. Its
other functions are to:
• provide education and encourage the development and sharing of knowledge and
research in actuarial science;
• demonstrate and promote to the public and business the benefits of actuarial skills; and
• provide membership services and foster a sense of belonging.
On the Web
www.actuaries.org.uk
I11 Institute of Risk Management (IRM)

The IRM was founded in April 1986 to meet growing demand for a diploma course in risk
management. The course offered one of the first qualifications with universal benefit for
students working in risk management in any sector: industry, commerce, academia or
elsewhere.
In 2005 the IRM launched the introductory International Certificate in Risk Management to
complement the existing diploma-level qualification. The IRM now delivers general and
specialist training courses, events, a topical risk management magazine and a variety of
other work to support the professional development of risk professionals around the world.
The IRM actively works with partner organisations to develop new educational programmes,
thought leadership and continuing professional development.
On the Web
www.theirm.org
Chapter 2
I12 Association of Insurance and Risk Managers in Industry
and Commerce (Airmic)
Airmic promotes the interests of corporate insurance buyers and those involved in risk
management and insurance for their organisation. Members include company secretaries,
finance directors, internal audit, and risk and insurance managers.
Membership can be either on an individual or corporate basis. Members come mainly from
multinational businesses, including around three-quarters of FTSE 100 companies. Medium-
sized and smaller enterprises, charities and public-sector organisations (such as universities
and local authorities) are also represented.
Airmic supports its members:
• through training and research;
• by sharing information;
• through a diverse programme of events;
• by encouraging best practice; and
• by lobbying on subjects that directly affect risk managers and insurance buyers.
As well as providing information and networking opportunities (including an annual
conference, lectures, seminars, monthly newsletter and a series of around 50 Airmic
Academy workshops a year), Airmic also presents the Association’s views to Government,
regulators, other market bodies and the EU.
For reference only

On the Web
www.airmic.com
I13 Insurtech UK (IUK)

InsurTech UK (IUK) was newly formed as a trade body in 2019 and aims to position the UK
as a leading force in technological innovation in the insurance sector. It represents the
interests of a range of business types operating in the sector – in particular, those that
describe themselves as ‘insurtech’ companies. These can generally be split into insurance
distributors (e.g. managing general agents (MGAs) and brokers) and technology suppliers
(e.g. policy administration system providers, data analytics specialists and claims automation
solutions).
While the body is at an early stage of its development, it has grown quickly, and now has
over 100 members. It is aimed at positioning the UK as a leading force in technological
innovation in the insurance sector and has been active in engaging the Government on a
range of issues.
IUK's membership reflects the diverse nature of this group, from MGAs built on technology
which enables the fast design and launch of new product offerings across personal and
commercial lines, providers of usage-based insurance for gadget insurance, new distribution
platforms, through to specialist providers of external data and analytics (data enrichment
services).
I14 Motor Insurers’ Bureau (MIB)

The MIB was established in 1946 as a private company, limited by guarantee. Its purpose
was and is to enter into agreements with the Government to compensate the victims of
accidents caused by uninsured or untraced motorists. It supports the principle that innocent
victims of road accidents should not be left without compensation, simply because of
inadequate or non-existent motor insurance policies.
The MIB’s objectives are to:

• reduce the level and impact of uninsured driving in the UK;
• compensate victims of uninsured and untraced drivers fairly and promptly; and
Chapter 2
• provide first class data asset management and specialist claims services.
The MIB functions under two separate agreements with the government: the Untraced
Drivers’ Agreement and the Uninsured Drivers’ Agreement.
Untraced Drivers’ Agreement Uninsured Drivers’ Agreement
• Applies to the provision of compensation for • Is concerned with third-party personal injury or third-
personal injury or death, plus property damage in party property damage, when there is no motor
limited circumstances. insurance policy in force.
• Property damage claims are only considered where
the vehicle is identified, but the driver cannot be
traced.
The MIB’s obligations are linked to the compulsory insurance requirement of the Road
Traffic Act 1988, so the protection provided is limited to where there is a legal requirement
to insure.
The MIB has a Green Card Section, the role of which is to identify and correspond with
overseas (mainly European) motor insurers regarding claims involving UK nationals.
The Bureau is financed by a levy on authorised motor insurers in the UK.
On the Web
www.mib.org.uk
For reference only

J Classes of insurance
When working in the insurance market, insurers will refer to personal lines insurance and
commercial lines insurance.
Personal lines insurance protects a policyholder from loss or damage to personal property
or from damages for which the policyholder may be held personally responsible.
Commercial lines insurance protects a business from loss of its business property or
damages for which the company may be held liable.
Insurance premium tax (IPT)

IPT is levied by the Government on general insurance premiums in the UK. There are two
main rates:
• A standard rate of 12%.
• A higher rate of 20% for travel insurance and some vehicles, and domestic and
electrical appliances.
Most long-term insurances, together with reinsurance and insurance on ships, aircraft and
goods-in-transit (internationally), are exempt from IPT.
Premiums for risks located outside the UK are also exempt, but they may be liable to
similar taxes imposed by other countries.
IPT is collected by the insurer in addition to the policy premium and shown separately in
the policy documentation. Insurers must account to HM Revenue & Customs (HMRC)
quarterly for tax that is due.
J1 Motor insurance
Insuring motor vehicles and liabilities arising out of their use is the most significant
compulsory insurance in the UK. The principal types of motor insurance are motor insurance,
motorcycle insurance, commercial motor insurance and motor trade insurance.
Personal motor insurance and home insurance are the most common types of general
insurance and motor and home can include elements of property and casualty cover.
Property cover pays for loss to the policyholder's property, while casualty cover pays for
Chapter 2
damages for which the policyholder is held liable.
Example 2.3
Miguel accidentally drives his car into the side of a building owned by someone else. His
insurance will pay for the damage to the vehicle through its property coverage, and for
damage to the building through its casualty coverage.
Larger commercial motor risks are considered very much on their own claims history and are
referred to as fleet-rated risks.
J2 Home insurance
This covers buildings and/or contents (usually on a 'new for old' basis) against a wide range
of perils, including fire, additional perils and theft. Valuables and personal effects are also
covered, as is public liability cover. A number of optional extensions are available including
accidental damage cover.
J3 Travel insurance
This covers individuals travelling within a country or overseas, and is available in 'single trip'
or 'annual multi-trip' policies. Such insurance covers, for example, injury, death, medical
expenses, loss of luggage/personal possessions/money and cancellation charges.
J4 Pet insurance
This is primarily designed to help cover vet costs if a pet is ill, gets injured or has an
For reference only

accident. In addition to vet fees, a pet insurance policy will typically cover:
• the purchase price if a pet dies due to an accidental injury; and
• an element of third party liability cover, usually applicable to dogs only, for injury to third
parties or damage to their property.
J5 Health insurance
There are a number of different types of insurance related to personal health:
Personal accident Cover in the event of accidental death or bodily injury.
Sickness Cover for an inability to work due to sickness.
Private medical insurance Cover for individuals who seek medical treatment outside the National Health
Service (NHS) when they are ill.
Short-term income Designed to pay an agreed monthly amount during a short period (usually 12
protection months) when an individual can't work because of an accident, sickness or
redundancy.
On making a claim, the policyholder has to wait a set number of days before
receiving a monthly payment.
The payments continue until the policyholder returns to work, or – if they don't
return to work – for a maximum period (typically one or two years).
Critical illness Cover in the event of the diagnosis of a defined range of serious illnesses.
Payment protection insurance (PPI)

PPI is slightly different from income protection cover, as it is designed to cover monthly
loan and credit card payments, as opposed to replacing a percentage of the insured's
income. Payouts will typically be made directly to the insured's creditors, rather than the
insured.
Under Financial Conduct Authority (FCA) rules PPI policies cannot now be sold as a
single premium contract, which effectively prevents them being sold as direct add-ons to a
loan that is taken out. This is because of poor selling and advice practices in the past. We
will cover these in greater detail in Application of PRA and FCA rules on page 9/13.
J6 Liability insurance
This is insurance to cover the legal liability to pay compensation and costs awarded against
the insured in favour of another party, in respect of death, injury, disease, loss or damage
Chapter 2
sustained by that party.
Employers’ liability Insurance to compensate the insured in respect of their legal liability to pay
damages to any employee arising out of bodily injury, disease, illness or death
received in the course of employment by the insured. Like motor insurance, this is
made compulsory by law.
Public liability Insurance to compensate the insured in respect of claims from third parties (i.e.
members of the public or companies) for accidental bodily injury or damage to
their property due to the insured’s negligence or that of their employees.
Products liability Covers legal liability for third-party bodily injury or property damage caused by
products, goods or services sold or supplied.
Directors’ and officers’ Covers personal legal liability incurred by individual directors and officers for
liability financial loss resulting from their negligence or failure to fulfil statutory
responsibilities.
Professional indemnity Protects a person acting in their professional capacity against claims that might
be made alleging that injury or loss has resulted from their negligent actions or
advice.
J7 Commercial property insurance

Property insurances cover risks to actual property. The main types of cover available are
summarised here.
Perils and ‘all risks’ policies These are issued to cover material property such as buildings, contents and
stock. Policies tend to be issued either on the basis of building up cover by
For reference only

adding different perils or, as in the case of all risks policies, by defining the cover
by its exclusions rather than adding more and more contingencies.
Engineering/breakdown Covers explosion, breakdown or accidental damage to plant, which is generally

grouped under the following headings:
This is generally grouped under the following headings:
• boilers and pressure plant;
• engine plant;
• electrical plant;
• lifting machinery;
• miscellaneous plant; and
• computers.
Many of these items need to be inspected regularly by a competent person as a
legal requirement. Consequently, inspection contracts often accompany these
covers.
Glass Policies cover destruction of or damage to all fixed glass (and may be extended
to include lettering on glass), on an ‘all risks’ basis.
It may also extend to cover damage to the contents of the window.
Livestock Insurance of livestock (horses, cattle etc.) against death through accident or
disease, and against theft and unexplained disappearance.
Policies for horses may also be extended to cover riding tack/equipment.
Money Money insurance is on an 'all risks' basis, covering all risks of loss or destruction
of or damage to money in transit, on the insured's premises during business
hours (and for modest amounts out of a safe outside business hours), in a bank
night safe etc. The term 'money' is defined widely. Cover may include fixed
payments if members of staff suffer injury or damage to their clothing when a
robbery takes place.
J8 Pecuniary insurance
Pecuniary means ‘relating to money’ and pecuniary insurance covers intangibles such as
income, revenue or value. Some classifications will include ‘money insurance’ under this
Chapter 2
heading.
Examples are as follows:
Fidelity guarantee The word 'fidelity' implies the 'faithful or loyal performance of a duty'. The financial
results of a lack of fidelity, arising from the dishonesty or disloyalty of a company's
employee(s), can be insured against. Therefore, such insurance covers the risk of
losing money or stock, by the fraud or dishonesty of a person holding a position of
trust.
Legal expenses Insurance for individuals, families and businesses to enable them to meet the
cost of seeking legal advice or pursuing/defending civil actions.
Credit Credit is the system of buying or selling goods or services without immediate
payment being made. Credit insurance covers businesses against the risk of non-
payment, whereby the seller ensures that if their debtors (buyers) fail to meet
their obligations, the seller can recoup their losses.
Business interruption Insurance against losses due to an interruption in business occurring immediately
after, and in consequence of, an interruption to the business usually arising from
material damage or disease. Cover is in respect of the actual loss of earnings of
the business, adjusted for business trends, plus the increased costs associated
with the business recovery.
Political risk Insurance that can be taken out by businesses against the risk that revolution or
other political conditions will result in a loss.
Guaranteed asset protection This insurance was originally sold to cover the ‘gap’ between the amount paid out
(GAP) by a motor insurance policy and the amount still to be repaid on the finance that
For reference only

was taken out to buy the vehicle (where that amount was larger).
J9 Marine and aviation insurance

Marine
Marine insurance covers three main areas of risk: physical damage to the ship or goods
(cargo), liabilities incurred to other parties and loss of income.
• Marine hull insurance covers physical damage to the ship, its machinery and equipment
and some limited liability insurance in case of contact with other vessels.
• Marine cargo insurance covers loss or damage to goods.
• Marine freight insurance covers the sum paid for transporting goods or for vessel hire.
Aviation
Aviation insurance covers both loss of or damage to the aircraft (hull) and legal liability to
third parties and passengers (liability). Specialist covers such as aviation products and
personal accident policies for aircrew are also insured in the aviation market. However,
aviation cargo is covered under a marine policy. Satellite insurance is a specialised branch
of aviation insurance.
J10 Cyber insurance

Cyber insurance can protect businesses for both first party and third party losses arising
from cyber attacks. First party protection can include investigation, the cost of recovering lost
data, loss of income for business shutdowns arising from an attack and some cover will
extend to include extortion payments demanded by attackers.
Cyber liability cover can provide cover for damages claimed by third parties for the loss or
theft of data and the legal costs of defending such claims.
J11 Combined or packaged policies

A combined or packaged insurance policy is one that brings together a number of different
types of cover or a range of risks/perils under one policy. Examples are:
Chapter 2
Commercial package Marketed under a variety of trade names these policies are designed to provide a
range of covers automatically for particular trade sectors, e.g. shopkeepers,
hoteliers, hairdressers. The cover is relatively inflexible and it would not be
possible to exclude different sections. The packaging has been carefully
researched so that the majority of those in the particular trade are catered for.
The packaging is usually offered at very favourable rates.
Commercial combined These policies pre-date the package policies and were originally introduced to
cater for small business risks, such as traders and shopkeepers, where more
than one type of insurance is required. Nowadays they tend to be issued either
for risks that are not eligible for package arrangements or where greater tailoring
is required. Such policies may bring together for example, fire, business
interruption, theft, money etc. The benefit of having these various types of
insurance within one policy is that a single renewal notice and premium payment
is made. There is also some modest premium saving as a result of insuring
several classes in one document. The policy is really a 'shell' into which different
covers may be placed.
As these insurance products, which are largely aimed at small to medium sized
business, have become more commoditised, insurers have developed 'eTrade'
portals through which brokers can place risks online, without having to pick up the
phone. These are usually hosted by a software house, which provides the
technology to support eTrade activities for multiple insurers, or alternatively via an
insurer's own extranet.
Question 2.3
For reference only

Insurance cover can usually be purchased in the UK to protect against:
a. An investment loss on the stock market. □
b. Dishonesty of an employee. □
c. Failure of a business venture. □
d. War damage to a domestic property. □
Key points
Chapter 2
Market structure
• The insurance market is made up of buyers, intermediaries, aggregators, insurers and

reinsurers.
Insurers
• Propriety companies are limited liability companies, owned by their shareholders and
registered under the Companies Act 1985.
• Mutual companies are owned by their policyholders.
• A captive insurer is a tax-efficient and cost-effective way of transferring risk.
• A protected cell company provides a cost-effective platform for a diverse range of
conventional insurance and other applications.
• Composite insurers accept several types of business, whilst specialist insurers accept
only one.
Lloyd’s
• Lloyd’s is not an insurer but a marketplace providing facilities for the placing of risks in
its market.
• The risks are carried by syndicates, who appoint managing agents who employ an
underwriter to accept risks on the syndicate’s behalf.
• Business is usually placed by means of a Market Reform Contract (‘slip’), containing
For reference only

details of the risk.
• Generally a broker takes the slip to a lead underwriter at Lloyd’s who indicates what
percentage of the risk they are willing to accept and on what terms.
• Other underwriters are then approached to fill the slip until all the risk has been
covered.
London Market
• The main providers in the London market are insurance and reinsurance companies,
Lloyd’s syndicates, Lloyd’s service companies and Protection and Indemnity clubs.
• Many of the insurance and reinsurance companies are members of the IUA.
• Many sizeable, complex and unusual risks are placed in the London Market.
Intermediaries
• Intermediaries are agents and an agent is one who is authorised by the principal to
bring that principal into a contractual relationship with a third party.
• The FCA regulates all aspects of insurance sales and advice and all who carry out
such activities must be either authorised or exempt.
• An intermediary can choose to be either regulated directly (i.e. to be an authorised
person) or to be an appointed representative or introducer appointed representative
(i.e. to be exempt).
• The services that intermediaries provide for their clients vary and depend on what sort
of intermediary they are (e.g. whether they are an independent intermediary or an
agent of an insurer). They also provide services to insurers.
• There has been considerable consolidation within the broking sector. This is either
through the development of broker networks or the growth of consolidators.
Insurance marketing and distribution
• Distribution of insurance products can either be direct, i.e. the insurer’s employees sell
the products, or indirect, i.e. intermediaries are paid by the insurer to promote products
on their behalf.
Key points
• Many insurers delegate some authority to intermediaries to act on their behalf.
Chapter 2
Price comparison websites
• A price comparison website (PCW) collects and analyses information from different
data sources to provide an online service to those wishing to compare prices on a
particular insurance product.
Reinsurance
• Reinsurance is the way that insurance companies insure the risks they have accepted.
They may wish to do this to increase their capacity for a particular risk or to protect
their portfolio from the impact of many associated small losses or the effects of a very
large potential loss.
• Reinsurers can purchase insurance for the risks they have accepted – this is known as
retroceding.
Insurance professionals
• An underwriter assesses the risk that people bring to the pool and decides whether to
accept it and on what terms. They will then calculate a suitable premium.
• The role of claims personnel is to deal quickly, fairly and cost effectively with all claims,
while distinguishing between real and fraudulent claims. They also assess how much
the claim will cost so that an adequate reserve is set aside prior to payment.
• A loss adjuster is an independent expert in handling large or complex claims, and is
appointed by the insurer to act in this capacity.
For reference only

• A loss assessor is an expert in dealing with insurance claims and is appointed by the
insured to assist them in negotiating a claim with the insurer.
• An actuary applies probability and statistical theory to problems of insurance,
investment, financial and risk management and demography.
• The role of the risk manager is the systematic identification, analysis and economic
elimination or control of risks that threaten a business.
• A compliance officer is responsible for ensuring that a firm complies with all legal and
regulatory requirements.
Market organisations
• The ABI is the principal body representing insurers carrying on business in the UK.
• BIBA is the major trade association for insurance intermediaries.
• The LMA provides representation, information and technical services to underwriting
businesses in the Lloyd's market.
• The LIIBA is a trade body representing the interests of brokers in the London and
worldwide insurance and reinsurance markets.
• The LMRC is the arm of BIBA representing the interests of Lloyd’s and other brokers in
the London insurance and reinsurance markets.
• The IUA is the world's largest representative organisation for international and
wholesale insurance and reinsurance companies.
• The MGAA is a trade body for MGAs. It represents their interests and sets best-
practice guidelines.
• The CII is the professional body for those who work in insurance and is at the forefront
of insurance education and professionalism.
• The CILA is the professional body for loss adjusters. Its members must operate under
its code of conduct.
• The IRM offers qualifications and training for risk management professionals and
provides information and networking opportunities.
• Airmic is a trade association that promotes the interest of corporate insurance buyers
and those involved in risk management.
Key points
• Insurtech UK (IUK) represents the interests of businesses that define themselves as
'insurtechs', and has as its primary aim the positioning of the UK as a leading force in
Chapter 2
technological innovation in the insurance sector.
• The MIB's purpose is to enter into agreements with the Government to compensate the
victims of accidents caused by uninsured or untraced motorists.
Classes of insurance
• Personal lines insurance protects a policyholder from loss or damage to personal

property or from damages for which the policyholder may be held personally
responsible.
• Insurance premium tax (IPT) is levied by the Government on general insurance
premiums in the UK. There are two main rates: a standard rate of 12% and a higher
rate of 20% for travel insurance and some vehicles, and domestic and electrical
appliances.
• Commercial lines insurance protects a business from loss of its business property or
damages for which the company may be held liable.
• The main types of general insurance are home, motor, travel, commercial property and
liability.
• There is also a range of general insurance related to the health of a person, such as
personal accident, sickness, medical insurance, payment protection, indemnity and
critical illness.
For reference only

Question answers
2.1 a. Captive.
Chapter 2
2.2 b. Names.
2.3 b. Dishonesty of an employee.
For reference only

Self-test questions
1. An insurer that provides insurance cover to its parent company is known as a:
Chapter 2
a. captive insurer. □
b. mutual company. □
c. proprietary company. □
d. reinsurance company. □
2. Park Place Veterinary Surgery require insurance to protect the partners against
professional negligence claims. They are most likely to arrange this through:
a. a composite company. □
b. Lloyd's. □
c. a specialist insurer. □
d. a limited liability company. □
3. Within the Lloyd's market, risks are placed by means of a:
a. Market risk contract. □
b. Market reform contract. □
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c. Note. □
d. Risk reform contract. □
4. Jacqui is an insurance broker. She is most likely to be remunerated by:
a. A fixed advice fee. □
b. Commission based on the sum insured. □
c. An ongoing advice fee. □
d. Commission based on the premiums charged. □
5. Ahmar has signed an agency agreement with Kent Regal Ltd. It is true to say that:
a. He can act for Kent Regal Ltd in bringing them into legal relationships with others. □
b. Any contracts he enters into will not be binding on Kent Regal Ltd. □
c. Any contracts he enters into will not be binding on the insured. □
d. He must act solely as a representative of the insured. □
6. Sulla, an independent intermediary, is placing business for new clients. Her services
are least likely to include:
a. Decisions on the best market in which to place the risk. □
b. Actions on behalf of the insurer. □
c. Advice relating to policy wording. □
d. Negotiating initial terms. □
7. An indirect marketing strategy would mean that an insurer would distribute their
products via:
a. Insurance brokers. □
Chapter 2
b. Company sales staff. □

c. Newspaper advertising. □
d. The internet. □
8. The purpose of reinsurance is to:
a. transfer all of the cost to a third party. □
b. smooth peaks and troughs in the trading results. □
c. enable claims to be settled quickly. □
d. reduce the cost for the client. □
9. Insurance premium tax (IPT) applies to:
a. Insurers' premium income. □
b. Life insurance premiums only. □
c. Some general insurance premiums. □
□
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d. All insurance premiums.
10. Income protection provides:

a. Fixed benefits in the event of accidental death or bodily injury. □
b. Fixed benefits in the event of an accident, illness or loss of job. □
c. Payments for inability to work due to sickness only. □
d. Payments in the event of diagnosis of a serious illness. □
Contract and agency
3
Chapter 3
outcomes
Introduction
A Contract law 5.1
B Offer and acceptance 5.2
C Consideration 5.3
D Renewal of insurance contracts 5.4
E Cancellation of insurance contracts 5.4
F Agency 5.5, 5.6, 5.7
G Terms of business agreements (TOBAs) 5.8
Key points
Question answers
For reference only

Self-test questions
Learning objectives
• define a contract and apply the definition to an insurance contract;
• list the essentials of a valid contract;
• compare conditional and unconditional acceptance;
• state how contracts of insurance can be terminated;
• apply the rules of consideration to contracts;
• describe the ways of creating an agency;
• describe the relationship between the agent, insurer and insured;
• describe the ways by which agency may be terminated; and
• describe the areas that should be included in a terms of business agreement between an
insurer and an intermediary.
Introduction
So far, we have considered the nature of insurance and the operation of the insurance
market and, by now, you should be quite familiar with these two topics. In this chapter, we
shall start to deal with the legal principles that apply to insurance. Here we shall look at
contract law and examine the special legal principles that apply to insurance contracts.
The legal aspects of insurance are considered in relation to English law. English law comes
from many sources. These include legislation (Acts of Parliament and statutory instruments),
judicial precedent (court decisions in previous cases), custom and retained EU law.
Chapter 3
Much of English law has developed from cases being heard in courts and the judgment
given, based upon the facts of the case. Generally speaking, once a principle has been
established, it is followed in other court cases where similar circumstances apply. This is
what we mean by the term judicial precedent. In the following sections, where case law has
contributed to the establishment of legal principle, we will refer to the case and a give a brief
summary of it.
You will see references to claimants and defendants whenever we give details of legal
cases. The claimant is the party who brings an action in court against the defendant. You
should be aware of the details of the case, where given, but you do not need to learn the
year of the case.
The terms of business agreement (TOBA) is one of the key documents prompted by the
previous regulator, the Financial Services Authority (FSA). Prior to its introduction, there
were agency agreements in force dealing with the contractual relationship between insurer
and intermediary, but the TOBA is a much more comprehensive document. You should note
that there are other TOBAs detailing the duties and responsibilities of intermediaries and
their clients towards each other. These are often coupled with service level agreements and
are beyond the scope of this course.
For reference only

Key terms
Agency Agency by Agency by consent Agency by necessity

agreement
Agency by Agent Breach of warranty Cancellation
ratification
Consideration Contract certainty Contract law Express authority
Fraudulent acts Implied authority Offer and Principal
acceptance
Terms of business Third party Void ab initio
agreement (TOBA)
A Contract law
The English law of contract is essentially a law of bargains. It is concerned with the
relationship between two parties, one of whom agrees to perform a certain act if and when
the other party performs a certain act.
Smith and Keenan’s English Law defines a contract as ‘an agreement, enforceable by law,
between two or more persons to do, or abstain from doing, some act or acts, their
intention being to create legal relations and not merely to exchange mutual promises’.
Applying this definition to insurance, it may be said that an insurance contract is an

agreement, enforceable by law, between insurer and insured. The insured agrees to pay a
premium to the insurer and abide by the terms and conditions of the policy. In return, the
insurer agrees to pay to the insured a sum of money or something of monetary value, on the
happening of a specified event.
Chapter 3 Contract and agency 3/3
How do both parties enter into this legally binding agreement and what conditions must be
satisfied by both parties to ensure that the contract is a valid one?
First, let us look at the essentials of a valid contract and then at the way in which an
insurance contract differs from other commercial contracts.
A1 Essentials of a valid contract

To ensure that a valid and enforceable contract is formed an agreement must satisfy certain
criteria.
Chapter 3
Offer and acceptance + Consideration
There are other important elements to a valid contract. These are not included in the
syllabus but are listed here for completeness:
• Intention to create legal relations.
• Capacity to contract.
• Consensus ad idem (genuine meeting of minds).
• Legality of purpose.
• Possibility of performance.
• Certainty of terms.
Contract certainty
The issue of contract certainty became central to the London Market following challenges
around coverage in the wake of the terrorist attacks on the World Trade Center in 2001.
The approach taken by the London Market is detailed in Contract certainty on page 2/11).
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A contract may be declared invalid or set aside if it is missing any of these essentials.
Legally, it is said to be void ab initio (from the beginning).
All parties to a contract must act in good faith. They must not mislead one another. However,
except for the seller’s legal duty to comply with recognised product quality standards, it is for
the buyer to satisfy themselves regarding the quality of the product.
Only in certain circumstances is a document necessary and a simple contract does not need
to be evidenced in writing. Insurance policies are simple contracts. It follows that a policy
does not have to have been issued for cover to exist. However, clauses spelling out the
specifics of a contract could be used by one party to demonstrate the other party had fully
understood a contract and their role in it if they had signed the document or indicated
acceptance of its terms.
B Offer and acceptance

A contract comes into existence when one party makes an offer which the other accepts
unconditionally. This statement seems straightforward enough and the following sections
show how offer and acceptance works in practice.
B1 Unconditional acceptance
It is easier to see how unconditional acceptance works by looking at an example. Let us
consider the following conversation.
Bill (from ABC Insurer): ‘On the basis of your proposal form I can offer you cover, subject
to driving being restricted to the named persons you have listed, for £350.’
Tom: ‘I accept.’
In this example, Tom’s acceptance does not alter any of the terms of Bill’s offer. The
acceptance is said to be unconditional. A contract is formed, subject to the other essential
elements (listed in Essentials of a valid contract on page 3/3) being present. To be effective,
acceptance must be the final and unqualified agreement to the offer.
B2 Conditional acceptance
If new terms are introduced, the so-called acceptance (Tom’s reply in the example) becomes
a new offer (a counter-offer) which is open to be accepted or rejected by the person who
made the original offer (in the example, Bill).
Now consider an alternative response by Tom.
Bill (from ABC Insurer): ‘On the basis of your proposal form I can offer you cover, subject
to driving being restricted to the named persons you have listed, for £350.’
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Tom: ‘I accept, so long as I can have ‘any driver’ cover.’
In this case, a contract has not been formed as Tom has not unconditionally accepted the
offer. Not until Bill accepts Tom’s counter-offer, without further conditions, is a contract
formed. A counter-offer operates as a rejection of the original offer.
Example 3.1
in the case of Hyde v. Wrench (1840), the defendant, Wrench, offered to sell his farm to
the claimant, Hyde, for £1,000. The claimant in turn offered £950, which was refused. The
claimant later increased his offer to £1,000, but this was also refused by the defendant.
It was held that there was no contract because the counter-offer acted as a rejection of the
original offer to sell at £1,000.
Consider this…
Ellen has lost her dog and has offered a reward for its safe return. Jayne finds and returns
the dog. Jayne is not aware of the reward. Do you think Ellen is contractually bound to pay
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Jayne a reward?
B3 Postal acceptance
The general rule is that the contract is made when the acceptance is received by the offeror
(person making the offer). However, where the parties have agreed to use the post as the
method of communication, acceptance is complete at the point when the letter of acceptance
is posted.
This rule applies even if the letter is delayed, or is lost or destroyed in the post and never
reaches the offeror – established in the case of Household Fire Insurance Co. v. Grant
(1879).
In this case Grant applied for shares in the Household Fire Insurance company. The
insurance company properly posted the letter accepting his offer, but it never arrived. The
court decided that the offer had been accepted when the acceptance was posted, so there
was a valid contract.
Consider this…
Judy posts a letter to Jim accepting his offer to sell her his car. She changes her mind. Do
you think she can withdraw the acceptance by telephoning Jim?
B4 Offer and acceptance in practice

Let us now bring together everything we have learnt so far about offer and acceptance and
see how it works in an insurance situation.
Example 3.2
Katie accepts the tenancy of a flat in a block owned by Lonchester Council. She buys
some furniture, carpets and curtains mainly using her credit card. She is concerned about
the risk of damage by fire, theft and other perils mentioned in the insurance company’s
prospectus.
Katie gives Newflat Insurance details of the risk to be insured. It responds by quoting a
premium of £100 which is an offer to Katie. She accepts the premium by notifying the
insurer and the insurer is then ‘on risk’ (another use of the term ‘risk’, which in this context
means that there is now a contract with Katie and any losses covered by the policy, which
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occur from that point onwards, will be met).
In some cases insurers allow their agents to accept liability on their behalf even before all the
formalities have been settled.
We shall now consider the essential element of consideration, which is necessary to ensure
that a valid contract is formed.
C Consideration
Contracts must be supported by consideration to be valid. But what exactly is consideration?
It was defined in Currie v. Misa (1875) as:
Some right, interest, profit or benefit accruing to one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other.
Consideration may be described, simply, as each person’s side of the bargain which
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supports the contract. The payment of money is a common form of consideration for one of
the parties, although, as we can see from the above definition, not the only form. Parties can
exchange promises to perform certain acts in the future or promise to do something in return
for the act of another. Their promises and actions are the consideration supporting the
contract.
Question 3.1
Jane offers to supply filing cabinets to Pam who accepts the offer. What further
action is required in order that a legally enforceable contract exists between them?
a. The terms of their agreement need to be written down. □
b. Another person needs to witness their agreement. □
c. The filing cabinets need to be delivered to Pam. □
d. Pam needs to agree to pay Jane for the filing cabinets. □
D Renewal of insurance contracts

Once an insurance contract has been concluded it is expected to continue until the agreed
expiry or renewal date. Some insurances are designed for short periods – travel insurance,
for example. Others such as motor, casualty or home insurance are renewable contracts that
will continue, typically, for one year and the insurer usually offers terms for renewal at the
end of that period. There is no obligation upon the insurer to offer renewal terms.
However, the fair treatment of customers principle and ICOBS imply that the insurer must
alert the customer to the fact that cover will expire.
A firm must take ensure that a customer is given appropriate information about a policy in
good time and in a comprehensible form so that the customer can make an informed
decision about the arrangements proposed.
(ICOBS 6.1.5)
Policy renewal should be offered ‘in good time’, which is determined by the point in the
renewal process at which the information may be most useful.
New regulatory rules were introduced by the FCA in April 2017 that require insurers and
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intermediaries selling retail general insurance products to:

• disclose the previous year’s premium on renewal notices (accounting for mid-term
adjustments where relevant);
• include text to encourage consumers to check their cover and shop around for the best
deal at each renewal; and
• identify consumers who have renewed with them four consecutive times, and give these
consumers an additional prescribed notice encouraging them to shop around.
These changes reflect the findings of an FCA consultation on consumer treatment by firms at
renewal, and the lack of competition that has resulted from this. The FCA found that price
increases were not transparent at renewal and that long-standing customers were paying
more than new customers for the same insurance product. As a result, consumers often
defaulted to renew products that were not good value or had become unsuitable for their
changing needs.
A further thematic review was undertaken in 2018, 'TR18/4: Pricing practices in the retail
general insurance sector: Household insurance', which identified the same issues relating to
firms' pricing practices. Following this review, a further consultation and market study took
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place in 2020 to investigate the issues identified in more detail and the FCA published the
'General Insurance pricing practices' market study in September 2020. The market study
identified again that when it comes to renewal pricing, home and motor insurance are not
working well for customers.
Be aware
New regulatory rules came into force on 1 January 2022 which place a responsibility on
insurers to ensure fair pricing when renewing insurance contracts. Whilst the full content
of this review is beyond the scope of this course, students should be aware that the new
rules mean a consumer cannot be offered a price at renewal which differs from the price
they would receive as if they were a new customer to that insurer.
E Cancellation of insurance contracts

There are some situations in which either the insurer or the insured will wish to cancel cover
during the currency of the policy. This will be governed by the written terms and conditions in
the policy. In some cases where insurance is purchased at a distance, if the policyholder is a
consumer they will have a ‘cooling off’ period whereby they have an automatic right to cancel
within a specific timescale. This is the right imposed by regulation rather than English law as
explained in Policyholder’s rights on page 3/7.
E1 Insurer’s rights
Most general insurance policies have a cancellation condition. This allows the insurer to
cancel, provided that a letter is sent to the insured's last known address (usually by recorded
delivery or registered post), giving 14 days' notice of cancellation. The period of notice is not
standard; some insurers state 10 days, others 30 days. If the insurer invokes this
cancellation condition a pro rata return premium is sent to the insured, representing the
unexpired portion of the risk.
It is rare to find an insurer doing this but it could happen. Examples would be if there has
been difficulty with a claims settlement and the insurer feels that the insured has acted
unreasonably and certainly if the insured has been guilty of fraud in connection with a claim
(although as we see later, if the insured has acted fraudulently the insurer may not be
obliged to return the premium).
E2 Policyholder’s rights
A consumer has a right to cancel without penalty and without giving reason for most
insurances purchased at a distance, for example over the internet or by phone. The main
exception is travel and baggage insurance and other policies for less than one month. A
consumer must exercise the right within 30 days for a payment protection contract or 14
days for any other. The FCA rule satisfies the Distance Marketing Directive requirements
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for the cancellation of distance contracts. When a consumer exercises the right to cancel
they may only be required to pay, without any undue delay, for the service actually provided
by the firm in accordance with the contract. However, no amount can be charged by the
insurer for the cancellation of a payment protection contract.
It is less common for the policyholder to have cancellation rights where cover has been
purchased face to face. Some insurers permit this in their wordings, even allowing a
proportionate return of premium. Insurers are entitled to charge for the cover already
provided and the generally accepted norm is to pro rata the premium based on the number
of days the policy was in force. In addition, the insurer can, and usually does, charge a flat
fee for the cancellation of the policy to cover their administrative costs. It is best practice to
set these costs out in the policy wording or accompanying sales literature. Insurers must
take care that these rates do not appear to be ‘unfair’ as this could be to the detriment of the
consumer and in contravention of the Unfair Terms in Consumer Contracts Regulations
1999 (UTCCRs).
Under the Deregulation Act 2015, where a policy is cancelled mid-term the policyholder is
no longer required to return the certificate of motor insurance or make a statutory declaration
or any statement acknowledging the policy has ceased to have effect (and not doing so
ceases to be an offence). This change came into effect on 30 June 2015.
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E3 Other means of terminating contracts of insurance
As with any other contracts, termination may be as a result of the fulfilment of the contract or
as a result of some problem in relation to the contract.
E3A Fulfilment
In insurance this would mean the total loss of the subject-matter. For example, if a car
insured under a private car policy is burnt out so that it effectively ceases to exist, the policy
is automatically terminated. An insurer could choose to allow a substitute vehicle to be
insured and will usually do so within a reasonable period. If not, the policy is terminated.
E3B Voidable contracts
There are circumstances in which one party to a contract may set it aside. It is said to be
voidable at their option. This may arise under insurance policies where the insured is in
breach of a policy condition that places a continuing requirement upon them. An example
would be where the insured is required to maintain equipment in efficient working order.
Where the insured has not done so, the insurer may treat the policy as void.
However, you must distinguish this type of situation from one in which the insured fails to
fulfil a condition relating to a claim. In this case the insurer may have the right to avoid
paying the particular claim, but the policy will remain in force.
An insurer may be able to avoid the contract entirely setting it aside ab initio as a
consequence of non-disclosure or misrepresentation of information by the policyholder.
There may also be situations where the policy has never been in force. This would arise
where there was no recognised insurable interest at the outset. In such cases the policy is
automatically void. This does not really amount to a termination since the contract has never
been in force.
E3C Breach of warranty
There are situations where an insurer’s liability is automatically discharged. A warranty is a
term in an insurance contract which according to the Marine Insurance Act 1906 (MIA
1906) must be exactly and literally complied with by the insured, whether material to the risk
or not. Departure from the exact requirements, even for reasons of necessity, constitutes a
breach.
Breach of a warranty will discharge the insurer from liability under the policy automatically
without the need for the insurer to terminate the contract unless the insurer opts to waive the
breach and continue the insurance. Although the insurer is ‘off risk’ from the date of the
breach this does not affect claims prior to that date. Depending on the nature of the warranty
and the breach, the insurer might be discharged from liability ab initio (from the beginning of
the contract).
Chapter 3
Refer to
See Insured's duty of disclosure – non-consumer insurance on page 5/3, for impact of
Insurance Act 2015
Changes introduced by the Insurance Act 2015 (IA 2015) mean that since August 2016 a
breach of warranty no longer automatically terminates the contract. The insurer will have no
liability for losses occurring or attributable to something occurring during the period of
suspensions relating to the breach, but will be liable for losses occurring after a breach has
been remedied. This is a complete change from the harsh situation of automatic discharge if
there was a breach even if not material to the risk.
E3D Fraudulent acts
Current law distinguishes between claims which go to the heart of the contract and use of
fraudulent means to increase otherwise valid claims.
Under IA 2015, insurers can elect to terminate an insurance contract with effect from the
time of a ‘fraudulent act’, without a return of premium.
If a fraudulent claim is made the insurer:
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• is not liable to pay the claim;
• can recover any amounts already paid for the claim; and
• can also choose to terminate the contract from the date of the fraudulent act.
If the insurer chooses to terminate the contract, it:
• can refuse liability for all matters occurring after the date of the fraudulent act; and
• does not have to return any premiums.
Different rules apply for group insurances. If the fraud is committed by one of the benefiting
individuals under the contract then the insurer’s actions do not affect the other individuals
benefiting from the contract.
F Agency
In law an agent is one who is authorised by a principal to bring that principal into a
contractual relationship with another, a third party. In general contract law the agent will
often not have any continuing duty once the contract has been concluded.
Principal Agent Third party
F1 Contracts and the agent

Most commercial insurance contracts and some personal insurance contracts result from the
activity of an intermediary who negotiates on behalf of the parties involved. We discussed
the different types of intermediary that are in the market in Intermediaries on page 2/11.
In law, however, everyone who acts on behalf of another person is an agent. If we allow
someone to act for us, or even if we allow them to say that they are acting for us without
denying the fact, we will probably have to accept responsibility for whatever is done on our
behalf.
F2 Methods of creating an agent/principal relationship

There are three ways in which the relationship of principal and agent can arise:
Consent
Principal Necessity Agent
Ratification
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F2A Agency by consent
Refer to
TOBAs examined in Terms of business agreements (TOBAs) on page 3/12
The most usual way of creating a relationship between principal and agent is by consent,
also known as an agency by agreement. Both parties enter into a legally enforceable
agreement. This is usually by means of express appointment where the terms of the
appointment are written down. It is by far the most common method used in insurance.
Insurers and other insurance firms will issue a terms of business agreement (TOBA) to
each agent stating the terms and conditions of the appointment, the extent of the agent’s
authority and how money is to be handled and accounted for. In addition, intermediaries will
issue a TOBA to their client setting out the services they are offering and the responsibilities
of both parties.
It is also possible for an agency relationship to be created by consent in an implied way. This
could be the case where work is undertaken and a commission paid but nothing is written
down. An agency may therefore be created by consent in either an express or an
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implied way.
F2B Agency by necessity
This arises where a person is entrusted with someone else’s goods and it becomes
necessary to act in a certain way in order to preserve the property in an emergency.
F2C Agency by ratification
Ratification refers to a situation where an agent acts without authority, but the principal
accepts the act as having been done by the agent on their behalf. The principal’s agreement
after the event is their ratification and they are bound by the contract to the third party.
Where this occurs the principal must ratify the whole contract and is not able to vary its terms
or pick and choose which elements to accept. This could occur where the agent has no
authority at all or is acting outside the terms of an agency agreement.
Consider this…
An agent gave an insured temporary cover for insurance, as they had done in the past.
Unfortunately, this cover was given despite a previous warning from the insurers that
cover was no longer available for risks of this type. A loss occurred before the insurers
realised that cover had been given by the agent on their behalf.
Do you think that the insurers have to indemnify the insured?
F3 Relationship of agent to principal

In most cases, an agent represents only one of the contracting parties. Independent
insurance intermediaries are an exception to this general rule because they may, at different
times, act for the insured and insurer. For those who have been granted AR status by an
insurer, their actions are, broadly speaking, the responsibility of the insurer on whose behalf
they operate.
F3A Agent of the insured

An independent intermediary is considered to be the agent of the insured when:
• giving advice on cover or the placing of insurance, or helping arrange the insurance; and
• giving advice to the insured on how to make a claim or assisting them with it.
F3B Agent of the insurer
An independent intermediary is considered to be the agent of the insurer when:
• an insurer authorises an intermediary to receive and handle proposal forms on its behalf
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and confirm cover;

• the intermediary surveys and describes the property on the insurer’s behalf;
• the intermediary has authority to collect premiums and does so; or
• an insurer authorises an intermediary to pay claims.
Question 3.2
An insurance broker recommends and arranges an insurance policy for the client and
collects the premium for the insurer. The broker subsequently advises the client on
how to make a claim. At what point in this scenario is the insurer the broker’s
principal?
a. Recommendation of the policy. □
b. Arrangement of the policy. □
c. Collection of the premium. □
d. Advising of the claim. □
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F4 Duties of an agent
An agent has the following duties to their principal:
Obedience One of the prime duties owed by an agent to their principal is the duty to obey instructions.
If the agent fails to comply, they are liable to be sued by their principal for damages.
Personal As a general rule, an agent must perform the duties imposed on them by the agency. The
performance special nature of the relationship between principal and agent means that they cannot
delegate their duties to someone else (although purely mechanical tasks may be
delegated). In practice, an agent for the placing of an insurance risk may be a company.
The particular individual who meets with the client is not expected to carry out all the
negotiating and placing functions: it is often market practice for these to be given to
specialists in the company.
Due care and skill A person must exercise due care and skill in the performance of all acts done in the course
of their duty as an agent. An independent intermediary is a person who claims to be a
specialist in insurance and must, therefore, offer a higher standard of ability than someone
whose main profession is not insurance.
Good faith An agent’s relationship with their principal is one of trust. It follows that they must not allow
their own interest to conflict with their duties towards their principal. There is a higher level
of duty owed in insurance contracts and this will be discussed in detail in chapter 5. Agents
must not accept bribes or secret commissions. In the case of insurance, it is customary for
the insurer to pay a commission to intermediaries. The level of this commission need only
be disclosed to a client when requested by them. However, any additional commission
received, such as profit commission, would need to be disclosed automatically to the client.
Accountability An agent must account to their principal for all money they receive on their behalf and must
keep a proper record of all transactions.
F5 Duties of a principal
A principal has the following duties to their agent:
Remuneration The agent has a right to the remuneration agreed by their principal or, if none has been
fixed, to a reasonable remuneration as is customary or appropriate. For insurance
transactions the remuneration usually consists of commission, and to earn this the agent
must prove that they were the effective cause of any transaction. In short, an agent has not
‘earned’ their commission until a contract has been signed.
Indemnity Subject to any express terms in the agency agreement, an agent has a right to claim from
Chapter 3
their principal an indemnity against all expenses or loss incurred when acting on the
principal’s behalf.
F6 Undisclosed principal
In most situations it is clear that an agent is acting not on their own behalf, but on behalf of a
principal. However, English law permits an agent to act for an undisclosed principal while
seeming to act on their own behalf.
The agent must have authority to act on behalf of the undisclosed principal at the time the
contract is made for it to be effective. In other words, the terms of the agency agreement
must be clear between the principal and agent.
F7 Consequences of an agent’s actions

The consequences of an agent’s actions on the principal will depend on the particular
circumstances. Influential factors will be the extent of the agent’s authority, i.e. whether there
is actual authority, apparent authority or no authority.
F7A Actual authority
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Actual authority may be express or implied.
Express authority arises from the terms of an agency agreement, which may be oral or in
writing. As already indicated, it would be unusual for this to be oral in an insurance context;
all terms would be expressed in a TOBA.
Implied authority may be of two kinds. If the agent has to undertake a certain action in
order to carry out express instructions, they will have implied authority to do so. So, for
example, if an agent needs to travel to a particular place to carry out the principal’s
instructions, the travel costs will be met without any need to have specific agreement on this
aspect.
F7B Apparent authority
It is unlikely that a third party will be aware of the extent of an agent’s authority. Since the
third party is often in no position to make any judgment about the extent of such authority,
the situation is catered for in law by what is termed ‘apparent’ authority. There are different
situations in which it may arise in an insurance context.
There is a helpful summary of how apparent authority arises in Gloystarne & Co Ltd v.
Mr G S Martin (2000), an Employment Appeal Tribunal case:
Putting the point alphabetically, B does not become A’s agent in dealings with C,
nor does B acquire authority from A to act on A’s behalf in relation to C by way
only of what B says to C. If that was the case, principals could have agents
completely unknown to them and over which they had no control. Rather the
case is that B becomes A’s agent in dealings with C by reason, in general, of
what A says to C on the point or whether A conducts himself to C in some way
that reflects on the possibility of B’s agency.’
In general we can say that if an agent has never been appointed, but claims to act on behalf
of a principal, this will not create a binding contract with the principal. It requires the
principal’s conduct to indicate that the agent is acting on their behalf.
However, an agent may have been validly appointed, but is not permitted to carry out certain
tasks. In this case, the way to determine if a contract is valid is whether the action carried out
by the agent is of a kind that is usual in that trade or profession.
Example 3.3
Let us assume that an insurer has provided an intermediary with a motor cover note book
(used by the intermediary to issue cover) and an agent’s guide as to the type of risks that
may be accepted. The intermediary provides a client with a quotation for a motor
insurance and issues a cover note on behalf of the insurer. The client assumes the
intermediary has the necessary authority to perform all these functions as they are usual
for the profession. If the intermediary indicates acceptance of the risk, but for some reason
it is beyond the authority limits granted by the insurer, a valid contract would nonetheless
be created, as they will have been acting with ostensible authority.
Chapter 3
Be aware
Even if the actions of an agent bind the principal to the contract, an agent acting outside
their authority will be liable to the principal for their actions.
F8 Termination of agency
An agency may be terminated in a number of ways. The most common are by:
• mutual agreement by the principal and the agent;
• the agency being withdrawn by the principal or given up by the agent; or
• the death, bankruptcy or insanity of either party.
Consider this…
One of the major problems in insurance is how the cancellation of an agency can be
brought to the attention of all existing and possible future third parties.
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Think of some reasons why the cancellation of an agency could cause problems for an
insurer.
It is important that a principal notifies all relevant parties when an agency is terminated. The
rule of apparent authority can apply for some time after termination and unscrupulous former
agents may continue to commit their principal to further agreements. Insurers may find
themselves bound to contracts entered into by an agent who no longer has any authority to
act on their behalf.
G Terms of business agreements (TOBAs)

Insurers and intermediaries alike have tended to develop bespoke TOBAs reflecting their
particular methods of doing business. Model TOBAs have been produced by a number of
market associations on behalf of their members. The ABI has given guidance on
insurer TOBAs.
G1 General requirements
All TOBAs should:
define and ensure

reflect the
be clear and allocate compliance with
business
succinct responsibilities regulatory or
relationship
and rights statutory rules
G2 Status
This should include an obligation on the broker to advise the insurer of their regulatory status
and of any change to that status. If there are restrictions on the classes of business to which
the TOBA applies this should also be clearly stated.
G3 Commission
Any scale of rates should be clearly stated and updated from time to time. If commission is
variable this should be stated, together with any minimum notice period for changes. The
date when commission is due and payable should also be given.
Chapter 3
G4 Material information
This relates to the need for prompt passing of information by the intermediary to the insurer.
The ABI recommends that it should be made clear that an intermediary provides all material
information to the insurer as agent of the policyholder. The only exception to this is where the
insurer has granted the intermediary delegated authority to act on its behalf.
G5 Premiums and credit

This section must deal with the responsibility for the credit risk in relation to premiums both
paid and refunded while in the hands of the broker.
An insurer who agrees to a ‘risk transfer’ arrangement under the FCA rules accepts full
responsibility for the premium even though it is not physically transferred to them until later.
Some insurers grant this facility to the brokers with whom they deal. (However, it is not
universal practice to permit risk transfer throughout the whole of a supply chain, where more
than one broker is involved.)
Where risk transfer is granted, the TOBA will specify the type of trust bank account permitted
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to hold the premiums.
This section will also specify terms of credit and the responsibilities for cancelling or
recovering documentation in the event of any breach by the policyholder. The broker’s
obligation to release all statutory documentation, such as motor insurance and employer’s
liability certificates, will also be covered in this section.
G6 Claims money
This section will specify whether the insurer or the broker is to bear the credit risk in relation
to claims money held by the broker.
G7 Broker/client relationship
The ABI suggests that under this heading insurers should consider including a non-
solicitation clause, effectively barring the insurer from acquiring business, currently placed
through the broker, on a direct basis for a period of five years. This element of guidance is a
suggestion only.
G8 Direct administration arrangements

This section clarifies that the insurer’s role in dealing directly with the policyholder is limited
to fulfilment of regulatory or contractual responsibilities. In other words, it reaffirms that the
usual situation is for the insurer to deal with the policyholder via the intermediary. Direct
contact between insurer and policyholder will occur only as provided for in the policy,
elsewhere in the TOBA or where required by regulation.
G9 Claims
Notification via the broker or direct should be specified.
G10 Termination
This section will specify the arrangements for termination where there is no fault (usually by
mutual agreement or specified notice period) and also where there is fault. The latter is a
more extensive list that tries to anticipate the types of situation in which one party would
expect to have the right to serve notice on the other.
Broadly speaking, the areas covered are:

• suspicion of fraud or dishonesty;
• change of regulatory status;
• administration arrangements causing prejudice to policyholders;
• failure to remedy a breach of the TOBA within an agreed timescale;
• irredeemable breach of the TOBA; and
• bankruptcy or receivership.
The insurer will also wish to include its right to cancel for failure to pay monies due, or on the
Chapter 3
death of the broker if the broker is a sole trader.
G11 Regulatory requirements

All TOBAs should themselves be compliant and should include terms requiring compliance
with all other applicable regulatory and legal requirements, such as anti-bribery and money
laundering obligations, and local regulatory and legal requirements where the intermediary is
outside the UK.
G12 Additional sections

Accounting procedures This will clarify who prepares the accounts and terms of settlement.
Assignment options Assignment is the transfer of rights under the terms of a contract. If this is
permissible, the terms should be specified.
Arbitration options The appointment of an arbitrator or other expert may be specified in the event
of a dispute.
Variation of terms Any variation (subject to the appropriate notice period) will be sent by recorded
delivery to the last known address.
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Signature Both parties will sign the document.
Authority If any delegated authorities have been granted, the terms should be specified
(including premium handling, claims handling and subagent arrangements).
Indemnity If included, this would provide an indemnity to each party in the event that the
other party acted outside the terms of the TOBA or their respective authority
limits.
Other clauses A list of other clauses, such as force majeure (effectively major things outside a
party’s control), are specified here. One of these is opting out of the Contracts
(Rights of Third Parties) Act 1999.
Refer to Contracts (Rights of Third Parties) Act 1999 on page 9/6 for more
on the 1999 Act.
G13 Other TOBAs in the market

Separate TOBAs are created for business dealings between intermediaries and their clients
and between brokers and their subagents or co-brokers (this is where more than one broker
acts for a client). There will be some common elements, but also some elements uniquely
focused on the different relationships. The 'client' TOBA may well contain a service level
agreement (SLA) indicating precisely what services are being provided and to what
standard. The scope of these is beyond the EP1 syllabus.
Key points
Contract law
• A contract is an agreement, enforceable by law, between two or more persons to

perform a certain act or abstain from doing so – their intention being to create legal
relations and not merely to exchange mutual promises.
• Two important criteria for a valid and enforceable contract are:
Chapter 3
– offer and acceptance; and
– consideration.
• To be effective, acceptance must be the final and unqualified agreement to the offer.
• Consideration may be described, simply, as each persons side of the bargain which
supports the contract.
Termination of contracts of insurance
• Most general insurance policies have a cancellation condition allowing the insurer to
cancel the contract, after due notice, with a pro rata return of premium.
• A consumer has a right to cancel, without penalty and without giving reason, most
insurance policies purchased at a distance as long as they do so within 30 days for a
payment protection policy or 14 days for any other type of policy.
• Some insurers also permit the insured to cancel other insurance contracts while
retaining the right to charge for the cover already given at their short period rates.
• A contract of insurance can be terminated by fulfilment or made voidable – for instance
For reference only

by the insured’s breach of a policy condition imposing a continued requirement on
them.
• Under the Insurance Act 2015 an insurer may elect to terminate a contract in response
to a fraudulent act.
Agency
• In law an agent is one who is authorised by a principal to bring that principal into a
contractual relationship with another, a third party.
• An agent–principal relationship can arise by consent, necessity or ratification. Authority
can be express or implied.
• In insurance an independent intermediary may, at different times, act for each party to
the contract.
• An agent has the following duties to the principal:
– obedience;
– personal performance;
– due care and skill;
– good faith; and
– accountability.
• An agency may be terminated by mutual consent, by either party or by the death,
bankruptcy or insanity of either party.
Terms of business agreements (TOBAs)
• All TOBAs should be clear, succinct, reflect the business relationship, define and
allocate responsibilities and rights and ensure compliance with regulatory and statutory
rules.
Question answers
3.1 d. Pam needs to agree to pay Jane for the filing cabinets.
3.2 c. Collection of the premium.

Chapter 3
For reference only

Self-test questions
1. A valid contract must include:
a. Signed documentation. □
b. A written offer. □
c. A legal disclaimer. □
□
Chapter 3
d. Consideration.
2. Sanjeev requires house insurance. He has spoken to an insurer over the telephone
who has offered him a policy with an excess of £500. Sanjeev accepts the policy but
requests an excess of £250. In contract terms, Sanjeev’s acceptance represents:
a. A counter offer. □
b. An offer. □
c. Unconditional acceptance. □
d. Agreement. □
3. Katie is selling her car for £2,000. May offers her £1,800, which Katie refuses.
Legally, a contract has not been formed between Katie and May because:
a. Katie’s refusal of the counter offer acts as a withdrawal of the original offer. □
□
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b. Katie and May did not sign a contract.
c. May’s counter offer acts as a rejection of the original offer. □

d. May offered less than Katie was prepared to accept. □
4. Colin buys home contents insurance, having received a quote through the post which
he is happy with. Acceptance of the quote will be complete when:
a. A letter of acceptance is received. □
b. A letter of acceptance is posted. □
c. The policy is put on risk. □
d. Colin receives confirmation from the insurer. □
5. Within insurance, consideration will typically be the:
a. Value of the claim paid by the insurer. □
b. Disclosure of all relevant facts at the outset by the insured. □
c. Initial terms for the insurance issued by the insurer. □
d. Premium paid by the insured. □
6. Joe and Maggie have been told that their insurance policy doesn't have a right to
cancel. What type of policy is it?
a. Travel insurance with a term of less than a month. □
b. Motor insurance with a term of less than a month. □
c. Payment protection insurance. □
d. Critical illness insurance. □
Chapter 3
7. Tolu has buildings insurance but has not adhered to a warranty on the policy. In the
event of a claim, the insurer would:
a. Be able to avoid the claim and cancel the policy from the outset. □
b. Be liable but would be able to only pay a set proportion of the claim. □
c. Not be liable for claims resulting from this, but will be liable for losses occurring □
after a breach has been remedied.
d. Be able to make a discretionary payment of an amount it feels is reasonable. □
8. If an independent intermediary completes a property survey for an insurer, they
would be considered to be a(n):
a. Principal for the insurer. □
b. Principal for the property owner. □
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c. Agent for the property owner. □
d. Agent for the insurer. □
9. Firdale Insurance Ltd has asked one of its agents to carry out a property survey 50
miles away. The agent carries out the survey and charges the mileage costs back to
the insurer. The costs will be met because:
a. The agent has implied authority. □
b. Agency agreements always allow for mileage costs. □
c. The agent has limited authority. □
d. The principal is always liable for the actions of their agent. □
10. All agency agreements should:
a. Set out the requirements and responsibilities for just the agent. □
b. Define and allocate the responsibilities and rights of each party. □
c. Set out the requirements and responsibilities for just the principal. □
d. Set out the broad principles and conduct requirements that each party will be □
subject to.
Insurable interest
4
outcomes
Introduction
A What is insurable interest? 6.1
Chapter 4
B When must insurable interest exist? 6.2
C How is insurable interest created? 6.3
D How is insurable interest applied? 6.4
Key points
Question answers
Self-test questions
Learning objectives
For reference only

• define insurable interest;
• describe when insurable interest needs to exist;
• explain when insurable interest commonly arises in various classes of insurance;
• describe how insurable interest may be created; and
• apply the concept of insurable interest to property and liability policies.
Introduction
In this chapter we shall examine insurable interest and its place in insurance. It is one of the
elements necessary to create a valid insurance contract.
Key terms
Common law Financial value Insurable interest Legal relationship

Statute Subject-matter
A What is insurable interest?

Chapter 4
Insurable interest is the legal right to insure arising out of a financial relationship
recognised at law, between the insured and the subject-matter of insurance.
A1 Features of insurable interest

The following features of insurable interest may help to clarify the definition:
• subject-matter;
• legal relationship; and
• financial value.
We will also need to consider some related terms to clarify other aspects of insurable
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interest. These are:
• insurers’ insurable interest; and
• anticipated insurable interest.
Consider this…
Do you have insurable interest in:
• a house you are purchasing, prior to the exchange of contracts?
• a watch you are holding as security for a loan?
• a car which has been sent to your garage for repair?
You have no insurable interest in the first case, As the buyer you have no legal interest in the
property, until there has been an exchange of contracts (at which point, both parties will have
an insurable interest).
There is an insurable interest in both the second and third case:
• You may be liable to pay for or replace the watch if it is damaged when the loan is repaid.
• The owner will require compensation from you if the car is lost or damaged.
A1A Subject-matter
The term ‘subject-matter’ is used in two ways: the subject-matter of the insurance and the
subject-matter of the contract.
Chapter 4 Insurable interest 4/3
Subject-matter of insurance The item or event insured.

The most obvious examples are cars, houses, valuables or factory stock or
liability for acts of negligence.
Any type of property or any event which may result in a loss of legal right or the
creation of a legal liability.
The subject-matter can be any type of property or any event which may result in a
loss of legal right or the creation of a legal liability. Under a household policy the
subject-matter can be the building, furniture and other contents or the creation of
liability, for example when a tile that should have been secured falls off a roof and
injures a passer-by.
Subject-matter of the The financial interest a person has in the subject-matter of the insurance, as
contract defined in the case of Castellain v. Preston (1883).
A1B Legal relationship

The relationship between the insured and the subject-matter of the insurance must be
Chapter 4
recognised in law. An example of a legal relationship is ownership. If there is no legal
relationship, there is no insurable interest (for example, a thief can have no insurable interest
in stolen goods nor indeed can one friend have an insurable interest in another's
possessions, unless they are in their possession for safekeeping).
A1C Financial value
The insurable interest in the subject-matter of insurance must have a financial value. Unlike
many other types of contract that may be concerned with performance or some other
obligation, insurance contracts are always concerned with a financial interest or value. We
will look at the measurement of the value later.
Activity
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Think about yourself or a member of your family and note down what insurable interests
you or they might have through owning or being responsible for something.
A1D Insurers’ insurable interest

Insurers share risks with other insurers. They are able to do this because they themselves
have an insurable interest in the risks that they have assumed. They reinsure with other
insurers (or reinsurers) part or all of a risk that they hold; the subject-matter of the contract
being the insurer's financial interest in the original insurance (the possibility of financial loss
to the insurer if there is insured liability, loss or damage).
We will look at anticipated insurable interest in Anticipated insurable interest on page 4/4.
B When must insurable interest exist?

The answer to this question varies according to the class of insurance business. In brief:
General insurance A general rule that insurable interest must exist both at inception and at the time of
contracts a loss, though some connection other than a full insurable interest may be
sufficient at inception.
Life insurance contracts Insurable interest must exist at inception but need not exist at the time of a loss.
Marine insurance contracts Insurable interest must exist at the time of a loss but need not exist at inception,
provided that there is a reasonable expectation of interest.
B1 General insurance
The Gaming Act 1845 extended the requirement for insurable interest beyond life insurance
contracts. This Act made all contracts of gambling or wagering null and void. The effect of
this legislation upon a general insurance policy taken out where there is no insurable interest
was to treat such contracts as a gamble, and therefore of no effect.
This legislation was repealed by the Gambling Act 2005 which came into force in 2007. The
2005 Act repealed the legislation by stating:
The fact that a contract relates to gambling shall not prevent its enforcement.
However, general insurance contracts are contracts of indemnity so, applying the principle of
indemnity, a party to a general insurance contract can only recover the amount of their loss
or other fixed amount as agreed with the insurer at the time a loss occurs.
Therefore, as a general rule, we can state that if a general insurance policy is effected when
there is no insurable interest it is void ab initio (from the beginning). In other words, insurable
interest should be present at the inception of a general insurance policy. However, we must
distinguish between actual and expected insurable interest. Take the following example:
Example 4.1
George has agreed to purchase a new car on Thursday from a main dealer. He arranges
an insurance policy (which covers damage to the car and third-party liabilities) effective
from Thursday and has been issued a cover note as evidence of cover by the insurer.
When George turns up at the garage at the appointed time, the car is not ready because
the garage, when carrying out the pre-sales check, discovered that oil was leaking and
Chapter 4
certain parts needed renewing. They tell George that regrettably this will take a couple of
days. He can collect the car on Saturday.
Disappointed, George agrees to this as he is still keen to purchase the car. He does
nothing about the insurance because it hardly seems worth changing things for the sake
of two days, and he picks the car up on the Saturday.
The terms of the Life Assurance Act 1774 do not apply to this insurance (the car is treated
as ‘goods’ and therefore exempt), but technically the policy was effected before George
had an insurable interest. He did not become the owner until two days after he effected
the policy. If we were to use the rule strictly, we arrive at the unreasonable conclusion that
the policy is null and void – this would clearly be a nonsense.
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The statement of the judge in Williams v. Baltic Assurance Association (1924) tends to
add weight to this conclusion. He said:
There is no real support for the broad proposition that an interest must subsist
at the time the policy is taken out.
It is not a straightforward area of law. We must therefore temper our general rule regarding
insurable interest at inception with the fact that there is generally no absolute requirement for
actual insurable interest at inception.
In addition, general insurance policies that are contracts of indemnity are subject to the rule
that insurable interest must exist at the time of the claim. This is because of the
compensatory nature of such policies. The claimant has, by definition, suffered no financial
loss if they had no legal financial interest at the time of the claim.
B1A Anticipated insurable interest
The expectation of acquiring insurable interest at some time in the future (however certain)
may not be enough to create insurable interest in general insurances.
This is illustrated in the case Lucena v. Craufurd (1806), where the judge said:
…suppose the case of the heir at law of a man who has an estate worth
£20,000 who is ninety years of age, upon his death bed intestate, and incapable
from incurable lunacy of making a will, there is no man who will deny that such
an heir at law has a moral certainty of succeeding to the estate, yet the law will
not allow that he has any interest, or anything more than a mere expectation.
Be aware
Although EP1 is not primarily concerned with life insurance or marine insurance, the
following two sections illustrate the differences with general insurance and are provided
for your reference.
B2 Life insurance
Prior to the Life Assurance Act 1774, a practice had developed of effecting life insurance
policies on another person’s life (by a disinterested party) simply as a form of wager. This
‘mischievous form of gaming’ was made illegal by the Act.
So, if at the time of effecting a policy on someone’s life, there is no insurable interest on the
part of the person effecting the policy, the Act means that the policy is void. In other words,
there must be an insurable interest at inception of a life policy. The Act also specified that the
name of the person effecting the policy had to be shown and they may only recover the
value of their interest. However, there need be no valid insurable interest at the time of a
claim (Dalby v. The India and London Life Assurance Company (1854))
The Act itself introduced some uncertainty by specifically excluding its application to
insurances on ‘ships, goods or merchandises’, leaving some room for debate regarding
insurances on buildings, for example. The courts have treated motor insurances (where
there is some cover for damage to the vehicle itself) as ‘goods’.
Chapter 4
B3 Marine insurance
The Marine Insurance Act 1906 (MIA 1906) stated that any marine insurance contract was
void in the absence of insurable interest at the time of any loss.
The Act contains the following on the timing of insurable interest:
Section 6 When interest must attach

The assured must be interested in the subject-matter insured at the time of the loss
though he need not be interested when the insurance is effected;
Provided that where the subject-matter is insured "lost or not lost", the assured may
For reference only

recover although he may not have acquired his interest until after the loss, unless at the
time of effecting the contract of insurance the assured was aware of the loss, and the
insurer was not.
We can assume that insurable interest for this class of insurance is not required but
reasonably expected at the time of entering the contract and required absolutely at the
time of loss.
Be aware
The Marine Insurance (Gambling Policies) Act 1909 made it a criminal offence to effect
a marine policy where either there is no insurable interest, or where there is no reasonable
expectation of such an interest.
We have now discussed the principle of insurable interest and have seen when insurable
interest must be present if an insurance contract is to be enforceable at law. We will now
consider the different ways in which insurable interest can arise.
Question 4.1
As a general rule, when must insurable interest first exist in order for a private motor
insurance policy to be enforceable at law?
a. At the time of the quotation. □
b. On completion of the proposal form. □
c. At inception of the policy. □
d. At the time of a claim. □
C How is insurable interest created?

Insurable interest in the subject-matter of
an insurance policy may arise under:
common law contract statute
C1 Common law
We all owe duties to each other and have certain rights under common law. These give rise
to insurable interest. The most straightforward is ownership. If we own something, we stand
to lose financially if it is lost or damaged. Equally, if we cause someone injury through our
Chapter 4
negligence, there is a financial aspect to this that gives us an insurable interest.
C2 Contract
There are situations in which we accept greater liabilities than those imposed by common
law. These occur when we enter into a contract that gives us greater responsibilities. A
landlord is normally liable for the maintenance of the property they own. However, the
landlord may make the tenant liable, under the terms of the lease. The imposition of these
responsibilities, or potential liabilities, creates an insurable interest.
C3 Statute
There are a few statutes (Acts of Parliament) which impose a particular duty on, or grant
For reference only

some benefit to, certain groups of people, thus creating or modifying insurable interest.
Examples of statutes imposing duties are the Settled Land Act 1925 and the Repair of
Benefice Buildings Measure Act 1972.
Where these statutes apply they make tenants responsible for the upkeep of the buildings
they occupy. This gives the tenants an insurable interest in the building.
Statutes modifying insurable interest
There are also statutes which restrict liability and therefore restrict insurable interest. For
example, the Carriage of Goods by Sea Act 1971 limits the liability of a carrier to a specific
amount, and therefore their insurable interest. Other examples of statutes restricting
insurable interest are the Hotel Proprietors’ Act 1956, Carriers Act 1830 and Trustee
Act 1925.
D How is insurable interest applied?

Now we have a clear understanding of the principles and features of insurable interest and
how it may arise, let us consider its application to property and liability insurance contracts.
D1 Property insurance
This is probably the easiest type of insurable interest to identify. It generally arises out of
ownership, where the insured is the owner of the subject-matter of insurance. There are also
instances where insurable interest arises when the insured is not the full owner of the
subject-matter, for example:
• Part or joint owners. A person who is a joint or part owner of certain property has an
insurable interest up to the limit of their financial interest. However, as they are
considered a trustee for any money that may be paid in the event of a claim, which may
exceed their actual interest, a joint or part owner can insure the property for its full value.
• Agents. Where a principal has insurable interest, their agent can insure on their behalf.
• Bailees. Where someone holds property on a temporary basis on behalf of the legal
owner, they are a bailee. They have an insurable interest in the property, since if it is
damaged or stolen they may have to replace it. Examples of bailees include shoe
repairers, garage owners and dry cleaners.
• Tenants. When someone is a tenant of a property, they are not the owner of it but have
an insurable interest in it. This is because in the event of damage to the property, the
tenant may be liable for the cost of repairs.
Bailees’ and tenants’ interests are in respect of possible liability.
Shareholders in a limited company do not have an insurable interest in the company’s
property. Their interest in the company is limited to the value of the shares that they own and
does not extend to the physical property owned by the company.
Consider this…
What do you think is the extent of insurable interest of:
• a mortgage lender in the borrower's property?
• a joint owner of a caravan?
In the first case, it is the extent of the mortgage. In the second case, it is the extent of the
Chapter 4
interest in the caravan. However, a joint owner is treated as a trustee for the other owner and
may insure to the full value of the caravan.
D2 Liability insurance
Under common law a person has insurable interest to the extent of any potential legal liability
that they may incur to pay damages awarded by a court and other costs.
Our definition of insurable interest included not only loss and damage but also potential
liability. This could arise under common law where, for example, a person may be liable for
injuring someone else through the careless use of an umbrella. This incident may give rise to
a potential award by a court plus a claimant’s legal costs. The potential liability and costs are
capable of being insured.
For reference only

Key points
What is insurable interest?
• Insurable interest is the legal right to insure arising out of a financial relationship
recognised at law, between the insured and the subject-matter of insurance.
• The main features of insurable interest are subject-matter, legal relationship and
financial value.
When must insurable interest exist?
• When insurable interest must exist depends on the class of insurance.

• For life insurance it must exist at inception.
• For marine insurance it must exist when a claim is made.
Chapter 4
• For general insurance it must exist when a claim is made and usually at inception,
though actual insurable interest at the time of inception is not absolute.
How is insurable interest created?
• Insurable interest can arise at common law, under contract or under statute.
How is insurable interest applied?
• With property insurance, insurable interest usually arises out of ownership, although
certain others, who are not the full owner, can also have an insurable interest.
• A person has insurable interest to the extent of any potential legal liability that they
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may incur to pay damages awarded by a court and other costs.
Question answers
4.1 c. At inception of the policy.
Chapter 4
For reference only
Self-test questions
1. What must exist for there to be insurable interest?
a. Subject-matter, ownership and financial value. □
b. Subject-matter, ownership and financial loss. □
c. Subject-matter, legal relationship and financial value. □
d. Subject-matter, legal relationship and financial loss. □
2. Dorothy and James are getting married and have taken out insurance for their
wedding day. In terms of insurable interest, their wedding day is the:
a. Legal relationship. □
Chapter 4
b. Subject-matter. □
c. Financial value. □
d. Risk. □
3. If an insurance company wants to reinsure part of a risk they hold, their financial
interest in the original insurance is known as the:
a. Subject-matter of insurance. □
□
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b. Anticipated insurable interest.
c. Legal liability. □
d. Subject matter of the contract. □
4. A couple arranged a joint life insurance contract shortly after they were married. They
divorced five years later. It is true to say that the contract is:
a. Still enforceable because insurable interest existed at inception. □
b. Not enforceable because insurable interest no longer exists. □
c. Still enforceable but only if either partner remarries. □
d. Only enforceable until the point they are divorced. □
5. Aiden sold his car to his friend Darren. Two weeks later Darren had an accident in
the car causing significant damage. As Aiden had not cancelled his original
insurance policy he submitted a claim on Darren’s behalf. His claim was refused
because:
a. He was only covered for third party fire and theft. □
b. He had no financial interest in the car at the time of the claim. □
c. Darren was not a named driver on the policy. □
d. His claim amount exceeded the cover on the policy. □
6. Which class of insurance requires the existence of insurable interest at both

inception and at the time of a loss?
a. Level term assurance. □
b. Marine insurance. □
c. An endowment plan. □
d. General insurance. □
7. Insurable interest can be created by:
a. Ownership, contract and court order. □
b. Ownership, contract and legislation. □
Chapter 4
c. Ownership, agency agreement and legislation. □
d. Ownership, contract and agency agreement. □
8. A dry cleaners has an insurable interest in the garments they clean and is therefore
referred to as a(n):
a. Bailee. □
b. Tenant. □
c. Agent. □
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d. Part owner. □
9. Why does a tenant have insurable interest in the property they live in?
a. They own the property for insurance purposes. □
b. They act as an agent for the owner. □
c. They may be liable for the cost of repairs. □
d. They are treated as part owners for insurance purposes. □
10. Robert is effecting an insurance policy on behalf of another party. Robert is not the
owner of the property but he is able to arrange insurance because he is a(n):
a. Bailee. □
b. Principal. □
c. Agent for the other party. □
d. Tenant. □
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Good faith and disclosure
5
outcomes
Introduction
A Principle of good faith 7.1
B Duty of disclosure 7.2, 7.5
C Material circumstances 7.3, 7.4
D Circumstances that do not need to be disclosed 7.6
E Consequences of misrepresentation by consumers 7.7
Chapter 5
F Consequences of a breach of the duty of fair presentation 7.7
G Compulsory insurances 7.7
Key points
Question answers
For reference only

Self-test questions
Learning objectives
• define good faith;
• explain how good faith applies to contracts of insurance;
• describe the duty of disclosure and give examples of breach of this duty;
• describe the duty not to make a misrepresentation in consumer insurance contracts;
• describe the duty to make a fair presentation of risk and how it arises;
• describe the ways in which insurers may limit their entitlement to disclosure of information;
• define a material circumstance and describe its importance; and
• describe the consequences of non-disclosure, misrepresentation or a breach of the duty of
fair presentation.
Introduction
Many contracts involve the purchase of a tangible product. A purchaser can inspect a
tangible item at the time they buy to check that it is good value. Provided that the seller does
not mislead them (for example, by showing a sample that is unrepresentative of the actual
product), the law expects the purchaser to satisfy themselves about the obvious properties of
the product being bought.
There are some obvious difficulties when trying to apply this principle to insurance contracts,
which have until recently been treated as contracts of utmost good faith. This meant, in
simple terms, that the insurer and insured both had a duty to deal honestly and openly during
their contractual relationship. This is still largely the case, although the law has been
modified to reflect the imbalance of bargaining positions between insurers and insureds, with
the rules for disclosure set out in the Consumer Insurance (Disclosure and
Representations) Act 2012 (CIDRA) for consumer contracts, and the Insurance Act 2015
(IA 2015) for non-consumer contracts.
On the Web
The full content of CIDRA and IA 2015 can be found at www.legislation.gov.uk.
Key terms
Chapter 5
Compulsory Disclosure Duty of fair Good faith

insurances presentation
Material Misrepresentation Non-disclosure
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circumstances
A Principle of good faith

Insurance contracts are subject to the principle of good faith.
Good faith means that disclosure must be made in a reasonably clear and accessible
manner, and material representations of fact, expectation or belief must be 'substantially
correct'.
This means that the parties to a contract must volunteer material information in all
negotiations before the contract comes into effect.
The principle applies equally to both the proposer and the insurer throughout the contract
negotiations. However, it applies rather differently to each party. It is the proposer who has
the duty to disclose all material circumstances about the risk to the insurer. The nature of
the subject-matter of the insurance contract and the circumstances surrounding it are facts
known mainly by the insured.
The insurer on the other hand must be entirely open with the proposer in other ways. The
insurer cannot introduce new non-standard terms into the contract that were not discussed
during negotiations, neither can the insurer withhold the fact that discounts are available for
certain measures that improve a risk (such as the fitting of an intruder alarm for household
contents insurance).
Be aware
You may hear your colleagues refer to good faith as 'utmost good faith'.
Chapter 5 Good faith and disclosure 5/3
B Duty of disclosure
It has, historically, been implicit in all insurance negotiations that there is a duty to disclose
material circumstances. The duty of disclosure was treated as particularly important at the
proposal stage, before the contract comes into existence. At common law, once the policy is
in force the duty of disclosure would be revived at each renewal date, and insurers would
often add specific policy terms to make the disclosure requirement a continuing one.
When considering what should be disclosed, customers would be expected to ask
themselves "What is a material circumstance?" and provide this information.
The definition, which is still relevant today, is taken from s.18(2) of the Marine Insurance
Act 1906 (MIA 1906):
Every circumstance is material which would influence the judgment of a prudent insurer in
fixing the premium or determining whether he will take the risk.
In this section, we look at the how the law has been modified to a position which reflects the
different levels of knowledge of risk and the balance of bargaining powers for consumer and
commercial policyholders.
B1 Insured’s duty of disclosure – consumer insurance
Chapter 5
The Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) came
into force on 6 April 2013. CIDRA removes the common law duty on consumers to disclose
any information that a prudent underwriter would consider material and replaces this with a
duty to take reasonable care not to make a misrepresentation.
CIDRA applies to consumers and not to business/commercial insurance (the Insurance Act
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2015 alters commercial contracts of insurance.). Under CIDRA a consumer is someone who
takes out insurance 'wholly or mainly for purposes unrelated to the individual's trade,
business or profession'. This is wider than the FCA definition of consumer which is 'any
natural person acting for purposes outside his trade, business or profession'.
CIDRA replaces the duty on consumers to volunteer information before taking out insurance,
with a duty to take reasonable care to answer insurers' questions fully and accurately. It also
sets out a Statutory Code clarifying the law of agency relationship, provisions for group
schemes and the insurance taken out on the life of another. Other provisions in the Act
include safeguards preventing insurers from including terms in insurance contracts which put
the insured in a worse position in respect of pre-contract disclosure and representation than
the legislation will permit. One example is the banning of 'basis of contract clauses' which
are sometimes found on proposal forms and warrant the truth or accuracy of the statements
and make them the basis of the contract.
There have been a number of consequences of this legislation for intermediaries and
insurers who have had to change their documentation, websites and ways of working.
Insurers in particular have had to make sure they ask specific questions of their potential
policyholders, and intermediaries have had to amend their terms of business agreements as
well as consider how their agency relationship with the policyholder may impact them.
Consider this…
Are consumers subject to the duty of good faith, either at the point of sale of an insurance
product or at renewal?
B2 Insured's duty of disclosure – non-consumer insurance

The Insurance Act 2015 (IA 2015), which came into force on 12 August 2016, extends
much of the legislation set out in CIDRA to non-consumer insurance contracts.
B2A Good faith

IA 2015 states that ‘any rule of law permitting a party to a contract of insurance to avoid the
contract on the ground that the utmost good faith has not been observed by the other party is
abolished’. It also states that ‘any rule of law to the effect that a contract of insurance is a
contract based on the utmost good faith is modified to the extent required by the provisions
of this Act and the Consumer Insurance (Disclosure and Representations) Act 2012’.
The concept of good faith continues, but the absolute remedy of avoidance in the case of a
breach no longer exists.
B2B Duty to make a fair presentation
IA 2015 changes the obligations on the parties during placement as a new duty of fair
presentation applies to non-consumer contracts.
The Act states that the ‘insured must make to the insurer a fair presentation of the risk’.
A fair presentation of the risk is defined as one:
• which makes disclosure of every material circumstance which the insured knows or
ought to know, or disclosure which gives insurers sufficient information to put a prudent
insurer on notice that it needs to make further enquiries for the purpose of revealing those
material circumstances;
• which makes the disclosure in a manner which would be reasonably clear and accessible
to a prudent insurer; and
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• in which every material representation as to a matter of fact is substantially correct and

every material representation as to a matter of expectation or belief is made in good faith.
This is a substantial change – the onus shifts from the insured to the insurer, which is
assumed to know information that would be expected of it. Insurers, therefore, have to take
responsibility for asking questions and probing for information about a risk.
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The new duty of fair presentation applies before the contract of insurance is entered into.
However, as the Act also deals with issues relating to breaches of duty during any variation
process, it can be interpreted that the duty continues through the life of the contract.
B2C Measure of the insured’s and insurer’s knowledge
IA 2015 sets out what an insured or insurer should know or is expected to know.
Insured
An individual insured knows only:
• what is known to them as an individual; or
• what is known to one or more of the individuals who are responsible for their insurance.
A ‘non-individual’ insured knows only what is known to one or more of the individuals
who are:
• part of the senior management (those who play significant decision-making roles about
the organisation of insured activities); or
• responsible for the insured’s insurances.
An insured is not deemed to know confidential information that is known to an individual
employed by their agent, where that information has been obtained by the individual from a
source unconnected with the insurance in question.
The measure of what the insured ought to know is defined as: ‘what should have been
revealed by a reasonable search of information available to the insured (whether the search
is conducted by making enquiries or by any other means)’.
Information can be held in the insured’s organisation or by any other person such as
the agent.
The Act specifically states that knowledge includes those things that an insured suspects
and about which they would have had actual knowledge, but for deliberately refraining from
confirming/enquiring about the information. Insureds should not therefore turn a blind eye to
issues they have suspicions about.
Insurer
An insurer knows something only if it is known to one or more individuals who participate on
behalf of the insurer in the decision as to whether to take the risk, and if so on what terms
(whether the individual does so as the insurer’s employee or agent, as an employee of an
agent or in any other capacity).
An insurer ought to know something only if:
• an employee/agent of the insurer knows it and ought reasonably to have passed on the
relevant information to the individual making the decision whether or not to take the risk;
or
• the relevant information is held by the insurer and is readily available to an individual
making the decision whether or not to take the risk.
An insurer is presumed to know:
• things which are common knowledge; and
• things which an insurer offering insurance of the class in question in the field of the
relevant activity would reasonably be expected to know in the ordinary course of
business.
Knowledge of both the insured and insurer includes matters that an insured or insurer
suspects and about which they would have had actual knowledge but for deliberately
refraining from confirming them or enquiring about them.
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B2D Agent’s duty
In non-consumer (business) insurance the insurer can seek remedy for the breach of the fair
presentation of the risk if the insured’s agent breaches the duty. Section 4 of IA 2015
regulates this principle in its provision that what is known to the person who is responsible
for the insured’s insurance is attributed to the insured.
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In common law, a person is responsible for the acts of their agent and so a careless or
reckless misrepresentation by an agent is treated as if it had been made by the principal.
This principle is maintained in consumer insurance by CIDRA, which states ‘Nothing in this
Act affects the circumstances in which a person is bound by the acts or omissions of the
person’s agent’ (s.12(5)).
Under CIDRA, an intermediary is to be considered to be the insurer’s agent if the
intermediary:
• is the appointed representative of the insurer;
• collects information from the consumer with express authority from the insurer to do so; or
• has authority to bind the insurer to cover and does so.
In all other cases it is presumed that the agent is the consumer’s agent unless, in light of
the relevant circumstances, the consumer proves otherwise.
B3 Insurer’s duty of disclosure – non-consumer insurance

The insurer also has a duty of disclosure to the insured. In order to fulfil this duty, the insurer
must also behave with good faith, by, for example:
• notifying an insured of a possible entitlement to a premium discount resulting from a good
previous insurance history;
• only taking on risks which the insurer is registered to accept (avoiding unenforceable
contracts); and
• ensuring that statements made are true: misleading an insured about policy cover is a
breach of good faith, shown in Kettlewell v. Refuge Assurance Company (1909).
Question 5.1
To whom does the principle of duty of disclosure apply in contracts of insurance?
a. The proposer only. □
b. The insurer only. □
c. Both the insurer and proposer. □
d. An interested party. □
B4 Effect of FCA rules
Financial Conduct Authority (FCA) rules require insurers and intermediaries to provide
sufficient information about the contract before its conclusion so that a prospective customer
can make an informed decision about whether to buy it or not.
One element of the information that must be disclosed to a client or prospective client is a
statement of their demands and needs. There is flexibility in the way that this may be done,
but the responsibility lies with the adviser to show how the demands and needs are met by
the product(s) offered. The fulfilling of this requirement implies that there is a comprehensive
fact gathering exercise that must be undertaken, placing the onus for establishing the facts
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upon the adviser.

The FCA imposes restrictions on rejecting claims where consumers have failed to disclose
information to insurers or have misrepresented facts. For this reason, the FCA requires firms
to ensure a customer knows what they must disclose by:
1. explaining to the customer the responsibility of consumers to take reasonable
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care not to make a misrepresentation and the possible consequences if a
consumer is careless in answering the insurer’s questions or if a consumer
recklessly or deliberately makes a representation;
2. explaining to a commercial customer the duty to disclose all circumstances
material to a policy, what needs to be disclosed and the consequences of any
failure to make such a disclosure;
3. ensuring that the commercial customer is asked clear questions about any
matter material to the insurance undertaking; and
4. asking the customer clear and specific questions about the information relevant
to the policy being arranged or varied.
The rules are generally more onerous on insurers of personal and private policies, but what
about commercial insurers and their duty of disclosure? Insurers of commercial risks have
the option of applying these more rigorous standards in their dealings with commercial
clients, though there is no obligation upon them to do so, providing they can demonstrate
that they are treating their customers fairly. In some areas, such as gathering information
material to the risk, it is clearly in their best interests, for example, to ensure that they ask
appropriate questions on the proposal form and provide clear details of the policy cover
provided.
B5 Disclosure post-contract
B5A At inception
Under both common law and recent law reforms, the duty of disclosure starts when
negotiations begin and ends when the contract is formed (at inception). From that point until
renewal negotiations take place there is no requirement for the insured to declare material
circumstances, unless these affect the policy cover.
For example, if the value of property increases or a car is sold and another purchased it is
clear that the insurer must be advised because the policy requires a specific endorsement to
accommodate the change in risk. However, a policyholder does not need to disclose a
conviction for fraud (which would be a material fact for all general insurance policies) until
the following renewal. The exception would be if there was a specific policy condition which
extended the duty so that it became a continuing one.
Consider this…
A motor policy was taken out in respect of a small van. While the policy was in force, the
insured joined an amateur band and the van was then used to transport equipment and
some band members. Do you think that the insured should notify the insurers of this
change, and if so, when and why?
Once the insurance starts from that point until renewal negotiations take place there is no
requirement for the insured to declare material information, unless this affects the policy
cover. For example, if a vehicle changes under a motor policy the new vehicle must be
declared and noted on the policy. In this case the new occupation would not need to be
declared until renewal unless the policy contains a condition which extends the duty so that it
becomes a continuing one.
B5B On renewal
On the renewal of a policy, the insured's duty of disclosure is revived for general insurance
policies.
All general insurance policies, such as fire, theft, liability and certain marine and aviation
policies, are contracts that are renewable, usually after twelve months. When the contract
ends it is customary to offer renewal terms. If accepted, a new contract is formed. The duty
of disclosure is revived during the period of negotiation and applies as for new contracts.
It is important that you distinguish between the requirements for short-term policies and
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those for long-term policies (such as life and pensions policies). Once the requirements for
disclosure have been met in the negotiations leading up to the inception of a long-term
contract, the duty of disclosure ceases. Once the policy is in force, even if a material
circumstance, such as the life insured’s health, changes, it does not need to be declared.
The only requirement for the policy to continue is that the insured pays the premiums when
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they fall due.
B5C Continuing requirement
Insurers are often concerned that their rights at common law are limited because they do not
need to be advised of certain material mid-term changes to a risk that they insure. They deal
with this situation in different ways for different classes of insurance. Not all insurers adopt
the same approach but the following will illustrate some of the issues.
Commercial property A policy condition requires continuing disclosure of removal to another location,
insurance or circumstances that increase the risk of damage.
Motor insurances There is usually an onerous policy condition that requires continuing disclosure
of all material changes by the insured, during the currency of the policy.
Public liability insurance The continuing requirement for disclosure for this class of business arises from
the fact that insurers tightly define ‘the business’ of the insured in the policy.
This means that the insured must notify any extension of activities for cover to
apply. A condition requiring ongoing disclosure of material circumstances may
be coupled with this.
B5D On alteration
During the term of a general (non-life) policy, it may be necessary to change the terms of the
policy. The insured may wish to increase the sum insured, change the description of the
property or add another driver to a motor policy. Where a change results in the need for an
endorsement to the policy, the duty of disclosure is revived in relation to that change.
B5E Limitation of an insurer’s right to information
In many cases it is the completion of a proposal form by the proposer that brings about
insurance. The insurer constructs the proposal form with the intention that it will draw out all
the relevant information relating to the risk. However, even if a specific question is not asked,
the duty of disclosure means that the proposer must still disclose any information that is
material unless they are a ‘consumer’ as defined under CIDRA. Following the
implementation of IA 2015, non-consumer customers are only under a duty to make a fair
presentation of the risk (unless the insured and the insurer have contracted out of this
provision of the Act). If the parties have contracted out of this provision then all material
circumstances must be disclosed whatever questions are posed by the insurer as the
principle of good faith still applies.
Refer to
Duty of fair presentation explained in Duty to make a fair presentation on page 5/4
If a question is asked, but the proposer only provides partial information in response and the
insurer does not seek further details, then the insurer is deemed to have waived its rights
regarding this information. The proposer is not considered to have failed to disclose a
material fact in these circumstances. This applies to answers left blank on proposal forms or
a vague description of a business. It is up to the insurer to follow up with appropriate further
questions.
Consider this…
A question on a proposal form asks the proposer for details of previous losses within the
last five years. The proposer answers the question by saying 'see your records'.
Would the insurers have a right to decline to pay a claim if the records, which they had not
consulted, subsequently showed a claim within the five-year period?
Even though such losses might well be material information, the insurer has limited what it
regards as material information and thus waived its right to the information.
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If an insurer clarifies what they mean by a ‘material circumstance’ by defining exactly what is
required in answer to a question on a proposal form, they are unable at a later date to claim
that they required wider or further disclosure. In effect, they cannot claim that there has been
a failure to disclose something material. This will be the case in any situation where the
insurer has requested what they regard as relevant information relating to a defined period.
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When there has been a breach of the duty of good faith by the insured (subject to the
exceptions noted above), the insurer will generally have the right to avoid the policy. Timing
will vary depending upon the circumstances. If an insurer chooses not to invoke the right to
avoid the policy, they may simply waive their right and treat the policy as remaining in force.
However, insurers must exercise care because their conduct may prevent them from
claiming that a breach of the disclosure duty has occurred. For example, if an insurer knows
that the insured failed to disclose a material circumstance in discussions leading up to
inception of the policy, the insurer has the option to avoid the contract ab initio (from the
beginning). However, the insurer must not act in a way that suggests that they have waived
their right to avoid the contract. Such an action could be writing to the insured invoking a
seven-day cancellation clause. It is clear that in doing this the insurer accepts that the policy
is in force up to the date of cancellation. The insurer has thus waived its right to avoid the
policy on grounds of non-disclosure at a later date. The effect of this would be that, should
a claim occur between inception and the cancellation date, the insurer could not avoid
payment of the claim on the grounds of non-disclosure.
The remedies available to insurers for misrepresentation or a breach of the duty to make a
fair presentation are described in Remedies available to insurers under CIDRA on page 5/
12 and Remedies available to insurers under IA 2015 on page 5/13 of this chapter.
C Material circumstances
The Insurance Act 2015 (IA 2015) states that ‘a circumstance or representation is material
if it would influence the judgment of a prudent insurer in determining whether to take the risk
and, if so, on what terms’.
Examples include:
• special or unusual information relevant to the risk;
• any particular concerns which lead the insured to request insurance to cover the risk; and
• anything which those concerned with the class of insurance and field of activity in
question would generally understand as being something that should be dealt with in a
fair presentation of risks of the type in question.
As we have discussed, under IA 2015 the duty of disclosure of material circumstances is

required from both parties when forming a new insurance contract. It is revived both at
renewal of the contract and during an alteration.
There is an ongoing requirement for notification of material changes which would affect
policy cover. Many insurers will also include policy endorsements – which form part of the
contract – that place responsibility on the insured to notify of all material changes.
Activity
Review a commercial policy wording from an insurer you work for or are familiar with.
What conditions do this insurer include for a change of material circumstance during the
period of the contract?
Question 5.2
A bookseller has a property insurance contract with Surebuild.
The contract was based on the bookseller's premises at the time of inception. The
building was of brick and slate construction and had a rebuild value of £400,000.
Two months after policy inception, the bookseller decides to move address.The
construction materials of its new premises are wood with a thatched roof.
Additionally, due to the successful growth of the bookseller's business, the new
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premises are much larger and have a rebuild value of £800,000.
Are these material circumstances which the bookseller should disclose to Surebuild
as soon as possible or should it wait until the next policy renewal?
C1 Features of material circumstances
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The courts test whether a circumstance is material by looking at it from a prudent insurer’s
point of view. They do not consider the insured’s point of view or that of the particular insurer
involved.
Example 5.1
The construction of a building would be a material circumstance in respect of a
commercial fire policy. Other factors that a prudent insurer would consider might include
occupancy, previous loss record, previous insurance record and heating arrangements.
C2 Material circumstances in non-life proposals

In general, material circumstances relate to either physical hazard or moral hazard. We have
already defined physical and moral hazard in chapter 1. Legal cases today rarely concern
physical hazards, as specific questions to establish this information are invariably included
on the proposal form. Moral hazard is less likely to be the subject of specific questions on the
proposal form.
C2A Physical hazard
Let us look at some examples of material circumstances that concern possible physical
hazards in relation to non-life proposals:
• Fire insurance: construction of the building, nature of use, heating and electrical system.
• Motor insurance: age and type of car, age of driver, whether full licence held, previous
accidents, the area where the vehicle is kept and the use to which it is put.
• Theft insurance: nature of stock, its value and nature of security precautions.
C2B Moral hazard

The following examples of material circumstances relating to moral hazard apply to non-life
insurance. They relate either to the insurance history of the insured or to their personal
history or attitude:
• Insurance history: previous refusals to insure (declinatures) by other insurers; previous
claims history if any indication of suspected fraud or exaggeration.
• Personal history: criminal convictions, a lack of good management of business
premises, excessive or wilful carelessness.
The case of Roselodge v. Castle (1966) examines the nature of moral hazard (personal
history) in the context of an application for insurance. In this case, McNair, J. ridiculed the
insurer’s suggestion that the fact that the proposer was caught stealing apples at the age of
twelve would be material to an application for insurance many years later.
D Circumstances that do not need to be

disclosed
The duty on the non-consumer insurance proposer to disclose material circumstances is in
some ways a heavy one. However, some circumstances can be considered 'material' but do
not need to be disclosed. This is either because the insurer ought to know them or could find
them out. Section 3(5) of the Insurance Act 2015 states that the following circumstances do
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not need to be disclosed:
Information that lessens the risk It would be unusual not to advise the insurer of circumstances that lessen
the risk. This is because they are matters that usually have the effect of
producing a lower premium or better cover. Nevertheless, there is no
requirement to disclose such facts.
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Example: the fitting of an intruder alarm to improve a theft risk.
Information the insurer knows Under IA 2015, the insurer is deemed to have knowledge where
information is known to one or more individuals who act for the insurer in
reaching a decision on whether to take on a particular risk and on what
terms.
Information the insurer ought Where an employee or agent of the insurer has knowledge of the material
to know circumstance, and ought reasonably to have passed it on to individual(s)
involved in decisions on whether to take on the particular risk (and on
what terms), the insurer will be treated has having ought to have
known it.
This would also include circumstances which should have been identified
as part of a reasonable survey which the insurer has had carried out, but
where the surveyor misses something which transpires to be material –
this is because the insured has no way of knowing what the surveyor may
or may not have noted during a visit.
Information the insurer is presumed The insurer is presumed to know things which are common knowledge,
to know or which an insurer offering insurance of a particular class would be
reasonably be expected to know in the ordinary course of business.
Examples:
• the existence of a state of war;
• a particular area being subject to natural catastrophes, subsidence,
hurricane or flood;
• industrial processes that are standard for a particular trade.
Information waived by the insurer This would include where the proposer has not answered a question on a
proposal form, or has just inserted a dash. If the insurer does not follow
this up, it is considered to have waived its right to that information. It
cannot claim non-disclosure in the future.
This would also include circumstances which are linked to but outside the
scope of specific questions raised by the insurer.
Example: if an insurer asks for details of all claims that have occurred in
the last three years, there is no need to disclose claims that occurred
more than three years ago, even if they are material.
D1 Spent convictions
The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), which
amends the Rehabilitation of Offenders Act 1974, came into force on 10 March 2014 in
England and Wales.
Under the new system, rehabilitation periods for community orders and custodial sentences
comprise the period of the sentence plus an additional specified ‘buffer’ period, rather than
all rehabilitation periods starting from the date of conviction as was the case under the
previous regime.
The rehabilitation periods have changed to:
Custodial sentences:
Sentence length New rehabilitation period is the period of sentence

plus the ‘buffer’ period which applies from the end
of the sentence
0–6 months 2 years
6–30 months 4 years
30 months – 4 years 7 years
Over 4 years Never ‘spent’
Non-custodial sentences:
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Sentence Buffer period (will apply from end of the sentence)
Community order & Youth rehabilitation order 1 year
Fine 1 year (from date of conviction)
Conditional discharge, referral order etc. Period of order
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As with the previous scheme, the above periods are halved for persons under 18 at the date
of conviction (except for custodial sentences of up to 6 months where the buffer period will
be 18 months for persons under 18 at the date of conviction).
On the Web
GOV.UK information on the reforms: bit.ly/2xkpZfj.
Question 5.3
When considering a proposal for a fire insurance policy on a property, what
information is not typically considered to be material?
a. Details of any mortgage secured on the property. □
b. The materials used to construct the building. □
c. The purpose for which the building will be used. □
d. Whether or not the risk premises are under the sole occupation of the proposer. □
E Consequences of misrepresentation by
consumers
So far we have considered the nature of material circumstances, those that need to be
disclosed and the consequences of non-disclosure. But what happens if information is stated
wrongly, or exaggerated? Non-negligent misrepresentation of a material circumstance by a
consumer will be considered unreasonable grounds for refusing to pay a claim. The test to
be applied, therefore, is whether that consumer has acted reasonably in providing the
information.
The rules that apply are therefore similar to those for non-disclosure. Slightly different words
are used, but the intention is the same. It is really a reinforcement of the fact that a proposer
need only answer to the best of their knowledge or belief. However, where a proposer
deliberately or recklessly answers wrongly, the insurer will be entitled to avoid the policy ab
initio. The misrepresentation must concern a fact not an opinion, and must otherwise meet
the conditions outlined earlier relating to non-disclosure.
Example 5.2
The following are examples of misrepresentation in insurance:
• A proposer for theft insurance says that the premises are protected by a burglar alarm
when they are not.
• A proposer for motor insurance declares that their car has not been modified in any
way when it has.
• A proposer for an appliance insurance declares that the appliance is under five years
old when it is ten years old.
E1 Remedies available to insurers under CIDRA

The Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) replaces
the duty on consumers to volunteer the information before taking out insurance, with a duty
to take reasonable care to answer insurers’ questions fully and accurately. Consequently, it is
the duty of the consumer to take reasonable care not to make a misrepresentation to the
insurer. The Act sets out proportionate remedies insurers are able to use if the
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misrepresentation is a ‘qualifying misrepresentation’.

If the misrepresentation is deemed a reasonable mistake based on the type of insurance
contract and the clarity of the insurers’ questioning, then the insurer may have to pay a
claim. Whether or not a consumer has taken reasonable care not to make a
misrepresentation is to be determined in the light of all the relevant circumstances. The
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following are examples of things which may need to be taken into account:
• The type of consumer insurance contract in question and its target market.
• Any relevant explanatory material or publicity produced or authorised by the insurer.
• How clear, and how specific, the insurer’s questions were.
• In the case of a failure to respond to the insurer’s questions in connection with the
renewal or variation of a consumer insurance contract, how clearly the insurer
communicated the importance of answering those questions (or the possible
consequences of failing to do so).
• Whether or not an agent was acting for the consumer.
A dishonest misrepresentation is always to be taken as showing lack of reasonable care.
Remedies are available to the insurer if the misrepresentation is a qualifying
misrepresentation. That is, it was either deliberate, reckless or careless. A qualifying
misrepresentation is deliberate or reckless if the consumer:
• knew that it was untrue or misleading, or did not take care whether or not it was untrue or
misleading; and
• knew that the matter to which the misrepresentation related was relevant to the insurer, or
did not care whether or not it was relevant to the insurer.
If a qualifying representation is found to be deliberate or reckless, the insurer:
• may avoid the contract and refuse all claims; and
• can keep any premiums paid, unless it would be unfair to the consumer to retain them.
A qualifying misrepresentation is careless if it is not deliberate or reckless. If there was a
careless misrepresentation, that is that the consumer ‘failed to take sufficient care to
understand what the insurer wanted to know or to check the facts’, then the insurer will be
able to apply a compensatory remedy. This would be based on what the insurer would have
done if it had known the correct information, such as applying a relevant exclusion, refusing
to offer terms at all or applying an increased premium. In the event of the latter, the claim
may be proportionately reduced by the amount the policyholder would have been obliged to
pay under the terms of the contract if the information had been disclosed at inception (the
approach to proportionate reduction this will be the same as that set out below for IA 2015 in
Original placement on page 5/13).
F Consequences of a breach of the duty of

fair presentation
For non-consumer contracts, unless the insurer has contracted out of the duty to make a fair
presentation of the risk an insurer will only be able to avoid a policy if the insured has made
a deliberate or reckless breach. In other cases the insurer will have to respond more
proportionately.
F1 Remedies available to insurers under IA 2015

An insurer has a remedy for breach of duty of fair presentation only if the insurer shows that,
but for the breach of duty:
• it would not have entered into the contract of insurance at all; or
• it would have done so only on different terms.
A breach that triggers a remedy is called a qualifying breach. The two categories of
breach are:
• deliberate or reckless; or
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• neither deliberate nor reckless.
The insurer has to show that the breach was deliberate or reckless. A deliberate or reckless
breach means that the insured:
• knew that it was in breach of the duty of fair presentation; or
• did not care if it was in breach of that duty.
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Actual remedies are contained in Schedule 1 of IA 2015. Different remedies are available
depending on when the breach occurred; i.e. at the time of the original placement or when
the contract was varied.
F1A Original placement
If a breach was deliberate or reckless insurers may avoid the contract, refuse all claims and
do not have to return the premium.
For all other breaches that were not deliberate or reckless the remedy depends on the
impact:
• If the insurer would not have entered into the contract at all they can avoid it and refuse
all claims – but they must return the premium.
• If the insurer would have entered into the contract, but on different terms (not related to
the premium), then the contract will be treated as if those terms applied unless the insurer
chooses not to apply them.
If the insurer would have entered into the contract, but charged a higher premium
(irrespective of other terms), then claims can be reduced proportionately. This concept is
similar to average, where a calculation is made on the premium received as contrasted to
the premium which should have been charged.
‘Reduce proportionately’ in this scenario means that the insurer need pay on the claim only x
% of what it would otherwise have been under an obligation to pay under the terms of the
contract (or, if applicable, under the different terms provided for by IA 2015) where:
premium actually charged
x= × 100
higher premium
Example 5.3
A motor insurer agreed to accept an insurance proposal for a risk where the proposer did
not disclose driving convictions as he mistakenly thought they were spent. The premium
charged was £590, but had the insurer known about the conviction the premium would
have been £720.
The insured’s vehicle was damaged, and he made a claim. The cost of repairs was £300.
You can use the formula above to proportionately reduce the claim: divide the premium
charged (£590) by the amount the premium should have been (£720) times 100. This
equals 81.94%. So the adjusted claim amount is 81.94% of £300, or £245.82.
F1B Variations of contracts

Under IA 2015, if a breach was deliberate or reckless the insurer can put the insured on
notice that the contract will be treated as terminated from the time when the variation was
made, and premiums do not have to be returned.
If the breach was not deliberate or reckless, and the premium either stayed the same or
increased as a result of the variation:
• If the insurer would not have agreed to the variation at all, the insurer can treat the
contract as if the variation never happened, but must return any applicable premium
charged for the variation.
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• If the insurer would have agreed to the variation, but on different terms including the
premium, then the contract will be treated as if those terms now applied and if the insurer
would have charged a higher premium then any claim will be reduced proportionately.
‘Reduce proportionately’ in this scenario means that the insurer need pay on the claim only x
% of what it would otherwise have been under an obligation to pay under the terms of the
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contract (or, if applicable, under the different terms provided for by virtue of the Act) where:
premium actually charged
x= × 100
higher premium
P is either the:
• total premium the insurer would have charged (either the increased premium or the
amount the premium should have been reduced by); or
• original premium.
Where an insurer wishes to avoid the contract, refuse all claims and retain the premiums the
burden of proof is on the insurer to demonstrate that they can use this remedy.
Insurers may apply these remedies retrospectively and can revisit previously agreed claims if
a breach is discovered later.
Question 5.4
Khalil makes a claim of £500 for baggage stolen from his car. The insurer had given
Khalil a discount on his premium because the vehicle was being kept in a locked
garage overnight; however, the insurer discovered that the vehicle was being kept in
a public car park when the theft occurred.
Khalil had arranged the insurance for his daughter and had not checked with her
when asked a direct question by the insurer about where the vehicle was stored; he
assumed it would be stored in the garage. The property was rented, and as the
garage was full of stored furniture the vehicle was parked in the nearest public car
park.
The insurer charged a premium of £800, but it should have been £1,000 if the
discount for overnight garaging had not been applied. What amount will the insurer
have to pay for the stolen baggage?
a. £500. □
b. £425. □
c. £400. □
d. £450. □
Chapter 5
F2 Breach of warranty
The Marine Insurance Act 1906 provides that a warranty must be exactly complied with
whether material to the risk or not.
For reference only

Immediate termination of the contract of insurance for breach of a warranty (even where the
breach was for only a short period of time) was widely considered to be unduly harsh. Under
IA 2015, breach of warranty will no longer automatically terminate the contract. Instead, an
insurer’s liability will be suspended from the time of the breach. The insurer will have no
liability for losses occurring or attributable to something occurring during the period of
suspension, but will be liable for losses occurring after a breach has been remedied. This is
a complete change from the harsh situation of automatic discharge if there was a breach –
even if the breach was not material to the risk.
If a loss occurs and the term has not been complied with, the insurer cannot rely on non-
compliance to exclude, limit or remove liability if the insured can show that the non-
compliance did not increase the risk of the actual loss that occurred in the circumstances
that it occurred. This puts the insured in a better position as it brings a materiality link into the
warranty concept, but the burden is on the insured to show that the breach in no way
increased the risk leading to any loss actively suffered.
IA 2015 refers to material terms as being terms of the contract which, if complied with, would
tend to reduce the risk of one of more of:
• particular kinds of loss;
• losses at a particular location; and
• losses at a particular time.
G Compulsory insurances
There are certain insurances which are required by statute and this impacts on an insurer’s
rights following a breach of the duty of disclosure. The most common example is motor
insurance (third-party personal injury and third-party property damage).
The Road Traffic Act 1988 prohibits the insurer from avoiding liability on the grounds of
certain breaches of good faith.
Exactly the same rules of disclosure apply to motor insurance contracts as to other non-life
classes of insurance. However, the law is primarily concerned that the innocent victims of
road accidents should be adequately compensated, and this aim would be defeated if an
insurer could avoid paying claims on the grounds of non-disclosure. Insurers must therefore
meet all claims for personal injury and property damage.
Once they have done so, they then have a right of recovery against the insured. They will
usually seek to recover what they can in such circumstances.
Example 5.4
Trevor insured a van for domestic use. A couple of months later, he installed six additional
seats, without notifying the insurer of this modification. Trevor took twelve friends to a
concert in it, and an accident occurred as a result of careless driving and the overloading
of the vehicle.
In this scenario, although Trevor was in breach of his insurance policy, and regardless of
the amount of the passenger injury claims, the insurer is not allowed to set the claim
aside. It is unlikely that Trevor will be able to afford to pay such a claim personally,
although the insurer will certainly try to recover its outlay from him.
Consider this…
Assume the driver in this example was badly injured as well. Could they claim against the
policy for their own injuries?
They couldn't, because the driver is the policyholder and cannot claim against themselves for
negligence. If they wished to claim under the personal accident section of the policy, the
insurer would refuse to deal with this claim because of the deliberate recklessness.
Chapter 5
For reference only

Key points
Principle of good faith
• Good faith as a positive duty to disclose, accurately and fully, all information material to
the risk being proposed, whether requested or not.
Duty of disclosure
• The insured has a duty of disclosure in both consumer and non-consumer insurance.
• The insurer also has a duty of disclosure to the insured.
• Policy wordings can modify the duty of disclosure, making it a continuing one.
• The duty of disclosure revives at renewal automatically, regardless of any policy
provision.
• An insurer who fails to further investigate unanswered questions or inadequate or
unclear information is deemed to have waived their right to it and cannot subsequently
claim non-disclosure.
• An insurer is estopped from avoiding a policy ab initio if their previous behaviour
suggests they have waived that right.
Chapter 5
Material circumstances
• A material circumstance is one which would influence the judgment of a prudent

insurer in fixing the premium or determining whether they will take the risk.
• Certain information, though material, does not need to be disclosed.
For reference only

Consequences of misrepresentation by consumers
• FCA rules state that insurers will not refuse to meet a claim from a consumer on the
grounds of misrepresentation of a fact material to the risk, unless misrepresentation is
negligent.
• There are specific remedies available to insurers where the policyholder is a
‘consumer’ as defined by CIDRA.
Breach of the duty of fair presentation
• IA 2015 introduces a new duty of fair presentation for non-consumer contracts.

• Specific remedies are available to insurers for breaches of the duty of fair presentation.
Compulsory insurances
• There are certain insurances which are required by statute and this impacts on an
insurer’s rights following a breach of the duty of disclosure.
Question answers
5.1 c. Both the insurer and proposer.
5.2 As soon as possible, as they are material circumstances which affect policy cover.
5.3 a. Details of any mortgage secured on the property.
5.4 c. £400.
Chapter 5
For reference only

Self-test questions
1. A life insurance policyholder has suffered two strokes but has not informed the
insurer of her change of health. This is because:
a. The duty of disclosure ends at inception of the policy. □
b. The duty of disclosure only applies at the policy renewal date. □
c. The duty of disclose never applies to life insurance contracts. □
d. Her health is not relevant information. □
2. Janette, a motor insurance policyholder, has been diagnosed with epilepsy. It is true
to say that:
a. As long as she was diagnosed after inception, she has no duty of disclosure. □
b. Her epilepsy is relevant information and she has a duty to disclose this to her □
insurer.
c. It is her choice whether she informs her insurer. □
d. She only has a duty of disclosure if directed to do so by her GP. □
Chapter 5
3. Why might an insurer require continuing disclosure for public liability contracts?
a. To ensure changes to business activity are notified. □
□
For reference only

b. To ensure premiums can be increased.
c. To avoid lengthy discussions at renewal. □

d. To identify opportunities for cross selling. □
4. Susie has completed a proposal form for building and contents insurance. She has
only provided partial information as she cannot recall full details of a claim she made
last year. The insurer asks no further questions and the policy is put on risk. In this
example:
a. The policy is null and void and any future claim will be refused. □
b. Any claim may be reduced as a result of the missing information. □
c. Susie is considered to be in breach of contract. □
d. The insurer is deemed to have waived its rights regarding the missing information. □
5. When Sakon applied for his motor insurance, he disclosed that there was a family
history of illness in response to a question on the proposal form. The insurer took no
further action. In the event of a claim, it is most likely that the claim would be:
a. Met in full as Sakon had provided enough information on the proposal. □
b. Declined as Sakon hadn't supplied full information. □
c. Met in full as Sakon's insurer had not sought further details. □
d. Subject to Sakon having to provide further information at the time of the claim. □
6. Material circumstances are those which:

a. Are important to a prudent underwriter in determining the nature of the risk, this □
being determined at the sole discretion of the underwriter.
b. Directly relate to the insurance policy. □
c. Influence the judgment of a prudent insurer in determining whether to take the risk □
and, if so, on what terms.
d. Are relevant to the insurance policy, as determined by an average person of □
average intelligence.
7. When applying for an insurance policy, a proposer is under an obligation to disclose

any material circumstances. This would include:
a. Matters of law. □
b. Information which the insurer ought to know. □
c. Information that is outside the scope of the specific questions asked by the insurer. □
d. Details of the proposer's circumstances that relate to the insurance being applied □
for.
8. BB Insurance Ltd have received a claim on a buildings insurance policy where the
Chapter 5
insured had deliberately and fraudulently failed to disclose details of existing

subsidence. Had this been disclosed, insurance cover would not have been offered.
As a result, BB Insurance Ltd are most likely to:
a. Refuse the claim, set the whole contract aside, and retain the premium. □
For reference only

b. Pay the claim and continue the policy, but refuse future claims relating to □
subsidence.
c. Refuse the claim, cancel the policy and refund the premiums paid. □
d. Pay the claim and continue the policy as before. □
9. An insurance claim is settled even though the insurer is aware that information had
been fraudulently misrepresented when applying for it. The type of insurance policy
is most likely to be:
a. Home contents insurance. □
b. Compulsory motor insurance. □
c. Buildings insurance. □
d. Medical expenses insurance. □
10. An insurer is obliged to settle a claim even though there was a breach of good faith
at the outset that, had they known, would have meant they otherwise would not have
entered into the contract. This is because they have received a claim:
a. For personal injury with a compulsory excess. □
b. Where it is not possible to apportion blame. □
c. For third party injury and property caused by moral hazard. □
d. For third party injury and property made compulsory by statute. □
Proximate cause
6
outcomes
Introduction
A Meaning of proximate cause 8.1
B Application to simple claims 8.2
C Modification by policy wordings 8.1
Key points
Question answers
Self-test questions
Learning objectives
For reference only

• define proximate cause;
Chapter 6
• distinguish between insured, excepted and uninsured perils; and
• apply the principle of proximate cause to simple insurance claims.
Introduction
In this chapter we shall look at the causes of loss and how these relate to the cover provided
under a policy. We will then go on to apply the principles to straightforward claims situations.
When a loss occurs, and the insured makes a claim for loss or damage, the insurer decides
whether to meet the claim by asking the following questions:
• Is the insurance contract in force?
• Was the loss caused by an insured peril?
Answers to both these questions can usually be found by checking policy records and the
claim form. Sometimes, however, it is not clear what actually caused the loss. In these
circumstances insurers look at the loss, at all the possible causes and at the relationship
between them, before deciding whether the claim is valid and so making a payment.
Key terms
Dominant cause Excluded perils Insured perils Modification by

policy wordings
Proximate cause Uninsured/unnamed
perils
A Meaning of proximate cause

Often the cause of a loss is straightforward and there is no need for a long investigation. A
For reference only

fire caused by an electrical fault is easy to establish. If a policy covers the peril of ‘fire’ the
Chapter 6
claim will be payable. If two cars are in collision, their respective policies will respond, to the
extent that blame is apportioned, for both third-party personal injury and third-party property
damage (any insured own damage will also be met, provided the policy is a comprehensive
one). There may need to be a lot of discussion about the apportioning of blame but there is
no doubt that the policies will respond because the cause is covered.
However, there are occasions when the cause of the loss is not so easily defined, either
because there is a chain of events or there is more than a single cause. In such cases we
need rules to guide the way in which insurers should deal with such losses. This is when
insurers apply the doctrine of proximate cause.
An insurance policy covers a particular loss caused by an insured peril. Insurers look first at
the relationship between the peril and the loss to establish the proximate cause of the loss.
They must then decide whether or not the cause (peril) is insured, before paying the claim.
Proximate cause means the active, efficient cause that sets in motion a train of events
which brings about a result, without the intervention of any force started and working
actively from a new and independent source.
(Pawsey v. Scottish Union and National (1907))
The proximate cause of an occurrence is always the dominant cause and there is a direct
link between it and the resulting loss. A single event is not always the direct cause of a loss:
a loss sometimes occurs following a train of events.
A good way to picture the relationship between cause and effect is to imagine a row of
dominoes, all standing. Imagine the first domino is pushed over, knocking the second which
in turn knocks over the third and so on until they have all fallen down. The push of the first
domino sets in motion the chain of events which brings about the fall of the last domino. If we
take the fall of this last domino to represent a loss, then the push of the first domino is,
therefore, the proximate cause of the loss.
Imagine, however, that one of the dominoes does not fall as a result of the first domino
falling. Instead it is pushed by an onlooker. In this case the chain of events stops and the
intervention of a new force, independent from the original chain of events, becomes the
cause of the last domino falling. It is, therefore, the new proximate cause of the loss.
Chapter 6 Proximate cause 6/3
Question 6.1
The proximate cause of a loss will always be the:
a. Dominant cause. □
b. First cause. □
c. Last cause. □
d. Only cause. □
Figure 6.1 below sets out the chain of events for a more complex, real-world scenario.
Figure 6.1: A complicated chain of events

Events Loss
Lighted match in garage
Rags on fire
Fire in office
Gas cylinder explodes
Wall of garage blows out
For reference only
Chapter 6
Burning materials blow into office
We can see clearly that the match being lit is the proximate cause in this scenario.
Example 6.1
Yi-Ling’s home is damaged after a serious water leak during a period of heavy rain. Upon
inspection of the property, the appointed loss adjuster concludes that the leak was caused
by earlier damage to the roof, with water causing damage over an extended period of
time, and which resulted from Yi-Ling’s failure to maintain the property.
It is likely that an insurer would treat the failure to maintain as the proximate cause, and
the claim would therefore be declined due to the lack of an insured peril (it is also likely
that the failure would amount to a breach of a policy condition) – see Nature of perils on
page 6/4 regarding the nature of perils.
However, we must be careful not to over-simplify the question of causation. Let us look again
at the definition of proximate cause that we highlighted from the case of Pawsey earlier. We
could argue that it only works where causes occur ‘in a straight line’ and one result leads
neatly to the next. Many situations involve several causes to a greater or lesser extent.
In the case of Leyland Shipping v. Norwich Union Fire Insurance Society (1918), Lord
Shaw stated that ‘causation is not a chain but a net’, going on to describe the proximate
cause as ‘proximate in efficiency’. This is particularly important as we consider more
complex claims where there may be more than one contributing cause, and the causes may
be insured, uninsured or excepted perils. These claims are beyond the scope of the EP1
syllabus.
A1 Identifying the cause

In many cases, common sense can be applied to determine the proximate cause of a loss by
looking at cause and effect.
We can see this in operation in the case of Marsden v. City & County Insurance Company
(1865) as described in example 6.2.
Example 6.2
A shopkeeper insured their plate glass shop window against loss or damage arising from
any cause except fire.
Fire broke out in a neighbour’s property and a mob gathered as a result. The mob then
rioted and broke the plate glass. It was held that the riot and not the fire was the cause of
the loss. It was not inevitable that a crowd would gather and then riot after the fire and so
the damage was not the inevitable result of the fire.
A2 Nature of perils
Once the insurer has established the proximate cause of the loss, it must check whether the
peril is covered by the policy. Perils can be classified as follows:
Insured perils Those named in the policy as covered.
Excepted/excluded perils Those named in the policy as specifically not covered.
Uninsured/unnamed perils Those perils not mentioned at all in the policy.
Insurers will decide whether or not a straightforward claim is valid by establishing which of
these categories the proximate cause of the loss falls into. It is only necessary to find the
For reference only

proximate cause of a loss where the events before the loss are not all insured perils.
Chapter 6
If they are all insured, the loss is covered. However, it may be necessary to determine which
peril caused a loss if different levels of excess apply to different perils in the chain.
Consider this…
A fire in a neighbour's house spreads to a boundary wall. The following day a storm
occurs and the wind blows down the wall. What do you think is the proximate cause of the
loss?
It is likely that the fire would be considered the proximate cause of the loss. However, any
significant time delay would point to storm being the dominant (and therefore proximate)
cause. This example is based on the case of Gaskarth v. Law Union (1876).
Even if only one event in the chain leading to the loss is an excepted peril, the rule must still
be applied to establish whether that peril was the proximate cause of the loss. If it was, then
the insurer is not liable for the damage.
If the loss is due to an uninsured or unnamed peril, say water damage caused by putting out
a fire, then insurers are liable if the proximate cause was an insured peril. In Modification by
policy wordings on page 6/6, we shall look at how these rules can be modified by policy
wordings.
Consider this…
A storm blew down the wall of a timber building which, when it fell, broke electrical wiring.
The broken wiring short-circuited and caused a fire in the timber building. The fire brigade
was called and the water they used to put out the fire and to cool neighbouring buildings
caused damage to the unburnt contents of the timber building and to the neighbouring
buildings.
What is the proximate cause of the water damage to the unburnt contents of the timber
building and the neighbouring buildings?
There is a direct line of causation between the storm, the collapse of the wall, the burning
damage and water damage. Therefore, the storm is the proximate cause of the water
damage.
Figure 6.2: Summary of the nature of perils
Loss caused by Insured peril is

Loss is covered
insured peril proximate cause
Loss caused by an Excepted peril is Loss is not

excepted peril proximate cause covered
Loss caused by Insured peril is

Loss is covered
unnamed peril proximate cause
B Application to simple claims

In this section, we shall look at proximate cause in relation to a fire policy. We shall also see
how the rule is modified by policy wordings and how remote and concurrent causes affect
recovery.
As we have already seen, there are two things that need to be considered when deciding if a
loss is covered:
For reference only

• Which perils are clearly stated as covered by the policy?
Chapter 6
• Which perils are clearly not covered by the policy (the excepted perils)?
In appendix 1, you will find a fire policy (material damage). We will use this document to
consider how cover and proximate cause operate in practice.
Activity
Turn to appendix 1. Think about how the fire policy (material damage) applies to the fire
described in Nature of perils on page 6/4.
You may also want to mark the appendix and refer to it as you study the next section.
In the scenario just mentioned, the proximate cause of the loss is the storm. However, as we
look backwards down the chain of events from the ultimate damage to the contents, we can
see that the water damage caused by the firefighters was as a direct result of the fire. The
cause of the fire, the storm, was not an excepted peril, it was simply unnamed. The outcome
would have been different if the original (proximate) cause had been an excepted peril: in
this case none of the claim would have been payable, whether fire damage or
extinguishment costs, because of the operation of an excepted peril.
Consider this…
An earthquake overturned an oil stove and the spilt oil caught fire. The burning oil set fire
to the building which set fire to a second building. Sparks and burning embers, blown in a
breeze, set fire to a third building and eventually, 500 metres away from the first fire, a
building was set alight by its neighbouring building.
What is the proximate cause of the last fire? Would the loss be covered under the terms of
the standard fire policy (material damage) shown in appendix 1.
The proximate cause of the fire is the earthquake. The case is based on Tootal Broadhurst
Lee Company v. London and Lancashire Fire Insurance Company (1908) where
earthquake was excluded and the insurers were held not to be liable for the damage.
C Modification by policy wordings

The wording used in the policy can modify the doctrine of proximate cause. In the fire policy
provided as an appendix to EP1, look at the difference between the wording used to exclude
damage by war risks (General Exclusion 1) and that applying to nuclear assemblies and
components (General Exclusion 2).
In General Exclusion 1, we see that the definition of war has been widened to include
‘whether war be declared or not’. However, only damage directly related to war risks will be
excluded. If war is a remote or incidental cause, then losses otherwise insured, will be paid.
Compare this to General Exclusion 2, where the use of such words as ‘indirectly caused by’,
or even more generally ‘contributed to by’, would exclude remote or even incidental causes
linked to nuclear risks.
This has an application to all classes of insurance. For example, an insurer becomes aware
that a proposer for personal accident insurance has a continuing back injury. They may well
decide that they will only provide cover if it excludes ‘any injury caused by, contributed to by,
or exacerbated by…’ the particular back complaint. This would mean that even unconnected
causes would be excluded, if the existence of the back complaint leads, for example, to the
person being off work for longer.
It is important to check the precise wording of exclusions to establish the way in which the
proximate cause of a loss is dealt with.
In the case of Oei v. Foster (1982), the claimant’s wife caused a chip pan fire in a house that
they had borrowed. She claimed against their personal liability insurer as she was legally
liable for the damage caused. The judge stated that the insurers were not liable to pay
because the policy excluded liability ‘arising directly or indirectly from … ownership or
occupation of any land or building’. This was wide enough to include the borrowing (and
therefore occupation) of the damaged building.
For reference only

Chapter 6
Question 6.2
Julie has a car accident, sustains mild injuries and requires is injured medical
treatment. She is taken to hospital where she dies due to an infection caught at the
hospital. What is the proximate cause of her death?
a. The car accident. □
b. The infection. □
c. Driving. □
d. Her stay in hospital. □
Key points
Proximate cause
• Proximate cause can be defined as the active, efficient cause that sets in motion a
train of events, which brings about a result without the intervention of any force started
and working actively from a new and independent source.
• Perils can be classified as insured, excepted/excluded and uninsured/unnamed. It is
the category into which the peril deemed to be the proximate cause of the loss falls,
which dictates how the insurer will respond to the claim.
• The doctrine of proximate cause can be modified by policy wordings and it is important
to check the precise wordings of exclusions in deciding how they impact on any claim.
For reference only
Chapter 6
Question answers
6.1 a. Dominant cause.
6.2 b. The infection.
For reference only

Chapter 6
Self-test questions
1. When identifying proximate cause, it is true to say that:
a. Proximate cause is the only cause of a resulting loss. □
b. There is always a direct link between proximate cause and resulting loss. □
c. Proximate cause is the last cause of a resulting loss. □
d. Proximate cause only occurs when there is a single event. □
2. Bad storms have caused heavy branches from surrounding trees to blow into the
road at a busy crossroads. During the night, before the branches can be moved, a
motorist has an accident at the crossing. The proximate cause of the accident is the:
a. Storm. □
b. Branches. □
c. Delay in moving the branches. □
d. Motorist. □
3. Following a party in a busy bar, partygoers spill out onto the street and a fight breaks
out. During the commotion a shop window is smashed. Later that evening stock from
the shop is stolen. The proximate cause of the theft is the:
□
For reference only

a. Party.
Chapter 6
b. Broken window. □
c. Revellers. □
d. Fight. □
4. The principle of proximate cause is applied when there is:
a. Only one cause. □
b. No identifiable peril. □
c. More than a single cause. □
d. No known cause. □
5. Tracey’s garden shed has been damaged by a fallen tree from her neighbour’s
garden. The tree fell during heavy storms. What is the proximate cause of the
damage to Tracey’s shed?
a. The storm. □
b. The fallen tree. □
c. The neighbour’s failure to secure the tree. □
d. Tracey’s failure to protect her shed. □
6. The shop window of a newsagents has been smashed and, although the premises
were insured for glass breakages, the claim has been refused. This is most likely
because the proximate cause of the loss was:
a. Not the dominant cause. □
b. An insured peril. □
c. An unnamed peril. □
d. An excluded peril. □
7. An unnamed peril is:
a. The policy as not covered. □
b. Not mentioned in the policy. □
c. Specifically excluded in the policy. □
d. Specifically mentioned in the policy. □
8. James has insured his painting and decorating tools against loss, theft and
accidental damage. The policy does not mention loss as a result of fire. This would
be referred to as an:
a. Excluded peril. □
b. Insured peril. □
For reference only

Chapter 6
c. Uninsured peril. □
d. Excepted peril. □
9. A shop owner's stock was water damaged following an attempt to put out a fire that
resulted from an electrical fault. The policy did not cover water damage but the claim
was paid because:
a. Water damage was an excepted peril. □
b. The proximate cause was an insured peril. □
c. Fire damage was an excepted peril. □
d. The proximate cause was water damage. □
10. An excepted peril is:
a. The policy as covered. □
b. Not mentioned in the policy at all. □
c. Linked directly to the proximate cause. □
d. Named in the policy as specifically not covered. □
Indemnity
7
outcomes
Introduction
A Definition of indemnity 9.1, 9.2, 9.3
B Application of indemnity 9.1
C Measuring indemnity 9.1
D Modifying indemnity 9.4
E Speed of indemnity – Enterprise Act 2016 11.6
F Limiting factors 9.1, 9.5
Key points
Question answers
Self-test questions
For reference only

Learning objectives
• define indemnity;
• explain how indemnity applies in policies and how it is measured and achieved;
Chapter 7
• describe how indemnity is modified by agreed value and first loss policies;
• identify circumstances where claimants may receive more than an indemnity settlement;
• describe situations when claimants may receive less than an indemnity settlement; and
• describe how the Enterprise Act 2016 protects policyholders.
Introduction
In this chapter we will discuss the concept of indemnity in relation to insurance contracts. We
will consider how the concept applies and how it is modified.
When an insured peril causes a loss, the insured submits a claim to their insurer for the loss.
The insurer checks the validity of the claim and then, if valid, accepts it, agreeing to meet
their obligation under the terms of the insurance contract. The actual settlement or the
amount payable by the insurer depends on a number of factors, including the nature of the
cover, the extent of the cover, policy excess and any conditions limiting the amount payable.
Most short-term (non-life insurance) contracts are contracts to indemnify the insured in the
event of loss, i.e. to pay the claim or indemnity. They are called short-term policies because
the insurer has the option of inviting renewal at the end of each period of insurance.
Key terms
Agreed value Average Benefit policies Betterment

policies
Day one Deductible Excess First loss policies
reinstatement
Indemnity New for old cover Pro rata condition of Reinstatement
average
Reinstatement Replacement Settlement Sum insured
memorandum
Underinsurance Valued policy
For reference only

A Definition of indemnity
Indemnity is financial compensation sufficient to place the insured in the same financial
position after a loss as they enjoyed immediately before the loss occurred.
Chapter 7
The importance of the principle of indemnity was emphasised by Brett, LJ, in the case of
Castellain v. Preston (1883):
The very foundation, in my opinion, of every rule which has been applied to
insurance law is this, namely that the contract of insurance contained in a
marine or fire policy is a contract of indemnity and of indemnity only…and if ever
a proposition is brought forward which is at variance with it, that is to say, which
either will prevent the assured from obtaining a full indemnity, or which gives the
assured more than full indemnity, that proposition must certainly be wrong.
A1 Benefit policies
Policies providing fixed benefits are not policies of indemnity. These policies are known as
benefit policies and mainly cover accident and sickness.
There is no way that a price can be placed on the loss of a limb or of sight, so the principle of
indemnity cannot apply. In the event of a claim, a defined amount or benefit will be paid.
You should note, however, that insurers do try to take account of an individual’s
circumstances and earnings, when agreeing to insure weekly benefits for temporary
disablement. They do so because they do not wish the policy benefits to act as an incentive
for the insured to remain off work longer than necessary. Apart from life, pensions, annuity
and investment contracts, policies that fall into the category of benefit policies include:
Chapter 7 Indemnity 7/3
• personal accident;
• sickness;
• critical illness;
• payment protection indemnity;
• hospital cash plans;
• permanent health; and
• elements of travel insurance.
A2 Options available to insurers

Now we have established that not all contracts of insurance are policies of indemnity, we will
consider the vast majority that do seek to provide exact financial compensation. For any type
of property insurance (and this would include the ‘own damage’ section of motor policies),
although the insured is entitled to receive indemnity (within the limits of the sum insured as
stated in the policy), there are different ways of providing indemnity.
There are several settlement options open to an insurer which will provide the insured with
the necessary indemnity:
Cash payment
Repair
Indemnity
Replacement
Reinstatement
The options available apply only if they are stated in the policy. If they are not, the insured
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has a legal right to financial compensation. These options have their origins in insurers
wanting to find the most economical way of providing indemnity.
For example, in the past, though not so much nowadays, insurers would have arrangements
with some major jewellers. They would then be able to replace very expensive jewellery at a
discount. They would often do this rather than pay out the ‘insurance valuation’ price – which
they may have considered an inflated figure provided by a valuer. Historically too, insurers
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would sometimes arrange for the repair of carpets that were damaged. With the advent of
‘new for old’ type covers this has diminished, but in the past many items were ‘repaired’ by
insurers.
Although these options have historical significance, there are some helpful aspects to them
which mean that insurers have found it useful to retain these options. Indeed some
applications are even on the increase. Effectively the options have remained the same but
the practical applications have changed.
A2A Cash payment
For many years, most insurance claims have been settled by the payment of money by the
insurer directly to the insured. This is still the case, particularly with commercial insurances.
However, for personal insurances (in particular, home insurance) there has been, since the
1990s, a growing trend for insurers to use the replacement option through nominated retail
chain stores or their own supply chains. This will be looked at in more detail in Replacement
on page 7/4, but it is worth noting here what happens if the item offered by the insurer is
not wanted by the insured.
Many insurance companies now have close relationships with retailers, and the insurer’s
bulk buying power often means they can get quite large discounts, often as much as 20%,
when purchasing goods.
Example 7.1
An insurer receives a claim for a damaged television, which the insurer can replace on a
like for like basis for the insured.
A replacement television would usually cost £1,000. However, the nominated retailer has
agreed that it will give the insurer a 20% discount, meaning the insurer can provide
indemnity to its policyholder for £800.
If the insured decides that they do not want a replacement, but would rather have a cash
settlement, the insurer will only be required to pay to the insured the amount they would
have paid the retailer; i.e. the discounted sum. Let us apply that to the example we have just
considered to see how this works.
Example 7.2
The insurer offers its policyholder the opportunity to receive a new television directly from
the household name retailer. The policyholder rejects this outright and demands a cash
payment. The insurer agrees and sends the policyholder a cheque for £800 (being £1,000
minus the 20% discount they would have received from the nominated retailer).
However, the Financial Ombudsman Service has indicated that where policyholders do wish
to have a replacement they should be allowed to choose where they purchase this and they
are entitled to a cash settlement if they cannot find an acceptable alternative. In these
circumstances, the insurer would not be entitled to reduce the cash settlement to take
account of the discount it would have received, had the policyholder bought the replacement
from one of its nominated suppliers.
The settling of claims for certain types of insurance always involves the payment of money.
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These types include money insurance, fidelity guarantee, business interruption, loss of rent,
kidnap and ransom insurance, and liability policies. In the case of liability insurance, payment
is made to the wronged party, not to the insured (although the insured is being indemnified
for their liability).
A2B Repair
Where it is possible, insurers may opt to repair any damage to an insured item. In this way
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they can provide indemnity, perhaps at a lower cost than the insured might achieve, because
of the negotiating power of a large organisation. The most common example is in motor
insurance claims.
Example 7.3
Gary’s car is involved in a collision. He notifies his insurer which arranges for the damage
to be repaired at a garage they have approved. The insurer pays the garage directly,
rather than paying money to Gary.
In this scenario, the ‘approved’ or ‘recommended’ repairer will provide the insurer with
guarantees in relation to workmanship and hourly rates, as well as the provision of courtesy
cars, in return for a flow of business from the insurer. Some insurers have taken this further
and developed their own networks of vehicle repairers, ensuring that they can control costs
and the end-to-end claims process in the majority of claims for damage to the insured's car.
Consider this…
Apart from motor vehicles, think of another example where insurers might wish to repair
rather than make a cash settlement.
A2C Replacement
The most common example of replacement as a means of providing indemnity is glass
insurance. Quick replacement means further losses are minimised, such as when shop front
windows are smashed.
As we have seen, replacement is also often used as a means of settling household property
losses. On these occasions the policyholder simply orders a replacement item from one of
the household name retail stores and the item is paid for by the insurer.
The use of nominated retailers by insurers brings them several benefits:
• The discounts that they receive mean lower claims costs.
• Using the replacement option can prevent or at least minimise fraudulent claims,
because, in most cases, a fraudster will be looking for easy cash from an insurance claim
rather than goods.
• Customer experience is improved by the use of quality retailers. For example, the insured
will have a new television delivered to their door and the bill will be paid direct by the
insurer.
Other situations in which insurers may opt for replacement are:
• car write-offs where the car is less than a year old; and
• losses relating to items of jewellery if the insurer can obtain a worthwhile discount from a
jeweller.
A2D Reinstatement
Reinstatement is the fourth way that an insurer can provide indemnity. Reinstatement
means that the insurer agrees to restore a building (or piece of machinery) that has been
damaged by an insured peril.
However, this is not a popular option with insurers. The reason for this is that, unless the
policy specifies otherwise, they are bound to reinstate the property so that it is largely in the
same condition it was before the loss. In any event they are their own insurers of the risk
during the period of reinstatement. Also, once they choose to reinstate, they lose the
certainty that the sum insured will be the maximum they have to pay out. This is reasonable,
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since the insurer can hardly insist on reinstatement and then, once the sum insured is
exhausted, stop work regardless of whether the building is completely restored by then
or not.
The distinction between repair and reinstatement may not be immediately obvious.
Reinstatement applies only to buildings (and occasionally machinery), and is concerned with
bringing the property back to its pre-loss condition. To achieve this purpose the insurer
effectively takes occupation of the premises (or what is left of them) to reinstate. The option
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to repair does not carry with it the ‘occupation’ aspect, or the same level of project
management by the insurer as required for reinstatement.
B Application of indemnity
Property policies and liability policies are contracts of indemnity because a value can be
placed on the subject-matter insured. This principle also applies to pecuniary insurances,
such as business interruption. You should note that life and personal accident policies are
not contracts of indemnity as the insured cannot be restored to the same financial position
after a loss.
B1 Property insurance
As a practical example of indemnity cover in respect of property insurance, imagine a fire
which destroys part of a school. Calculating the value of the loss may be a problem since
equipment and facilities are likely to be worth less than the original purchase price. Where
equipment is completely destroyed, the measure of indemnity is the replacement cost less
an allowance for wear and tear. In the case of partial damage, indemnity is the repair cost
less an allowance for wear and tear. This is very much a theoretical starting point. Most
property policies incorporate some form of ‘new for old’ cover.
Refer to
Refer to New for old cover on page 7/10 for details of ‘new for old’ cover
B2 Liability insurance
A liability policy provides indemnity to the insured in respect of their legal liability to pay
damages and claimant’s costs. The policy does not define the financial value of the
indemnity, as this is often left to the courts to decide. However, it does lay down the elements
to be included in an indemnity settlement. There will always be a limit to how much the policy
will pay in the event of a claim, and this will be stated in the policy (with the exception of
motor liability insurance causing injury or death, which is unlimited).
Question 7.1
Roy takes out two personal accident policies. The first policy provides £25,000 cover
for loss of limb. The second policy provides £30,000 cover for loss of limb. What is
the total amount that Roy will receive in the event of a valid loss of limb claim?
a. £25,000. □
b. £27,000. □
c. £30,000. □
d. £55,000. □
C Measuring indemnity
In this section, we will see how insurers measure indemnity for different classes of
insurance.
Our starting point must be the financial value of the subject-matter of the insurance, but how
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is this financial value calculated? In the absence of policy conditions modifying the position,
in property insurance, the value of the subject-matter of the insurance is its value at the time
and place of loss. However, as we shall see, it is usual for policy conditions to apply which
alter this position. We start by looking at different categories and types of insurance and
considering the standard cover provided by them, before examining possible extensions.
Example 7.4
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Simon was preparing a meal in the kitchen when the front doorbell rang. When he finally
returned to the kitchen, it was full of smoke. A pair of kitchen gloves had caught fire from
one of the gas rings. The resulting fire had spread to curtains. Simon managed to put out
the fire by using a wet tea towel.
Simon claimed £3 for the gloves, £70 for the curtains and £2 for the tea towel; the cost of
the items two years previously.
In the absence of any new for old cover the insurers would have agreed to pay Simon the
full replacement purchase price, less a deduction for wear and tear and depreciation.
C1 Marine insurance
In a valued policy (which is the same as an agreed value policy), the insurable value is
agreed between the insured and the insurer. The insurable value in an unvalued policy must
be calculated using the formula in the Marine Insurance Act 1906 (MIA 1906). Thus, in both
kinds of policy, there is an identifiable insurable value, effective from the start of the period of
insurance (policy inception), and which is unaffected by subsequent market price variation. It
usually corresponds with the sum insured.
C2 Property insurance
The measure of indemnity for property is its value at the date and place of loss. This is a
very broad guideline and we must look at the different types of property insurance in order to
understand how the principle operates in specific cases.
C2A Buildings
Basic cover
This basic cover is referred to in the market as an ‘indemnity’ settlement, to distinguish it
from reinstatement (see below). Insurers calculate the indemnity for loss of, or damage to,
buildings as the cost of repair or reconstruction at the time of loss. They make an allowance
for any improvements that may result from the repair or reconstruction; for example, new
plumbing or new decoration. This is termed betterment. It is very unusual for buildings to be
insured on this basis. Insurance on reinstatement conditions is much more common.
Reinstatement conditions
This is an extension of the principle of indemnity. Cover applies on the basis, not of a
discounted sum reflecting wear and tear, but the full reinstatement value at the time of
reinstatement. There are several different types of insuring clause, the most common of
which are the reinstatement memorandum and day one reinstatement.
Reinstatement memorandum • The most important aspect of insurances subject to the reinstatement
memorandum is that the sum insured must represent the full value at the
time of reinstatement.
• The insured pays a premium based upon the higher amount, although this
particular clause allows a margin for error in estimating the sum insured.
It states that the insured value must be at least 85% of the actual value
otherwise claim payments will be reduced.
• This still leaves the insured with a problem if the claim amount exceeds the
85% figure, since insurers will not pay more than the sum insured in the
event of a loss.
• Reinstatement must be carried out without delay, although the insured is
given flexibility about where and how reinstatement takes place.
Day one reinstatement • The insured is required to state the reinstatement amount on the first day of
the cover.
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• Insurers provide an automatic uplift to allow for inflation (usually an extra
50% of the ‘declared value’) but only charge a modest increase for this
inflation element (15% of the premium).
• The reinstatement figure at day one is relatively easy to establish. Because
of this, the day one value must be accurate.
• There is no 15% margin for error as there is with the reinstatement
memorandum.
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Example 7.5
ABC Ltd owns a factory. It wishes to insure the building on a basis that provides that in the
event of loss or damage, the building will be put back to the same condition without any
deduction being made for ‘wear and tear’. This rules out a policy based solely on an
indemnity settlement, but still leaves a choice to be made about the exact basis of cover.
ABC could decide that it wishes to insure on the basis of the reinstatement memorandum.
Let us assume that the rebuilding cost today is £1m. ABC will need to decide how long
reinstatement is likely to take. It will then need to estimate the full impact of this time
period on the inflation of building costs. This is because it will need to set a sum insured
that will be adequate at the time of reinstatement. ABC is confident that rebuilding, even
following a substantial loss, could be completed within eighteen months. Consequently, it
may consider that an inflationary element of 20% is the maximum that needs to be catered
for. It would, therefore, set the rebuilding sum insured at £1.2m and pay a premium based
upon this figure.
In the event of a loss, provided that the actual reinstatement value is no more than
£1.412m, average will not be applied because its sum insured represents 85% of this
amount.
Given these assumptions, ABC is far better advised to opt for the ‘day one’ reinstatement
arrangement. The figure that it needs to declare is £1m, to which an automatic uplift of
50% will be applied. This is far more than its estimate of what it requires. The premium is
increased by 15%, so producing a lower premium than the equivalent reinstatement
memorandum arrangement. Average (which we look at in detail in Limiting factors on
page 7/11) will only apply if the ‘day one’ figure is inadequate (but no margin for error is
permitted).
You can see from this that different rebuilding periods or estimates of future inflation will
affect the policyholder’s decision regarding the most appropriate arrangement, but for
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most, the ‘day one’ option provides the better solution.
C2B Household goods

Basic cover
In general, indemnity is based on the cost of replacing the items at the time of loss, subject
to a wear and tear deduction.
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New for old cover

New for old cover is more popular and almost universally used within the UK. It modifies the
principle of indemnity by making no allowance for wear and tear. Most insurers retain the
deduction for wear and tear for items of household linen and clothing, but apply cover for all
other items on a ‘new for old’ basis. This is justified by setting the sum insured to represent
the full replacement cost of the household goods and the premium paid reflects this.
However, it does extend the principle of indemnity.
C2C Machinery and contents
Basic cover
The starting point for the measurement of indemnity depends on whether there is a ready
second-hand market for the item:
• When there is a ready second-hand market, indemnity is the cost of the second-hand
item plus carriage or installation costs.
• When there is no second-hand market, indemnity is the cost of repair or replacement less
an allowance for wear and tear, if applicable.
Again it is important to emphasise that this is the starting point for considering property
covers. In practice this very limited form of cover is rare.
Reinstatement conditions
Like buildings insurances, covers for machinery and contents (other than stock) also tend to
be on a reinstatement basis. This modifies the principle of indemnity. The reinstatement
memorandum is a common method of insuring such items and day one reinstatement is also
possible. Again, it is important for you to note that the sum insured must be calculated on the
same basis as the proposed settlement formula.
C2D Cash settlements under reinstatement conditions

One of the key elements of reinstatement conditions is the fact that in order to benefit from
the cover the insured must actually reinstate.
If no reinstatement takes place, the insured is entitled only to a settlement based upon strict
indemnity. This means that wear and tear and depreciation will be taken into account.
C2E Stock
This may be considered under two headings:
Manufacturers’ stock in trade Wholesalers’ and retailers’ stock in trade
This stock generally consists of raw materials, work in Indemnity here is the cost of replacing the stock, at the
progress and finished stock. Indemnity value is the cost time of the loss, including the costs of transport to the
of raw materials, at the time and place of loss, plus insured’s premises and handling costs. It is not possible
labour and other costs incurred in respect of work in to insure stock on any kind of reinstatement basis.
progress and finished stock.
In both cases, the insured is not entitled to payment in respect of any potential profit element
on sale of stock. This is one of the aspects that is catered for by a business interruption
policy.
One of the difficulties in measuring stock losses (whether for manufacturers or wholesalers)
is that the stock may not have a definite constant re-sale value. In addition, some stock may
be obsolete. Items may be unfashionable or be superseded by a more sophisticated model
and, therefore, be difficult to sell. In these cases, settlement must be made to maintain the
insured’s financial position, not to improve it. This may mean paying only the market value
where this is less than raw materials plus the costs defined above.
C2F Farming stock
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In the case of livestock and produce, the local market price is the basis of indemnity.
Farming stock is different from other types of stock, as the insured is entitled to receive any
potential profit on sale. This is because the market price is both the buying price and selling
price at any time and there is no way of separating out the profit element.
C3 Liability insurance
In liability insurance indemnity is measured as the amount of any court award (or more
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commonly, negotiated ‘out of court’ settlement) plus the costs and expenses arising in
connection with the claim. Where the insurer agrees that other expenses can be incurred
these are included in the amount payable. An example of such additional expenses would be
paying for specialist medical treatment for an injury.
D Modifying indemnity
We have already seen some ways in which the principle of indemnity can be modified by
agreement between the parties. There are others that allow the insured to get either more or
less than a strict indemnity settlement. The principle of indemnity is modified in agreed
value policies and first loss policies.
D1 Agreed value policies

In agreed value policies the value of the subject-matter of the insurance is agreed at the start
of the contract and the sum insured is fixed accordingly. This value will be reviewed at each
renewal. In the event of a claim, the value need not be proved at the time of the loss.
Agreed value, or ‘valued’ policies are common in marine insurance. They may at times also
be used when insuring works of art and other objects, such as vintage motor cars, whose
true value may become a matter of dispute at the time of a claim. It is common to confine the
agreed valuation to total losses and to provide that partial losses are settled as if the policy
was unvalued; that is, on an indemnity basis. If the policy wording does not restrict the
agreed value to total losses, then partial losses will be dealt with on a proportionate basis.
D2 First loss policies

There are occasions when the insured believes that the full value of the insured property is
not really at risk, in other words a total loss or even a very substantial loss seems
impossible. In this case the insured may request that their policy has a sum insured that is
less than the full value. Where insurers agree to this it is known as a ‘first loss’ policy.
Example 7.6
Substantial amounts of stock are stored in a warehouse and may potentially be totally
destroyed by fire. However, it may be physically impossible to remove all the stock from
the warehouse in the course of a theft without using many lorries. The insured’s
assessment of the situation is that there is no need to insure the full value for theft cover.
However, the insurer’s view of the maximum amount realistically at risk is often similar to the
insured’s estimate. Consequently, the insurer will have calculated the premium for the full
value taking these factors into account. It follows, therefore, that insurers generally only give
very modest discounts on the ‘full value’ premium for risks insured on this basis. The reason
for this is that there may only be a slight reduction in their maximum exposure and they must
still pay all individual claims up to the first loss figure.
D3 New for old cover

This type of cover usually applies to household contents policies. Commercial property risks
that are insured on a reinstatement basis can also be placed in the same category. Each
represents an attempt to replace at current costs.
Example 7.7
In 2012, Mark inherited a painting from his great-aunt. An expert valued the painting at
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£4,000–£5,000 and Mark took out an agreed value policy with his insurers for £5,000.
In 2014, a painting by the same artist and of the same quality sold at auction for £8,000.
Shortly after, thieves break into Mark's home and steal the painting.
The policy that Mark has with his insurers is an agreed value policy. Therefore, the insurer
is only liable to pay Mark the value that was agreed, i.e. £5,000.
How the insurer will respond to a claim for damage will depend on the policy. If the agreed
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value is restricted to total losses then the partial loss will be settled on an indemnity basis.
If the policy does not restrict the agreed value to total losses then the claim for damage
will be settled on a proportionate basis.
E Speed of indemnity – Enterprise Act 2016

The Enterprise Act 2016 was passed on 4 May 2016 and gives policyholders a legal right to
claim damages in the event of a late payment. Under previous law damages for late payment
of claims were not recoverable from insurers. Policyholders could only recover what was
owed under an insurance contract but not any additional losses they had suffered due to
delay in payment to them.
The law, which is an amendment to the Insurance Act 2015, applies to every (re)insurance
policy placed or renewed on or after 4 May 2017, if it is subject to the laws of England and
Wales, Scotland, or Northern Ireland.
Retail and smaller commercial customers had some access to redress in the event of late
settlement of claims via the Financial Ombudsman Service (FOS). For example,
complainants could be awarded interest in respect of delayed settlements where the
complaint was considered justified. However, neither eligible nor non-eligible complainants
had any legal right to compensation.
The Act amended the Insurance Act 2015 by adding an implied term into every contract of
insurance that (re)insurers must pay any sums due to their insured within a ‘reasonable
time’ (the ‘implied term’). If a valid claim is not paid within a reasonable time, the insured will
be entitled to enforce payment of the claim and pursue a claim for damages.
What constitutes a ‘reasonable time’ will depend on the relevant circumstances and the Act
provides examples of matters which may need to be taken into account, including:
• the type of insurance;
• the size and complexity of the claim;
• compliance with relevant statutory or regulatory rules or guidance; and
• factors outside the insurer’s control, such as supply chain issues.
The Act also provides that insurers will not be in breach of the provisions merely by failing to
pay the claim all the while that a genuine dispute is continuing.
Under the Act claims against (re)insurers will be time-barred unless they are made no later
than one year from the date on which the insurer has paid all the sums due in respect of the
claim. There are, however, some safeguards that have been built in to avoid spurious claims.
A key one is that the loss has to be foreseeable. For example, an insurer would be able to
foresee that a delay in paying for a broken machine in a busy factory would lead to
production losses whereas losses arising from a delay in paying a landlord for
reimbursement of a broken boiler in a property that had been empty and unused for many
years might not be foreseeable.
While parties to a non-consumer policy are permitted to contract out of the provisions the
(re)insurer must meet strict ‘transparency requirements’. The (re)insured’s attention must be
brought to the disadvantageous term before the contract is entered into and the term must
be clear and unambiguous as to its effect. If the requirements are not met, the term will
be void.
The Act also provides that a term seeking to contract out of the late payment provision will
also be void if an insurer ‘deliberately or recklessly’ fails to pay out in a reasonable time. The
Act suggests that a breach will be ‘deliberate or reckless’ if the insurer does not pay a claim
and either knows it is in breach of the requirement to pay an insurance claim in a reasonable
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time or did not care whether or not it was in breach.
Insurers will not be able to contract out of these provisions in consumer contracts.
F Limiting factors
There are a number of situations where insurers may provide less than a full indemnity. This
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may be either because of the insured’s choice of policy cover (as in the case of a first loss
policy), because of poor insurance arrangements or because full cover was not requested.
Policy terms may also restrict the insured’s entitlement to a full indemnity.
We will now consider how the sum insured, the application of average, excesses and
deductibles limit the operation of the principle of indemnity.
F1 Sum insured
The maximum amount that can be recovered under a property insurance policy is limited to
the sum insured. In liability policies, the maximum amount that can be recovered is the
indemnity limit plus agreed costs. If, following a loss, the amount needed to provide
indemnity is greater than the sum insured, the insured's recovery is limited to the sum
insured (figure 7.1).
Figure 7.1: Insured’s recovery limited to sum insured
Amount needed
to provide
Amount the policy
Sum insured an indemnity
will pay
Some policies have no limit stated, for example there is no limit for third-party personal injury
cover in a motor policy. In such cases indemnity is restricted only by the amount of the court
award (or the amount agreed in an out of court settlement).
F2 Inner limits or item limits

There are many policies that contain limits within the overall sum insured. The most common
of these is a household contents policy. There is usually a single item limit (for gold, silver or
similar items) of 5% of the sum insured. There may also be an overall limit for such items of,
say, one-third of the total contents value; a separate limit for cash in the home and so on.
Each of these may act as a limiting factor if the true value exceeds the limits stated.
Let us take an example from commercial insurance. Under a business interruption policy
insured damage caused at specified suppliers will be subject to a financial limit. In fact, in
most classes of insurance there are monetary limitations for specified items or categories.
Example 7.8
Following a fire in the insured's home a picture, valued at £3,500 at the time of the loss,
was destroyed. If the total sum insured was £35,000, it is possible that the insured would
not receive full indemnity for the picture.
There could be a limit on works of art of, say, 5% of the sum insured. Using a limit of 5% in
this example, the indemnity would be:
5% × £35,000 = £1,750
This is lower than the market value of the picture destroyed in the fire. The insured has
not, therefore, received a full indemnity.
F3 Average
We have said that in property insurance, the amount payable by an insurer is limited to the
sum insured under the policy. This sum insured is the total value declared by the insured. It
is this figure that is used to determine the premium. We have already seen that equitable
premiums are central to the concept of pooling risks.
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If, when taking out their policy the insured understates the value of the subject-matter of the
insurance, there is said to be underinsurance. The intention is that everyone who
contributes to the pool pays a premium that is based on the full value of the subject-matter of
the insurance. It would not be equitable to accept a risk into the pool that is based on less
than the full value, as the premium charged would be too low. However, insurers cannot
check that the sum insured is adequate every time they take on a new risk. Instead, they
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limit their liability by applying a policy term known as the average condition. In effect, this
term means that the insured is considered to be their own insurer for the amount they have
chosen not to insure, if there is underinsurance at the time of any loss. It means that even
partial losses will be shared in proportion to the amount of underinsurance.
The formula used to calculate a claim payment, subject to the pro rata condition of
average, uses:
sum insured
× loss
value of goods at risk
The average condition is usual in commercial property policies and in virtually all household
policies. It cannot apply to liability insurances.
Example 7.9
Hugh Brown & Co. had a fire in their shop and claimed for a loss of £600. The loss
adjuster, instructed by the insurers, was satisfied that the loss claimed was correct but
reported that the insured’s accounts showed that there was £10,000 of goods in stock but
only an £8,000 sum insured under the policy. Therefore, he adjusted the loss and
recommended settlement as follows:
sum insured
× loss
value of goods at risk
£8,000
× £600 = £480 to be paid
£10,000
Be aware
An insurer would only pay the total sum insured under a policy if the insured suffered a
total loss.
Question 7.2
Mr Smith’s garage buildings are valued at £200,000 and insured for £150,000 under
a policy which is subject to average. If he suffers a £50,000 insured loss, how much
will his insurers pay?
a. £12,500. □
b. £33,333. □
c. £37,500. □
d. £50,000. □
F3A Variations in conditions of average
The principle that losses will be paid in proportion to what the insured has decided to set as
a sum insured applies to most property insurance policies. However, insurers vary their
approach in different circumstances.
Special condition of average
You will recall that the basis of indemnity for farming stock is its market value, despite the
fact that this includes the insured’s profit margin. Insurers also take a more flexible view of
the application of average for farmers and apply the special condition of average to
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agricultural produce and livestock. This is because the value of both may fluctuate
significantly. In the case of agricultural produce this is particularly the case around harvest
time. The effect of the clause is to state that if the value at the time of loss represents at least
75% of the actual value, average will not be applied. The condition does not apply to items
that relate solely to growing crops, fences, gates and boundary walls, household goods or
overhead cables or poles. The standard ‘average’ condition applies to such items. (There
may also be an option for the insured to insure for the ‘forward price’ of produce. In this case,
in the event of loss or damage, the value could not be ascertained until the forward date
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chosen has been reached.)
Two conditions of average
These conditions are designed to apply to contents or stock, the insurance of which is
arranged on a floating basis (in more than one location), where specific insurance also
applies. The effect of the wording is first of all to state that ‘average’ applies. However, it
goes on to state that if there is a more specific insurance for the items insured at any of the
locations, only the excess value will be used to check whether average applies.
Example 7.10
An insured has a fire policy covering stock in warehouses A, B and C for a total value of
£250,000 and another separate insurance for stock in warehouse B of £50,000.
A loss occurs and at that time the total value of the stock is £280,000. When settling the
loss under the floating policy, the figure of £50,000 is deducted from the total value. This
leaves £230,000, which means that the sum insured of £250,000 is adequate and average
would not apply.
F4 Excess; deductible
An excess is an amount that is deducted from each claim and is paid by the insured. Some
excesses are voluntary. This means that the insured receives some premium reduction for
agreeing to carry the excess. They may alternatively be compulsory, such as the excesses
that apply to UK motor insurance policies for damage to the insured vehicle when young or
inexperienced drivers are in charge of the vehicle.
Combinations of voluntary and compulsory excesses are possible, and motor insurance
provides us with a good example of this. A policyholder may opt to carry a voluntary excess.
In the event of a claim involving a ‘young’ driver, the voluntary and the compulsory excesses
are added together and the total figure deducted from the own damage claim.
There is a lack of consistency in the market regarding the use of the term deductible.
Historically, a deductible was a large excess – and this remains one of its definitions today.
This would be the case where a commercial organisation agrees to meet the cost of any
claim falling within the policy terms, up to the stated value of the deductible. It works in
broadly the same way as an excess for claims that exceed the deductible amount (the
policyholder paying the amount of the deductible and the insurer paying the balance, subject
to any policy limits). However, it is often linked to a risk management process and is a means
of retaining risks up to a certain size within an organisation. The precise way in which it may
operate in conjunction with policy limits should be clearly stated in a policy wording. The
variations in the market are beyond the scope of this course.
When a deductible does represent a very large sum, for which the insured accepts
responsibility under a material damage or business interruption policy, there tends to be a
72-hour time limit for the defining of ‘any one event’. This is important when considering
weather-related claims that may occur over a period of time. It means that the deductible
applies only once in such circumstances.
What may confuse you is the fact that sometimes the two terms ‘excess’ and ‘deductible’
appear to be used interchangeably in the market. This blurring of boundaries has been
influenced by the fact that in parts of the world, most notably in the USA.
In general, policies that contain an excess will pay up to the policy limit over and above the
excess. However, where the policy refers to a deductible, this amount is deducted from the
limits. Even this usage is not universal, but it serves to distinguish the terms as a general
rule. It is always necessary to refer to the policy wording for clarity.
If there is underinsurance or any other policy term that limits or reduces a loss, and an
excess or deductible applies to the same loss, the excess or deductible is deducted
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last of all.
Consider this…
Why might an insurer allow a reduction in your motor insurance premium if you voluntarily
agreed to pay the first £150 of each claim?
Chapter 7
You would remove the need for the insurer to become involved in claims for very small
amounts, which could still be very costly to administer, and would reduce the size of payment
of any claim that exceeds £150.
Key points
Definition of indemnity
• Indemnity is financial compensation sufficient to place the insured in the same financial
position after a loss as they enjoyed immediately before the loss occurred.
• Not all insurance policies are policies or indemnity. Some, e.g. personal accident
policies, are benefit policies, as it is impossible to put a financial value on something
like the loss of a limb.
• Indemnity can be provided through a cash payment, repair of the damaged item,
replacement or reinstatement.
Application and measurement of indemnity
• For property insurance the measure of indemnity is the cost of repair or replacement at
the time of the loss, less an allowance for wear and tear.
• For liability insurance the measure of indemnity is the damages and claimants costs
awarded by a court (or arising from an out of court settlement).
• For marine insurance a valued or agreed value policy means that the insurable value is
agreed between the insurer and insured and does not fluctuate with the market.
Modifying indemnity
• It is possible to extend the principle of indemnity for property insurance through the use
of reinstatement conditions and new for old cover.
• Agreed value policies modify indemnity by fixing the value of the subject-matter of the
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insurance at inception. It is then not necessary to prove value on loss.
• A first loss policy limits the sum insured to an amount that the insured feels is the
maximum potential loss where this is not the full value of the subject-matter of the
insurance.
Enterprise Act 2016
Chapter 7
• The Enterprise Act 2016 protects policyholders if the insurer does not settle valid
claims within a reasonable time.
Limiting factors
• The maximum that can be recovered under any policy is the amount agreed to be the
sum insured or the indemnity limit.
• There may be inner limits or item limits to the sum insured within the policy.
• In cases of underinsurance the average condition is applied whereby only that part of
the loss that is proportionate to the sum insured is paid.
Question answers
7.1 d. £55,000.
7.2 c. £37,500.
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Chapter 7
Self-test questions
1. A home insurance policy does not state any specific settlement options. In the event
of a claim, the policyholder is therefore:
a. Legally entitled to financial compensation. □
b. Legally entitled to reinstatement. □
c. Only entitled to repair. □
d. Only entitled to replacement. □
2. Reinstatement is a settlement option which:
a. Replaces the subject matter with one of the same condition. □
b. Restores the subject matter to the same condition it was in before the loss. □
c. Provides a cash payment to the value of the subject matter. □
d. Repairs the subject matter to its original condition. □
3. Property and liability policies are contracts of indemnity because:
a. They are long term, non-renewable contracts. □
b. A value can be placed on the subject matter insured. □
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c. They only offer cash settlement options. □
d. They provide fixed benefits. □
4. The sum insured on a property insurance is defined as the full value at the time of
reinstatement with a 15% margin for error. This is an example of:
Chapter 7
a. A reinstatement memorandum clause. □
b. Basic cover. □
c. Betterment. □
d. Day one reinstatement. □
5. When calculating the indemnity value of a manufacturer's stock, it will be defined as
the cost of raw materials at the time and place of loss, plus:
a. Labour and costs of all stock, including lost profit. □
b. The retail price of all stock. □
c. Labour and the retail price of all stock less a deduction for wear and tear. □
d. Labour and costs in respect of work in progress and finished stock. □
6. For which type of stock is the insured entitled to receive any potential profit on sale?
a. Household goods. □
b. Farming stock. □
c. Manufacturer's stock. □
d. Wholesaler's stock. □
7. If an insured does not wish to insure the full value of their stock for theft, they are
most likely to need a(n):
a. New for old policy. □
b. Agreed value policy. □
c. First loss policy. □
d. Fixed value policy. □
8. A claim for £2,000 has been made on a household contents insurance policy which
has a sum insured of £25,000. The policyholder may receive less than £2,000 if:
a. The item claimed for cannot be replaced. □
b. The policyholder has already made a claim on the policy. □
c. There is a single item limit. □
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d. It is an agreed value policy. □
9. China Industries are claiming £2,000 following a break in at their warehouse. The
loss adjuster has applied the average condition as the accounts show goods in stock
of £10,000, whereas the sum insured is £7,500. What would the final settlement
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amount be?
a. £2,000. □
b. £2,500. □
c. £2,666. □
d. £1,500. □
10. If an insured values the subject matter of the insurance at less than the actual value,
there is said to be:
a. Underinsurance. □
b. An average condition. □
c. Reinsurance. □
d. A deductible. □
Contribution and
8
subrogation
outcomes
Introduction
A Contribution 10.1
B Applying the contribution principle 10.1
C Subrogation 10.2
D Insurers’ subrogation rights 10.2
E Insurers’ rights arising from the subject-matter 10.2
F Market agreements 10.2
G Precluded subrogation rights 10.2
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Key points
Question answers
Self-test questions
Learning objectives
• explain the concept of contribution;
• state how contribution applies to insurance contracts;
• explain what is meant by subrogation;
• list the circumstances in which insurers can exercise their rights of subrogation; and
Chapter 8
• explain the way in which insurers acquire rights in relation to total loss settlements and
salvage.
Introduction
There are some situations in which an insured may have in place more than one policy
covering a particular loss or liability. Circumstances may also arise where the policyholder
has insured a risk but the loss, when it happens, is caused by the actions of someone else.
Consequently, not only is the policyholder protected by the insurance, they also have the
potential to recover damages from the third party. In the first case we need to look at the
rules that apply where there is some kind of dual insurance (the principle of contribution); in
the second we need to see how the insured’s rights of recovery are passed on to the insurer
(the principle of subrogation).
Underlying both these principles is the principle of indemnity, which relates to exact financial
compensation. This means that the insured is not entitled to profit from a claim settlement.
Key terms
Common insurable Common peril Common subject- Contribution

interest matter
Independent liability Non-contribution Precluded Rateable proportion
method clause subrogation rights
Salvage Subrogation Tort
A Contribution
When we examined the principle of indemnity, we said that when settling a loss, the intention
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was to place an insured in the same financial position they enjoyed immediately before the
loss. We also said that the insured cannot recover more than the financial loss suffered.
The insured can take out as many insurance policies as they wish, provided that there is no
fraudulent intent. But what happens when there is double insurance with more than one valid
policy of indemnity in force? Can an insured recover under both policies and hence receive
more than they actually lost?
From our study of the principle of indemnity, we know that an insured should not be able to
recover, in total, more than the amount lost by claiming under both policies. The insured can
only recover the total amount of a loss sustained, regardless of the number of policies held.
Let us consider an insured who holds two policies. If they then make a claim on only one of
the insurers and receive indemnity from it, the other insurer has avoided its financial
responsibility to them. The insurer that paid the claim has taken full financial responsibility for
Chapter 8
the loss. It is this possibility that gives rise to the principle of contribution, which seeks to
share the burden of the loss fairly among all insurers who cover the loss.
Dual insurance
There are many situations where dual insurance exists. This means that two types of
insurance provide cover in the event of loss.
Examples of dual insurance include the following:
• An ‘all risks’ policy and a travel insurance policy both covering travel and possibly the
same property whilst abroad.
• The household contents policy and the personal effects section of a motor policy both
covering personal effects whilst in a motor vehicle.
• A homeowner taking out a household buildings policy and not remembering that among
the items agreed with the mortgage lender was the effecting of a policy with another
insurer.
• A specific warehouse stock policy and a ‘floating’ policy covering stock over several
warehouses: both covering the same stock.
Chapter 8 Contribution and subrogation 8/3
A1 Contribution condition
Contribution supports the principle of indemnity, and so it exists whether stated in a policy
document or not. However, if there is no specific policy condition, the insured is entitled to
claim the whole amount from any of the insurers liable to pay. They will then leave that
insurer to recover appropriate shares from the other insurers. Therefore, insurers customarily
include a contribution condition in their policies. This condition restricts the insurer’s liability
to its rateable proportion or rateable share of a loss.
Activity
Look again at the standard fire policy given in appendix 1. Find the contribution condition
and see how it is worded.
The effect of the condition is to compel the insured to make a claim under each valid policy
for the sum for which each insurer is liable, if they wish to receive a full settlement.
A2 Definition of contribution
Contribution is the right of an insurer to recover part of a claim payment where two or
more polices cover the same interest, the same risk and are in force when the loss occurs.
A3 How contribution arises

Under common law, the following requirements must be satisfied before contribution arises:
Two or more policies of indemnity

must exist
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The policies must cover a common
insurable interest
The policies must cover a common

peril which gives rise to the loss
The policies must cover common

subject-matter
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Each policy must be liable for
the loss
Neither policy must contain a

non-contribution clause
Contribution arises
It is only necessary for the insurable interest, peril and subject-matter to be common to all
policies. There is no requirement for the policies to be identical but there does need to be
some overlap between one policy and another. We will now look more closely at the
requirements of:
• common insurable interest;
• common peril; and
• common subject-matter.
A3A Common insurable interest

Contribution only applies where the policies cover a common interest in the subject-matter.
In other words, the insurable interest is the same (owner, user, bailee etc.). This principle
was established in the case of North British and Mercantile v. Liverpool and London and
Globe (1877), known as the King and Queen Granaries case.
In this case, a merchant had deposited grain at a granary owned by Barnett. By virtue of the
custom of his trade, Barnett had insurable interest in the grain and had insured it. The owner
had also insured it to cover his own interest in it.
The grain was damaged by fire and Barnett’s insurers paid the whole claim. They then
sought to recover from the owner’s insurers. However, it was held that, as the two insureds’
interests were different, one as bailee and one as owner, contribution did not apply. Barnett’s
insurers bore the whole loss.
This raises the question of whether both parties may claim under their policies if the interests
in the same loss are different. In theory, both insureds could recover but, in practice, the
insurance market has reached an agreement to protect itself from paying out twice on the
same loss.
Example 8.1
Before going on holiday, Andy purchased travel insurance and, while he was away, his
camera (worth £500) was stolen. At that time, he also had in force an 'all risks' policy
covering personal items.
Andy can only claim a maximum amount of £500 under either policy as he cannot
recover more than his loss.
If policy cover for each policy was the same he would be able to claim £250 from each
policy as this represents the proportion which each policy would contribute.
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However, if an average condition was included in the policy then this would reduce the
amount payable.
A3B Common peril

The peril which causes a loss must be common to both contracts. Let us consider a situation
where we have two policies: one covering dishonesty and the other covering dishonesty, fire
and burglary. These can be brought into contribution where the loss is due to dishonesty.
However, this is not the case where the loss is due to fire only, since this peril is not common
to both policies. The insurer covering fire bears the burden for the loss in these
circumstances.
A3C Common subject-matter
Chapter 8
For contribution to apply, each insurer must provide cover in respect of the subject-matter of
insurance which suffers loss or damage. This is frequently some form of property, but could
equally relate to a legal liability.
B Applying the contribution principle

B1 Rateable proportion
We have seen that insurers contribute to a claim on the basis of what is termed a rateable
proportion.
Rateable proportion is the share of any claim that an insurer pays when two or more insurers
cover the same risk, usually in proportion to the respective sums insured. There are two
possible ways of determining the rateable proportion of a claim.
B1A By sum insured
One method of calculating the rateable proportion of a loss is by apportioning it in line with
the sums insured under each policy.
The rateable proportion is calculated using the formula:

policy sum insured
× loss
total sum insured (all policies)
Example 8.2
Look again at the standard fire policy given as appendix 1. Find the contribution condition
and see how it is worded.
Policy A sum insured: £10,000
Policy B sum insured: £20,000
Total sum insured: £30,000
policy sum insured

× loss
total sum insured (all policies)
The proportion of the claim paid by policy A is:
10, 000 1
= 3
30, 000
Policy B pays:
20, 000 2
= 3
30, 000
This method of assessing contribution is used for property policies which are not subject to
average and which have identical subject-matter. However, the sum insured method ignores
the fact that different restrictions, such as average (or an excess), may apply to each policy.
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Question 8.1
Colin’s cottage is valued at £100,000 and is covered by two fire insurance policies
with identical terms and conditions. The first policy has a sum insured of £50,000 and
the second policy has a sum insured of £100,000. A fire causes damage costing
£60,000 to repair. Once contribution has been agreed between the insurers, how
much will be paid by the first policy?
a. £20,000. □
b. £25,000. □
c. £30,000. □
d. £50,000. □ Chapter 8
B1B By independent liability

An alternative method for calculating each insurer’s share of a loss is the independent
liability method. This method calculates the amount payable under each policy as if no
other policy existed and the insurer was alone in indemnifying the insured. The loss is then
shared in proportion to the independent liabilities of the two policies.
This method is used where property policies are subject to average or where an individual
loss limit applies within a sum insured.
The formula used is:
policy sum insured
× loss
total value at risk
Example 8.3
Policy A sum insured: £10,000
Policy B sum insured: £20,000
Both policies are subject to average.
Total value at risk: £50,000
Loss incurred: £15,000
Whenever the total value at risk exceeds the total sum insured by all policies, each
policy pays:
policy sum insured
× loss
total value at risk
Policy A pays:
10, 000
× 15, 000 = £ 3, 000 (1 5 of loss)
50, 000
Policy B pays:
20, 000
× 15, 000 = £ 6, 000 (2 5 of loss)
50, 000
The total payment, in this example, made by the two insurers is therefore £9,000. The
balance of the loss (£6,000) must be borne by the insured as they have not fully insured the
total value at risk.
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B2 Modifications to the principle
There are some situations in which the principle of contribution is modified.
B2A Non-contribution clauses
Certain policies have what is known as a non-contribution clause. This may be worded as
follows:
This policy shall not apply in respect of any claim where the insured is entitled to
indemnity under any other insurance.
This means that the policy would not contribute if there was another insurance policy in
force. The courts do not favour such clauses, and in situations where a similar clause applies
to both (or all) policies, they are treated as cancelling each other out. This means that each
Chapter 8
insurer would contribute its rateable proportion.

B2B More specific insurance clauses
Certain policies include a clause which restricts cover in situations where a more specific
insurance has been arranged. The most common example of cover being restricted in this
way is in a household policy. It does this because many householders arrange specific
insurance for jewellery and other items, and it is not the intention for both policies to
contribute.
B2C Market agreements
There are many market agreements which operate to smooth the path of contribution
settlements. For example, insurers are party to an agreement in relation to overlapping
cover, caused when a driver has a 'driving other cars' extension and drives another person's
car which they are also insured to drive as a named driver under the owner's policy. Insurers
agree that the owner's policy will pay.
There is also an Association of British Insurers (ABI) agreement that applies when there is
an overlap between travel, all risks, household and the personal effects section of a motor
policy – the Personal Effects Contribution Agreement (PECA). The agreement states that
insurers will not insist that the insured claims a proportion from each insurer where the sum
involved is modest, regardless of what the policy conditions actually say.
Consider this…
What do you think are the advantages for insurers who are party to market agreements?
For the insured, there may be a reduction in premiums where such claims agreements are in
force. This is because the insurers have saved money, both through cheaper administration
and the avoidance of expensive and arguably disproportionate litigation.
C Subrogation
Subrogation is a common law right. Any means of reducing the size of the loss by exercising
recovery rights are for the insurer's benefit, up to the amount that the insurer has paid out.
The insured cannot claim an indemnity payment from an insurer and then also acquire a
further payment from a negligent third party. This would result in a profit to the insured and
would breach the principle of indemnity.
However, the requirement that the insurer must already have indemnified the insured before
pursuing subrogation rights, gives rise to some problems. This is because the insurers would
not have had complete control of proceedings from the date of the loss. Its eventual position
could be severely prejudiced by delay or by some other action taken by the insured.
In order to gain this control, insurers invariably include a condition in the policy which gives
them the power to pursue subrogation rights before the claim is paid. The only limitation is
that the insurer cannot recover from a third party before it has actually settled its own
insured’s claim.
Consider this…
While your car is parked, another motorist collides with it, causing damage. You claim
under your own comprehensive motor insurance policy and also contact the other
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motorist's insurance company to claim damages.
You receive two cheques in settlement; one from each of the insurers.
Are you entitled to keep both cheques?
You would clearly make a profit from this situation if you kept both cheques, which is in
breach of the principle of indemnity. Therefore, the settlement from the third party insurers
should by right of subrogation, go to your motor insurer to help compensate its loss.
However, you are only obliged to reimburse your own insurer the amount that they had
actually paid. You can keep the balance which may include an excess or other uninsured
losses.
You will remember that the concept of indemnity is to place the insured in the financial
position they were in immediately before the loss. In this case, your own motor insurer has
Chapter 8
already fulfilled this obligation; your insurer is, therefore, entitled to any money received from
third parties in respect of the loss that it has already paid.
C1 Definition of subrogation
Subrogation can be defined as the right of an insurer, following payment of a claim, to take
over the insured’s rights to recover payment from a third party responsible for the loss. It is
limited to the amount paid out under the policy.
Let us look at the leading case concerning indemnity and subrogation, namely Castellain v.
Preston (1883).
Preston was in the course of selling his house to Rayner when it was damaged by fire.
Preston recovered the money for the damage from his insurers, but did not carry out any
repairs. Subsequently, Preston received the full purchase price for the house, even though
the building had not been repaired.
An action was brought on behalf of the insurers to recover the payment they had made to
Preston. The action was successful because of the principle of indemnity and the doctrine of
subrogation. The insured had received more than a full indemnity. He received both
compensation from his insurers and the full purchase price for the house. However, it is more
usual for insurers to recover all or part of their losses from the third party.
Consider this…
Why does the principle of subrogation not apply to life or personal accident policies?
D Insurers’ subrogation rights

In keeping with the principle of indemnity, insurers are also not entitled to recover more than
they have paid out. This is seen in the case of Yorkshire Insurance Co. v. Nisbet Shipping
Co. Ltd (1961). In this case, the insurers made a settlement of £72,000. However, there was
a long period of time between the payment of the claim and the recovery from the third party
and there had been changes in the rates of exchange. Consequently, the insured actually
recovered £127,000. It was held that the insurers were only entitled to £72,000. The insured
was entitled to the balance.
The position has become slightly blurred, following decisions by the Court of Appeal (Coles
v. Hetherton (2013)) and the Competition and Market Authority (2014) that insurers seeking
vehicle repair costs at the market rate, when the work was carried out by their own repair
network at a discounted rate, was lawful.
Subrogation rights may arise in one of three ways:
tort contract statute
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D1 Tort
Under common law, everyone has a duty to act in a reasonable way towards others. A
breach of this duty is called a tort. The person who has suffered damage or injury is entitled
to compensation.
A breach of this duty may arise in a number of ways, for example:
• a lorry driver negligently loses control of their vehicle and crashes through your
kitchen wall;
• your neighbour, practising their golf shots, hits a ball into your garden and it smashes
your greenhouse; or
• a workman knocks over a road sign, causing your car to hit a roadroller.
Chapter 8
In each of these examples, an individual has wronged you or your property. It is possible to
arrange a policy to cater for each of these events. As well as the indemnity which insurers
provide, the insured has a right (in tort) to financial compensation from the individuals
involved in the wrongdoing. The insurers assume the rights of the insured and attempt to
recover their outlay from the wrongdoer.
Consider this…
Your car is damaged by the negligent act of another motorist. As well as the repairs
involved, you claim for the cost of hiring another car in order to carry on working. Your
insurer pays only for the repairs to your car and sues in your name for recovery of the
paid claim.
As a person can only be sued once for one event, how can you recover your costs for
hiring the car (an uninsured loss)?
As an insurer must sue in an insured's name, the insured can include in the legal action a
claim for the additional loss suffered through the hire of another car. In practice, the insurers
would recover the full amount and would pass on the amount of the uninsured loss to the
insured.
D2 Contract
Under certain contracts a breach entitles the aggrieved party to compensation, regardless of
fault. Insurers can assume the benefits of these rights.
Example 8.4
Tony takes up a tenancy in rented accommodation. Part of the contract between Tony and
the landlord makes Tony responsible for damage to the property. The property is damaged
and a claim is made on the landlord’s insurer. This insurer then exercises its subrogation
rights and recovers its losses in respect of the damage from Tony, regardless of fault or
the existence of alternative insurance to cover the loss.
Many building projects are entered into under particular forms of contract that specify the
legal, and insuring, responsibilities of the parties; principal, contractor and subcontractors.
D3 Statute
Most insurers require that claims for riot, civil commotion and malicious damage must be
notified within seven days of the event. This is because under the terms of the Riot
Compensation Act 2016 (RCA) insurers may have rights of recovery against the local
policing body for riot damage, but have only 42 days from the date of the riot to notify of a
claim, with a further 90 days to provide all details and evidence.
E Insurers’ rights arising from the subject-

matter
If the insurer regards the property that is the subject-matter of insurance as being beyond
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economic repair, they may offer a total loss settlement. This often happens in motor
insurance and under many motor policies the insurer states in advance what will constitute
‘economic repair’. Market practice tends towards repairs exceeding 60% of market value as
being uneconomic. Of course, when this happens there may be some residual value in the
thing insured. This is termed salvage. If the insurer meets the loss in full it is the insurer that
is entitled to the benefit of the salvage value.
As it is a financial benefit, a question arises as to who has rights to the salvage itself. The
Financial Ombudsman Service (FOS) has made it clear that the insured should always be
given the opportunity to retain the salvage, provided a suitable deduction is made from the
claim payment to take its value into account. The amount needs to be agreed between the
insurer and the insured. This principle would govern the recovery of property. For example, if
an insurer pays out a sum as a total loss for an item of jewellery that has been stolen and it
is subsequently recovered, the insured must be offered the jewellery provided that the full
Chapter 8
claim payment is repaid to the insurer.
In an important respect rights arising from the salvage differ from subrogation rights. When
the insurer retains the salvage, the insurer becomes the owner of it. If, when it is sold, a
greater sum is achieved than the insurer originally assumed, there is no obligation to pass
profit on to the insured.
Example 8.5
A painting by a little-known artist is damaged. It is regarded as a total loss and the insurer
pays the claim accordingly and retains the damaged painting. The insurer gets an expert
to repair the painting and offers it for sale. The artist in the meantime has become very
popular and the sale value is well beyond the original claim payment. The profit made is to
the benefit of the insurer.
Question 8.2
An insurer pays £10,000 and allows the insured to retain the salvage, valued at
£1,000, in settlement of a claim for damage caused by a negligent third party. How
much can the insurer claim from that third party when exercising its subrogation
rights?
a. £1,000. □
b. £9,000. □
c. £10,000. □
d. £11,000. □
F Market agreements
There are many situations in which, by virtue of the operation of subrogation, insurers would
be corresponding about money that they would need to claim back from each other. A limited
number of market agreements exist to reduce the correspondence and administrative costs
involved in pursuing frequent subrogation procedures.
F1 The ABI Memorandum of Understanding – Subrogated

Motor Claims
This does not seek to avoid apportioning blame nor does it have an agreed formula for
sharing losses. Instead it sets out principles for subrogated motor claims that are based on
‘honesty and transparency’. It is not a legally binding agreement. In order to avoid disputes
For reference only

about quantifying subrogated claims, reduce costs and ensure prompt settlement, four key
elements are incorporated:
• Consistency of practice in the control of own damage claims regardless of any
subrogation rights.
• Subrogated claims are to represent the net cost to the insurer after all discounts, and
certain items such as emergency treatment fees, are excluded.
• All material supporting documentary evidence should be volunteered, together with
salvage value and the basis of calculation for vehicles written off.
• Legal costs should be avoided wherever possible.
On this basis insurers communicate with one another to decide the basis on which they will
share losses. Often this will simply be by agreement on the telephone, or through a number
of third party ‘subrogation portals’ that have developed in the last few years. Agreements will
Chapter 8
take into account contributory negligence where necessary.
G Precluded subrogation rights

We have seen that there are situations where a market agreement exists that relates to
predetermined apportionment for subrogated claims. There are also some situations in which
insurers are barred from exercising subrogation rights, or where they agree not to
exercise them.
G1 Insured has no rights

The insurer’s right to subrogate relies on the fact that the insured has rights against a
negligent third party. In circumstances where an insured has waived those rights the insurer
cannot re-acquire them. This could happen if an insured signs an agreement with a ‘hold
harmless’ clause, which prevents the insured from pursuing recovery rights.
G2 Benefit policies
As we have established, certain policies, such as personal accident policies, are benefit
policies. This means that they are not subject to the rules that flow from the principle of
indemnity. It follows that even if a person negligently causes an accident in which the insured
is injured, the personal accident insurer will have no right of recovery. This is true even if the
insured successfully sues the negligent third party and receives financial compensation for
the injuries. The insured is entitled to keep both the personal accident benefits and the
court award.
G3 Subrogation waiver
There are circumstances in which insurers agree to waive their rights of subrogation. They
do this through subrogation waiver clauses, which are common in commercial insurances.
These clauses are usually designed to prevent the insurer from pursuing any subrogation
rights it may have against a parent or subsidiary company of the insured.
G4 Negligent fellow employees

Insurers took the decision not to pursue their recovery rights against negligent fellow workers
as a result of the court case, Lister v. Romford Ice and Cold Storage Ltd (1957). The
details of this case are that a son injured his father in the course of his employment (they
were fellow workers). The insurers paid out for the father’s injuries under the employer’s
liability policy. They then successfully recovered their outlay from the son (because his
father’s injuries were the result of a lack of reasonable care on his part). There was criticism
of the insurance industry and a general feeling that this was harsh. Therefore, insurers have
generally agreed (except in extreme circumstances) not to pursue recovery rights against
negligent fellow workers.
For reference only
Chapter 8
Key points
Contribution
• Contribution is the right of an insurer to recover part of a claim payment where two or
more polices cover the same interest, the same risk and are in force when the loss
occurs.
• Although contribution always exists where there is more than one insurance covering
the same loss, many policies include a contribution condition, which compels the
insured to make a claim under each valid policy for the sum for which each insurer is
liable.
• For contribution to apply the insurable interest, peril and subject-matter must be
common to all the policies.
• Each insurer pays their rateable proportion of any claim, which is calculated either by
the sum insured method or by the independent liability method.
• Contribution can be modified by non-contribution clauses, more specific insurance
clauses and by market agreement.
Subrogation
• Subrogation can be defined as the right of an insurer, following payment of a claim, to

take over the insured’s rights to recover payment from a third party responsible for the
loss. It is limited to the amount paid out under the policy.
• Subrogation rights may arise out of tort, contract or statute.
• In certain situations insurers cannot or will not exercise subrogation rights. They cannot
For reference only

where the insured has no right against a negligent third party or the policy is a
benefit one.
Chapter 8
Question answers
8.1 a. £20,000.
8.2 c. £10,000.
For reference only
Chapter 8
Self-test questions
1. Which principle of insurance seeks to share the burden of loss fairly among all
insurers who cover the loss?
a. Subrogation. □
b. Contribution. □
c. Average condition. □
d. Proximate cause. □
2. Gareth has two policies covering his camera. The sum insured with policy A is £500.
The sum insured with policy B is £250. What is the rateable proportion payable by
insurer A?
a. 1/4. □
b. 1/3. □
c. 2/3. □
d. 1/2. □
3. Romesh has two insurance policies covering the same loss, both subject to average.
Policy A’s sum insured is £20,000. Policy B’s sum insured is £30,000. The total value
at risk is £60,000. If the claim is for a loss of £30,000, what contribution would policy
For reference only

A pay?
a. £15,000. □
b. £20,000. □
c. £30,000. □
d. £10,000. □
4. An insurer has paid a claim of £150,000 but, under their subrogation rights, has
recovered £160,000. Who is entitled to the balance of £10,000 over and above the
claim value?
□
Chapter 8
a. The insured.
b. The insurer. □
c. The third party. □
d. The insured and the insurer in equal shares. □
5. In common law, a breach of duty to act in a reasonable way towards others is known
as:
a. A tort. □
b. Subrogation. □
c. A breach of contract. □
d. Liability. □
6. A car is badly damaged in an accident and is found to be beyond economic repair. If

the insurer meets the loss in full and the car is then sold for scrap, who is entitled to
the salvage value?
a. The policyholder. □
b. The garage. □
c. The insurer. □
d. The insurer and the policyholder in equal shares. □
7. Julie’s bicycle is badly damaged by a negligent third party. Her insurer pays £1,500
and allows her to keep the camera as salvage, valued at £500. What is the value of
the insurer's subrogation rights in respect of the negligent third party?
a. £500. □
b. £1,500. □
c. £1,000. □
d. £2,000. □
8. A ‘hold harmless’ clause in respect of a recent accident means that the insurer:
a. Can acquire Tony’s subrogation rights. □
b. Can only claim if the third party is insured. □
For reference only

c. Must pay the full amount of the claim. □
d. Has no subrogation rights. □
9. What type of insurance policy has no subrogation rights?
a. A benefit policy. □
b. An indemnity policy. □
c. Motor insurance. □
d. Household insurance. □
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10. An insurer is least likely to waive their subrogation rights if the claim is against a:
a. Parent company of the insured. □
b. Subsidiary company of the insured. □
c. Negligent third party of the insured. □
d. Negligent fellow employee of the insured. □
For reference only
Legal and regulatory
9
environment
outcomes
Introduction
A Compulsory insurance 11.1
B Legislation concerning third parties 11.3
C Overview of the UK regulatory framework 11.5, 11.6
D Prudential Regulation Authority (PRA) 11.5, 11.6
E Financial Conduct Authority (FCA) 11.5, 11.6
F Application of PRA and FCA rules 11.5, 11.6
G Discipline and enforcement 11.7
For reference only

H Authorisation and regulation of insurers 11.4, 11.10
I Authorisation and regulation of intermediaries 11.4, 11.8
J Insurance: Conduct of Business Sourcebook (ICOBS) 11.8, 11.9
K Insurance Distribution Directive (IDD) 11.8
L Money laundering 12.2
Key points
Question answers
Self-test questions
Learning objectives
• outline the main types of compulsory insurance in the UK;
• describe the effect on insurance contracts of the Contracts (Rights of Third Parties) Act
1999 and the Third Parties (Rights Against Insurers) Act 2010;
• explain the role of the financial services regulators in the authorisation, supervision and
Chapter 9
regulation of insurers and intermediaries;

• explain the basic powers of the Financial Conduct Authority (FCA) for the authorisation,
supervision and regulation of intermediaries;
• explain the concept of the regulators’ principles for businesses and Senior Managers &
Certification (SM&CR) regime;
• state the consequences of non-compliance with PRA/FCA rules;
• describe the reporting requirements for FCA-regulated firms; describe the reporting
requirements for FCA-regulated firms;
• explain the capital adequacy requirements of the PRA;
• describe the scope of the Insurance: Conduct of Business (ICOBS) rules; and
• define money laundering and discuss the relevant legislation in place to combat it.
Introduction
The effectiveness of any form of regulation depends on the general willingness of society to
obey the law and respect the sanctions which the regulatory body enforces. Statutory
regulation takes the form of statutes (i.e. laws) governing aspects of the transaction of
insurance.
In this section, we look at the the forms of insurance that the UK Government has made
compulsory. We then examine the regulatory structures in place that governing insurance
companies, and some of the key pieces of legislation which are applicable to intermediaries
and insurers.
Key terms
Approved persons Authorisation Capital adequacy Compulsory

insurance
Conduct risk Controlled functions Employers' liability Fair treatment of
insurance customers
Financial Conduct Insurance: Conduct Money laundering National Crime
Authority (FCA) of Business Agency (NCA)
Sourcebook (ICOBS)
Principles for Privity of contract Professional Prudential
Businesses (PRIN) indemnity insurance Regulation Authority
(PRA)
Public liability Retail Mediation Solvency II Solvency margin
For reference only

insurance Activities Return
(RMAR)
A Compulsory insurance
In the UK, the Government acts as an insurer in its own right by providing certain benefits for
individuals. These are important and include welfare benefits, unemployment benefits and
retirement benefits. However, this will not be true in every country. Many countries, for
example, have a form of worker’s compensation cover (giving fixed benefits), which is
provided by the private sector rather than by the state. Internationally, there is considerable
variation as to whether health insurance is provided by the state or the private sector and in
how these two sources are balanced.
The UK Government has tended to make the insuring of certain risks, relating to legal liability
or negligence, compulsory through legislation. The aim is to make sure that funds are
available to compensate the innocent victims of many types of accident (though not all).
Those made compulsory by law may be summarised as follows:
• Private individuals. Third-party motor insurance and public liability insurance in respect
Chapter 9
of the ownership of dangerous wild animals and/or dangerous dogs are compulsory for
private individuals.
• Professions and businesses. Motor insurance is compulsory for every business which
uses motor vehicles on a road and employers’ liability (EL) insurance is compulsory for
companies with employees. Public liability (PL) insurance is also compulsory for specific
trades and professions, including riding establishments. Solicitors and other
professionals, including insurance intermediaries, must have professional indemnity (PI)
insurance. Marine pollution liability insurance is compulsory, as is liability insurance for
operators of nuclear reactors.
Chapter 9 Legal and regulatory environment 9/3
The following are the main reasons why certain forms of insurance are compulsory in
particular cases:
• To provide funds for compensation. The main objective of compulsory insurance is to
provide means by which persons injured, or suffering loss, through the fault of others may
receive compensation. There would be little point in awarding damages to someone if
there were no funds to meet the award. Compulsory insurance ensures, as far as
possible, that funds are available when damages are awarded by a court, even though
the person who caused the injuries may lack the necessary financial resources.
• In response to national concerns. The areas where insurance has been made
compulsory represent areas of greatest national concern.
Figure 9.1: Compulsory insurance in the UK
Compulsory insurance
Employers’ Motor Public liability Liability Professional

liability insurance insurance – insurance – indemnity
insurance riding dangerous wild insurance
establishments animals/
dangerous dogs
Solicitors
Insurance
intermediaries
For reference only

A1 Motor insurance
The Road Traffic Act 1988 (as amended) stipulates that it is illegal to cause or permit the
use of a vehicle on a public road (extended now to include ‘any other public place’) unless an
insurance policy is in force, covering third-party property damage and third-party bodily injury
or death.
Although compulsory third-party personal injury cover featured as part of UK law well before
the first EU motor insurance directive (in 1972), many subsequent changes to UK law have
been prompted by EU directives. Compulsory third-party property damage cover and the
requirement to be able to trace the insurer of a vehicle from its registration plate are two
examples. Five EU motor insurance directives were brought into UK law between 1973 and
2007, which were consolidated by the Codified Motor Directive introduced in 2009.
The certificate of motor insurance has always been used as evidence of valid Road Traffic
Act 1988 insurance cover. Section 9 of the Deregulation Act 2015, however, amended the
Road Traffic Act and there were some consequential changes to the requirements:
• Insurance certificates must still be delivered to policyholders, but delivery is no longer
required for the policy to be effective.
• Where a policy is cancelled mid-term the policyholder is no longer required to return the
Chapter 9
certificate or make a statutory declaration or any statement acknowledging the policy has
ceased to have effect (and not doing so ceases to be an offence).
• Insurers are relieved of the burden of requesting policyholders to surrender certificates for
cancelled policies as a prerequisite of avoiding contractual liability.
The Motor Insurers’ Bureau has a key role to play in handling motor insurance claims for
compulsory motor insurance.
Refer to
Motor Insurers’ Bureau covered in Motor Insurers’ Bureau (MIB) on page 2/29
A2 Liability insurance for dangerous wild animals and/or

dangerous dogs
Apart from motor insurance, the other forms of liability insurance which are compulsory for
private individuals are in respect of the ownership of dangerous wild animals or
dangerous dogs.
The nature and scope of such insurance is not defined in the Dangerous Wild Animals Act
1976 or the Dangerous Dogs Act 1991. However, the local authority, which issues the
appropriate licence, must be satisfied as to the adequacy of the insurance.
In general, insurers are not willing to issue a policy that would only cover the liability arising
out of the ownership of the dangerous wild animal or dangerous dog. To do so would amount
to selection against the insurer.
Instead the insurer would probably only be prepared to insure the risk as an extension to
another insurance policy held by the insured/owner. Such a policy could be the household
policy, where it would be covered within the public liability section.
Example 9.1
Keith has bought a pit bull terrier, mistakenly believing it was a different breed. Having
decided to keep the dog, he has managed to obtain an exemption from the courts on the
basis that the dog does not pose a threat to the public. The local authority has issued him
with a licence.
He has spoken to numerous mainstream insurers, but has found it very difficult to obtain
liability insurance cover specifically for the pit bull terrier. Speaking to his current home
insurer, he has been advised that he can potentially extend his cover to include this by
paying an additional premium. Alternatively, he can seek cover for this specific risk from a
For reference only

specialist insurer, most likely via a broker.
A3 Employers’ liability insurance

The Employers’ Liability (Compulsory Insurance) Act 1969 made it compulsory for
employers in Great Britain to effect employers’ liability insurance. This insures them against
their liability to pay compensation to employees who sustain bodily injury or disease, arising
out of and in the course of their employment. There is a list of exemptions from this
requirement, mainly relating to family members and government agencies. In practical terms,
however, most employers have to insure this risk. The minimum required limit of indemnity
has been increased and now stands at £5m, though the insurance market provides £10m as
standard. Although there had been a requirement for employers to retain the certificates, this
was changed by the Employers’ Liability (Compulsory Insurance) (Amendment)
Regulations 2008. There is no longer any specific requirement to keep certificates for a
specified period. The previous legal requirement to display certificates at each place of work
is satisfied if employees have reasonable access to the certificate in an electronic format.
A4 Public liability insurance for riding establishments

One of the provisions of the Riding Establishments Act 1970 is that all proprietors of riding
establishments must have public liability insurance.
Chapter 9
The insurance must indemnify the insured against claims arising from the use of the
insured’s horses. This would include injuries sustained by both persons riding the horses and
members of the public. The insurance must also indemnify the horse riders themselves
against any liability they may incur for injury to members of the public, arising out of the hire
or use of the proprietors’ horses. The terms and limitations of the insurance are not specified
in the Act.
A5 Professional indemnity (PI) insurance

PI insurance is compulsory for certain professions. These include solicitors and others such
as accountants and insurance intermediaries who are authorised by the Financial Conduct
Authority (FCA).
A5A Solicitors
The Solicitors (Amendment) Act 1974 states that solicitors must hold PI insurance. This
insurance must indemnify the solicitor against claims for financial loss suffered by clients as
a result of the solicitor’s professional negligence.
There are many different situations that provide scope for negligence on the part of solicitors
which might result in financial loss to a client, such as:
• negligence in the making of all the necessary enquiries in relation to the purchase of a
property; and
• errors or omissions in the preparation of legal documents resulting, possibly, in the
completion of defective contracts and consequent financial loss to the client.
A5B Insurance intermediaries
Insurance intermediaries authorised by the FCA must have PI insurance. This is to cover
financial loss suffered by a third party caused by their professional negligence up to
substantial limits and FCA rules stipulate the minimum level of cover they must purchase.
Be aware
Appointed representatives and introducer appointed representatives are not required to
have this form of insurance, since everything they do is undertaken for an insurer or an
intermediary that is responsible for their actions.
The minimum level is currently €1,300,380 for a single claim, and for aggregate losses, the
higher of €1,924,560 or 10% of annual income (up to £30m). The limits were raised in
August 2021, with the minimum requirements originating from the Insurance Distribution
Directive (IDD) in 2018. Regardless of the minimum levels, all firms should consider their
potential liabilities and purchase sufficient insurance to cover these. Where a policy is issued
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other than in euros, it should meet the minimum currency equivalent.
Consider this…
PI policy premiums have increased dramatically in recent years, as have the numbers of
PI claims. What do you think are the reasons for this?
A5C Growing need for PI cover

The UK is arguably becoming a more litigious society (following in the footsteps of the USA)
so the need for PI cover has grown.
Reasons for this include:
• the rising cost of legal services;
• retrospective legislation which may ‘move the goalposts’ to the detriment of insurers; and
• adverse judicial decisions.
Question 9.1
Chapter 9
An employer has 50 employees making overalls in a factory. What insurance must

they have by law?
a. Business interruption. □
b. Employers’ liability. □
c. Products liability. □
d. Public liability. □
In many areas where there is a risk that innocent victims can suffer death, injury or loss,
liability insurance has been made compulsory. However, we can see that this is not true of all
areas. For example, there is no compulsory requirement for manufacturers of defective or
dangerous products to insure their liability to the public. Similarly, there is no requirement to
insure a more general liability to the public. Nevertheless, we can argue that in those areas
where there are most likely to be innocent victims of accidents or poor advice, the existence
of compulsory insurance means that they will be compensated.
We have considered the effect of legislation in the area of compulsory insurance. There is
other legislation that has an impact on insurance that we need to be aware of. We will
consider three significant examples of such legislation in the next four sections.
B Legislation concerning third parties

B1 Contracts (Rights of Third Parties) Act 1999
The concept of ‘privity of contract’ means that a person can only enforce a contract if they
are a party to it. Consequently, even if a contract is made with the purpose of benefiting
someone who is not a party to it, that person (the ‘third party’) has no right to sue for breach
of contract.
The Contracts (Rights of Third Parties) Act 1999 reforms this rule and sets out the
circumstances in which a third party will have a right to enforce a term of the contract.
Broadly speaking, either the contract must make express provision for the enforcement or
the third party must be expressly identified in the contract by name, class or description. The
remedies allowed are those usually permitted (damages, injunction or specific performance).
If we were to take motor policies as an example, we would see that it is common for
individuals other than the policyholder to be named (e.g. as drivers) and for classes of
persons to be identified (e.g. in certificate wordings).
Insurers do not wish to extend their liability and, as it is permissible to contract out of the
provisions of the Act, this is what insurers have tended to do in their liability and motor
policies. There is now a standard general exclusion stating that the terms of this legislation
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do not apply to the insurance contract.
B2 Third Parties (Rights Against Insurers) Act 2010

The Third Parties (Rights Against Insurers) Act 2010 sets out to protect insurance
proceeds from the effects of insolvency. The Third Parties (Rights Against Insurers) Act
1930 confers rights on third parties against insurers in the event of the insured becoming
insolvent. Under the 1930 Act, however, the process is complex, requiring an application to
be made to the court to restore a dissolved insured company to the Register of Companies
in order to establish liability and bring a claim against it. This process can be costly and time
consuming.
The 2010 Act permits a third party to bring a claim directly against the insurer, without having
to restore the insolvent company to the register. This prevents circumstances in which
insurance monies are paid to the insolvent insured and then on to the general creditors as
part of insolvency proceedings, rather than being paid to the intended beneficiaries of an
insurance policy. Prior to the new Act the protection offered by insurance contracts was often
undermined. For example, although companies with employees are obliged by law to take
out compulsory employers’ liability insurance, if an employee was injured the claims monies
would be paid to the insolvent insured and then to the general creditors and not the injured
employee.
Chapter 9
In order for the 2010 Act to apply, an insured must:

• incur a liability to a third party for which they have insurance; and
• be insolvent.
In addition, the 2010 Act gives claimants more rights to establish whether a company has
insurance before issuing a claim. Both changes help save time and costs.
Example 9.2
Tom, who worked mainly for one employer for his entire working life as a construction
worker, is diagnosed with an asbestos-related illness. After engaging a solicitor to support
him with an employers’ liability claim against the company, he discovers that it has
recently become insolvent.
Under the 2010 Act, Tom is entitled to issue a claim directly against the insurers that
provided cover to his employer during the period of his employment, rather than having to
seek permission from the courts to do so.
Due to fast changing solvency legislation, the 2010 Act was defective and was not brought
into force after Royal Assent. The Insurance Act 2015 (IA 2015) includes amendments to
the Third Parties (Rights Against Insurers) Act 2010, aimed at rectifying the failure to include
certain insolvency circumstances in the original 2010 Act. Other amendments deal with long-
tail liabilities, such as mesothelioma (a cancer associated especially with exposure to
asbestos), which may have a latency period of up to 50 years. The long-awaited Act was
finally brought into effect on 1 August 2016.
Any insured that became insolvent in the past under previous insolvency legislation is
included within the scope of the 2010 Act, but only where the insured incurs a liability after
commencement of the Act. Where liability was incurred prior to the 2010 Act, the 1930 Act
still applies.
C Overview of the UK regulatory framework

The UK regulatory framework for financial services consists of three regulatory bodies:
Prudential Regulation Authority (PRA)
For reference only

• Sits within the Bank of England and is responsible for the stability and resolvability of
systemically important financial institutions such as banks, building societies and
insurers.
• Will not seek to prevent all firm failures but will seek to ensure that firms can fail without
bringing down the entire financial system.
• Will place emphasis on 'judgment based' approach to supervision focusing on: the
external environment, business risk, management and governance, risk management
and controls and capital and liquidity.
Financial Conduct Authority (FCA)
• Separate independent regulator responsible for conduct of business and market issues
for all firms and prudential regulation of small firms, like insurance brokerages and
financial advisory firms.
• Focused on taking action early, before consumer detriment occurs.
• Shift towards thematic reviews and market-wide analysis to identify potential problems in
areas such as financial incentives.
• Reviews the full product lifecycle from design to distribution with the power to ban
products where necessary.
Chapter 9
Financial Policy Committee (FPC)

• A committee within the Bank of England responsible for monitoring emerging risks to the
financial system as a whole and providing strategic direction for the entire regulatory
regime.
The Bank of England and Financial Services Act 2016 put the Bank of England at the
heart of UK financial stability by strengthening the Bank’s governance and ability to operate
more effectively as ‘One Bank’. The PRA became part of the Bank, ending its status as a
subsidiary, and a new Prudential Regulation Committee (PRC) was established. The PRC
operates alongside the other two Bank committees, namely the FPC and the Monetary
Policy Committee (MPC).
Bank of England
Financial Conduct
Authority (FCA)
Monetary Policy Prudential Financial Policy Enhancing confidence in the
Committee (MPC) Regulation Committee (FPC) UK financial system by
Setting interest Committee (PRC) Identifying action to facilitating efficiency and
rates. Taking control of the remove or reduce choice in services, securing an
PRA’s most systemic risk. appropriate degree of
important financial consumer protection and
stability and protecting and enhancing the
supervision policy integrity of the UK financial
decisions. system.
Prudential Regulation Authority (PRA)

Enhancing financial stability by promoting the safety and soundness
of PRA-authorised persons, including minimising the impact of their
failure.
Prudential regulation Conduct regulation Prudential and

conduct regulation
Prudentially significant firms: Investment firms and

banks, building societies, credit unions, insurers and some investment exchanges, other financial
firms. services providers including
independent financial advisers
(IFAs), investment
exchanges, insurance brokers
and fund managers.
For reference only

D Prudential Regulation Authority (PRA)
The PRA is responsible for the prudential regulation of all ‘systemically important firms’,
defined as those firms that pose a risk to the financial system if they were to fail. It is
responsible for the regulation of all institutions that accept deposits or which accept
insurance contracts. This means that the PRA authorises and supervises all banks, building
societies, credit unions, general insurers and life insurers.
D1 PRA objectives
The PRA has two primary objectives:
• To promote the safety and soundness of the firms it regulates.
• Specific to insurance firms, to contribute to ensuring that policyholders are appropriately
protected.
It also has one secondary objective:
• To facilitate effective competition in the markets for services provided by PRA-authorised
firms.
Chapter 9
D2 Threshold Conditions
The Threshold Conditions are the minimum requirements that firms must meet in order to be
permitted to carry on regulated activities. The PRA is responsible for those Threshold
Conditions designed to promote safety and soundness. At a high level, they require:
• a firm’s head office, and in particular its mind and management, to be in the UK;
• a firm’s business to be conducted in a prudent manner and that the firm maintains
appropriate financial and non-financial resources;
• the firm itself to be fit and proper and appropriately staffed; and
• the firm and its group to be capable of being effectively supervised.
Firms must ensure that they meet the Threshold Conditions at all times. The PRA will assess
firms against them on a continuous basis.
D3 Approach to supervision
The PRA's approach to supervision is judgment-based, forward looking and focused on
key risks.
This approach to supervision is characterised by a move away from rules and a focus on
forward-looking analysis, including an assessment of future risks the firm faces, how a firm
would be resolved if it were to fail, the impact this would have on the system as a whole and
the use of new public funds. The aim is therefore to 'pre-empt risks before they crystallise'.
Central to the approach is a risk assessment framework.
D4 Risk assessment framework

The framework operates in a way that reflects the PRA’s additional objective to protect
policyholders as well as the financial system. The framework approaches risk as follows:
• The consideration of the potential impact on policyholders and the financial system of a
firm coming under stress of failing. The external context and business risk it faces are
considered and how it might affect the firm's viability.
• Risk mitigation by the firm, which considers both operational mitigation which covers
management and governance of the firm combined with it's risk management and
controls.
• Financial mitigation and financial strength, specifically reserves, capital and liquidity.
• Structural mitigation and the firm's resolvability.
The PRA then undertakes a potential impact assessment, which, derived from Its risk
assessment and a quantitative and qualitative analysis enables it to place firm category's 1
to 5 based on the threat posed to the PRA's strategic objectives. Category 1 firms pose the
greatest risk with category 5 firms presenting the least risk to the PRA's overall objectives.
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D4A The intensity of supervision
The intensity with which firms are supervised depends on their level of riskiness, the threat of
harm to policyholders and the PRA's objectives from their failure. Supervisory resources are
allocated to each firm based on the impact assessment.
A small firm, for example, will not pose a great threat to the wider financial market should
they fail from an isolated risk. However, all firms face at least a 'baseline level of
monitoring'. This will involve:
• ensuring compliance with prudential standards for capital;
• liquidity, asset valuation, provisioning and reserving;
• at least an annual review of the risks posed by firms or sectors to the PRA’s objectives;
• examining individual firms when a risk crystallises; and
• assessing a firm’s planned recovery actions and how it might exit the market.
D5 Proactive Intervention Framework (PIF)

The PRA’s judgment about proximity to failure will be captured in the firm’s position within the
Proactive Intervention Framework (PIF). Judgments about a firm’s proximity to failure are
derived from those elements of the supervisory assessment framework that reflects the risks
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faced by a firm and its ability to manage them – namely, external context, business risk,
management and governance, risk management and controls, capital and liquidity.
There are five clearly demarcated PIF stages, each denoting a different proximity to failure,
and every firm will sit in a particular stage at each point in time. As a firm moves to a higher
PIF stage – i.e. as the PRA determines that the firm’s viability has deteriorated – supervisors
will review their supervisory actions accordingly. Senior management of firms are expected
to ensure they take appropriate remedial action to reduce the likelihood of failure and the
authorities will ensure appropriate preparedness for resolution.
D6 Firms’ culture and prudential supervision

The PRA expects insurers to have a culture that supports their prudent management. Good
prudential management must be pursued by all individuals working in an insurance company
not just senior staff. However, the PRA has 'no right culture in mind' when making judgments
about firms. The PRA focuses instead on 'whether boards and management clearly
understand the circumstances in which the insurer's solvency and viability come into
question, whether accepted orthodoxies are challenged, and whether action is taken to
address the risks on a timely basis'.
The PRA’s supervisory approach suggests that firms will face increased scrutiny the more
their organisational culture fails to demonstrate a strong, joined up model to managing the
prudential risks related to their business. Supervisors will assess risks using expertise and
judgment rather than box-ticking. It is, therefore, up to firms to show how their organisation is
managing prudential risks appropriately – no one approach to risk management will be right
for everyone. If firms fail to do this they could find themselves facing greater intervention as
they move up the PIF.
D7 Regulation of Lloyd’s
Refer to
See Lloyd’s and the London Market on page 2/8 for a summary of how the PRA regulates
Lloyd's
E Financial Conduct Authority (FCA)

E1 FCA objectives
The FCA's overarching strategic objective is to make sure the relevant markets
function well.
It has three operational objectives:
• Consumer protection: protecting consumers from bad conduct.
For reference only

• Integrity: protecting and enhancing the integrity of the UK financial system.
• Competition: promoting effective competition in the interests of consumers.
E2 Approach to regulation
E2A Product intervention and governance
The FCA is more proactive than the FSA and intervenes at an earlier stage to pre-empt and
prevent widespread harm to consumers. Powers include temporary intervention rules and
product pre-approval.
E2B Super-complaints
The FCA is able to review and react to detailed submissions by consumer groups.
Previously only the Office of Fair Trading (OFT) could receive these super-complaints
highlighting systematic problems in particular markets. Previous submissions have led to
enquiries from the Competition Commission into payment protection insurance (PPI) and
extended warranties.
The Competition and Markets Authority (CMA) obtained its full powers on 1 April 2014. Its
aim is to promote fair competition for the benefit of consumers both within and outside the
UK. It supersedes and brings together the functions of the Competition Commission and the
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consumer functions of the OFT.

E2C Competition powers
The FCA’s competition objective – to promote effective competition in the interests of
consumers – will mean:
• firms must compete for business by offering better services, better value and types of
products that customers want and need;
• prices offered are in line with costs; and
• firms will innovate and develop new products over time: the FCA will draw a distinction
between ‘good’ innovation that meets consumers’ genuine needs and other types that
exploit consumers.
E3 Approach to supervision
E3A General principles
Refer to
Refer to Fair treatment of customers on page 9/14 for more on the fair treatment of
customers
The FCA requires all firms to meet its high-level Principles for Businesses (PRIN), including
the fair treatment of customers, as well as comply with more detailed rules in specific
areas. More information on PRIN and other aspects of the FCA Handbook can be found in
Application of PRA and FCA rules on page 9/13. Guidance has also been issued which is
available on the FCA website. The FCA aims to act more quickly and decisively, and
attempts to address issues before they cause harm.
E3B Supervisor organisation
This approach requires a flexible focus on bigger issues as they emerge, either in individual
firms or across sectors. This means that some firms might be supervised with a dedicated
supervision team whilst others will be supervised as part of a portfolio. As of 2022, the FCA
supervises around 50,000 firms.
E3C Supervisory work
There are eight core principles which guide the FCA's supervisory work:
• Forward-looking.
• A focus on firm strategy and business models.
• A focus on culture and governance.
For reference only

• A focus on individual as well as firm accountability.
• Proportionate and risk-based
• Two-way communication.
• Coordinated.
• Putting right systematic harm that has occurred and stop it happening again.
E3D Supervision model
The supervision model is based on three types of work and applies to all firms:
• Proactive – pre-emptive identification of harm through review and assessment of firms
and portfolios: this includes business model analysis and reviewing the drivers of culture.
• Reactive – dealing with issues that are emerging or have happened to prevent harm
growing.
• Thematic – wider diagnostic or remedy work where there is actual or potential harm
across a number of firms.
E3E The FCA’s approach to supervising small firms
Small firms receive will generally receive less contact from the FCA in comparison to larger,
higher risk firms.
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To support the small firms, the FCA makes increasing use of roadshows and workshops and
any visits are usually as a result of thematic reviews, whistle-blowing or other information
which may have come to light.
While the supervision of small firms is relatively light-touch by comparison to larger firms, the
degree of intrusiveness from the regulator depends on the ability of small firms to evidence
best practice in the interests of customers. Similar to large firms then, small firms must
consider the appropriateness of employees’ training and competence, the governance of
incentive schemes, and the kinds of systems and controls necessary to resolve potential
conflicts of interest if they want to successfully navigate the current regulatory regime.
On the Web
www.fca.org.uk/publication/corporate/our-approach-supervision.pdf
E4 Intervention
The FCA has powers to intervene to prevent detriment occurring. The Financial Services Act
2012 confirmed a number of regulatory initiatives to shift the balance from tackling the
symptoms of consumer detriment to the ‘root causes’.
Here are some examples:
• Where the FCA identifies a serious problem with a product or service feature, it is able to
take timely and necessary steps to ban it. Legislation enables the FCA to make
temporary product intervention rules in the retail sector without prior cost-benefit analysis
or consultation valid up to twelve months.
• The FCA is able to take action in relation to misleading financial promotions.
• The FCA is able to vary the permissions granted to firms.
• The FCA is also able to disclose the fact that enforcement against a firm or individual has
commenced.
The FCA is required to alert a firm of its proposed course of action and to allow for, and
consider representations by, firms before publishing any details of its action. The FCA is only
allowed to use its product intervention powers in relation to retail customers.
E5 Publication of enforcement action

The FCA takes a very proactive approach to enforcement by pressing for tough penalties for
offenders and being willing to pursue cases against individuals, including senior
management. The FCA is allowed to publish the fact that a warning notice had been issued
about a firm as well as making a summary of the notice publicly available. This power is also
available to the PRA.
In making a decision about whether or not to disclose the warning notice, the regulator must
consider a number of factors, including whether publication of the information would be
For reference only

unfair to the person to whom the warning notice relates.
E6 Market intelligence gathering and research

The FCA’s Policy, Risk and Research Division combines research into what is happening in
the market and to consumers with better analysis of the types of risks where they appear. It
is intended to be the ‘radar’ of the organisation. It is designed to identify and assess risks to
consumers, create a common view to inform the FCA’s supervision, enforcement and
authorisation functions. While relying on existing sources for evidence, including consumer
groups, the media and ongoing market monitoring and analysis, the FCA also makes use of
the consumer action line.
E7 Authorisation and approvals

The FCA’s authorisation function focuses on the proposed business model, governance and
culture, as well as the systems and controls the firm intends to put in place, especially over:
• product governance;
• end-to-end sales processes; and
• prevention of financial crime.
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The FCA also works closely with the PRA in considering applications to approve individuals
to roles which have a material impact on the conduct of a firm’s regulated activities. The FCA
assesses whether applicants have a good understanding of how to ensure good outcomes
through corporate culture, conduct risk management and product design.
E8 Accountability
The FCA is required to report annually to Government and Parliament. The FCA's work is
overseen by a board appointed by government with a majority of non-executive directors.
The Financial Services Act 2012 contains a provision for independent reviews on the
efficiency and effectiveness of the FCA’s use of resources. There is also a requirement for
the FCA to make a report to the Treasury in the event of a regulatory failure and where this
failure was due to the FCA’s actions.
E9 Engagement with consumers

The FCA seeks to build a better understanding of consumer behaviour, needs and
experiences to shape how it designs its interventions. The FCA also engages more with
consumers directly through social media, consumer bodies, road shows, focus groups and
face-to-face contact. The FCA collects and analyses consumer information from other
sources such as complaints, including those investigated by the FOS, and external,
academic and public interest research.
E10 Transparency and disclosure

The FCA is required to have in place four statutory panels representing the views of
consumers, regulated firms, smaller regulated firms and market practitioners. The FCA has
continued to build on the FSA’s approach to consultation as part of the rule-making process
and is seeking to develop more effective ways of getting feedback on proposals, including
those from consumers and their representatives. The FCA publishes more information about
its views on markets (key trends, products and services) and the comparative performance
of a firm.
F Application of PRA and FCA rules

The FCA Handbook and PRA Rulebook contain the high-level principles which apply both to
insurers and intermediaries. We will see that there are some rules that are specific to each
category when we come to consider the more detailed rules. In the following sections we will
summarise the main high-level rules that are relevant to all general insurance organisations.
Each of these is a rulebook in its own right.
F1 Principles for Businesses (PRIN)

There are eleven principles of good business practice that must be met. They are as follows:
For reference only

Principles for Businesses (PRIN)
Principle Detail
1. Integrity A firm must conduct its business with integrity.
2. Skill, care and diligence A firm must conduct its business with due skill, care and
diligence.
3. Management and control A firm must take reasonable care to organise and control its
affairs responsibly and effectively, with adequate risk
management systems.
4. Financial prudence A firm must maintain adequate financial resources.
5. Market conduct A firm must observe proper standards of market conduct.
6. Customers’ interests A firm must pay due regard to the interests of its customers and
treat them fairly.
7. Communications with clients A firm must pay due regard to the information needs of its clients,
and communicate information to them in a way which is clear, fair
and not misleading.
8. Conflicts of interest A firm must manage conflicts of interest fairly, both between itself
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and its customers and between a customer and another client.
9. Customers: relationships of trust A firm must take reasonable care to ensure the suitability of its
advice and discretionary decisions for any customer who is
entitled to rely upon its judgment.
10. Clients’ assets A firm must arrange adequate protection for clients’ assets when
it is responsible for them.
11. Relations with regulators A firm must deal with its regulators in an open and cooperative
way, and must disclose to the FCA appropriately anything relating
to the firm of which that regulator would reasonably
expect notice.
Note: The PRA applies Principles 1 to 4, 8 and 11 only. © Financial Conduct Authority
Separate sections in the FCA Handbook and PRA Rulebook develop each of these themes
more fully. Some principles are expected to be embedded in a firm’s operations and
procedures, e.g. the fair treatment of customers.
F2 Fair treatment of customers

The FCA expects authorised firms to embed the fair treatment of customers principle in
their corporate strategy and build it into their firm’s culture and day-to-day operations.
This means addressing the fair treatment of customers throughout the product life cycle, as
illustrated in the following diagram.
product design and

governance
complaints handling identifying target

markets
after-sales marketing and

information promoting the product
For reference only

sales and advice
processes
There are six positive consumer outcomes that firms should strive to deliver to ensure the
fair treatment of customers:
• Outcome 1: Consumers can be confident they are dealing with firms where the fair
treatment of customers is central to the corporate culture.
• Outcome 2: Products and services marketed and sold in the retail market are designed
to meet the needs of identified consumer groups and are targeted accordingly.
• Outcome 3: Consumers are provided with clear information and are kept appropriately
informed before, during and after the point of sale.
• Outcome 4: Where consumers receive advice, the advice is suitable and takes account
of their circumstances.
• Outcome 5: Consumers are provided with products that perform as firms have led them
to expect, and the associated service is of an acceptable standard and as they have been
led to expect.
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• Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to

change product, switch provider, submit a claim or make a complaint.
It is the role of firms to ensure that they implement procedures to achieve these outcomes.
In essence, the initiative is simple – firms must focus on delivering the six outcomes and
recording evidence that they are doing so. In practice, this means firms should:
• look at their business and identify all of the outcomes that are relevant to them; and
• ensure they have appropriate systems in place – using management information or other
sources – to measure whether they are delivering all the identified outcomes. Firms may
find it helpful to consider where there are specific risks when they are assembling their
evidence, look at what the evidence is telling them – and act on it.
Evidence could come in a variety of forms, for example, conventional management
information, results of compliance checks, senior management assessments of call-centre
traffic or press coverage. In fact, anything that provides sound and reliable information on
whether a firm is treating its customers fairly could, in principle, be used as evidence. The
evidence does not necessarily have to be structured around the customer outcomes, but
firms must be able to demonstrate through their evidence that they are delivering those
outcomes.
The FCA introduced new rules (PROD 4) in October 2018 covering the development,
distribution and life cycle of new products as a result of the Insurance Distribution Directive,
which we look at in Insurance Distribution Directive (IDD) on page 9/33.
Consider this…
You are looking at developing and selling personal possessions cover for people in
residential care homes. What would you need to consider to ensure you deliver fair
outcomes for customers?
F2A Ethical behaviour and delivering positive customer outcomes

The principles set by the FCA reflect the professional and ethical standards that should
guide everyone in the financial services industry. However, it's vitally important that
customers have confidence that they are dealing with people who are putting their interests
first; not because they have to, but because they believe it's the right thing to do.
Vulnerable customers
Financial services firms also have a duty to protect vulnerable customers for which the
FCA has issued finalised guidance, available at
www.fca.org.uk/publication/finalised-guidance/fg21-1.pdf.
The Financial Vulnerability Taskforce is a newly-created independent professional body
For reference only

covering the insurance and wider financial sectors. Its objective is to promote greater
understanding, encourage appropriate behaviours and establish good outcomes in
respect of customer vulnerability.
Its resources can be found at www.fvtaskforce.com/resource-library.
The CII Code of Ethics (see The CII Code of Ethics: an overview on page 10/8) provides
members of the insurance profession with a framework in which to apply their role-specific
technical knowledge in delivering positive consumer outcomes. Under the fifth 'Core duty'
within the Code, members are required to: 'treat people fairly regardless of: age, disability,
gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion
and belief, sex and sexual orientation'.
Delivering a positive customer outcome is not just about treating the customer fairly or giving
special thought to those who may be vulnerable for whatever reason. It is about thinking
about the customer's whole situation when discussing a product or providing advice, to
ensure that the end result is positive.
Question 9.2
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At which stage of a policy's lifecycle does the Financial Conduct Authority expect an
insurer to treat the customer fairly?
a. At the proposal stage. □
b. At inception of the policy. □
c. At the time of a claim. □
d. During the whole lifecycle. □
F3 Consumer Duty
In its business plan for 2021/22, the FCA proposed introducing a new Consumer Duty on
authorised firms. Amongst other things, this would require them to ask themselves what
outcomes their customers should be able to expect from their products and services. This
reinforces the fair treatment of customer's principle.
In other words, firms would be required to demonstrate that their products and services
represent fair value for customers. The desired outcome is a more consistent standard of
consumer protection and to stop harm before it happens.
A basic overview of the elements of this Consumer Duty is shown in figure 10.1:
Figure 9.2: Key elements of Consumer Duty
Consumer Principle
Overarching Cross-cutting Rules

Firms must take all reasonable steps to:
• avoid causing foreseeable harm
• enable customers to pursue their financial objectives
For reference only

Firms must act in good faith toward customers
Four Outcomes for the key elements of the

firm-consumer relationship:
1. Communications
2. Products and Services
3. Customer Service
4. Price and Value
Source: www.fca.org.uk/publications/consultation-papers/cp21-13-new-consumer-duty
Be aware
The FCA established a new Principle 12 ('A firm must act to deliver good outcomes for
retail customers') to implement the consumer duty in July 2022 with full implementation
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expected by 31 July 2023.
F4 Senior management arrangements, systems and

controls (SYSC)
In the next few sections, we will focus on a few key areas of the senior management
arrangements, systems and controls (SYSC) section of the FCA Handbook, including:
• the Senior Managers and Certification Regime (SM&CR), which has replaced the
Approved Persons Regime (APER); and
• requirements around whistle-blowing, in line with the Public Interest Disclosure Act
1998 (PIDA).
F5 Threshold Conditions
These rules relate to conditions that must be met when becoming authorised and
subsequently maintained.
These rules relate to conditions that must be met when becoming authorised and
subsequently maintained.
They are concerned with:
• the legal status of the organisation;
• the location of its offices;
• close links (concerned with the nature of controlling interests by persons or
organisations);
• the adequacy of resources; and
• issues that relate to suitability of the person or firm to be, and remain, authorised.
Refer to
Refer back to Threshold Conditions on page 9/8 for the PRA’s Threshold Conditions
F6 Senior Managers and Certification Regime (SM&CR)

The Senior Managers and Certification Regime (SM&CR) started on 7 March 2016, came
into force for insurers on 10 December 2018, and all remaining FSMA authorised firms were
brought into scope for this regime from 10 December 2019. This new regime is the result of
changes required by Solvency II and the regulators’ intention to bring insurance into line
with new banking supervision rules.
The SM&CR introduced a new regulatory framework for individual accountability to replace
For reference only

the Approved Persons Regime (APER). It focuses on the most senior individuals in firms
who hold key roles or have overall responsibility for whole areas of relevant firms. Firms are
required to:
• ensure each senior manager has a Statement of Responsibilities, setting out the areas
for which they are personally accountable;
• produce a ‘Responsibilities Map’ that knits these together; and
• ensure that all senior managers are pre-approved by the regulators before carrying out
their roles.
The Government also introduced a ‘duty of responsibility’, which means senior managers are
required to take the steps that it is reasonable for a person in that position to take, to prevent
a regulatory breach from occurring. This formed part of the Bank of England and Financial
Services Act 2016. The SM&CR is likely to result in greater disciplinary action on individuals
should governance controls be lacking in the business area for which they are responsible.
Firms are split into three categories, to ensure that the regime is flexible and proportionate.
• 'Core': applies to the majority of firms.
• 'Enhanced': carries increased obligations, and applies to larger and more complex
organisations.
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• 'Limited scope': more light-touch, with fewer obligations than core and enhanced.
SM&CR is formed of three key pillars:
• Senior Managers Regime.
• Certification Regime.
• Conduct Rules.
F6A Senior Managers Regime (SMR)
The Senior Managers Regime (SMR) applies to persons performing the most senior roles in
a firm – 'senior managers'. These roles, known as senior management functions (SMFs),
have been specified in rules made by the PRA and FCA. Any firms planning a new senior
manager appointment, or a material change in role for currently approved individuals, must
prepare and submit an application to the regulators for approval.
The SMR has a broader scope than the previous Approved Persons Regime (APER), with
new roles including:
• Head of key business area – this relates to individuals managing a business area so
large (relative to the size of the firm) that it could jeopardise the safety and soundness of
the firm, and so substantial in absolute terms that it would warrant a separate SMF –
even though the individual performing it may report to the CEO or another SMF.
• Group entity senior manager – individuals employed in another group entity or parent
company who can exercise significant influence over the firm’s affairs.
• Significant responsibility function – senior executives responsible for certain functions
or business areas where key risks exist, but not currently categorised under a significant
management function.
The SMFs are prescribed by the PRA and the FCA, and for each regulatory body are split
into Executive and Non-executive – these are listed in the following table.
PRA FCA
Executive
• Chief executive function. • Executive director.

• Chief finance function. • Significant responsibility senior manager.
• Chief risk function. • Money laundering reporting officer or nominated
• Head of internal audit. officer.
• Head of key business area. • Compliance oversight.
• Group entity senior manager.
Non-executive
• Chairman. • Non-executive director.
For reference only

• Chair of the risk committee. • Chairman of the nominations committee.
• Chair of the audit committee.
• Chair of the remuneration committee.
• Senior independent director.
A Statement of Responsibilities (SoR) should be prepared for each senior manager,

setting out their responsibilities in managing the firm’s affairs – this should include the
appropriate Prescribed Responsibilities as set out by the FCA. It should be complemented
by the individual’s CV, personal development plan, job description, organisation chart
showing reporting lines and the firm’s responsibilities map.
A responsibilities map sets out the firm’s management and governance arrangements,
including reporting lines and responsibilities. Extending the principle of proportionality, the
FCA distinguishes between large and small firms, and acknowledges that in the latter the
map will be a simple document.
F6B Certification Regime
The Certification Regime (CR) applies to individuals who are not carrying out SMFs, but
whose roles have been deemed capable of causing significant harm to the firm or its
customers by the regulators. The CR requires firms to assess the fitness and propriety of
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persons performing other key roles, and to formally certify this at least annually. These
‘significant harm function’ roles are also specified by the regulators in rules but the
appointments are not subject to prior regulatory approval.
Within a firm, a senior manager must be allocated the responsibility for the Certification
Regime, and will be personally accountable for how it is managed.
Unlike the SMR, which applies to roles overseas with an impact on a firm's UK strategy, the
CR generally only applies to UK-based employees (with the exception of those categorised
as 'material risk takers' or those dealing with UK clients).
F6C Conduct Rules
Under SM&CR, the regulators have the power to make Conduct Rules, which will apply to
senior managers, certified persons and other employees. For senior managers (and other
approved persons), these rules replace the Statements of Principle made under APER.
There are two tiers of Conduct Rules:

1. Individual Conduct Rules – rules which apply to most employees within a firm.
2. Senior Manager Conduct Rules – rules which only apply to SMs.
F7 The Fit and Proper test (FIT) for employees and senior
personnel
An individual in senior management or a certified position under SM&CR must be (and
remain) 'fit and proper' for their function. This means that they must be tested with regard
to their:
• honesty, integrity and reputation;
• competence and capability; and
• financial soundness.
This reflects the position under the previous regime, although the onus is now on the firm to
determine whether an individual is fit and proper for the role. To ensure that individuals meet
the appropriate standards, authorised firms will carry out such measures as credit enquiries,
bankruptcy and County Court judgment checks, and references from all previous employers
in the last six years, while the regulator also carries out its own monitoring in these areas.
There is a requirement for firms to assess relevant employees at the point where their
application is prepared for submission, and for there an annual re-certification process
in place.
F8 Public Interest Disclosure Act 1998 (PIDA)

The Public Interest Disclosure Act 1998 (PIDA ) concerns ‘whistle-blowing’, which is the
public allegation of a firm’s concealed misconduct, usually from within the same
For reference only

organisation. It lists a wide range of possible illegal or criminal activities known as ‘protected
disclosures’.
Guidance on its application to regulated firms’ relationships with the regulator (but not
guidance on all the terms of the Act) is provided in SYSC, which applies to all
regulated firms.
The Act was born out of a desire to encourage a culture of openness within an organisation
on the basis that prevention is better than cure.
PIDA states that individuals who make qualifying disclosures of information in the public
interest have the right not to suffer detriment by any act or omission of their employer
because of the disclosure. The technical term for 'whistle-blowing' is 'making a qualified
disclosure'.
Protected disclosures
PIDA makes it unlawful for an employer to punish an employee (for example, terminate
their employment) for whistle-blowing as long as the report was made in good faith.
The term 'protected disclosure' is used to define a qualifying disclosure made by an
employee and links PIDA with employment rights legislation so as to ensure that
employees making qualified disclosures cannot be discriminated against by reason of
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having made that disclosure.
A qualifying disclosure is one which, in the reasonable belief of the worker, tends to show
that one or more of the following has been, is being, or is likely to be committed:
• A criminal offence.
• A failure to comply with any legal obligation.
• A miscarriage of justice.
• The putting of the health and safety of any individual in danger.
• Damage to the environment.
• Deliberate concealment relating to any of the above.
Application of PIDA
PIDA does not just apply to the financial services industry. For example, say a factory
owner deliberately fails to provide appropriate safety equipment (such as gloves, steel
toecap boots or guards on machinery) to staff performing a dangerous task. In this case,
the whistle-blower should go to the Health and Safety Executive to report the factory
owner.
PIDA protects those who make such a disclosure to their employer, provided it is made in
good faith. Firms are encouraged by the FCA to adopt appropriate internal procedures
encouraging workers to blow the whistle internally when they are concerned about
compliance-related matters. However, a wise employer would not restrict this solely to
regulatory issues.
For a larger firm, such appropriate internal procedures may include a statement of intent that
the firm takes failures seriously and which indicates what it regards as a failure. Written
procedures should show respect for the confidentiality of workers who raise concerns and
describe how such concerns may be raised (outside the usual management structure and, if
necessary, outside the firm).
The firm should consider offering access to an external body, such as an independent
charity, for advice. The procedures should also describe the penalties for making false and
malicious allegations and ensure that once a worker has made a protected disclosure they
are not victimised. In addition, they should make whistle-blowing procedures accessible to
staff of key contractors.
A less wide-ranging set of procedures may be appropriate for smaller firms.
Activity
For reference only

Locate your company's whistle-blowing procedures and familiarise yourself with them.
F9 Environmental, social and governance (ESG)

ESG has a far wider reach than just concerns about climate change, although that is a major
part of it. From regulators down to individual stakeholders such as investors or customers,
there is an increasing need for businesses to consider both their own strategy and also how
the strategy of their clients or business partners, impacts their willingness to do business
with them.
For example, the FCA has indicated these as being some of the key themes in their work
programme:
• Promotion of global standards for sustainability reporting.
• Improved transparency of performance on diversity and inclusion matters.
• Integration of ESG into financial market decision making.
On the Web
You can read more about the FCA's ESG strategy at www.fca.org.uk/publications/
corporate-documents/strategy-positive-change-our-esg-priorities.
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G Discipline and enforcement

The PRA and FCA have a range of measures and sanctions available in their enforcement
and disciplining of individuals and firms. A number of new powers were invested in the
regulators under the Financial Services Act 2012 as outlined in Proactive Intervention
Framework (PIF) on page 9/9 and Intervention on page 9/12.
We will consider the actions the PRA could take against an insurer that fails to meet
minimum capital adequacy requirements in Intervention on page 9/25 and Winding-up on
page 9/26. Here we will look at the disciplinary measures available in general terms. These
measures include financial penalties, public censure and public statements. In addition, there
are civil remedies and, even, criminal prosecution. These are valuable measures because
they show that regulatory standards are taken seriously and are being upheld, thus helping
to maintain market confidence. They may also act as a deterrent against financial crime.
G1 Public censure
Where the FCA considers that the firm has failed to meet a requirement imposed on it under
the Financial Services Act 2012, it may issue a public statement of misconduct on an
approved person. The FCA may indicate its intention by first giving a warning notice to that
person. It may use this approach where it considers a financial penalty to be inappropriate
or, possibly, in addition to a financial penalty.
Consider this…
Why would public censure be an effective punishment?
Public censure would draw the public's attention to the firm's or approved person's
misconduct, damaging their reputation. This could hinder the future success of the firm or
individual.
G2 Financial penalties
The FCA may impose financial penalties on a firm itself where the firm has contravened a
requirement of the Financial Services Act 2012 or on an approved person guilty of
misconduct. The seriousness of the offence and the extent to which misconduct may have
been deliberate or reckless will influence the regulator in determining the penalty. In its
calculations it will also take into account the:
• resource level of the person in contravention; and
• amount of profit accrued or loss avoided as a result of the contravention.
For reference only

Other circumstances will also be considered, such as:
• the conduct of the firm or person following the contravention;
• their disciplinary record; and
• their compliance history or other relevant history in relation to their dealings with the
regulator.
Example 9.3
Recent examples in the insurance sector include a fine of £29.1m against The Carphone
Warehouse (March 2019) for mis-selling mobile phone insurance, and a fine of just under
£5.3m against Liberty Mutual Insurance Europe SE for issues relating to complaints
handling, culture and governance, and the unfair treatment of customers (October 2018).
G3 Prosecution for criminal offences

The FCA also has the power to bring criminal prosecution proceedings against individuals for
a wide range of offences in England, Wales and Northern Ireland. These include:
• carrying on a regulated activity without authorisation;
• failing to cooperate with, or giving false information to, the regulator’s appointed
Chapter 9
investigators;
• failing to comply with provisions about control over authorised persons;
• providing false or misleading information to an auditor; and
• misleading the regulator.
There are guidelines in place for cases of mutual interest to the FCA and other agencies
such as the Serious Fraud Office, Crown Prosecution Service and Association of Chief
Police Officers in Scotland. These guidelines exist to assign the correct investigative agency,
enable cooperation between agencies, prevent undue duplication of work and avoid subjects
of proceedings being treated unfairly for unwarranted involvement of more than one agency.
G4 Civil and less formal remedies

The FCA may take civil or regulatory action, such as:
• injunctions;
• restitution;
• withdrawal or variance of approval;
• cancellation of permission;
• withdrawal of authorisation; and/or
• prohibition of individuals from carrying out functions in connection with regulated
activities.
It is possible that the FCA may issue a formal caution rather than prosecute an offender. If so
a record of the caution is kept by the FCA, but it is not published.
The FCA may consider that disciplinary action is inappropriate. However, because of an
inability to meet minimum standards or doubts about the fitness or propriety of an approved
person, it may feel that some remedial action is necessary. In these circumstances it may
decide to:
• vary or cancel the permission of a firm;
• withdraw its terms of authorisation;
• withdraw an individual’s status as an approved person; or
• on a more limited basis, withdraw approval for the performance of a specified function.
In the case of minor transgressions the regulator may issue a private warning. In this case
nothing would be made public but it is possible that the FCA may take such issues into
account when deciding upon any action for future breaches.
For reference only

Be aware
In rare circumstances the FCA may even ask a firm to voluntarily apply for a requirement
to be imposed (see www.fca.org.uk/publication/requirement-notices/wonga-vreq.pdf).
H Authorisation and regulation of insurers

When a UK-based insurance company decides that it wishes to transact insurance, it has to
complete and submit detailed forms to the PRA. The information given on these forms is
used by the PRA to satisfy itself that the company is financially sound, that its markets,
administration and premium structure are sound and that its key personnel are 'fit and
proper' persons.
In brief, the PRA has the power to authorise a company to transact general business, and
can also restrict authorisation to specific classes of general insurance, such as accident,
damage to property or general liability.
The Insurance: Conduct of Business Sourcebook (ICOBS) rules (see Insurance: Conduct of
Business Sourcebook (ICOBS) on page 9/28) apply to insurers.
Chapter 9
Brexit
The UK left the European Union (EU) on 31 January 2020, following the referendum on 23
June 2016. A transition period applied until 31 December 2020, during which the UK
continued to follow all the EU's rules.
From 11pm on 31 December 2020, UK insurers and intermediaries lost their passporting
rights to conduct business in the European Economic Area (EEA). To continue servicing
their EEA clients, many UK insurers and intermediaries decided to operate through new or
existing subsidiaries in the EEA, while the UK agreed to EEA firms continuing their
activities for a limited period of time, if they entered the UK's Temporary Permissions
Regime (TPR) at the beginning of 2020.
The EU has expressed its opposition to 'post box' European operations. And, it has
challenged arrangements where a new European operation was set up by the UK insurer
purely to deal with EU business post Brexit, with no or few employees physically present
in the relevant Member State.
Regarding the run-off period for existing insurance contracts, the UK has allowed EEA
insurers a 15-year period to continue servicing such contracts with UK insureds. The
matter is more complex for UK insurers’ contracts with EEA insureds, as every EU State
has implemented different rules which apply to UK insurers in its jurisdiction.
Negotiations about an equivalence regime between UK and EU regulation started in
March 2021 but have since broken down. It is unlikely the EU will grant equivalence to the
UK's regulatory regime, due to the expected divergence by the UK from EU rules in the
future, particularly in respect of Solvency II. Equivalence under EU law occurs where a
third party's regulatory framework is sufficiently similar to EU standards that firms from that
country are given access to the EU market. Equivalence is granted at the discretion of the
EU Commission and can be withdrawn or changed at any time. It is not, therefore, the
same as the passporting status enjoyed by UK firms before Brexit.
For reference only

From the UK's perspective, the EU Solvency II regime has been criticised because of its
imposition of high-risk margin requirements. In fact, during the Queen's Speech on 10
May 2022, it was announced that the Financial Services and Markets Bill will revoke
retained EU law on financial services, replacing it with an approach to regulation that is
designed for the UK.
Please note: This is the position at the time of publication. Any relevant changes that may
affect CII syllabuses or assessments will be announced as they arise on the qualification
update page for the unit.
H1 Capital adequacy
Capital acts as a buffer to absorb unexpected losses. Having enough capital of sufficiently
high quality therefore reduces the risk of a firm becoming unable to meet the claims of its
creditors.
Since capital is intended to provide the capacity to meet such unforeseen losses, it is also
crucial for maintaining the confidence of those creditors.
A solvency margin is the amount by which assets must exceed liabilities. Each company
Chapter 9
must maintain a minimum balance between its assets and how much it knows it has to pay
or would be likely to pay in liabilities.
Solvency II, implemented in January 2016, set out a strong EU-wide requirement on capital
adequacy and risk management for insurers with the aim of increasing protection for
policyholders. The strengthened regime should reduce the possibility of consumer loss or
market disruption in insurance. Solvency II has the following three pillars:
• Pillar 1 – financial requirements.
• Pillar 2 – governance and supervision.
• Pillar 3 – reporting and disclosure.
H1A Pillar 1 – financial requirements
Pillar 1 covers the financial requirements that Solvency II imposes and defines the resources
a company needs to be considered solvent, ensuring that a firm is adequately capitalised to
deliver policyholder protection.
The Solvency II capital requirements include the following:

• Solvency capital requirement (SCR): the level of capital required to give 99.5%
confidence that assets will be sufficient to cover liabilities over the following twelve
months.
• Minimum capital requirement (MCR): the level of capital required to give the national
supervisor 85% confidence that assets will be sufficient to cover liabilities over the
following twelve months.
Firms that fall below their SCR will trigger the ‘ladder of intervention’, which consists of
common European intervention tools aimed at recovering firms’ solvency position within a
set period of time. Firms which fall below the MCR will have a shorter period of time to
recover their position, with the ultimate supervisory action being closure if the solvency
position is not recovered.
Firms can calculate their capital requirements using one of the following:
Standard formula Designed to capture the standard risks a firm may face and calculate the capital
requirements to these risks. The standard formula categorises risks into risk modules
for capital purposes. The risk modules are market risk, credit risk, underwriting risk
(life and non-life) and operational risk.
Undertaking specific In some cases a firm may change the parameters on the standard formula to ones
parameters more appropriate to their business. This can only be applied to certain risks and
needs to follow a set calculation process, with ultimate approval from the regulator.
Internal models For complex firms, a full or partial internal model allows a more bespoke assessment
of a particular business and its risk profile.
Any firm wishing to use an internal model or a partial model has to obtain prior approval of
their model from the PRA. Lloyd’s managing agents have to seek approval of their models
For reference only

from Lloyd’s of London, who in turn get approval from the PRA.
H1B Pillar 2 – governance and supervision
A key part of pillar 2 is the Own Risk and Solvency Assessment (ORSA). This is a set of
processes and procedures that are used to identify, assess, monitor, manage and report the
short- and long-term risks a (re)insurance company faces or may face.
The ORSA also enables companies to determine the level of funds which would be
necessary to ensure that their solvency needs are met. This new risk management process
is a key part of pillar 2. It aims to assess, in a continuous and prospective way, the overall
solvency needs related to the specific risk profile of the insurance company capturing non-
quantifiable risk where capital is not necessarily the best measure.
ORSA information is reported to the supervisory authorities and will help inform their view of
capital adequacy as part of the supervisory review process. The matching of own funds to
the risk profile is meant to help promote a strong culture of risk management in a business.
H1C Pillar 3 – reporting and disclosure
This sets out how information should be given to the regulator and the market in the form of
public and private reports:
• Solvency and Financial Condition Report (SFCR) – a public report.
Chapter 9
• Regulator Supervisory Report (RSR) – a private report between a firm and its national
supervisor.
Be aware
Now that the UK has left the EU, Solvency II no longer applies directly, and the concept of
equivalence comes into play. This concept basically involves trading partners such as the
EU and UK agreeing to mutually recognise that each other's standards are of equal quality
and offer the same level of protection for example to customers. As at mid-2022 the EU
had not granted the UK financial services industry equivalence, although the UK
Government indicated in late 2020 that they would recognise the EU systems.
H2 Monitoring
The PRA needs to ensure that its standards, including capital requirements, are being
maintained. Regular monitoring is, therefore, an important supervisory aspect of its work.
Each financial year, every authorised insurance company must prepare and submit
information, as part of the monitoring process, to the PRA.
Refer to
Refer back to Pillar 3 – reporting and disclosure on page 9/24 for the required reports
However, with the implementation of Solvency II, insurers are obliged to provide a number of
new reports. The SFCR and the RSR contain both qualitative and quantitative reports. The
following table details the quantitative and qualitative reports required.
Sections covered in the quantitative reports Sections covered in the qualitative reports
• Balance sheet. • Business and performance.

• Premium claims and expenses. • System of governance.
• Own funds. • Risk profile.
• Variation analysis. • Valuation for solvency purposes.
• SCR and MCR. • Capital management.
• Assets.
• Technical provisions.
• Reinsurance.
• Group reporting.
Although qualitative reports are required annually, some quantitative reports are required
For reference only

quarterly. The PRA will also require additional ad hoc reporting as it has always done.
The PRA also expects firms with an approved internal model to report the model’s outputs so
they can supervise internal models on an ongoing basis. In order to do this, the PRA has
developed templates that allow firms to capture outputs from different internal model
structures. These templates recognise the differences in internal model structure and the
main risk drivers between life and non-life insurance activities.
As Lloyd’s is approved to use an internal model to calculate its SCR, the PRA expects it to
report the internal model outputs produced by the managing agents for each syndicate it
manages.
H3 Intervention
The idea of monitoring a company’s performance is only of value if the PRA is also able to
intervene if the monitoring process identifies problems. The PRA can and would intervene,
for example, if a company failed to comply with the PRA’s requirements – such as failing to
maintain adequate solvency margins.
In addition, the PRA can intervene where, for example, the company has departed
significantly from its original business plan. The PRA will take into account how close a firm
is to failing when considering actions. Its judgment about a firm’s proximity to failure will be
Chapter 9
captured in that firm’s position within the PIF. In these and other cases, the PRA has various
powers of intervention.
For example, the PRA can:
• restrict the company’s premium income;
• require the company to submit accounts more frequently than yearly;
• require the company to provide further information;
• prevent the insurer from accepting new business;
• require a company to restore its capital position;
• impose requirements on the company’s investment policy; and/or
• as a final sanction, withdraw authorisation.
The PRA does not rely entirely upon returns submitted by insurers; it also adopts a process
of risk-based assessments.
H4 Winding-up
Ultimately, if an insurance company fails to meet its requirements, the PRA can intervene
and the company can be wound-up (i.e. formally cease to operate).
I Authorisation and regulation of

intermediaries
Despite this section’s focus on intermediaries, many of the areas covered also apply to the
sales and administration activities of insurers.
Any intermediary looking to undertake insurance mediation activities must become
authorised or exempt. Certain types of insurance sale may be exempt from FCA regulation,
such as extended warranty. Certain persons are also exempted under the FCA by virtue of
their profession, e.g. solicitors.
The only exemption currently allowed is that of becoming an appointed representative (AR).
Refer to
We discussed ARs in Appointed representatives on page 2/12
Insurance mediation can be defined as the activities of introducing, proposing or carrying

out other work preparatory to the conclusion of contracts of insurance, or of concluding
such contracts, or of assisting in the administration and performance of such contracts, in
particular in the event of a claim.
The ICOBS rules (see Insurance: Conduct of Business Sourcebook (ICOBS) on page 9/28)
For reference only

apply to intermediaries.
I1 Record-keeping and reporting via RMAR

The FCA requires the reporting of certain information so it can monitor a firm’s regulatory
position. The focus of this monitoring relies upon the completion by firms of a Retail
Mediation Activities Return (RMAR) submitted via an online system named GABRIEL.
The purpose of the RMAR is to provide a framework for the collection of information required
by the FCA as a basis for its supervision activities. It also helps the FCA to monitor capital
adequacy and financial soundness. In addition, firms are required to complete and submit a
complaints return via an online form within 30 days of their accounting reference date and
half year accounting reference date.
For small retail firms a set of detailed guidance notes has been produced by the FCA.
I1A Accounting information
The frequency of reporting for this section varies according to the type of firm and the
amount of regulated income. Larger firms with higher incomes may be required to report
more frequently (quarterly). The firm must supply details of its profit and loss and balance
sheet and its assets and liabilities.
Chapter 9
The form also asks for details of client money – how it is held, the type of bank account and
amounts involved.
I1B Regulatory capital
Whether or not the firm comes under the client money rules determines the percentage of its
income it must hold as regulatory capital as a buffer against difficult trading conditions.
I1C Professional indemnity (PI) insurance
The firm has to supply details of its professional indemnity insurance, including details of the
insurer, policy number and excess.
Be aware
As we discussed in Insurance intermediaries on page 9/5, the FCA requires an
intermediary to have hold PI cover up to substantial limits of at least €1,300,380 for a
single claim, and the higher of €1,924,560 or an amount equivalent to 10% of annual
income (up to €30m).
I1D Threshold Conditions

The FCA requires confirmation that a firm continues to meet the Threshold Conditions.
These are a pre-requisite to continuing authorisation. Questions in this section of the return
relate to whether there have been any changes to a firm's Close Links and Controllers.
I1E Training and competence
The return requires a statement as to the number of individuals that give advice, the number
of supervisors, those that have left and the number currently assessed as competent.
I1F Conduct of business data
In this section of the return the FCA is seeking data in relation to:
• whether regulated activities are its core business or it is a secondary intermediary (where
insurance activities are secondary to the firm’s core business, for example a motor dealer
or estate agent);
• the number of ARs; and
• the monitoring of ARs.
The FCA uses the data collected in this section to establish the extent and nature of the
business, and to assess the potential risks posed by the business activities.
I1G Product sales data
For reference only

Data on the different types of product sold is collected on this part of the return. The FCA
gathers certain information from product providers and uses this data in conjunction with
product sales data to identify market trends. It therefore assists the FCA in carrying out its
thematic supervision work (topic-based research within the market). The combined data may
be used for supervisory purposes. Specific information is required relating to critical illness
insurances.
This section of the return is concerned with:
• the types of policies sold:
• the volume of policies;
• areas where a firm is part of a chain of supply; and
• where a particular product type formed a significant part of the firm’s business.
I1H Calculation of fees
The return requires firms to provide details of their income from regulated activities. This
information is used to calculate a firm’s fees to the FCA.
I2 Complaints monitoring
Chapter 9
We will deal with the FCA’s requirements regarding complaints handling in Complaints
procedures on page 10/13. The reporting of complaints is one of the means by which the
FCA monitors the performance of authorised firms. We will therefore deal with that
aspect here.
Firms must provide details of the type of product they have received complaints about and
the nature of the complaint, whether the complaint relates, for example, to:
• advising, selling and arranging;
• information, sums/charges or product performance;
• general admin/customer service;
• arrears; or
• another consideration.
Firms must also provide details of how long it has taken them to handle their complaints.
They must stipulate how many complaints were closed within three days, within eight weeks
or took longer than eight weeks to close.
Details of the amount of redress paid must also be provided, along with the number of
complaints that were upheld versus the number of complaints received.
Firms with high volumes of complaints have to publish details on their website and the FCA
also publish information to enable customers see how insurers and intermediaries are
performing, and compare results.
Consider this…
Why do you think the FCA is interested in complaints?
I3 FCA monitoring
The FCA has developed an approach to supervision and a risk framework. The FCA is
primarily concerned with a firm’s business model and culture to see whether the business is
run on a foundation of the fair treatment of customers. It then looks at how this translates
through to product design and the services it provides to customers and whether the
processes in place support appropriate outcomes for customers.
J Insurance: Conduct of Business

Sourcebook (ICOBS)
ICOBS is a rulebook that applies specifically to the sales and administration process for
general insurance. Importantly, because of particular issues that arose with payment
protection indemnity policies, when firms advise on or sell these, and certain pure protection
For reference only

(life) policies, there are more stringent requirements than those that apply generally. The
FCA has also recently introduced stricter rules governing the sale of guaranteed asset
protection (GAP) policies.
Some of the rules in the FCA Handbook we have already looked at are more specifically
addressed by ICOBS. Generally, therefore, in order to be authorised a firm has to meet the
requirements of the FCA’s principles and standards set out in the Handbook and also comply
with the more specific rules of ICOBS.
Be aware
The introduction of the Insurance Distribution Directive (IDD) in October 2018 has
meant a number of changes to ICOBS. See Insurance Distribution Directive (IDD) on page
9/33 for more details on the IDD and the main changes from the Insurance Mediation
Directive (IMD).
There are eight chapters in ICOBS. In the following sections we will give a brief summary
of them.
J1 Application of the ICOBS rules

Chapter 9
This section defines the range of activities to which the rules apply, and includes the fact that
they apply to the activities of the firm’s ARs in the UK. The particular activities are:
• insurance distribution activity;
• effecting and carrying out contracts of insurance (including claims management);
• managing the underwriting capacity of a Lloyd’s syndicate as a managing agent at
Lloyd’s; and
• communicating or approving financial promotions.
Where there is a chain of intermediaries between the insurer and the customer, the rules
apply to the intermediary who is in contact with the customer, not to others in the distribution
chain. If an insurer is dealing directly with a customer the rules also apply to them. Some
exemptions apply in relation to the application of the rules for reinsurance and ‘large risks’
(for which there is a definition).
J2 General matters
Different rules apply, depending on the category of customer. A consumer is one who is
acting in their private capacity. Otherwise, customers will fall into the category of
'commercial customer'. A customer whose capacity is unclear must be treated as a
consumer. However, if the customer is acting in the capacity of both consumer and a
commercial customer, they are to be treated as a commercial customer unless the customer
is acting mainly for the purposes unrelated to their trade or profession in relation to a
particular contract of insurance, in which case the customer is a consumer. On the whole,
consumers receive more detailed protection.
J2A Financial promotions
A financial promotion is the phrase the FCA uses to describe advertising of any kind
intended to encourage a person to buy insurance or make an investment. There are rules
that relate to product brochures, advertising and websites. Firms must show that they have
taken reasonable steps to ensure that promotions are clear, fair and not misleading. Firms
are required to check and keep records to demonstrate that any promotion they undertake is
compliant with the rules.
J2B Inducements
As a firm’s first duty is to its customers it has to take care that payments it receives, including
commission or hospitality from insurers, don’t lead (induce) it to favour one insurer above
another.
J2C Record-keeping
Records have to be kept to demonstrate compliance with the rules, particularly how sales
were made, the reason for any advice given, and why it meets the customer’s demands
and needs.
For reference only

J2D Exclusion of liability
It is not possible to contract out of regulatory requirements, however it is permissible to
delegate tasks to a third party. In doing so, if there are absolute obligations placed on the
firm itself these will be retained. For example, a regulated firm cannot opt out of its obligation
to handle claims promptly because of the inefficiency of a third-party firm to which it has
delegated certain claims functions.
The requirements refer to the general law, including the Unfair Terms in Consumer
Contracts Regulations 1999 (UTCCRs) (for contracts entered into before 1 October 2015)
and the Consumer Rights Act 2015, which also limits the scope for a firm to exclude or
restrict any duty or liability to a consumer.
J3 Distance communications
The Distance Marketing Directive applies rules to protect consumers who have entered
into an insurance contract through a distance sale (e.g. over the telephone or through a
website). They give consumers a cooling-off period and for a sale over the telephone, with
the customer’s explicit permission, the firm can shorten the sale and send the rest of the
information by post or email.
Generally, information in a prescribed form and in a ‘durable medium’ (i.e. paper not an
Chapter 9
email) must be supplied before the conclusion of the contract. There are special rules
relating to payment of the premium and to cancellation rights.
J4 Information about the firm, its services and

remuneration
Insurers and insurance intermediaries have obligations under the rules to consider the
information needs of the customer. The firm should consider what a customer needs in order
to understand the relevance of the information and at what point in the sales process the
information will be most useful to the customer to enable them to make an informed decision.
The minimum information required to be disclosed is prescribed and additional information is
needed to be provided by insurance intermediaries.
In order to inform its customers about the extent to which the firm has carried out the search
in the market, the firm must state whether the advice given is on the basis of a ‘fair analysis
of the market’. To make this claim, a firm must, using professional criteria, have considered a
sufficiently large number of insurer’s products. If it does not claim a fair analysis, the firm
must state whether there is a contractual restriction on the number of insurer’s products on
which it may provide advice. If this is the case, the customer is entitled to know which
insurers the intermediary has approached and must be given this information if they
ask for it.
If no recommendation is given to a customer, the firm must make the customer aware of the
need for the customer to ensure that the policy meets their demands and needs. It is not a
requirement that commission should be disclosed unprompted. However, if a commercial
customer does ask, it must be disclosed promptly and the amount must include the earnings
of any associates in addition to the firm’s earnings. Although FCA rules do not oblige firms to
disclose commission unless requested by a commercial customer, an intermediary also has
fiduciary duties when acting as an agent for any customer, and under agency law is obliged
to account for their earnings and not make a secret commission.
J5 Identifying client needs and advising

There are rules concerning the assessment of a customer's demands and needs and the
suitability of a contract that is recommended. An intermediary must provide a statement of
the customer's 'demands and needs' and give reasons for any advice given in relation to a
policy.
Because of the nature of PPI products, especially those that are sold in conjunction with a
loan or mortgage, limited information may be requested initially. The reason for this is
because the provider relies upon eligibility criteria as one of the main means of underwriting
and risk selection. One of the problems this creates is that those who may have been paying
premiums for some time could find that for health or other reasons, they are ineligible to
claim. They may only find this out at the point of claim notification. This has prompted a
separate rule for such contracts, placing an onus on the advising firm to check eligibility
For reference only

when providing initial advice.
Refer to
See Insured's duty of disclosure – non-consumer insurance on page 5/3 for the impact of
IA 2015
The FCA provides guidance on the need to explain the duty of disclosure of material
circumstances, consequences of failure and the need to ask clear questions, in order to
avoid problems of claims avoidance arising from non-disclosure.
J6 Product information
Certain rules deal with the information that must be given on the scope of the cover provided
under policies. A firm must take reasonable steps to ensure a customer is given appropriate
information about a policy. This information must be made in good time and be in a form that
the customer can use to make an informed decision about the arrangements proposed.
Generally, the insurer is responsible for producing the information and for providing its
content. Where there is an authorised intermediary, that firm is generally responsible for
providing the information to the customer. The type of information provided to customers and
its timing are specified in the rules and include:
Chapter 9
• price disclosure, separating the premium from the prices for any other goods or services;
• the law applicable to the contract;
• complaints handling procedures, including reference to the FOS;
• the EEA State of the insurer and the head office address;
• for pure protection (some life) policies or payment protection indemnity insurances there
is a strengthening of disclosure requirements as an FCA rule (this is by way of a
guidance note for other insurances) in relation to significant exclusions, the importance of
reading the document and pricing information, together with the production of a policy
summary; and
• cancellation provisions.
The summary itself must be provided under the rules for PPI or pure protection policies.
Alternatively, it may be produced in response to the FCA guidance note, as a means of
ensuring that a client can make an informed choice.
Be aware
The FCA has also updated its rules to ensure they are in line with the Insurance
Distribution Directive (IDD), which requires that certain information for non-life policies is
provided to the customer in the form of a standardised insurance product information
document (IPID), such as details of the risk, how premiums are charged, and key
exclusions. We look at the broader changes introduced by the IDD in Insurance
Distribution Directive (IDD) on page 9/33.
J6A Guaranteed asset protection (GAP) insurance

Following a review on general insurance add-ons, the FCA voiced concerns about
competition in the guaranteed asset protection (GAP) insurance market and consulted on
changes to remedy this. As a result it published rules, which came into force on 1 September
2015 and were updated on 1 October 2018, aimed at empowering customers when making
decisions about purchasing add-on GAP insurance, and limiting the point-of-sale advantage
of add-on distributors.
Firms distributing add-on GAP insurance in connection with the sale of a motor vehicle are
required to:
• provide customers with prescribed information to help them shop around and be more
engaged when making decisions about purchasing the product; and
• introduce a deferral period, which means GAP insurance cannot be introduced and sold
on the same day.
For reference only

Except as specified in the rules, a GAP contract cannot be concluded by a firm until at least
two clear days have passed since the firm provided the information prescribed for this type of
insurance.
Before a GAP contract is concluded, a firm must give the customer the following information:
• the total premium of the GAP contract;
• significant features and benefits;
• significant and unusual exclusions or limitations, and cross references to the relevant
policy document provisions;
• duration of the policy;
• whether the GAP contract is optional or compulsory;
• when the GAP contract can be concluded by the firm; and
• the date the above information is provided to the customer.
In addition, the firm must also comply with the rules described in Product information on
page 9/30.
J7 Cancellation
The cancellation rules do not apply to short-term policies or events (of less than one month's
Chapter 9
duration). Neither do they apply where the terms of the contract have been met in full.
Beyond these, this section of ICOBS does give a consumer, though not a commercial
customer, the right to a cooling-off period of 14 days for most general insurance contracts.
Strictly speaking this is not a 'cooling off' period since, in certain circumstances, the rules
allow insurers to charge for the services that they have provided when a policy is cancelled.
There is no provision for insurers to make a charge for the time they have been on risk
unless a claim has been made.
J8 Claims handling
The general principle adopted is that an insurer is responsible for the handling of claims
whether personally undertaken, delegated or outsourced.
The firm must keep their client advised on the progress of their claim, and there are special
rules for when an insurer wishes to decline to deal with a claim.
The rules themselves relate to the fair and prompt handling of claims and the reasonable
guidance that must be given. Insurers must not unreasonably reject a claim and must settle
promptly once the claim has been agreed. Intermediaries must act with skill, care and due
diligence and not put their own interests above those of their client. Any conflict of interest
must be resolved with the client’s approval of the proposed arrangement.
We considered in chapter 5 the implications of non-disclosure and misrepresentation on the
payment of claims. There is a further requirement imposed upon insurers in relation to
warranties and the payment of claims. FCA rules state that an insurer will not refuse to pay a
claim (from a consumer policyholder only) where a warranty has been breached, unless the
circumstances of the claim are connected with the breach and the warranty is material to the
risk and was drawn to the customer’s attention before the conclusion of the contract.
Refer to
See Insured's duty of disclosure – non-consumer insurance on page 5/3 and
Consequences of a breach of the duty of fair presentation on page 5/13 for the impact of
IA 2015
The ICOBS rules now also reflect the protection given to consumers in relation to non-
disclosure or misrepresentation in recent legislation.
For reference only

Following the implementation of the Insurance Act 2015, effective from August 2016,
insurers have more restrictions placed on them where there is a breach of warranty by a
non-consumer customer.
The Enterprise Act 2016 amended the Insurance Act 2015 by adding an implied term into
every contract of insurance that insurers must pay any sums due to their insured within a
‘reasonable time’. If a valid claim is not paid within a reasonable time, the insured will be
entitled to enforce payment of the claim and pursue a claim for damages. The potential
implications of this for insurers has already been explored earlier in this chapter.
Refer to
Enterprise Act 2016 covered in Speed of indemnity – Enterprise Act 2016 on page 7/10
Motor claims that occur abroad have separate prescriptive rules to ensure compliance with
the terms of EU motor insurance directives. These include the requirement for insurers to
appoint claims representatives in each Member State of the EU as required by the Fourth
EU Motor Insurance Directive.
Chapter 9
K Insurance Distribution Directive (IDD)

Insurance Distribution Directive
The requirements of the Insurance Distribution Directive 2016/97/EC (IDD) have
applied to firms since 1 October 2018. This means that although the UK has now left the
EU, the IDD is still in force in the UK as it is part of UK law.
The IDD sets out consumer protection provisions in insurance and the scope of regulation
includes all firms that sell, advise on, or conclude insurance contracts and those who
assist in administering and performing them, including those that shortlist as part of a
selection process (such as aggregators), or introduce insurance. However, just providing
general information about insurance products, insurers or brokers without collecting such
information has been excluded, as is providing data on potential policyholders to insurers/
brokers.
The key provisions of the Directive are:
• Professionalism. All firms engaged in any of the activities covered by the Directive
must possess appropriate knowledge and ability to complete their tasks and perform
their duties adequately, such as: the insurance market; applicable laws governing
insurance distribution; claims handling; complaints handling; assessing customer
needs and business ethics standards/conflict of interest management. Staff must
complete at least 15 hours of professional training or development per year.
• Commission disclosure. Pre-contractual disclosure of the intermediary and the
nature, not amount, of their remuneration (whether commission, fee or other type of
arrangement). This could be waived for contracts involving large risks or for
professional customers. The pre-contract disclosure regime extends to insurance
undertakings. Firms must state what type of firm they are (intermediary or insurer) and
For reference only

whether they provide a personal recommendation. Firms that sell insurance on a non-
advised basis must ensure that the products they are selling fulfil the customers most
fundamental needs.
• New product governance requirements, which are largely in line with the FCA’s
product governance requirements.
• A new category of insurance settler called Ancillary Insurance Intermediaries. This
includes connected travel insurance providers that don’t sell or introduce insurance as
their main business, but still do so and therefore are subject to selling rules.
• New duties applicable to insurance companies that are selling products through
companies that are not authorised by the FCA.
• A requirement for all general insurance firms in the retail and small corporate market to
provide customers with Insurance Product Information Documents. An IPID is a
short, pre-contractual, non-personalised product summary document, the layout of
which is fixed and must follow closely what is prescribed in the IDD. One must be
issued to every retail customer purchasing a general insurance product, regardless of
the channel being used, ahead of closing a sale or renewal. The purpose is to allow
customers at the quotation stage to compare similar products offered by different
insurers in an easy-to-follow consistent way so they can see at-a-glance the
differences between products and make informed decisions. The requirement to
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provide an IPID only applies to consumer insurance contracts. This requirement now
forms part of ICOBS 6.
K1 The IDD general principles

The IDD introduces general principles that apply to all insurance distributors. These are
overarching requirements, which apply in a similar way to the UK’s Principles for
Businesses. In summary, these are:
• Distributors must act honestly, fairly and professionally in the best interests of their
customers.
• Distributors must communicate in a way which is clear, fair and not misleading, including
ensuring that marketing materials are clearly identifiable as such.
• Remuneration of a distributor or its employees, and performance management of
employees, must not conflict with the duty to act in the customer’s best interests.
The IDD definition of 'remuneration' includes commission, fee, charge or other payment,
including an economic benefit of any kind or any other financial advantage or incentive
offered or given in respect of the insurance distribution activity.
Firms should note that these overarching general principles will apply to all firms carrying out
insurance distribution activities, where they have a direct impact on the policyholder. This
means that firms conducting insurance distribution activities as part of a distribution chain will
be caught by the customer’s best interests rule. This will include, for example, a wholesale
intermediary who concludes a policy placed with it by a retail intermediary, or a comparison
website which proposes a contract but directs a customer to another intermediary or insurer.
L Money laundering
Be aware
While general insurance does not come under the money laundering regulations that
apply to other financial services, it does come under the Proceeds of Crime Act 2002
(POCA) which includes some aspects of money laundering.
Money laundering is the process by which criminals and terrorists convert money that has
been obtained illegally into legitimate funds.
This does not apply only to large criminal organisations; it may also be carried out on a much
smaller scale.
Money laundering has a particular relevance in the financial services sector. A criminal may
choose to deposit their illegally obtained cash into an apparently legitimate arrangement,
such as a pension, life policy, unit trust, building society account or into traveller’s cheques.
They may take out a general insurance policy and then cancel it shortly after so they can get
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the return premium. Criminals are happy to discount money if the result of the transaction is
that it becomes ‘clean’ money.
There are three stages in the money laundering process:
Placement This is the process of putting cash into the financial system and converting it into other
financial assets, such as cheques or even property.
Layering It may still be possible to trace the money back to its illegal origins so the criminal will want
to get involved in layering. To conceal the origins of the money they will create a series of
complex transactions (this is layering). This may include fund transfers overseas or trading
in stocks or futures.
Integration Integration is where the criminal finally gets access to the money. There are many ways of
giving the impression of something legitimate. The replacement of stock and its sale to the
public is one example. Often much more sophisticated methods are used. Buying property
and leasing it or creating a company and drawing a salary are just two examples.
L1 Application of the law and regulation

In general terms there are three strands to the legal rules that apply to money laundering.
These strands are:
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• Specific laws that define what represents a criminal offence and the penalties that apply
to such acts (which are of general application).
• Money laundering regulations that apply to a stated range of firms carrying on activities in
the financial sector (but not specifically to general insurance or general insurance
mediation).
• Regulatory rules and guidance apply in different ways to different categories of firms.
L2 Specific legislation
The most important legislation relating to money laundering is given in this section.
L2A Criminal Justice Act 1993
This extended the scope of the Criminal Justice Act 1988 (which applied only to drug
trafficking and terrorism) by making it a criminal offence to launder gains from other crimes. It
not only requires individuals to not be actively involved in money laundering, collusion or
concealment, but also that they report any knowledge or suspicion of money laundering. It
also makes ‘tipping off’ a suspected person a criminal offence.
The Act provides for ‘unlawful conduct’ to include any conduct occurring in a country outside
the UK that would be unlawful in that country or which would have been unlawful if
committed in the UK.
The offences
There are three principal offences under the terms of the Criminal Justice Act 1993:
• Assistance to a criminal where you either know or suspect, or ought to have known or
suspected, that money laundering was taking place (maximum 14 years’ imprisonment).
(This means that you help them retain the benefits of their criminal activities or you
acquire, possess or use the benefits yourself, or you conceal or transfer the proceeds in
order to avoid prosecution or confiscation of assets.)
• Failing to report either actual knowledge or suspicion of money laundering (maximum five
years imprisonment). This is extended under POCA (see Proceeds of Crime Act 2002
(POCA) on page 9/35).
• Tipping off (maximum five years’ imprisonment). Deliberately telling someone that you
suspect them of being involved in money laundering or that there is a formal or police
investigation under way.
Consider this…
Why do you think the law takes such a strong approach to money laundering?
L2B Proceeds of Crime Act 2002 (POCA)

The Proceeds of Crime Act 2002 (POCA) extends the range of offences for money
laundering.
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POCA set up an Assets Recovery Agency (ARA) with financial investigators whose purpose
was to recover the proceeds of criminal activity. Criminal lifestyle is a key test and is defined
in the Act. There are provisions for fines and confiscation or restraint orders.
Offences under POCA are:
• Concealing, disguising, converting or transferring criminal property or removing it
from the UK.
• Acquiring, possessing or using criminal property.
• Failing to disclose that someone else is engaged in money laundering.
Like the Criminal Justice Act 1993, POCA applies across the board in the UK and therefore
to all employees of regulated firms, whether or not the specific money laundering rules apply
to those firms.
L2C Serious Crime Act 2007
The Serious Crime Act 2007 extended a range of serious crime prevention orders that
could be made by the High Court and amended POCA in a number of important respects. It
abolished the ARA and transferred all its activities to the Serious Organised Crimes Agency
(SOCA). SOCA’s operations merged into a larger National Crime Agency (NCA) created
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through the Crime and Courts Act 2013, which commenced operations on 7 October 2013.
On the Web
NCA: www.nationalcrimeagency.gov.uk
L2D Serious Crime Act 2015

The Serious Crime Act 2015gave effect to a number of legislative proposals relating to
serious and organised crime. It builds on current law to ensure the National Crime Agency,
the police and other law enforcement agencies have the powers they need to effectively and
relentlessly pursue, disrupt and bring to justice serious and organised criminals. The Act
contains provisions amending the Proceeds of Crime Act 2002 to strengthen the asset
recovery process including increased prison sentences for failure to pay confiscation orders.
L3 EU money laundering regulations

L3A The Money Laundering Regulations 1993
MLR 1993 is foundational to money laundering prevention in the financial sector. It requires
the creation and maintenance of systems to prevent and control money laundering and
effective training to be in place.
The provisions apply to defined organisations operating in the UK financial sector, but not
general insurance activities, including mediation activities.
L3B The Money Laundering Regulations 2017
Further Regulations were brought into force in 2003, but these were supplemented by the
Money Laundering Regulations 2007, effective from December 2007, and then the Money
Laundering Regulations 2017 (MLR 2017), effective from June 2017. MLR 2017 covers a
wider range of businesses. These are defined as:
• credit and financial institutions (including life insurance companies and financial
advisers); and
• auditors, accountants, tax advisers and insolvency practitioners, independent legal
professionals, trust or company service providers, estate agents, high value dealers
(dealing with goods with a transaction value greater than €15,000).
MLR 2017 covers the following areas:
• Customer due diligence. This involves verifying the identity of the customer (and the
beneficial owner, if different) and obtaining information on the purpose and intended
nature of the business relationship. If the customer is not present for the transaction
further measures are required, such as the production of additional documents,
confirmation of identity from an appropriate financial institution, or payment through a
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credit institution.
• Policies and procedures. These are to be risk-sensitive. The rules relate to due
diligence measures, reporting, record-keeping, internal control, risk assessment and
monitoring in order to prevent activities related to money laundering and terrorist
financing.
• Registration. Organisations must register and there are detailed procedures for this as
well as a list of reasons for the FCA to refuse registration.
• Enforcement. Enforcement powers include the right to enter and inspect premises and
take copies of any relevant documents. Designated authorities may impose ‘appropriate’
civil penalties. ‘Appropriate’ is defined as being effective, proportionate and dissuasive. If
partners or directors are personally responsible for failure to comply with regulations they
may be fined (up to an amount not exceeding the statutory maximum) or imprisoned for
up to two years, or both. In this case they would not also be liable to a civil penalty.
L4 Regulatory rules and guidance

The FCA has a responsibility to prevent and detect money laundering. Regulated persons
should be aware of the risk that their business could be used in connection with the
commission of financial crime. It also provides that they take appropriate measures (in
relation to their administration and employment practices and the conduct of transactions by
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them) to prevent financial crime, facilitate its detection and monitor its incidence.
‘Financial crime’ is defined in the Act as fraud, dishonesty, misconduct in, or misuse of
information relating to, a financial market or handling the proceeds of crime.
Firms must have in place systems and controls, which must include giving their employees
suitable training, with regard to money laundering. The governing body and senior
management must be in receipt of certain information and the money laundering reporting
officer must make a report, at least annually, on how the systems and controls operate and
on their effectiveness.
The firm also needs to document both its risk profile and risk management policies in relation
to money laundering. On a day-to-day basis it must take the risk of money laundering into
account when developing new products, taking on new customers and when changing its
business profile.
Money laundering reporting officer (MLRO)

A director or senior manager must take overall responsibility for establishing and maintaining
effective anti-money laundering systems and controls within the firm. This role is often
undertaken by the money laundering reporting officer (MLRO).
The MLRO is:
• expected to be based in the UK;
• required to have a certain level of authority and independence within the firm; and
• required to have sufficient resources and information to enable them to fulfil their
responsibilities.
Anyone who suspects that money laundering is taking place must report this to the MLRO.
The MLRO must then decide whether the suspicious transaction should be reported to
the NCA.
L5 Protection measures
To aid the detection of money laundering it is important to protect the person who reports
their suspicions. The NCA must know who they are as they may need to obtain further
information from them in pursuing their investigations. Outside the investigation, however,
their names will be concealed and they will not be called upon to give evidence.
L6 Client verification
Firms must take all practical measures to check the identity of new clients and that their
addresses are genuine. Money laundering regulations are not specific as to the precise
nature of appropriate means of identification. Guidelines issued by JMLSG state that client
verification for individuals should be by means of a valid passport, valid photocard driving
licence (full or provisional), National Identity card (non-UK nationals), firearms certificate or
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shotgun licence or an identity card issued by the Electoral Office for Northern Ireland.
A home visit to the client is suitable evidence, provided that it is clear that the house is
genuinely the personal residence of the client and this is one of two means of identification.
A client’s bank or another reputable financial institution can be asked to verify their identity
where they are not being met face-to-face.
In the case of a company, it would be necessary to establish its full name, registered
number, registered office in country of incorporation and business address and to check that
it legally exists for normal business operations. This could be done by, for example, obtaining
a copy of its Certification of Incorporation or searching the relevant company registry. Any
complex ownership arrangements should be clarified.
Proof of identity should be obtained as soon as possible and transactions should not be
completed until this has been provided. Although general insurance firms are not subject to
the Money Laundering Regulations they must ensure that they are able to demonstrate to
the regulator that the extent of their customer due diligence measures is appropriate in view
of the risks of money laundering and terrorist financing.
Any verification difficulties should usually be reported to the MLRO and, possibly, by the
MLRO to the authorities. Records must be kept for five years.
Chapter 9
L7 Summary of money laundering rules

General insurers and intermediaries are subject to the high-level rules, and in particular
SYSC, which contains specific requirements regarding anti-money laundering measures.
Their employees are also individually subject to the terms of CJA and POCA. Therefore,
although general insurers and intermediaries are not directly impacted by the Money
Laundering Regulations, there are specific money laundering rules that apply to them. Firms
must follow guidance issued by the JMLSG in relation to client identification and verification,
and appropriate systems and controls.
L8 Bribery Act 2010

The Bribery Act 2010 is one of the most far-reaching Acts relating to improper payments –
the range of offences under the Act is extremely wide. The Act has been in force since 1 July
2011 and applies to all commercial organisations.
The Act created four new criminal offences:
failure by a
requesting, commercial
giving, agreeing to bribing a foreign organisation to
promising or receive or public official prevent active bribery
offering a bribe accepting a bribe being committed on
its behalf
It is the last of these that has been a main cause for concern because of the possibility of
‘failing to prevent’ bribery. Linked to this, even before its introduction, very heavy fines had
been levied by the FSA (two in excess of £5 million) in relation to inadequate measures
taken by firms to prevent financial crime.
The terms of this Act must be taken into account alongside the need for effective measures
to combat money laundering and other areas of financial crime.
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Chapter 9
Key points
Compulsory insurance
• The Employers' Liability (Compulsory Insurance) Act 1969 made it compulsory for
employers in Great Britain to effect employers' liability insurance.
• The Road Traffic Act 1988 (as amended) makes it illegal to drive a motor vehicle on a
public road or any other public place without insurance covering third-party property
damage, injury or death.
• Other compulsory insurances are public liability insurance for riding establishments
and for private individuals owning dangerous wild animals or dogs.
• Professional indemnity insurance is compulsory for certain professions, e.g. solicitors
and insurance intermediaries.
Legislation concerning third parties
• The Contracts (Rights of Third Parties) Act 1999 sets out the circumstances in which a
third party will have a right to enforce a term of the contract.
• The Third Parties (Rights Against Insurers) Act 2010 protects insurance proceeds from
the effects of insolvency.
UK regulatory framework
• The PRA, FCA and FPC form the UK's financial services regulation framework.
• Under the Bank of England and Financial Services Act 2016, the PRA became part of
the Bank of England and a new Prudential Regulation Committee (PRC) was
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established.
The Prudential Regulation Authority (PRA)
• The PRA is responsible for the prudential regulation of all ‘systemically important firms’
such as insurers.
• Its primary objectives are to contribute to ensuring that policyholders are appropriately
protected.
• The PRA’s risk assessment framework supports its additional objective to protect
policyholders as well as the financial system.
The Financial Conduct Authority (FCA)
• The FCA is responsible for the conduct of business and market issues for all firms, and
prudential regulation of small firms.
• The FCA’s main objective is to ensure the relevant market functions well.
• The FCA has three operational objectives covering the areas of consumer protection,
integrity and competition.
Chapter 9
The FCA Handbook and PRA Rulebook
• There are eleven Principles for Businesses.

• The FCA expects authorised firms to embed the fair treatment of customers principle
into their corporate strategy.
• The PIDA concerns public allegations of a firm’s concealed misconduct, usually within
the same organisation.
• Senior management functions should be carried out only by those who meet
appropriate standards, i.e. those who are identified as 'senior managers' by firms and
authorised as such by the FCA.
Key points
Discipline and enforcement
• There are a number of measures and sanctions available to the regulators in their
enforcement and disciplining of firms and individuals.
• The PRA is able to take action against a firm that fails to meet minimum capital
adequacy requirements.
Authorisation and regulation of insurers
• A UK-based company wishing to transact insurance in the UK must be authorised by

the PRA.
• To be authorised a firm must be operated by fit and proper persons and meet capital
adequacy requirements.
• Each authorised firm must make certain reports to the FCA on a prescribed basis.
Authorisation and regulation of intermediaries
• The only way to carry out insurance mediation activity in the UK is to be authorised by
the FCA or exempt.
• An authorised intermediary must supply the FCA with a Retail Mediation Activities
Return (RMAR).
Insurance: Conduct of Business Sourcebook (ICOBS)
• Different rules apply depending on whether the customer is a private individual or a

commercial client.
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• There are more stringent rules relating to advice on PPI contracts and pure protection
contracts as well as the sale of GAP products.
• ICOBS contains rules concerning financial promotions, identifying client needs,
advising and selling standards and product disclosure.
• There are also rules on cancellation and claims handling.
• Specific rules apply for contracts sold at a distance (e.g. call centres) and for electronic
means of communication.
Money laundering
• Money laundering is the process by which money that has been obtained illegally is
converted into legitimate funds.
• There are serious penalties for aiding money laundering, failing to report money
laundering and for tipping off those suspected of money laundering.
• All authorised persons by the FCA must appoint an MLRO.
• The Proceeds of Crime Act 2002 establishes a number of offences around the
handling of criminal property and the reporting of money laundering.
• Firms must take all practical measures to check the identity of new clients.
Chapter 9
Question answers
9.1 b. Employers’ liability.
9.2 d. During the whole lifecycle.
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Chapter 9
Self-test questions
1. Which of the following is not a type of compulsory insurance in the UK?
a. Public liability insurance for riding establishments. □
b. Employers' liability insurance. □
c. Travel insurance. □
d. Motor insurance. □
2. What type of insurance are insurance intermediaries required to hold?
a. Professional liability insurance. □
b. Public liability insurance. □
c. Public indemnity insurance. □
d. Professional indemnity insurance. □
3. Which concept is reformed by the Contracts (Right of Third Parties) Act 1999?
a. Estoppel. □
b. Privity of contract. □
c. Proximate cause. □
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d. Subrogation □
4. Which of these is not a threshold condition that the PRA requires to be met when
becoming authorised?
a. Be appropriately staffed. □
b. Have a head office in Europe. □
c. Be capable of being effectively supervised. □
d. Conduct business prudently. □
5. The Prudential Regulation Authority's Principles for Businesses states that a firm
must maintain financial resources that are:
a. Adequate. □
b. Easy to liquidate. □
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c. Equal to its liabilities. □

d. Less than its liabilities. □
6. Under its disciplinary procedures, when is the Prudential Regulation Authority most
likely to take action against an approved person, instead of the firm?
a. When the approved person has deliberately breached the regulations. □
b. When the approved person has delegated correctly, but the fault was outside of □
their control.
c. When the approved person has performed an influence and a regulatory failure □
has occurred in the area for which they are responsible.
d. When the firm has breached the reasonable care rule in maintaining its systems □
and controls.
7. The Insurance: Conduct of Business sourcebook (ICOBS) is issued and regulated by
the:
a. Association of British Insurers. □
b. Chartered Insurance Institute. □
c. Financial Ombudsman Service. □
d. Financial Conduct Authority. □
8. What are the three stages in money laundering?
a. Placement, layering and integration. □
b. Placement, hiding and integration. □
c. Finding, layering and integration. □
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d. Placement, layering and reusing. □
9. A transaction which is suspected of involving money laundering has been reported to
and validated by a firm's money laundering reporting officer (MLRO). Which
organisation should the MLRO report this matter to?
a. HM Revenue & Customs. □
b. The Department for Business, Energy & Industrial Strategy. □
c. The Serious Fraud Office. □
d. The National Crime Agency. □
10. What is the principal purpose of the Proceeds of Crime Act 2002?
a. To enable retrieved goods which have been obtained by theft or deception to be □
returned to their rightful owners.
b. To empower authorities to confiscate funds where it is believed that such funds □
Chapter 9
have been obtained unlawfully.

c. To evaluate the annual loss to the British economy from organised criminal □
activities.
d. To facilitate the conviction of persons suspected of money laundering activities. □
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Consumer protection and
10
dispute resolution
outcomes
Introduction
A Data protection law in the UK 12.1
B Unfair contract terms and the Consumer Rights Act 2015 11.2
C Ethical standards 14.1, 14.2
D Training and competence 11.8
E Complaints procedures 13.1
F Financial Ombudsman Service (FOS) 13.2
G Financial Services Compensation Scheme (FSCS) 13.3
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Key points
Question answers
Self-test questions
Learning objectives
• describe the effects of data protection legislation;
• explain the scope and operation of the CII Code of Ethics;
• explain the Financial Conduct Authority (FCA) requirements for training and competence;
• describe the prescribed FCA complaints procedures and the services provided by the
Financial Ombudsman Service (FOS); and
• explain the provisions of the Financial Services Compensation Scheme (FSCS). Chapter 10
Introduction
In this chapter we will consider the rules and regulations in place for the protection of data
and also look at the ethical standards which firms must comply with. We will go on to explain
why it is important to have effective complaints handling procedures in place and examine
the roles of the Financial Ombudsman Service (FOS) and the Financial Services
Compensation Scheme (FSCS).
Key terms
Code of Ethics Competence Complaints handling Data protection

Ethical standards Financial Financial Services Personal data
Ombudsman Service Compensation
(FOS) Scheme (FSCS)
Special category
data
A Data protection law in the UK

A1 UK General Data Protection Regulation (UK GDPR)
Who does the UK GDPR apply to?
The UK GDPR applies to data controllers and processors in the United Kingdom, including
Northern Ireland. Prior to its introduction, the European Union (EU) GDPREU General Data
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Protection Regulation (EU GDPR) applied.
The UK GDPR places legal obligations on processors. For instance, firms are required to
maintain records of personal data and processing activities, and a firm has significant legal
liability if it is responsible for a breach.
Controllers are not relieved of their obligations where a processor is involved. The UK GDPR
places obligations on controllers to ensure their contracts with processors comply with the
regulations.
What information does the UK GDPR apply to?
It applies to personal data of an identified living individual. However, the definition of
personal data reflects changes in technology and in the way in which information is
collected. It makes it clear that information such as an online identifier – e.g. an IP address –
can be personal data.
It also applies to both automated personal data and to manual filing systems where personal
data is accessible according to specific criteria. This is similar to the EU GDPR but wider
than the definitions in the previous UK data protection legislation. It could include
chronologically ordered sets of manual records containing personal data. Personal data that
has been anonymised – e.g. key-coded – can fall within the scope of the UK GDPR
depending on how difficult it is to attribute such data to a particular individual.
Sensitive personal data
The UK GDPR refers to sensitive personal data as 'special categories of personal data'.
These categories include:
• race;
• ethnic origin;
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• politics;
• religion;
• trade union membership;
• genetics;
• biometrics (where used for ID purposes);
• health;
• sex life; or
Chapter 10 Consumer protection and dispute resolution 10/3
• sexual orientation.
Principles
Under the UK GDPR, the data protection principles set out the main responsibilities for
organisations. The most significant addition is an emphasis on accountability. The UK GDPR
requires firms to show how they comply with the principles – for example, by documenting
the decisions they take about a processing activity.
Consider this…
Data Protection Principles under the UK GDPR
The following principles apply to all personal data:
1. Lawfulness, fairness and transparency: data should be processed lawfully; data should
be handled in ways people would expect giving consideration to the effect of
processing the data on the individuals concerned; and there should be full compliance
with the obligations of the 'right to be informed'.
2. Purpose limitation: data should only be collected for specified, explicit and legitimate
purposes and not further processed in a manner that is incompatible with those
purposes.
3. Data minimisation: data should be adequate, relevant and limited to what is necessary
in relation to the purposes for which it is processed.
4. Accuracy: data should be accurate and, where necessary, kept up to date.
5. Storage limitation: kept in a form which permits identification of data subjects for no
longer than is necessary for the purposes for which the personal data is processed.
6. Integrity and confidentiality: data should be processed in a manner that ensures
appropriate security of the personal data, including protection against unauthorised or
unlawful processing and against accidental loss, destruction or damage, using
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appropriate technical or organisational measures.
Lawful processing
For processing to be lawful under the UK GDPR, firms need to identify a lawful basis before
they can process personal data and document it. This is significant because this lawful basis
has an effect on an individual's rights. The six lawful bases for processing data are:
1. Consent
Consent must be a freely given, specific, informed, and unambiguous indication of the
individual's wishes. There must be some form of positive opt-in; consent cannot be
inferred from silence, pre-ticked boxes or inactivity, and firms need to make it simple for
people to withdraw consent. Consent must also be separate from other terms and
conditions and be verifiable. Where a firm relies on someone's consent, the individual
generally has stronger rights, for example to have their data deleted.
2. Contract
The processing is necessary for a contract a firm has with the individual, or because they
have asked the firm to take specific steps before entering a contract.
3. Legal obligation
The processing is necessary for a firm to comply with the law (not including contractual
obligations).
4. Vital interests
The processing is necessary to protect an individual's life.
5. Public task
The processing is necessary for a firm to perform a task in the public interest or for its
Chapter 10
official functions, and the task or function has a clear basis in law.
6. Legitimate interests
The processing is necessary for a firm's legitimate interests or the legitimate interests of a
third party, unless there is a good reason to protect the individual's personal data which
overrides those legitimate interests.
Rights
The UK GDPR contains similar rights to the EU GDPR, creates some new rights for
individuals and strengthens some of those that existed under previous data protection
legislation.
Right to be informed • Individuals have the right to be informed about the collection and use of
their personal data.
• This must be provided to individuals at the time the personal data is
collected from them.
Right of access • Individuals have the right to find out if an organisation is using or storing
their personal data.
• They can exercise this right by submitting a subject access request
(SAR) to the organisation concerned.
• A company should respond to an SAR within one month; it can take an
additional two months in certain circumstances.
Right to rectification • Individuals have the right to have inaccurate personal data rectified or
completed if it is incomplete.
• An individual can make a request for rectification verbally or in writing.
Right to erasure • Individuals have the right to have their personal data erased, also known as
'the right to be forgotten'.
• The right is not absolute and only applies in certain circumstances.
Right to restrict processing • Individuals have the right to request the restriction or suppression of their
personal data.
• This is not an absolute right and only applies in certain circumstances.
• When processing is restricted, an organisation is permitted to store the
personal data, but not use it.
For reference only

Right to data portability • This allows individuals to obtain and reuse their personal data for their own
purposes across different services.
Right to object • This gives individuals the right to object to the processing of their personal
data in certain circumstances.
• Individuals have an absolute right to stop their data being used for direct
marketing.
Rights in relation to • An individual has the right not to be subject to a decision based solely on
automated decision making automated processing.
and profiling
• Processing is 'automated' where it is carried out without human intervention
and where it produces legal effects or significantly affects the individual.
Accountability and governance

Accountability is one of the data protection principles under the UK GDPR. Firms are
expected to put into place comprehensive but proportionate governance measures. Good
practice tools such as privacy impact assessments and privacy by design are now legally
required in certain circumstances. Practically, this is likely to mean more policies and
procedures for organisations, although many will already have good governance measures
in place.
Breach notification
The UK GDPR introduces a duty on all organisations to report certain types of data breach to
the ICO, and in some cases to the individuals affected.
Transfers of personal data to third countries or international organisations
To ensure that the level of protection of individuals afforded by the UK GDPR is not
undermined, restrictions have been imposed on the transfer of personal data outside the EU,
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to third countries or international organisations.

The UK GDPR still applies directly to firms operating in the EEA post-Brexit, and to any
organisations in Europe that send data to firms in the UK. These UK transfer rules broadly
mirror the EU GDPR rules, but the UK has the independence to keep the framework
under review.
Example 10.1
Jerzy completes the application process with an insurer to receive a quote for a motor
insurance policy. After receiving the quote, he decides not to proceed, but over the coming
months receives emails from the insurer regarding the application and other insurance
products they consider may be suitable for him.
While Jerzy has previously opted in to receive marketing emails (i.e. provided consent), he
no longer wants the insurer to hold the personal information he provided in the application.
Jerzy therefore contacts the insurer by phone to request that they delete any personal
data that they hold in relation to him. As the insurer did not provide Jerzy with an
insurance policy, and is therefore not exposed to any claims from or against him, it is likely
that the insurer would have to comply with the request. The insurer would then be
expected to delete the data held about Jerzy across its systems, within the one-month
time limit stipulated by the GDPR.
Consider this…
List some areas in which insurance companies and brokers etc. will be affected by the
right to data portability.
Question 10.1
What is the key requirement in order to hold personal data under the UK GDPR?
a. Using it regularly. □
b. Only using it once. □
□
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c. Only storing it electronically.
d. Permission from the person concerned. □

A2 Data Protection Act 2018
The DPA 2018 came into effect in the UK in May 2018, to coincide with the implementation
of the EU GDPR. Since Brexit, the key principles, rights and obligations remain the same.
However, there are implications for the rules on transfers of personal data between the UK
and EEA countries.
Be aware
DPA 2018 has been amended to reflect the UK GDPR and remains the legislation
governing data protection in the UK.
Main elements of the DPA 2018:

• Ensuring that sensitive health, social care and education data can continue to be
processed, to ensure confidentiality in health and safeguarding situations.
• Restricting the rights to access and delete data where there are legitimate grounds for
doing so (e.g. for national security purposes).
• Setting the age from which parental consent is not needed to process data online.
• Providing the ICO with enhanced powers to regulate and enforce data protection laws.
– For the most serious data breaches, it can levy fines of up to £17.5 million or 4% of
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annual global turnover.

– The ICO can bring criminal proceedings against a data controller or processor if they
have altered records following an SAR with the intent to prevent disclosure.
B Unfair contract terms and the Consumer

Rights Act 2015
Be aware
The Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs) applied, with
certain exceptions, to unfair terms in contracts concluded between a consumer and a
seller or supplier.
The Consumer Rights Act 2015 consolidated and clarified existing consumer legislation on
unfair contract terms, removing conflicting overlaps between the Unfair Contract Terms
Act 1977 and the UTCCRs.
Its provisions cover both ‘consumer contracts’ and ‘consumer notices’ (which may be either
written or oral). A consumer notice includes announcements and other communications
intended to be read by a consumer, including renewal notices and customer promotions (e.g.
financial promotions).
It ensures that terms used in contracts and notices will only be binding upon the consumer if
they are fair. It defines ‘unfair terms’ as those that put the consumer at a disadvantage, by
limiting the consumer’s rights or disproportionately increasing their obligations as compared
with the trader’s rights and obligations.
It also sets out factors a court should take into account when determining whether a term is
fair, notably that it should consider the specific circumstances existing when the term was
agreed, other terms in the contract and the nature of the subject matter of the contract. This
assessment is known as the ‘fairness test’.
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Example 10.2
A contract could contain a term allowing the insurer to cancel the cover at short notice. In
deciding whether this is fair or not, the court would consider issues such as whether the
insured can also cancel at short notice or obtain a refund if the insurer cancels the
contract.
When developing proposals for the Act, the Government took into account the definitions
and measures contained within the EU Directive on Consumer Rights and, as far as
appropriate, has made the Act consistent with it to achieve overall a simple, coherent
framework of consumer legislation.
The Act also clarifies the circumstances when the price or subject matter of the contract
cannot be considered for fairness and, in particular, makes clear that to avoid being
considered for fairness those terms must be 'transparent' and 'prominent'.
A term is transparent if it is expressed in plain and intelligible language and (in the case of a
written term) is legible.
A term is prominent if it is brought to the consumer’s attention in such a way that an
average consumer would be aware of the term. The Act defines an ‘average consumer’ as a
consumer who is reasonably well-informed, observant and circumspect.
B1 The 'grey list' of unfair terms

The Act also clarifies the role of, and extends the indicative list of, terms that may be
regarded as unfair (known as the ‘grey list’).
Terms which exclude/hinder the consumer’s right to take legal action or exercise any
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other legal remedy

This might be by:
• requiring the consumer to take disputes exclusively to arbitration not covered by legal
provisions;
• unduly restricting the evidence available to the consumer; or
• imposing on the consumer a burden of proof which, according to the applicable law,
should lie with another party to the contract.
Terms which alter the terms of the contract unilaterally without a valid reason
These would be regarded as unfair unless:
• the trader is required to inform the consumer of the alteration at the earliest opportunity;
and
• the consumer is free to dissolve the contract immediately.
New additions to the list:
• Disproportionately high charges where the consumer decides to cancel the contract.
• Terms enabling the trader to determine the characteristics of the subject matter of the
contract after the conclusion of the contract.
• Terms allowing the trader to determine the price after the consumer is bound by the
agreement.
B2 Regulation
If an insurer has been found to use policies containing unfair terms or has been found to
breach consumer law, the Competition and Markets Authority (CMA) or the FCA may
require an undertaking to amend the term. They may also bring injunctive action to prevent
further use of the terms. The Act introduces enhanced measures including redress measures
such as compensatory payments to consumers who have suffered as a result of the use of
unfair terms, enabling consumers to terminate a contract and, where a consumer cannot be
identified, measures taken for the collective interest of consumers. The Act also extends the
bodies that may act as private enforcers, specified as such by the Secretary of State. Private
enforcers are expected to include consumer representative organisations. The FCA will
issue its finalised guidance on variation terms in December 2019, following a period of
consultation.
C Ethical standards
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In its most general sense, the subject of ethics is tied up with issues of morality. Ethical
standards are therefore concerned with the way in which a moral outcome can be achieved
in given circumstances. They are concerned with behaviour and conduct. In the context of a
profession, the hallmark of a professional is the ability to step back from issues of self-
interest and provide competent independent advice in the best interests of a client. This will
inspire public trust in their services. By contrast, any real or perceived lack of ethical
standards is likely to lead to a serious undermining of trust, not merely in the individual giving
advice, but possibly in the profession as a whole.
In considering ethical standards it is necessary to take account of best practice in other
professions and the requirements of legislation and regulatory authorities.
All professional bodies produce a code, often described as a code of conduct, to which
their members must adhere. Codes of conduct do not have the force of law and, although
there may be penalties for failure to comply, a breach does not provide any automatic
grounds for criminal prosecution.
Codes of conduct apply to individuals as a result of their membership of a professional body.
Often there are more rigorous requirements for senior categories of membership.
Professional bodies are linked to those whose job is in a particular sector. They set
appropriate examinations and coursework assignments, often at different levels, to provide a
path of progression towards their highest qualification – typically fellowship. Beyond
qualification by examination there is a requirement to continue professional development,
often in a prescriptive way.
In one sense we need to distinguish between examination success and membership of a
professional body. This is because success in the former will affirm a level of technical ability
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or knowledge whereas the latter relates to behaviour and values. Where they meet is what
we might call professional competence.
Trade bodies may have their own codes to which members subscribe on a voluntary basis. A
breach of the provisions of such a code would not necessarily result in disciplinary action,
although there would be regard to the contents of a code in any disciplinary proceedings.
However, professional bodies can and do take disciplinary action against members who are
in breach of their codes of conduct since such codes are designed to provide a framework of
appropriate behaviour. It follows that failure to follow the code may bring the individual or the
profession into disrepute.
Consider this…
If you were to describe someone as being ‘professional in their conduct’ what would you
be saying about them? Why would it be important for someone working in insurance to be
seen in this way?
C1 The CII Code of Ethics: an overview

The Chartered Insurance Institute (CII)'s Code of Ethics represents a set of ethical
principles for insurance and financial services professionals worldwide. As the Code is
‘principles-based’ it is sufficiently flexible to take account of the wide range of different roles
undertaken within the sector.
It is described in the following way by the CII:
This Code should not be seen as yet another regulatory burden but rather as a
virtuous platform for improving the reputation of CII members as a whole and in
distinguishing our membership in comparison with less qualified and regulated
competitors. Beyond this, adoption of and adherence to the Code can help
promote standards and public trust.
The Code itself should be considered as a whole. We can view it as a series of overlapping
requirements, each of which emphasises a particular aspect of ethical behaviour as shown in
figure 10.1.
For reference only

Figure 10.1: Overlapping requirements of ethical behaviour
Integrity
Compliance
Fairness
Ethical
behaviour
Client’s
Service
interest
The Code has as its purpose the meeting of standards and maintaining the reputation of the
CII. It is concerned with attitude and behaviour and, therefore, tends to have a wider
application than the regulatory rules that will overlap many aspects of business life. Rather
than setting a series of minimum requirements, the Code represents a positive statement of
the core principles that must inform decision-making, business relationships and a member’s
more general behaviour.
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To assist members in the way that the principles should be applied in different situations,
there is a section entitled ‘key questions to ask yourself’. This section tries to help people
think about how the Code and the principles that underpin it affect them as an individual. The
CII’s aim is to make the Code more of a ‘living’ document that individuals will read and
consult regularly. To this end, the CII has also produced two companions to the Code,
covering digital ethics and financially inclusive customer outcomes.
Refer to
The Code appears in CII Code of Ethics on page 2/1
Members are obliged to comply with the Code. If they do not, the CII may take disciplinary
action against them. The central principles that underpin it are summarised in the next
section.
C2 Central principles of the Code

There are five central principles in the Code of Ethics. The Code states that members must:
• comply with the code and all relevant laws and regulations;
• act with the highest ethical standards and integrity;
• act in the best interests of each client;
• provide a high standard of service; and
• treat people fairly, regardless of: age, disability, gender reassignment, pregnancy and
maternity, marriage and civil partnership, race, religion and belief, sex, and sexual
orientation.
We will consider the scope of each in the following sections. In addition, we will identify
scenarios that have the potential to produce both ethical and unethical behaviour in
each area.
C2A Compliance with the Code, relevant laws and regulations
This section of the Code embraces the member’s dealings with the CII and regulatory
authorities, requiring an open, cooperative and courteous manner. Emphasising the ethical
nature of the Code, members must abide by both the spirit and letter of the law. Individuals
must be properly authorised and regulated and, as far as they are able, make sure that their
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organisations are suitably regulated and compliant. Breaches must be reported to the CII.
There are some key practical questions in this section implying a need to be up to date with
regulatory and legislative developments and to be aware of specific regulations regarding
advertising, data protection and competition. These are not exhaustive. So, for example, as
the Bribery Act 2010 was enacted in the UK its implications needed to be understood and
acted upon to ensure the compliance regime within the firm, including the updating or
developing of policies and approach where necessary.
From a legal perspective, the decisions of the Financial Ombudsman Service (FOS) are
highlighted. These decisions are independent of the court system and demonstrate the FOS’
expectations of the fair treatment of consumers.
Case study
You are an intermediary. Your internal compliance procedures state that the renewal
process for a client should begin one month prior to renewal. You are aware that a
particular client will be on holiday for a significant part of the period immediately prior to
renewal and that there is likely to be a need to consider other insurers' terms because of
the poor claims experience during the current policy period.
We are concerned here with the difference between the 'spirit' and the 'letter'. You would
arguably be acting compliantly if you were to commence the renewal process one month
before renewal. However, to act ethically, you would need to start the process earlier to be
able to give your client advice in good time to make an informed decision.
C2B Highest ethical standards and integrity

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Honesty, trustworthiness and reliability underpin this section of the Code. It deals with
avoiding taking unfair advantage of a client, a colleague or a third party. It prohibits wrongly
motivated inducements (whether given or received) or even those that have the appearance
of implying an improper obligation. This section is not all prohibitory. Members must promote
professional standards and encourage the use of ethical codes within their firms.
This section also covers membership of the CII and the use of CII designations. It includes a
requirement to advise the CII of material changes in circumstances that affect either of
these. Operating professionally extends to being financially responsible, including the need
to remain solvent.
Key questions include assessing the likely perception of others of ethical standards seen
from our actions, whether we need to refer to someone more senior for advice and matters
of trustworthiness. The difference between ‘getting away with things’ and positive ethical
behaviour is highlighted.
Case study
You work for an insurance company. You have an expense account that permits you to
entertain intermediaries that are likely to generate new business flows. There is a stated
limit for any one meal/event. A particular intermediary shows encouraging signs of being
willing to consider placing business with you having not been a supporter of yours in
the past.
The issue here is the extent to which it is appropriate to entertain for legitimate reasons
and the point at which this would be seen as providing a level of inducement that may
appear to point towards an improper obligation. Continual entertaining patterns or
expensive one-off events may fall in this category. From the intermediary's viewpoint,
support for an insurer that is based upon personal entertainment levels for the
intermediary's benefit, rather than any real benefit to the client is wrong and so is the
provision of entertainment by the insurer that encourages such behaviour.
C2C The best interests of each client

The fair treatment of customers is a key theme of the FCA and of the Code. Members should
encourage their firms to place the fair treatment of customers at the centre of the firm's
corporate culture. Emphasis is placed on understanding and meeting client needs and
providing comprehensive information so that an informed decision can be made by the client.
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Promises about product performance and after sales service must be true. Confidentiality
and the need to avoid conflicts of interest are dealt with.
Key questions in this section focus upon honesty, truthfulness, and objectivity. They also
cover the rewards culture within the firm and the need to take account of client requirements,
emphasising the need for two-way communication with clients.
Case study
You are an intermediary that has arranged separate private motor insurances for two
different clients. As part of your service you have agreed to attempt to recover for each
client their uninsured losses (costs of car hire, out of pocket expenses etc.) following a
non-fault motor accident. There is a car collision involving both your clients and each
maintains that it is the fault of the other.
The issue that arises here is the way that you ensure that you treat each client fairly. It is
insufficient simply to 'know' yourself that you will be fair and even handed with each. You
clearly cannot avoid this conflict (since you have already agreed to act for each). An
ethical approach is firstly to disclose the conflict to each client. Secondly, a course of
action should be proposed acceptable to each party. An example would be the allocation
of the handling of each separate claim to a different member of staff to represent each of
their separate interests, or that the uninsured loss claims are managed by the insureds'
chosen legal representatives. Such 'arm's length' arrangements may often be the only
effective means of being fair and of being seen to be fair to each client.
C2D High standard of service

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Communication with clients must be accurate and straightforward. Transparency (including

fees and other costs) and suitability are the main elements of this section, which also
emphasises the need for a member to recognise their personal limitations and to keep up to
date, meeting any CPD requirements.
Key questions highlight the need for reliability in the fulfilment of promises and a positive
attitude towards personal improvement. Approachability is a key quality, ensuring those
supervised are properly motivated and trained. Lessons must be learned from complaints
and customer satisfaction feedback.
Case study
You work for an insurance company. An analysis of recent customer complaints shows
that the team you manage is receiving an increasing number of complaints that customers
expected to be covered under their policies, but were excluded. The timing coincides with
the introduction of a rewritten series of scripted answers for the provision of information
about cover (provided at point of sale). Its introduction reduced the average time for each
sale significantly.
Although the motivation for the introduction of the new scripted answers may have
seemed sound financially, an appropriate ethical approach now prompts us to analyse
whether the possible connection between providing less information and the increase in
unexpected excluded claims is substantiated. If there is real connection, then the insurer
(and the team) is failing in its promises and this needs to be addressed and corrected. As
team leader this should be pursued. It is unethical to simply 'accept' the greater level of
complaints as an unfortunate but necessary byproduct of the greater efficiencies.
C2E Treating people fairly (non-discrimination)

The focus of this section is the avoidance of unfair discrimination on grounds of age,
disability, gender reassignment, pregnancy and maternity, marriage and civil partnership,
race, religion and beliefs, sex, and sexual orientation. It relates to the equality and diversity
laws in the member's country. Rules require that each person is treated as an individual and
emphasise openness, fairness, respect and opportunity.
The key questions emphasise the need to consider actions or treatment from the perspective
of the other individual and to consider whether any requests present unnecessary barriers or
difficulties.
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Case study
You work for an insurance company that has a practice of offering travel insurance for
those up to 70 years of age. You have been challenged about this practice by someone
who is 74 years of age arguing that they are fitter than most 65 year-olds.
The question here revolves around legitimate (or otherwise) practice in discrimination on
grounds of age. It would be inappropriate simply to state that it was 'company practice'
and leave things there. There is no absolute answer but an ethical response would be to
establish that differential treatment had been justified by data fairly reflecting the different
risk profiles of different age groups. Acceptable evidence would be supported by actuarial,
statistical, medical or other information relating to the person's age provided that it was
relevant, accurate and from a source upon which it was reasonable to rely. Any response
should be related to these facts.
Activity
Take a look at the CII Code of Ethics in appendix 2. Consider your everyday working life
and measure your approach to your work and actions against the principles (and key
questions posed) as far as they apply to your job role.
D Training and competence

While the FCA relies upon its high-level rules to provide the framework and principles for
training and competence, a separate sourcebook provides more detailed rules that relate
to achieving and maintaining competence for specific categories of firm. For all firms, the
FCA places great importance on the quality of performance and especially the quality of
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advice given to clients.
Refer to
Refer back to Senior management arrangements, systems and controls (SYSC) on page
9/16 for details of the SYSC requirements
High-level rules, applying to all authorised firms, are found in the senior management
arrangements, systems and controls (SYSC) sourcebook. Firms should satisfy themselves of
the suitability of those acting on their behalf and this includes honesty as well as
competence. The principles are that a firm must:
• employ personnel with the skills, knowledge and expertise necessary for the discharge of
the responsibilities allocated to them; and
• take into account the nature, scale and complexity of its business and the nature and
range of financial services and activities undertaken in the course of that business.
For those providing advice in the general insurance sector, the extra requirements of the
training and competence sourcebook apply only to firms whose employees advise on
contracts with consumers. (A firm may choose to take account of the extra requirements in
the training and competence sourcebook even if they are not subject to its terms.)
Competence means having the skills, knowledge and expertise needed to discharge the
responsibilities of the employee’s role. This includes achieving a good standard of ethical
behaviour. The FCA states that there are three key areas of training and competence that all
firms need to consider. These are:
• assessing competence;
• maintaining competence; and
• record-keeping.
It is necessary to supervise employees until such time as they demonstrate the necessary
competence to carry on the activity. Subsequently, supervision is expected to be less
intense. Assessing an employee as competent must follow clear criteria and procedures.
These should be in place in every firm, so that it can demonstrate when and why a reduced
level of supervision was considered appropriate.
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Firms must have in place a detailed written manual that indicates how they deal both with the
assessment of competence and its maintenance at every stage of an employee’s
development. This applies from the initial checking of information when a person first applies
for a job, through to the point at which they are deemed to be competent. It then continues to
apply to the maintaining of that competence level, through appropriate continuing
professional development.
Consider this…
How would you go about assessing whether someone was competent to do the task set
for them?
You should note that the FCA does insist on a range of approved qualifications for those who
wish to provide financial advice in areas of life insurance, pensions and investments.
However, they do not have such a range for general insurance, though firms may choose to
use an approved qualification as part of their means of establishing competence.
Once competent, the maintenance of competence must take account of:
• technical knowledge and its application;
• skills and expertise; and
• changes in the market and to products, legislation and regulation.
For firms advising on insurance, the FCA requires that records of training and assessment of
competence must be kept for at least three years from the time that the employee ceased to
carry out that role.
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Be aware
The Insurance Distribution Directive (IDD), which came into effect in October 2018,
imposes a requirement on those directly involved in the ‘distribution’ of insurance (broadly
speaking those involved in activities that are regulated by the FCA) and those supervising
them to do at least 15 hours of professional training or development per year. The staff
knowledge and competence requirements will apply to insurers and intermediaries. The
FCA proposes to apply them only to those employees directly involved in insurance
distribution. This includes relevant people within the management structure with
responsibility for insurance distribution (for example, product or sales managers). The
requirements will not apply to employees in ancillary roles such as HR, facilities
management and IT.
IDD examined in Insurance Distribution Directive (IDD) on page 9/33.
E Complaints procedures
In Complaints monitoring on page 9/27 we considered the procedures for reporting
complaints that an authorised firm must follow. The FCA requires its detailed rules to be
incorporated into each firm's procedures. We will consider the effect of the Dispute
Resolution: Complaints (DISP) sourcebook and the way in which a compliant complaints
system should operate.
Every authorised firm should order its recruitment methods, training programmes and
systems in such a way that complaints should not arise. However, if they do arise there must
be an effective system in place that complies with regulatory requirements and standards.
In some companies, complaints procedures are wider in scope than is strictly required by
regulation. They consider it to be more straightforward to treat all those affected by their
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business activities equally when it comes to any grievance that they may have. More
stringent regulatory rules apply to 'eligible complainants'.
Thorough complaints procedures also:
• limit the impact of customer dissatisfaction;
• avoid exposure to errors and omissions claims;
• enable an insurer to identify problems with its systems and rectify them; and
• enable an insurer to improve its standards.
A complaint may emanate from a number of sources. FCA regulation is concerned with two
categories of complainant, ‘eligible’ and ‘non-eligible’ (defined later), though in practice
handling procedures may embrace all types of complaint.
Prompt resolution of complaints, from whatever source, satisfactorily and fairly, will
automatically discharge regulatory responsibilities. There are certain specific FCA rules that
relate to eligible complainants, since they have an automatic right to pursue their complaint
through the FOS. A firm must appoint a senior individual at a firm, or in the same group as
the firm, to have responsibility for oversight of the firm’s compliance with the FCA’s
complaints handling rules and for the overall complaints handling function in the firm.
Each stage in the handling of a complaint is important. The starting point is establishing
whether the situation falls within the firm’s definition of a complaint. If so, it must then be
recorded, investigated and a decision made that is appropriate, timely and fair by someone
independent of the original complaint. In order to operate the system fairly and impartially a
firm may decide that every complaint must be referred to, say, the head of department. They
will then determine whether it is to be treated as a complaint and who should handle it.
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Be aware
The Insurance Distribution Directive (IDD) imposes requirements on both insurers and
reinsurers in respect of dispute resolution. DISP already incorporates many of the
requirements but there will be some minor changes needed to comply with the IDD.
E1 Definition of a complaint
A complaint is defined in DISP as:
Any oral or written expression of dissatisfaction, whether justified or not, from, or
on behalf of, a person about the provision of, or failure to provide, a financial
service, which alleges that the complainant has suffered (or may suffer) financial
loss, material distress or material inconvenience.
An ‘eligible complainant’ is defined as a:
• consumer;
• micro-enterprise;
• charity with an annual income of less than £6.5m;
• trustee of a trust with a net asset value of less than £5m;
• consumer buy-to-let (CBTL) consumer;
• small business at the time the complainant refers the complaint to the respondent; or
• guarantor.
All complaints from eligible complainants are subject to FCA complaints handling rules and
complainants within these categories have a right of access to the Financial Ombudsman
Service (FOS). The FOS will determine eligibility by reference to appropriate evidence, such
as audited accounts or value added tax returns.
Be aware
The eligibility of ‘small businesses’ was introduced on 1 April 2019, as part of an extension
of the FOS’ jurisdiction, alongside increases to the upper limit for a charity’s annual
income and a trust’s net asset value (both previously £1m).
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For non-eligible complainants, firms must have in place, and operate, appropriate
procedures for registering and responding to the expression of dissatisfaction.
E2 Recording complaints
All complaints files must be retained for at least three years from the date the complaint was
received, and a record must be kept of measures taken for its resolution.
Most firms will have a complaints form that must be completed and kept on file or a master
complaints log – this will be used to track the progress of the complaint.
A firm has to keep a register (or log) of eligible complainants in order to be able to fulfil its
regulatory reporting responsibilities. Full details of the complaints which have been
investigated are also required so that root cause analysis can be undertaken and any trends
and issues identified. Firms should be able to demonstrate the steps they have taken to
ensure that similar complaints do not occur in the future; for example, by changing
processes or retraining.
The firm must update entries in the register (or log) at every material stage of development.
The register is then kept as a permanent record.
E3 Time limitations and procedures

There are compulsory time limitations under FCA rules for dealing with complaints from
eligible complainants. Every complaint must be acknowledged promptly and the progress of
complaints should be monitored.
Where complaints are resolved early (within three business days) they may be handled less
Chapter 10
formally without sending out a final response letter. In this case, however, firms will still need
to issue a Summary Resolution Communication to complainants, advising them that
although the complaint appears to have been resolved; if that is not the case, the
complainant has a right to refer the matter to the FOS.
Refer to
FOS covered in Financial Ombudsman Service (FOS) on page 10/15
Firms should aim to resolve complaints as quickly as possible, and must ensure the
complainant is kept informed of the progress of the measures being taken to resolve the
complaint.
Within eight weeks of receiving a complaint, a firm must provide either:
a 'final response' – a written • accepts the complaint and, where appropriate, offers redress or
response from the respondent – which remedial action; or
• offers redress or remedial action without accepting the complaint; or
• rejects the complaint and gives reasons for doing so; and which
• encloses a copy of the FOS standard explanatory leaflet; and
• informs the complainant that if they remains dissatisfied with the
respondent's response, they may now refer their complaint to the
FOS and must do so within six months;
or
a written response which • explains why it is not in a position to make a final response and
indicates when it expects to be able to provide one;
• informs the complainant that they may now refer the complaint to the
FOS; and
• encloses a copy of the FOS standard explanatory leaflet.
The FCA expects that within a period of eight weeks of receipt almost all complaints will
have been substantively addressed through a firm’s final response or written response as
described above.
If a complainant has already indicated acceptance of the response then provided the firm
has properly advised the complainant of their rights to refer the matter to the FOS, the firm is
relieved of further compliance with the rules.
For reference only

Lloyd’s also has a Personal Lines Claims and Complaints Handling Code. Eligible
complainants who have a policy placed at Lloyd’s usually have their complaint independently
handled by Lloyd’s if they remain dissatisfied with the final response they receive from the
firm, although they still have a right to pursue their complaint through the FOS.
F Financial Ombudsman Service (FOS)

The Financial Ombudsman Service (FOS) was introduced following the enactment of the
Financial Services and Markets Act 2000 (FSMA), assimilating the independent
Ombudsmen that existed under previous regimes. The FOS is an independent body that has
a memorandum of understanding with the FCA for cooperation and communication as they
carry out their independent roles. Membership is compulsory for all authorised insurers and
other authorised firms, including intermediaries.
The FOS is an independent mechanism for dealing with disputes from ‘eligible
complainants’. It is not concerned with commercial insurances for larger enterprises. The
FOS aims to provide both impartial and independent resolution of disputes between either
insurer and policyholder or intermediary and client. Although the vast majority of cases
referred to the FOS involve claims, any cause for complaint is investigated.
A complainant needs a final response from the firm they have used before a complaint can
be referred to the FOS. The complainant then has a period of six months or more
(depending on the time period the firm has chosen) from the date of the final decision of the
authorised person/firm to refer the matter to the FOS. The FOS ensures that all possible
steps are taken by the insurance company or intermediary to try to resolve the dispute.
However, if the dispute remains unresolved, the FOS then steps in to review the dispute and
Chapter 10
make a decision.
Be aware
The maximum award the FOS can require a firm to make to a complainant changed on 1
April 2022. It is now £375,000 for complaints referred on or after 1 April 2022 about acts or
omissions by firms on or after 1 April 2019.
For complaints referred before that date, the maximum award is as follows:
£355,000 for complaints referred between 1 April 2020 and 31 March 2022 about acts or
£350,000 for complaints referred between 1 April 2019 and 31 March 2020 about acts or
£170,000 for complaints referred on or after 1 April 2022 about acts or omissions by firms
before 1 April 2019.
£160,000 for complaints about acts or omissions by firms before 1 April 2019, and which
are referred after that date.
£150,000 for complaints referred before 1 April 2019.
The FOS may recommend a higher figure, if appropriate, but this will not be binding on
the firm.
The complainant must then accept or reject the decision within the time limit specified by the
FOS. If the complainant accepts the decision it is binding on the respondent. If the
complainant rejects the decision it is not binding and they are free to pursue the matter in
court. If the complainant does not respond to the FOS's decision letter it is treated as a
rejection and the respondent is not bound by the decision.
For reference only

On the Web
www.financial-ombudsman.org.uk
G Financial Services Compensation

Scheme (FSCS)
The Financial Services Compensation Scheme (FSCS) is the UK's compensation fund of
last resort for customers of deposit-taking companies and investment firms, as well as for
those of authorised insurance companies and intermediaries.
The FSCS covers claims against firms where they are unable, or likely to be unable, to pay
claims against them. Usually this is when a firm has become insolvent or has gone out of
business. The scheme was set up mainly to assist private individuals, although small
businesses (broadly speaking those with a turnover of less than £1 million) are also covered.
In the case of insurance, policyholders are protected if they are given advice by or have their
policies arranged by an authorised intermediary or are insured by an authorised insurance
company under contracts issued in the UK (or in some cases in the European Economic
Area, Channel Islands or the Isle of Man). The scheme covers compulsory (e.g. third-party
motor insurance), general and life insurance and is usually triggered if an insurance
company goes out of business or into liquidation. The amount of compensation a
policyholder can receive depends on the type of policy; whether it concerns compulsory
insurance, non-compulsory insurance or long-term insurance.
The amount of protection a policyholder can receive depends on the type of policy:
Chapter 10
100% protection • compulsory insurance (third-party motor and employers' liability);

• professional indemnity insurance;
• long-term insurance (e.g. pensions and life insurance); and
• claims for injury, sickness or infirmity of the policyholder.
90% protection • other types of policy, including general insurance advice and
(no upper limit) arranging.
The FSCS is funded by a levy on all authorised firms who receive an income from eligible
claimants.
On the Web
www.fscs.org.uk
For reference only
Chapter 10
Key points
Data protection
• The Data Protection Act 2018 (DPA 2018) and UK General Data Protection Regulation
(UK GDPR) set out data protection law in the UK.
• Personal data is information relating to a living individual who can be identified from
that data.
• Data protection principles cover how personal data is processed.
• Data subjects have certain rights in respect of information held about them and these
have been strengthened under the DPA 2018 and UK GDPR.
• Firms are now responsible for demonstrating their compliance with the regulations and
ICO has increased supervisory powers with which to regulate. This includes the ability
to impose much higher fines.
Consumer Rights Act 2015
• The Consumer Rights Act 2015 provides protection for consumers relating to unfair
terms in contracts between a consumer and a trader, seller or supplier.
Ethical standards
• The CII’s Code of Ethics is concerned with attitudes and behaviour.

• It has five central principles and ‘key questions to ask yourself’.
Training and competence
For reference only

• Firms must have a detailed written manual indicating how they deal with the
assessment of competence and how it is maintained.
Complaints procedures
• All complaints from 'eligible complainants' are subject to FCA complaints

handling rules.
• An eligible complainant is defined as a:
– consumer;
– micro-enterprise;
– charity with an annual income of less than £6.5m;
– trustee of a trust with a net asset value of less than £5m;
– consumer buy-to-let (CBTL) consumer;
– small business at the time the complainant refers the complaint to the respondent;
or
– guarantor.
• For non-eligible complainants, firms must have in place, and operate, appropriate
procedures for registering and responding to complaints.
Financial Ombudsman Service (FOS)
• Eligible complainants can refer their complaint to the FOS if not satisfied with the
authorised company’s response. They must fulfil certain criteria first.
Chapter 10
• The FOS is an independent, impartial mechanism for dealing with disputes between
policyholders and insurers and between intermediaries and clients.
Financial Services Compensation Scheme (FSCS)
• The FSCS provides compensation to customers of deposit-taking companies,

investment firms and authorised insurers and independent intermediaries where the
firms are not longer able to meet claims against them.
Key points
• Who is eligible to be compensated, and how much they will receive, depends on
whether the insurance is compulsory, non-compulsory or long-term.
For reference only
Chapter 10
Question answers
10.1 d. Permission from the person concerned.
For reference only

Chapter 10
Self-test questions
1. An insurer wishes to use a motor policyholder's personal data in connection with a
proposed direct marketing campaign. Under the Data Protection Act 2018, it cannot
proceed with the mailing unless it:
a. Ensures that all data is held electronically. □
b. Ensures that the policy is still valid. □
c. Guarantees the policyholder's anonymity. □
d. Gives the policyholder permission to opt in or out of the mailing. □
2. When considering an insurance contract, the Consumer Rights Act 2015 applies to
individuals and:
a. Brokers. □
b. Insurers. □
c. Reinsurers. □
d. Trade bodies. □
3. What are the main elements covered in the Chartered Insurance Institute's Code of
Ethics that relate to delivering a high standard of service?
□
For reference only

a. Accuracy, transparency and suitability.
b. Accuracy, price competitiveness and suitability. □

c. Non-discrimination, price competitiveness and suitability. □
d. Non-discrimination, transparency and suitability. □
4. What is the limit for an award made by the Financial Ombudsman Service for acts or
omissions after 1 April 2020?
a. £1,000,000. □
b. £500,000. □
c. Unlimited. □
d. £355,000. □
5. Which organisation will become involved if an insurance company is unable to pay its
claims?
a. The FOS. □
b. The PRA. □
c. The FSCS. □
Chapter 10
d. The FCA. □
6. Under the Financial Services Compensation Scheme, for what total percentage of a
compulsory third party motor insurance claim may compensation be provided?
a. 100%. □
b. 80%. □
c. 70%. □
d. 90%. □
For reference only

Chapter 10
Appendix 1
Appendix 1
Standard fire policy
(material damage)
For reference only

Appendix 1 A1/2 EP1/October 2022 Insurance, legal and regulatory (EPA)
For reference only

Appendix 1
Appendix 1 Standard fire policy (material damage) A1/3
For reference only

For reference only
Appendix 2
Appendix 2
CII Code of Ethics
Introduction
The Chartered Insurance Institute is committed to setting,

maintaining and supporting high professional and ethical
standards in insurance and financial planning.
In order to uphold these standards, Failure to comply with the Code may
the Chartered Insurance Institute result in individual sanctions and
requires all members to adhere to adverse publicity for the member and
its Code of Ethics. the member’s employer.
The Code sets down the principles Note: the Chartered Insurance Institute’s
which all Chartered Insurance Institute Code of Ethics is subject to regular
members must follow in the course review to ensure it remains relevant and
of their professional duties. appropriate. This published Code has been
For reference only

As such you are required to: updated to improve clarity and to reflect
recent changes introduced by the Equality
1. Comply with the Code and all Act. It came into force on 14th April 2014.
relevant laws and regulations.
For further details visit cii.co.uk/code
2. Act with the highest ethical
standards and integrity.
3. Act in the best interests of
each client.
4. Provide a high standard of service.
5. Treat people fairly regardless
of: age, disability, gender
reassignment, marriage and
civil partnership, pregnancy and
maternity, race, religion and belief,
sex and sexual orientation.
2
1. You must comply with this Code and all

relevant laws and regulations.
This includes, but is not Some key questions to

limited to: ask yourself:
1.1 dealing with the Chartered • Am I up-to-date with recent
Insurance Institute in an open, clear regulatory and legislative
and co-operative manner; developments?
1.2 dealing with regulators in an open, • Am I aware of general business
clear and co-operative manner; regulatory requirements covering
1.3 ensuring regulators and the areas such as advertising, data
Chartered Insurance Institute are protection and competition?
treated courteously and not in • Do I take full account of reports on
a vexatious or frivolous manner individual cases from ombudsman
and that all queries are dealt services, as well as the wider
with promptly; regulatory and legal framework?
1.4 meeting any Continuing • Do I appreciate the general
Professional Development purpose of the rules I am following,
(CPD) requirements; for example, do I follow the letter
1.5 working not only within the law of the regulation but fail to think
but also within the spirit of the law; about the outcome for my client?
1.6 if within your control, making • Am I aware of internal compliance
sure your organisation is suitably arrangements?
regulated and has effective • Do I consider the compliance
compliance arrangements; arrangements within my
1.7 ensuring, where required, you organisation are effective
For reference only

are individually authorised and comply with all relevant
or regulated; and regulations?
1.8 reporting any breaches of the • Am I aware of how to update or
Code to the Chartered Insurance correct compliance arrangements
Institute. or whom to contact if they require
change or update?
Where this core duty conflicts with
another core duty this duty will have
priority over the others.
By way of example, notwithstanding
core duty 3, it is your duty to give
confidential information to the relevant
authorities where the information
relates to a criminal act or fraud by
your client.
3 Code of Ethics
Appendix 2 CII Code of Ethics A2/3
Appendix 2
2. You must act with the highest
ethical standards and integrity.
This includes, but is not Key questions:

limited to:
2.1 b eing honest and trustworthy; • What would an outsider think of
2.2 being reliable, dependable what I am doing, and does this
and respectful; matter ethically?
2.3 not taking unfair advantage of a • How would my actions look
client, a colleague or a third party; to the Chartered Insurance
Institute?
2.4 not bringing the financial services
industry or the Chartered • Should I discuss my proposed
Insurance Institute into disrepute actions with my superior or
whether through your actions in another appropriate person
work or outside work; or the Chartered Insurance
Institute?
2.5 not offering or accepting gifts,
hospitality or services which could, • Do I know if my organisation
or might appear to, imply an has an ethical code and do I fully
improper obligation; understand it?
2.6 promoting professional standards • Does my organisation reward
within the industry; good ethical behaviour?
2.7 encouraging your organisation to • Does my organisation follow
produce an ethical code; a whistle blowing policy?
2.8 making sure your Chartered • How can I promote trust in my
Insurance Institute membership organisation and the financial
services industry?
For reference only

or chartered status is described
correctly; • Do people trust me? If not,
2.9 informing the Chartered Insurance why not?
Institute of any change in your • Do I think it is OK if I don’t get
work or circumstances which caught?
affect your membership or • Do I say “show me where it says
chartered status; and I can’t” or do I say “is this ethical”?
2.10 operating both professionally and • Why am I being entertained or
in a financially responsible manner offered hospitality?
including avoiding personal
insolvency.
4
3. You must act in the best

interests of each client.
This includes, but is not

limited to:
3.1 e ncouraging your organisation to A conflict of interest is a situation
put fair treatment of clients at the in which someone has competing
centre of its corporate culture; professional or personal interests.
3.2 basing your decisions on a Depending on the circumstances,
clear understanding of client there may be a perceived rather than
needs, priorities, concerns and an actual conflict of interest. Both
circumstances; perceived and actual conflicts must
3.3 giving your client all the information, be dealt with appropriately.
of which you are aware, which is
needed for your client to make an Conflicts of interest can arise where:
informed decision provided that
information is not confidential to • You owe, or your firm or employer
another client; owes, separate duties to two or
3.4 making sure the promises you more clients in relation to the same
make to clients about a product’s or related matters and those duties
performance and the after sale conflict or there is a significant risk
service are true; they may conflict; or
3.5 respecting confidential information • Your duty to act in the best interests
of clients, former clients and of any client conflicts, or there is a
potential clients; significant risk it may conflict, with
your own interests.
3.6 ensuring you do not use information
For reference only

from work improperly and/or to your
personal or business advantage;
3.7 turning down work where a conflict
of interest exists between you or
your employer and the client; and
3.8 refusing to act where a conflict of
interest exists, save where acting
in these circumstances is expressly
permitted by a regulator.
5 Code of Ethics
Appendix 2
Key questions:
• Am I acting fairly towards this • How can I help my clients to

client or my employer or my understand financial services?
colleagues? • Do I provide clear information
• Are my opinions and statements pre and post sale?
objective? • Do I listen to my clients or just
• Am I being honest and truthful? hear them?
• How can I better help my client • Will acting for this client
to make capable and confident compromise my position?
decisions? • If I act for this client will it harm
• Would I like to be treated in this them or be to the detriment
way if I were a client? of another client?
• Is this in the best interests of my
client or my bonus?
• Do I try to cover up my mistakes?
• Does my organisation reward
arrangements that deliver fair
treatment to customers as well as
offer incentives to help employees
For reference only

grow the business?
• Are employees rewarded in ways
which encourage them to put their
client’s best interests first?
• If the client is vulnerable, what
extra steps can I take to make sure
I act in my client’s best interest?
6
4. You must provide a high

standard of service.
This includes, but is not Key questions:

limited to: • Do I do what I say I will do and do
it when I say I will?
4.1 ommunicating with each client
c
in a way that is accurate and • How can I improve the service I
straightforward and expressed give my clients?
in a way that the individual client • Am I approachable?
can understand; • Do I give and receive constructive
4.2 being transparent about fees and feedback to/from colleagues?
other costs; • Does my organisation seek
4.3 making sure reasonable steps feedback from clients?
are taken to ensure all advice • Does my organisation have a
is accurate and suitable for the swift and effective mechanism for
individual client; resolving complaints?
4.4 obtaining and providing clear • Do I learn from complaints?
information before, during and
after the point of sale; • Do I take complaints seriously?
4.5 ensuring adequate and correct • Can I improve my knowledge by
records are kept; additional training?
4.6 acting with skill, care and • Do I encourage subordinates to
diligence; increase their knowledge?
4.7 acting only within your ability and • Do I ask for help when I need it?
authorisation and seeking help • Does my organisation have
where necessary; systems for managing paperwork
For reference only

4.8 ensuring your knowledge and and data which work?
expertise is kept up-to-date and • Does my organisation assess
relevant for your work; customer satisfaction and provide
4.9 ensuring those who work for you feedback to employees?
have appropriate training and
supervision and contributing to
their learning and development;
and
4.10 if it is within your control, making
sure your firm has a clear written
complaints procedure which is
followed.
7 Code of Ethics
Appendix 2
5. You must treat people fairly regardless of:
This includes, but is not

Age limited to:
5.1 treating each person as an
Disability individual;
5.2 challenging and reporting unlawful
Gender reassignment or otherwise unfair discriminatory
behaviour and practice;
5.3 always acting openly and fairly and
Marriage and civil treating employers, employees,
partnership colleagues, clients, potential clients
and suppliers with equal respect
and opportunity;
Pregnancy and 5.4 making reasonable adjustments
maternity to assist people with disabilities or
particular needs you may deal with
at work;
Race 5.5 encouraging your organisation to
produce and promote an equality
and diversity policy setting
Religion and belief out how the business plans to
promote equality, diversity and
inclusion, prevent discrimination
Sex and deal with any instances
For reference only

of discrimination which might
Sexual orientation happen; and
5.6 if it is within your control, making
sure processes and procedures do
not discriminate.
8
For reference only

i
Chapter 1
self-test answers
1 c. Financial, pure and particular.
2 d. Similar risks which help determine a pattern.
3 b. Speculative risk.
4 b. Risk identification, risk analysis and risk control.
5 a. Physical control measure.
6 a. Costs of operating the pool and an element of profit.
7 d. The construction company has a direct contractual relationship with each of the
insurers.
8 c. Self-insurance.
For reference only

ii EP1/October 2022 Insurance, legal and regulatory (EPA)
Chapter 2
self-test answers
1 a. captive insurer.
2 c. a specialist insurer.
3 b. Market reform contract.
4 d. Commission based on the premiums charged.
5 a. He can act for Kent Regal Ltd in bringing them into legal relationships with others.
6 b. Actions on behalf of the insurer.
7 a. Insurance brokers.
8 b. smooth peaks and troughs in the trading results.
9 c. Some general insurance premiums.
10 b. Fixed benefits in the event of an accident, illness or loss of job.
For reference only

iii
Chapter 3
self-test answers
1 d. Consideration.
2 a. A counter offer.
3 c. May’s counter offer acts as a rejection of the original offer.
4 b. A letter of acceptance is posted.
5 d. Premium paid by the insured.
6 a. Travel insurance with a term of less than a month.
7 c. Not be liable for claims resulting from this, but will be liable for losses occurring after
a breach has been remedied.
8 d. Agent for the insurer.
9 a. The agent has implied authority.
10 b. Define and allocate the responsibilities and rights of each party.
For reference only

iv EP1/October 2022 Insurance, legal and regulatory (EPA)
Chapter 4
self-test answers
1 c. Subject-matter, legal relationship and financial value.
2 b. Subject-matter.
3 d. Subject matter of the contract.
4 a. Still enforceable because insurable interest existed at inception.
5 b. He had no financial interest in the car at the time of the claim.
6 d. General insurance.
7 b. Ownership, contract and legislation.
8 a. Bailee.
9 c. They may be liable for the cost of repairs.
10 c. Agent for the other party.
For reference only

v
Chapter 5
self-test answers
1 a. The duty of disclosure ends at inception of the policy.
2 b. Her epilepsy is relevant information and she has a duty to disclose this to her
insurer.
3 a. To ensure changes to business activity are notified.
4 d. The insurer is deemed to have waived its rights regarding the missing information.
5 c. Met in full as Sakon's insurer had not sought further details.
6 c. Influence the judgment of a prudent insurer in determining whether to take the risk
and, if so, on what terms.
7 d. Details of the proposer's circumstances that relate to the insurance being applied
for.
8 a. Refuse the claim, set the whole contract aside, and retain the premium.
9 b. Compulsory motor insurance.
10 d. For third party injury and property made compulsory by statute.
For reference only

vi EP1/October 2022 Insurance, legal and regulatory (EPA)
Chapter 6
self-test answers
1 b. There is always a direct link between proximate cause and resulting loss.
2 a. Storm.
3 d. Fight.
4 c. More than a single cause.
5 a. The storm.
6 d. An excluded peril.
7 b. Not mentioned in the policy.
8 c. Uninsured peril.
9 b. The proximate cause was an insured peril.
10 d. Named in the policy as specifically not covered.
For reference only

vii
Chapter 7
self-test answers
1 a. Legally entitled to financial compensation.
2 b. Restores the subject matter to the same condition it was in before the loss.
3 b. A value can be placed on the subject matter insured.
4 a. A reinstatement memorandum clause.
5 d. Labour and costs in respect of work in progress and finished stock.
6 b. Farming stock.
7 c. First loss policy.
8 c. There is a single item limit.
9 d. £1,500.
10 a. Underinsurance.
For reference only

viii EP1/October 2022 Insurance, legal and regulatory (EPA)
Chapter 8
self-test answers
1 b. Contribution.
2 c. 2/3.
3 d. £10,000.
4 a. The insured.
5 a. A tort.
6 c. The insurer.
7 b. £1,500.
8 d. Has no subrogation rights.
9 a. A benefit policy.
10 c. Negligent third party of the insured.
For reference only

ix
Chapter 9
self-test answers
1 c. Travel insurance.
2 d. Professional indemnity insurance.
3 b. Privity of contract.
4 b. Have a head office in Europe.
5 a. Adequate.
6 a. When the approved person has deliberately breached the regulations.
7 d. Financial Conduct Authority.
8 a. Placement, layering and integration.
9 d. The National Crime Agency.
10 b. To empower authorities to confiscate funds where it is believed that such funds
have been obtained unlawfully.
For reference only

x EP1/October 2022 Insurance, legal and regulatory (EPA)
Chapter 10
self-test answers
1 d. Gives the policyholder permission to opt in or out of the mailing.
2 b. Insurers.
3 a. Accuracy, transparency and suitability.
4 d. £355,000.
5 c. The FSCS.
6 a. 100%.
For reference only

xi
Cases
C Y
Castellain v. Preston (1883), 4A1A, 7A, 8C1 Yorkshire Insurance Co. v. Nisbet Shipping
Coles v. Hetherton (2013), 8D Co. Ltd (1961), 8D
Currie v. Misa 1875, 3C
D
Dalby v. The India and London Life
Assurance Company (1854), 4B2
G
Gloystarne & Co Ltd v. Mr G S Martin (2000),
3F7B
H
Household Fire Insurance Co. v. Grant (1879),
3B3
Hyde v. Wrench (1840), 3B2
K
Kettlewell v. Refuge Assurance Company
(1909), 5B3
For reference only

L
Leyland Shipping v. Norwich Union Fire
Insurance Society (1918), 6A
Lister v. Romford Ice and Cold Storage Ltd
(1957), 8G4
Lucena v. Craufurd (1806), 4B1A
M
Marsden v. City & County Insurance
Company (1865), 6A1
N
North British & Mercantile v. Liverpool &
London & Globe (1877), 8A3A
O
Oei v. Foster (1982), 6C
P
Pawsey v. Scottish Union and National
(1907), 6A
R
Roselodge v. Castle (1966), 5C2B
W
Williams v. Baltic Assurance Association
(1924), 4B1
xii EP1/October 2022 Insurance, legal and regulatory (EPA)
For reference only

xiii
Legislation
B L
Bank of England and Financial Services Act Legal Aid, Sentencing and Punishment of
2016, 9C, 9F6 Offenders Act 2012 (LASPO), 5D1
Bribery Act 2010, 9L8, 10C2A Legislative Reform (Lloyd’s) Order 2008, 2D4,
2D6B
Life Assurance Act 1774, 4B1, 4B2
C Lloyd’s Act 1982, 2C1
Carriage of Goods by Sea Act 1971, 4C3
Carriers’ Act 1830, 4C3 M
Codified Motor Directive, 9A1
Consumer Insurance (Disclosure and Marine Insurance (Gambling Policies) Act
Representations) Act 2012 (CIDRA), 5B1, 1909, 4B3
5E1 Marine Insurance Act 1906 (MIA 1906), 3E3C,
Consumer Rights Act 2015, 9J2D, 10B 4B3, 5B, 5F2, 7C1
Contracts (Rights of Third Parties) Act 1999, Money Laundering Regulations 1993 (MLR
3G12, 9B1 1993), 9L3A
Crime and Courts Act 2013, 9L2C Money Laundering Regulations 2017 (MLR
Criminal Justice Act 1988, 9L2A 2017), 9L3B
Criminal Justice Act 1993, 9L2A
P
D
Proceeds of Crime Act 2002 (POCA), 9L,
Dangerous Dogs Act 1991, 9A2 9L2A, 9L2B
Dangerous Wild Animals Act 1976, 9A2 Public Interest Disclosure Act 1998 (PIDA),
Data Protection Act 2018 (DPA 2018), 10A2 9F4, 9F8
Deregulation Act 2015, 3E2, 9A1
For reference only

Distance Marketing Directive, 3E2, 9J3
R
E Rehabilitation of Offenders Act 1974, 5D1
Repair of Benefice Buildings Measure Act
Employers’ Liability (Compulsory Insurance) 1972, 4C3
(Amendment) Regulations 2008, 9A3 Riding Establishments Act 1970, 9A4
Employers’ Liability (Compulsory Insurance) Riot Compensation Act 2016 (RCA 2016), 8D3
Act 1969, 9A3 Road Traffic Act 1988, 2I14, 5G, 9A1
Enterprise Act 2016, 7E, 9J8
Equality Act 2010 (Amendment) Regulations
2012, 1G2A
S
EU Gender Directive, 1G2A Serious Crime Act 2007, 9L2C
EU General Data Protection Regulation (EU Serious Crime Act 2015, 9L2D
GDPR), 10A2 Settled Land Act 1925, 4C3
Solicitors (Amendment) Act 1974, 9A5A
F Solvency II, 2H6, 2H7, 2H9, 9H1
Financial Services Act 2012, 9E4, 9E8, 9G

Financial Services and Markets Act 2000
T
(FSMA), 10F Third Parties (Rights Against Insurers) Act
Fourth EU Motor Insurance Directive, 9J8 1930, 9B2
Third Parties (Rights Against Insurers) Act
G 2010, 9B2
Trustee Act 1925, 4C3
Gambling Act 2005,, 4B1
Gaming Act 1845, 4B1
U
H UK General Data Protection Regulation (UK
GDPR), 10A1
Hotel Proprietors’ Act 1956, 4C3 Unfair Contract Terms Act 1977, 10B
Unfair Terms in Consumer Contracts
Regulations 1999 (UTCCRs 1999), 3E2,
I 9J2D, 10B
Insurance Act 2015 (IA 2015), 3E3C, 5B2, 5C,
5F1, 5F2, 9B2, 9J5, 9J8
Insurance Distribution Directive (IDD), 9A5B,
9J, 10D, 10E
xiv EP1/October 2022 Insurance, legal and regulatory (EPA)
For reference only

xv
Index
A cash payment, 7A2A
cedant, 2G2
actual authority, 3F7A ceding office, 2G2
actuaries, 2H6 Chartered Institute of Loss Adjusters (CILA),
agency, 3F 2I9
by agreement, 3F2 Chartered Insurance Institute (CII), 2I8
by consent, 3F2 CII Code of Ethics, 10C
by necessity, 3F2 central principles, 10C2
by ratification, 3F2 compliance with, 10C2A
contracts, 3F1 ethical standards and integrity, 10C2B
termination of, 3F8 scope and operation, 10C1
agent, 2D claims personnel, 2H2
and principal relationship, 3F2 client verification, 9L6
duties of, 3F4 co-insurance, 1H
duty of, 5B2D codes of conduct, 10C
of insured, 3F3A combined or packaged policies, 2J11
of insurer, 3F3B commercial package policies, 2J11
agent, actions of, 3F7 commercial property insurance, 2J7
agent/principal relationship, 3F3 compensation, 9A
aggregators, See comparison websites Competition and Markets Authority (CMA),
agreed value policies, 7C1, 7D1 9E2B, 10B
ancillary insurance intermediaries (AIIs), 9K complaint(s)
apparent authority, 3F7B definition of, 10E1
appointed representatives (ARs), 2D, 2D2, 9I handling, 9E2, 9J6, 10E
approved persons, 9F1, 9F4, 9F8, 9G1, 9G2, procedures, 10E
9G3, 9G4 processing, 10E2
Association of British Insurers (ABI), 1B3, 2I1 time limitations, 10E3
For reference only

Memorandum of Understanding – Subrogated compliance officers, 2H8
Motor Claims, 8F1 composite companies, 2B2
standard fire policy (material damage), 6B, 6C compulsory insurance, 5G, 9A
Statement of General Insurance Practice, 5B4 and FSCS, 10G
Association of Insurance and Risk Managers conduct of business data, 9I1F
in Industry and Commerce (Airmic), 1B, consideration, 3A1, 3C
2H7, 2I12 consolidation, 2D6
authorisation and regulation broker networks, 2D6A
of insurers, 9H consolidators, 2D6B
of intermediaries, 9I consumer(s), 9E2
authorised persons, 2D1 and FCA, 9E9
authority, 3G12 protection, 9E1, 9K
authority (TOBAs), 3G12 contract
average, 7F3 cancellation of, 3E
variations in conditions, 7F3A essentials of a valid, 3A1
aviation insurance, 2J9 law, 3A
privity of, 9B1
renewal of, 3D
B rights of third parties, 9B1
balance sheet, 9H2 unfair terms, 10B
bancassurance, 2E3 contract certainty, 2C4
Bank Of England, 9C contribution, 8A
benefit policies, 8G2 application of, 8B
binders, See delegated authority condition, 8A1
breach of warranty, 3E3C definition of, 8A2
bribery, 9L8 how it arises, 8A3
British Insurance Brokers Association (BIBA), modifications to, 8B2
2I2 more specific insurance clauses, 8B2B
broker networks, 2D1 non-contribution clauses, 8B2A
buildings insurance, 7C2A controlled functions, 9F4, 9F6
business interruption, 2J8 Council of Lloyd's, 2C1
credit, 2J8
critical illness insurance, 2J5
C cyber insurance, 2J10
cancellation, 9J7
capital adequacy, 9H1 D
monitoring, 9H2
captive insurers, 2B1D damages
xvi EP1/October 2022 Insurance, legal and regulatory (EPA)
damages Financial Conduct Authority (FCA) (continued)

(continued) discipline, 9G
right to claim, 7E disclosure, 5B4, 9E10
data protection, 10A Dispute Resolution: Complaints (DISP)
principles, 10A1 sourcebook, 10E
regulation and enforcement, 10A2 enforcement action, 9E5
rights, 10A1 engagement with customers, 9E9
day one reinstatement, 7C2A fair treatment of customers, 9E3A, 9F2
deductible, 7F4 Firm Systematic Framework (FSF), 9E3D
delegated authority, 2E2A fit and proper test (FIT), 9F7
designated professional body, 2D Handbook, 9F, 9K
direct marketing channels, 2E, 2E1 ICOBS, 9J
features of, 2E1A intervention, 9E4
directors’ and officers’ liability, 2J6 market intelligence, 9E6
discipline and enforcement, 9G monitoring, 9I3
civil remedies, 9G4 objectives, 9E1
financial penalties, 9G2 product intervention and governance, 9E2A
prosecution, 9G3 record keeping and reporting, 9I1
public censure, 9G1 regulation of intermediaries, 9I
distance communications, 9J3 risk framework, 9E3D
distribution channels, 2E super-complaints, 9E2B
double (or dual) insurance, 8A supervising small firms, 9E3E
duty of disclosure, 5B supervisory work, 9E3C
and FCA rules, 5B4 training and competence, 10D
at inception, 5B5A transparency, 9E10
continuing requirement, 5B5C Financial Ombudsman Service (FOS), 8E,
effect of IA 2015, 5B2 10C2A, 10E1, 10F
insured’s, 5B1 Financial Policy Committee (FPC), 9C
insurer’s, 5B3 financial risks, 1D1
on alteration, 5B5D Financial Services Compensation Scheme
on renewal, 5B5B (FSCS), 10G
For reference only

duty of fair presentation, 5B2B Fire Protection Association (FPA), 1B3
duty of fair presentation, breach of, 5F first loss policies, 7D2
breach of warranty, 5F2 fit and proper test (FIT), 9F7
original placement, 5F1A fortuitous event, 1E1
remedies available to insurers, 5F1 fraudulent acts, 3E3D
variations of contracts, 5F1B fraudulent claims, 1B3
fulfilment, 3E3A
fundamental risks, 1D3
E
employers’ liability, 2J6 G
insurance, 9A3
enhanced capital requirement (ECR), 9H1 general insurance, 4B1
environmental, social and governance (ESG), good faith, 5A, 5B2A
9F9 grey list, 10B2
equality, 1G2A guaranteed asset protection (GAP), 2J8, 9J,
equitable premiums, 1G2 9J6A
ethical standards, 10C
European Insurance and Occupational
Pensions Authority (EIOPA), 9K
H
excess, 7F4 hazard, 1C3
exclusion of liability, 9J2D health insurance, 2J5
express authority, 3F7A home insurance, 2J2
homogeneous exposures, 1E4
F household insurance, 7C2B
fair treatment of customers, 9F2, 10C2C

farming stock, 7C2F
I
fees ICOBS, 9H, 9J
calculation of, 9I1H application of, 9J1
fidelity guarantee, 2J8 cancellation of policies, 9J7
Financial Conduct Authority (FCA), 9C, 9E claims handling, 9J8
accountability, 9E8 distance communications, 9J3
and intermediaries, 9A5, 9I exclusion of liability, 9J2D
approach to regulation, 9E2 financial promotions, 9J2A
approach to supervision, 9E3 general matters, 9J2
authorisation, 9E7 identifying client needs, 9J5
competition powers, 9E2C inducements, 9J2B
complaints monitoring, 9I2 information about the firm, 9J4
xvii
ICOBS (continued) introducer appointed representatives (IARs),

product information, 9J6 2D, 2D3
record-keeping, 9J2C
implied authority, 3F7A
indemnity, 3G12
K
application of, 7B key functions, 9F6
benefit policies, 7A1 knowledge
definition of, 7A of insured, 5B2C
limiting factors, 7F of insurer, 5B2C
measuring, 7C
modifying, 7D
options available to insurers, 7A2 L
independent liability method, 8B1B
late payment of claims, 7E
indirect marketing channels, 2E, 2E2
law of large numbers, 1G1
inducements, 9J2B
layering, 9L
inner/item limits, 7F2
legal expenses, 2J8
Institute and Faculty of Actuaries (IFoA), 2I10
liability insurance, 2J6, 7B2, 7C3
Institute of Risk Management (IRM), 2H7, 2I11
life insurance, 4B2
insurable interest, 1E2
limitation of insurer’s right to information,
anticipated, 4B1A
5B5E
application of, 4D
Lloyd's
common, 8A3A
brokers, 2C2A, 2D4
common law, 4C1
capital, 2C1C
contract, 4C2
managing agents, 2C1B
creation of, 4C
members' agents, 2C1D
definition of, 4A
Names, 2C1C
features of, 4A1
regulation of, 2C1
financial value, 4A1C
syndicates, 2C1A
insurers’, 4A1D
transacting insurance at, 2C2
legal relationship, 4A1B
unlimited liability, 2C1C
liability insurance, 4D2
Lloyd’s Market Association (LMA), 2I3
For reference only

property insurance, 4D1
London and International Insurance Brokers’
statute, 4C3
Association (LIIBA), 2I4
subject-matter, 4A1A
London Market, 2C3
timing of, 4B
Regional Committee (LMRC), 2I5
insurable risks, 1E
London Underwriting Centre (LUC), 2G2, 2I6
insurance
long-term insurance
benefits of, 1F
and FSCS, 10G
distribution, 9K
loss adjusters, 2H3
market structure, 2A
loss assessors, 2H4
motor, 9A1
Loss Prevention Research Council, 1B3
insurance buyers
associations and clubs, 2A1E
companies, 2A1B M
partnerships, 2A1C
private individuals, 2A1A machinery and contents insurance, 7C2C
public bodies, 2A1D managing agents, 2C1B
insurance mediation activities and FSCS, 10G Managing General Agents’ Association
insured has no rights, 8G1 (MGAA), 2I7
insurer’s rights, 3E1 marine insurance, 2J9, 4B3, 7C1
insurers, 2B market agreements, 8B2C, 8F
authorisation and regulation of, 9H market organisations, 2I
capital adequacy, 9H1 Market Reform Contract (MRC), 2C2B
insurtech, 2I13 marketing mix, 2E
Insurtech UK (IUK), 2I13 material circumstances, 5A, 5B2B, 5C
intermediaries, 2D, 9A5B features of, 5C1
accounting information, 9I1A in non-life proposals, 5C2
authorisation and regulation, 9I that do not need to be disclosed, 5D
conduct of business data, 9I1F minimum capital requirement (MCR), 9H1A
product sales data, 9I1G misrepresentation, 5E
professional indemnity (PI) insurance, 9I1C remedies available to insurers, 5E1
record-keeping and reporting, 9I1 money laundering, 9L
services provided by, 2D5 application of the law, 9L1
Threshold Conditions, 9I1D client verification, 9L6
training and competence, 9I1E legislation, 9L2
internal auditors, 2H9 protection measures, 9L5
International Underwriting Association of regulations, 9L3
London (IUA), 2C3, 2G2, 2I6 reporting officer (MLRO), 9L4
intervention, 9D5 moral hazard, 1C3, 5C2B
more specific insurance clauses, 8B2B
xviii EP1/October 2022 Insurance, legal and regulatory (EPA)
motor insurance, 2J1, 5G, 9A1 proximate cause (continued)

Motor Insurance Anti Fraud and Theft Register modification by policy wordings, 6C
(MIAFTR), 1B3 nature of perils, 6A2
Motor Insurers’ Bureau (MIB), 2I14, 9A1 Prudential Regulation Authority (PRA), 9C,
mutual companies, 2B1B 9D
mutual indemnity associations, 2B1C and insurers, 9H2
firms’ culture, 9D6
intervention, 9H3
N judgment-based supervision, 9D3
National Crime Agency (NCA), 9L2C monitoring standards, 9H2
nature of perils, 6A2 objectives, 9D1
negligent fellow employees, 8G4 Proactive Intervention Framework (PIF), 9D5
new for old cover, 7C2B, 7D3 prudential supervision, 9D6
non-disclosure risk assessment framework, 9D4
consequences of, 5B4 Rulebook, 9F
non-discrimination, 1G2A, 10C2E supervision, 9D4A
non-financial risks, 1D1 Threshold Conditions, 9D2, 9F5
winding-up, 9H4
Prudential Regulation Committee (PRC), 9C
O public interest disclosure, 9F8
public liability, 2J6
offer and acceptance, 3A1, 3B
dangerous wild animals and/or dangerous
conditional acceptance, 3B2
dogs, 9A2
in practice, 3B4
insurance, 9A4
postal acceptance, 3B3
riding establishments, 9A4
unconditional acceptance, 3B1
pure risks, 1D2
Own Risk and Solvency Assessment (ORSA),
9H1B, 9H1C
R
P rateable proportion, 8A1, 8B1
Reconstruction and Renewal (R&R), 2C1C
For reference only

particular risks, 1D3
record-keeping and reporting, 9I1
payment protection indemnity, 2J5
Regulator Supervisory Report (RSR), 9H1C
pecuniary insurance, 2J8
regulatory capital, 9I1B
penalties
reinstatement, 7A2D
financial, 9G
memorandum, 7C2A
peril, 1C3, 6A2
reinsurance, 2G
common, 8A3B
customer service, 2G1C
personal accident insurance, 2J5
new business areas, 2G1D
Personal Effects Contribution Agreement
protecting the portfolio, 2G1B
(PECA), 8B2C
purpose of, 2G1
pet insurance, 2J4
smoothing peaks and troughs, 2G1A
physical hazard, 1C3, 1C3A, 5C2A
reinsured, 2G2
policyholder’s rights (to cancel), 3E2
reinsurer, types of, 2G2
political risk, 2J8
repair, 7A2B
positive customer outcomes, 9F2A
replacement, 7A2C
price comparison websites (PCWs), 2F
Retail Mediation Activities Return (RMAR),
principal, 2D
9I1
duties of, 3F5
accounting information, 9I1A
undisclosed, 3F6
calculation of fees, 9I1H
Principles for Businesses (PRIN), 9F1
conduct of business data, 9I1F
private medical insurance, 2J5
product sales data, 9I1G
product(s)
professional indemnity (PI) insurance, 9I1C
governance requirements, 9K
regulatory capital, 9I1B
information, 9J6
Threshold Conditions, 9I1D
liability, 2J6
training and competence, 9I1E
sales data, 9I1G
retrocession, 2G2
professional indemnity, 2J6
risk
professional indemnity (PI) insurance, 9A5,
-averse, 1A4
9I1C
-seeking, 1A4
and FSCS, 10G
analysis, 1B2
insurance intermediaries, 9A5B
attitude to, 1A4
solicitors, 9A5A
categories of, 1D
property insurance, 7B1, 7C2
components of, 1C
proprietary companies, 2B1A
concept of, 1A
protected cell companies (PCCs), 2B1D
control, 1B3
proximate cause
definition of, 1A2
application to single claims, 6B
frequency, 1C2
identifying the cause, 6A1
identification, 1B1
meaning of, 6A
xix
risk (continued) terms of business agreement (TOBA)

insurable, 1E (continued)
level of, 1C2 status, 3G2
managers, 2H7 termination, 3G10
meaning of, 1A3 variation of terms, 3G12
perception, 1A1 third parties, 2D, 9B2
pooling of, 1G training and competence, 9I1E
sharing, 1H travel insurance, 2J3
sharing with the insured, 1H2
risk management, 1B
U
S uncertainty, 1C1
underinsurance, 7F3
salvage, 8E underwriters, 2H1
self-insurance, 1I unfair terms in consumer contracts, 10B
senior management arrangements, systems uninsured drivers’ agreement, 2I14
and controls (SYSC), 9F4, 9F8 untraced drivers’ agreement, 2I14
senior management functions (SMFs), 9F6A
Senior Managers and Certification Regime
(SM&CR), 9F4, 9F6
V
Certification Regime, 9F6B valued policy, 7C1
Conduct Rules, 9F6C voidable contracts, 3E3B
Senior Managers Regime (SMR), 9F6A
service standards, 10C2D
sickness insurance, 2J5 X
signature, 3G12
Xchanging Ins-sure Services (XIS), 2C2B
slip, See Market Reform Contract (MRC)
Solvency and Financial Condition Report
(SFCR), 9H1C
solvency capital requirement (SCR), 9H1A
solvency margin, 9H1
For reference only

specialist insurers, 2B2
speculative risks, 1D2
spent convictions, 5D1
stock in trade, 7C2E
subject-matter
common, 8A3C
insurers’ rights arising from, 8E
subrogation, 8C
definition of, 8C1
precluded rights, 8G
waiver, 8G3
subrogation rights, 8D
contract, 8D2
statute, 8D3
tort, 8D1
sum insured, 7F1
method, 8B1A
super-complaints, 9E2B
surveyors and forensic services, 2H5
T
takaful insurance companies, 2B3
terminating contracts of insurance, 3E3
terms of business agreement (TOBA), 3F2,
3G
accounting procedures, 3G12
arbitration options, 3G12
assignment options, 3G12
broker/client relationship, 3G7
claims, 3G9
claims money, 3G6
commission, 3G3
direct administration arrangements, 3G8
general requirements, 3G1
material information, 3G4
premiums and credit, 3G5
regulatory requirements, 3G11
xx EP1/October 2022 Insurance, legal and regulatory (EPA)
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Insurance, legal

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Updates and amendments

© The Chartered Insurance Institute 2022

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Using this study text

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

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

Insurance, legal and

Summary of learning outcomes Number of questions

3. Understand the main features of insurance. 8

4. Know the structure and main features of the insurance market. 14

5. Understand contract and agency. 9

6. Understand the principle of insurable interest. 5

For reference only

8. Understand the doctrine of proximate cause and its application to non-complex 2

9. Understand the principle of indemnity and how this is applied to contracts of 7

10. Understand the principles of contribution and subrogation. 4

12. Understand consumer protection and dispute resolution. 6

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Published October 2022 2 of 5

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Published October 2022 3 of 5

11. Understand the main regulatory and legal Reading list

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13. Know the main methods of preventing, Periodicals

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Exam technique/study skills

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Syllabus learning outcome Study text chapter

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Syllabus learning outcome Study text chapter

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2: The insurance market

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3: Contract and agency

5: Good faith and disclosure

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8: Contribution and subrogation

9: Legal and regulatory environment

10: Consumer protection and dispute resolution

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Appendix 1: Standard fire policy (material damage) A1/1

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Attitude to risk Co-insurance Dual insurance Equitable premiums

A Concept of risk and risk transfer

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Figure 1.1: Risk of causing injury while driving a car

A3 Other meanings of the term ‘risk’

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Figure 1.2: Relationship between frequency and severity