Presentation of Quotation Information to Clients/Negotiation: Part 1

Page Title: 1. Welcome

Welcome
Our focus in this module will be on the presentation of quotation information to clients, as well as the
process of negotiation.
This first half of the module will focus on four main areas:
The risk management process
Regulatory requirements
Building the client relationship
Contract certainty.
The concluding part will then build on these ideas to develop a complete picture of how brokers should
approach the presentation of quotation information.
Use the arrow button on the right when you're ready to begin.

Page Title: 2. Risk management and the role of the broker

Risk management and the role of the broker

The key task of an insurance broker is to arrange the insurances of their clients. However, the modern
insurance broker offers a more comprehensive service, assisting clients to manage the risks faced by their
businesses or as individuals.
In its purest sense, risk management has been defined as:
‘The identification, analysis and economic control of risks face by an organisation.’
Many large organisations employ people specifically to follow this process within the business. However,
we also follow the same process in our personal lives; we all face risk every day.
Many clients appreciate the expertise of insurance brokers in helping them address the risks that they or
their businesses face. Insurance is only one option when trying to eradicate or mitigate risk.

Page Title: 3. Five options for risk management

Five options for risk management

Now that we have established what risk management involves and how it relates to the role of the broker,
let’s take a look at how it can work in practice.
Risk management options include:
Risk avoidance
Risk reduction
Reducing the consequences of risk
Risk acceptance
Risk transfer.
Select each tab above for more information on each of these options.

Risk avoidance
Many risks are too hazardous and likely to lead to losses. Where possible, such activities should be
avoided or alternative, safer options found.
Of course, not all risks are avoidable; if you own a building for example, there is always the risk that it may
suffer damage. Nor would we want to avoid all risks; there are some that we consciously take in order to
reap rewards from doing so.
Risk reduction
It may be worthwhile taking measures to reduce the chances of an accident or loss occurring. Such
measures should be within the client’s budget and should help to avoid losses that would cost the client
considerably more than the cost of implementation.
Enhanced security measures are an example of risk reduction.

Reducing the consequences of risk

If there remains the possibility that a risk will occur and cause a loss to the client, they should have
measures in place wherever possible to keep the impact of such a loss to a minimum.
Sprinkler installations or wearing a seatbelt when driving are measures designed to reduce the
consequences of risk.

Risk acceptance
If a risk is unlikely to occur and if the effects upon the client are relatively trivial if it does, they may decide
simply to accept the risk and deal with any consequences using their own funds.
The broker can assist the client in determining the client’s ‘risk appetite’ and therefore what risks they are in
a position to accept.
A further consideration is the avoidance of what is known as ‘pound-swapping’. It may be that when a
business reaches a certain scale, a number of smaller losses become inevitable. These predictable losses
are uneconomic to insure; in giving the premium to insurers that relates to these losses, it is inevitable or
near inevitable that these will be returned to pay for these losses. In fact, the sum returned will be less the
insurer’s profit margin and operating costs. It is cost-effective to retain such risk in these circumstances.

Risk transfer
If, despite exploring and using a variety of other risk management options, a risk is still present and it is one
that the client is unwilling to accept, there remains the option of transferring the risk to an insurer. However,
this does depend upon whether the risk is insurable or not. Some business risks are more speculative and
do not lend themselves to this type of option.
These are the options used by risk managers to effectively deal with the risks that they and their businesses
face. This is also the sequence in which risk management measures should be considered. For example,
options to reduce the risk should only be explored if the risk cannot be eradicated.

Page Title: 4. Risk analysis

Risk analysis
Before selecting which risk management option to use for any particular risk, it is necessary to analyse it to
determine:
The possibility that the risk will take place (frequency)
The impact of the risk if it does occur (severity).
Many firms adopt a methodical approach to this process by grading the likelihood of a risk event (perhaps
on a scale of 1-5 where 5 is frequent and 1 is extremely rare). They may also grade the impact of a risk
event (again, perhaps on a scale of 1-5 where 5 is catastrophic and 1 is trivial).
The two scores can then be multiplied together to determine which risks require immediate attention.
It may be such that the client has not undergone such a process previously or considered the risks they face
in a methodical fashion. The broker can offer basic advice to raise this awareness.

Page Title: 5. Legal/regulatory requirements and contractual obligations

Legal/regulatory requirements and contractual obligations

Further considerations can arise when certain insurances may be required to comply with the law, such as:
 Employers’ liability insurance
Third party motor insurance
Professional indemnity insurance for solicitors.
Furthermore, some businesses are required to hold certain types of insurance by their industry regulators or
representative membership bodies. Insurance brokers themselves are required to hold professional
indemnity cover and other professions such as architects are required to do so by the Architects
Registration Board.
In most respects, these are the easiest insurance products to persuade the client to buy as they are unable
to trade without them.
A client may be contractually obliged to buy insurance, such as when property is purchased by means of a
mortgage or when building contractors enter contracts under Joint Contracts Tribunal wordings.

Page Title: 6. Risk transfer

Risk transfer
Most insurances are bought because the client has weighed up the risk and despite taking measures to
mitigate the frequency and severity, still considers it sufficiently hazardous to transfer to an insurer.
The more measures that the client takes to mitigate the risks they face, the greater the chance of the broker
securing a favourable deal with underwriters.
The more assistance the broker can give the client in managing their risks, the easier the placement
process and the greater the choice and extent of cover offered by underwriters.
Although the broker’s main task remains securing the best insurance deal for their client, their expertise in
recommending risk improvements in the form of security enhancements, fire safety and various health and
safety improvements eases this main task.

Page Title: 7. Prioritising insurance cover

Prioritising insurance cover

In prioritising the risks where insurance is required, the following basic order should be followed:
Insurances required to comply with the law or regulatory requirements
Insurances required to comply with contractual obligations
Insurances to cover risks which, following analysis, can be damaging to the client’s interests in the event
that they take place.
Which risks fall into which category will vary between clients; the first step the broker must take with each
client is the identification and analysis of the risks they face.

Page Title: 8. Common law duties

Common law duties

At common law, the broker owes their client some basic duties:
Obedience – to follow the instructions of the principal
To act promptly, with diligence and skill
To maintain fiduciary (trust and integrity) duties, putting the principal’s interests before their own and
avoiding conflicts of interest.
When considering these duties, it important to establish exactly who the broker’s client is. In insurance
mediation activities, the party who will become the insured is the client. However, in undertaking certain
tasks, the broker is acting as agent of the insurer – such as when issuing insurance documentation on behalf
of the insurer.
To fulfil these duties to the client, the broker must understand the risks the client faces.
Page Title: 9. The Financial Conduct Authority

The Financial Conduct Authority

Insurance brokers are currently regulated by the Financial Conduct Authority (FCA).
The broker will exchange terms of business agreements (TOBAs). Although there is no specific
regulatory requirement to do so, it does provide evidence of compliance with some of the FCA’s Principles
for Business.
The key areas of this document cover:
Anything that may influence their choice of insurer (conflicts of interest)
Whether they offer policies from a range of insurers or just one
Which type of service they offer – advice and a recommendation after assessing needs, or information
on a selection of products for the client to choose
Fees charged
The complaint procedures and whether they can refer to the Financial Ombudsman Service (FOS)
Entitlement to compensation from the Financial Services Compensation Scheme (FSCS) if the broker
causes a loss and is unable to provide compensation
The identity of the regulator.

Page Title: 10. The Insurance Distribution Directive

The Insurance Distribution Directive

Effective since 1 October 2018, the Insurance Distribution Directive (IDD)concerns the provision of
insurance services in the UK market to all insurance customers.
The overarching IDD principle – which is a rule in the Insurance Conduct of Business Rules (ICOBS) – is
that insurance distributors must always act honestly, fairly and professionally in accordance with the best
interests of their customers.
To this end it states that firms should not remunerate their staff so as to provide an incentive to itself or its
employees to recommend a particular contract of insurance to a customer when they could offer a different
insurance contract which would better meet the customer’s needs.
Similarly, if a broker is acting through any binding authority agreement with insurers, any profit commission
arrangement should be such that it does not incentivise the broker to act unfairly to the customer.

Page Title: 11. The IDD: requirements

The IDD: requirements

The IDD introduces provision of information and business conduct requirements, including:
The introduction of an Insurance Product Information Document (IPID) – this is similar to a policy
summary and must be supplied by the insurer or whoever devised the product and issued to consumers
(by the intermediary, where appropriate) for each policy. It is a pre-contractual document detailing the
key features of the product
Cross-selling – full clarity over add-ons stressing the customer’s choice as to whether or not these are
optional purchases
Provision of full clarity on the part of the retail broker of details of the basis of their commission (albeit
not a specified percentage or an amount) as well as any fees payable in cash terms to both commercial
customers and consumers
Training and competence – 15 hours of training each for front line sales staff and those involved in
product development per year, complete with recorded evidence
Product governance – enhanced product development, periodic review processes and clarity about the
intended target market
Conflicts of interest – need to be disclosed to the customer where they can’t be avoided.
Firms should have met these requirements in advance of the implementation date.
Page Title: 12. The IDD and ancillary insurance intermediaries

The IDD: ancillary insurance intermediaries

It should be noted that many of the requirements set out by the IDD may apply to firms which interface with
the customer who are not insurance firms or brokers per se but may be selling insurance coverage as an
ancillary product.
These firms are often categorised as ancillary insurance intermediaries (AIIs) and although most were
considered outside of the scope of financial services regulation if the insurance cover sold related to a non-
motor or liability risk and where the premium does not exceed €500 (for example, extended warranty cover
on electrical goods), the IDD does have rules regarding training and competence applicable to them.
The authorised firm who uses these AIIs as a means to distribute their products is responsible for their
compliance with these rules.
Again, while regulation in this respect tries to be proportionate, many of the products sold by these means
are viewed by the regulator as posing the highest degree of risk.

Page Title: 13. The broker's actions

The broker's actions

The initial process undertaken by the broker is to establish the ‘demands and needs’ of their client for
insurance products. This is achieved by a variety of methods, but for most risks it is sufficient to have a
statement of fact completed by or on behalf of the client to fulfil this requirement.
An insurance broker giving advice to clients on the basis of a ‘fair analysis of the market’ must consider a
sufficiently large number of similar contracts available.
Having established the client’s demands and needs for insurance, the broker must identify a suitable
insurance product and recommend it. If the product does not fully address the client’s needs for insurance,
the broker is required to advise them of the areas where cover falls short.
In doing so, the client is able to make an informed choice as to whether to buy that product.

Page Title: 14. Suitability of the contract

Suitability of the contract

When assessing the suitability of the contract for the client, the broker needs to consider:
Whether the level of cover is sufficient for the risks that the client wishes to insure
The cost of the contract, where this is relevant to the demands and needs of the client
The relevance of any exclusion, excesses, limitations or conditions in the contract.
To do this, the broker needs a comprehensive understanding of the insurance contracts available in the
marketplace.

Page Title: 15. Duty of disclosure

Duty of disclosure
A broker is obliged to explain to the client the requirement to disclose all circumstances that may materially
affect the insurer’s considerations at inception and throughout the contract.
The consequences of failure to disclose all relevant information must also be explained.
Key legislation relating to the duty of disclosure is shown here.

Consumer Insurance (Disclosure and Representations) Act 2012

The law regarding disclosure for consumer and mixed contracts (those involving both consumer and
commercial risks) is changed with the introduction of the Consumer Insurance (Disclosure and
Representations) Act 2012.
Effective from April 2013, its main provisions included the requirement for the consumer to ensure that they
take care not to make a misrepresentation to the insurer prior to inception or when the cover is altered. The
main effect of this is that insurers are unable to rely upon any aspect of the risk that they have not asked the
client or their broker to disclose. There does remain the requirement to answer insurer’s questions
accurately and to the best of the client’s knowledge and belief.

Insurance Act 2015

For commercial risks, brokers are obliged to fairly present the risk to underwriters.
The Insurance Act outlines this as follows:
‘Fair presentation of risk requires disclosure of every material circumstance which the insured knows or
ought to know, or… gives the insurer sufficient information to put a prudent insurer on notice that it
needs to make further enquiries.’

Page Title: 16. Material facts

Material facts
Material facts are those circumstances that can affect the underwriter’s decision to:
Accept the application for insurance
Set the premium to be charged
Set the terms, conditions and extent of cover provided by the policy.

Page Title: 17. Material facts: Jones v Environcom Ltd 2010

Material facts: Jones v Environcom Ltd 2010

The broker’s duty to advise the need to disclose material facts has been modified by the recent decision in
Jones v Environcom Ltd 2010.
In this case, the broker had serviced a commercial industrial risk for a number of years and at each renewal,
they had warned the client of the consequences of the failure to disclose material facts.
Ordinarily, this would have been considered sufficient to discharge the broker’s duty in this respect.
However, it was found that the broker should go further than simply issue the warning by actually advising
which type of facts may affect the underwriter’s judgement in considering the risk presented.
The insured’s claim was disputed as they had not disclosed the use of plasma cutters which increased the
risk of fire. Although insurers did bear some of the cost of the claim, the balance was met by the broker’s
professional indemnity insurer.
The duty upon insurance brokers is an onerous one and failing to comply may give rise to a claim on their
professional indemnity cover if a client’s claim is refused.

Page Title: 18. Building the client relationship

Building the client relationship

The most successful brokers are those that build and maintain lasting relationships with both clients and
insurers alike.
There are a number of elements to building the client relationship:
Providing excellent customer service
Excellent communication skills
Achieving cost-effective solutions to the client’s insurance needs.
Page Title: 19. Effective scheduling

Effective scheduling
Most effective brokers will use a timetable to ensure that they are prompt and efficient and take a proactive
position when dealing with their client’s insurances.
This timetable may be an extensive one when dealing with a large commercial risk, whereas a
simple household or private motor risk may require contact only in good time prior to renewal. The broker
should take the view that each time they establish contact with the insured they treat it as an opportunity to
enhance the relationship.
For a large commercial risk, contact may be made on a number of occasions.
Let's look at an example of a timetable for a large combined commercial policy with a renewal date in mid-
June:
February – risk survey
March – meeting to discuss the key points arising from the risk survey
Early April – pre-renewal meeting to discuss insurance considerations and requirements
Late April – marketing the risk
Early May – meeting to consider quotations obtained and the merits of respective covers offered
Late May – firm order for cover
Early June – cover confirmed and policy documentation supplied
Mid-June – cover commences
Late June – client contact/meeting to ensure that services have met with the client’s requirements and to
discuss any deficient areas.
A firm of brokers with many such risks will need to ensure that it operates an efficient diary system to
ensure that no dates are missed and that the client is warned in good time of their responsibilities
concerning their duty of disclosure.

Page Title: 20. Benefits of early client contact

Benefits of early client contact

Initiating contact in plenty of time prior to renewal:
Indicates a desire to be of service to the client
May prevent the client from exploring the possibility of using another broker
Helps to achieve ‘contract certainty’ – a regulatory requirement. Contract certainty is achieved by ‘the
complete and final agreement of all terms between the insured and insurers by the time that they enter
the contract, with contract documentation provided promptly thereafter’. We will look at the requirement
for contract certainty in more detail next.
Initiating contact also helps the broker to fully understand the nature of the client’s business for commercial
risks and this is invaluable when the risk is marketed.
The broker in this position is able to address the enquiries of the underwriter personally without referring
back to the client, which can often cause significant delay.

Page Title: 21. Insurance Conduct of Business (ICOBS) rules

Insurance Conduct of Business (ICOBS) rules

Insurance Conduct of Business (ICOBS) rules outline what must happen before and after conclusion of
the contract. There are high level rules that apply to all customers – commercial and retail:
To provide sufficient information before the contract is concluded to enable the customer to make an
informed decision about the contract being proposed. This should take account of the main benefits,
exclusions, limitations and conditions of a policy in deciding what constitutes sufficient information
To take into account the customer’s knowledge, experience and ability when providing information to
 them e.g. you would be expected to disclose a different level of information to a sole trader than you
would to a large firm
To provide a policy document promptly after conclusion of the contract, considering the complexity of
the contract and the needs and expectations of the customer.
For retail customers (consumers), this information specifically includes:
A key facts policy summary
A statement of price
A policy document
Information regarding the claims handling process
Information regarding cancellation rights
Details of any applicable compensation scheme mentioned in the policy summary.

Page Title: 22. Insurance Product Information Document (IPID)

Insurance Product Information Document (IPID)

Prior to conclusion of the contract, the retail customer should be provided with a document called the
Insurance Product Information Document (IPID).
This has a standardised format across the industry to enable prospective customers to compare products
between different providers.
Although not mandatory for commercial insurances, IPIDs are often provided for more straightforward risks
and forms of cover and this is generally considered to be good practice.

Page Title: 23. Renewal pricing and transparency

Renewal pricing and transparency

The FCA has imposed rules upon insurers and brokers to ensure that retail customers who renew their
policy are not unfairly penalised by paying a higher premium than new business customers who secure the
same level of cover.
This means that any renewal price should not exceed the equivalent new business price (ENBP). The
ENBP should reflect any cash incentives or discounts that are available to only new business customers,
some of which may be provided by brokers.
This measure is designed to prevent what has become known as the loyalty penalty, where successive
renewal premiums increase (known as price walking), which can take advantage of any lethargy on the part
of existing customers to shop around for more competitive premiums for their insurances.
Any renewal notice must state the premium for the prior year for comparison purposes and, upon issue for
the renewal that relates to the fourth consecutive year of cover, it must also contain a warning that a more
competitive premium may be obtained by seeking quotations from other providers.

Page Title: 24. Prompt service

Prompt service
One of the key aspects in the achievement of contract certainty is the prompt service provided by the
broker.
An intimate knowledge of the client’s risk will speed up the placement process to help to achieve this aim.
Similarly, a prompt onward transmission of the policy documents to the client enables them sufficient time
to check that the insurance meets their requirements and that all the details conveyed to the underwriter
have been recorded correctly.

Page Title: 25. End of Part 1

End of Part 1
You have reached the end of the first part of this module on the presentation of quotation information to
clients and negotiation.
We have looked at a number of key topics here, including:
The risk management process
Regulatory requirements
Building the client relationship
Contract certainty.
Use the menu button in the upper left if you want to go back to any of these topics at this stage.
Part 2 will complete the picture by discussing some of the key elements of the negotiation process,
including effective communication with the client, selling the benefits of risk improvements, assertive
behaviour in negotiations and gaining agreement.
Use the cross button in the upper right when you’re ready to move on.