M80 Underwriting Practice Study Text 2024-2025 PDF

Underwriting practice M80 2024-25 STUDY TEXT  Underwriting practice M80: 2024–25 Study text Updated edition This edition incorporates any web updates issued, up to 31 May 2024, for the 2024–25 st...

Underwriting practice M80 2024-25 STUDY TEXT  Underwriting practice M80: 2024–25 Study text Updated edition This edition incorporates any web updates issued, up to 31 May 2024, for the 2024–25 study text. RevisionMate This unit is assessed by both an online multiple-choice examination and a coursework assignment, which is submitted via RevisionMate.You can access RevisionMate via your MyCII page, using your login details: ciigroup.org/login Both these components need to be completed within 18 months of purchase. Please refer to your RevisionMate coursework course for your assignment deadline. Your RevisionMate course contains everything you need to complete your studies, including: Printable PDF and ebook of the study text. Examination guide and specimen coursework assignment and answers. Coursework assignment questions and the submission area. Please note: If you have received this study text as part of your update service, access to RevisionMate will only be available for the remainder of your 18-month enrolment. Coursework questions can be answered from any edition of the study text. Updates and amendments As part of your enrolment, any changes to the exam or syllabus, and any updates to the content of this course, will be posted online so that you have access to the latest information. You will be notified via email when an update has been published. To view updates: 1. Visit www.cii.co.uk/qualifications 2. Select the appropriate qualification 3. Select your unit from the list provided Under ‘Unit updates’, examination changes and the testing position are shown under ‘Qualifications update’; study text updates are shown under ‘Learning solutions update’. Please ensure your email address is current to receive notifications. 2 M80/June 2024 Underwriting practice © The Chartered Insurance Institute 2024 All rights reserved. Material included in this publication is copyright and may not be reproduced in whole or in part including photocopying or recording, for any purpose without the written permission of the copyright holder. Such written permission must also be obtained before any part of this publication is stored in a retrieval system of any nature. No part of this publication may be copied or reproduced in a generative AI tool. This publication is supplied for study by the original purchaser only and must not be sold, lent, hired or given to anyone else. 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: 978-1-83727-097-2 Electronic edition ISBN: 978-1-83727-098-9 This edition published in 2024 Updater Amanda Burnell LLM, FCII has over 25 years’ underwriting experience and has been with Liberty Specialty Markets since 2006. She is responsible for underwriting all classes of professional liability insurance, primarily for major UK and international corporate clients. She specialises in architects, engineers and construction-related professional liability where she is recognised as a leader in the field. Prior to Liberty, Amanda worked for Scor, where she established their London Casualty and Professional Liability account, and Munich Re. Acknowledgements The CII would like to thank the following for their contribution to earlier editions of this study text Philip Priddle ACII Alan Liddiard, ACII Mark Wallace BA, FIA Rosamund Emery ACII Peter Hill DMS, FCII Michaela Nowik BSc, ACII Mike Poll ACII Arthur Radley FCII Steve Wilcox FCII The CII would also like to thank Nicola Armin for her review of chapter 5. The CII thanks the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for their kind permission to draw on material that is available from the FCA website: www.fca.org.uk (FCA Handbook: www.handbook.fca.org.uk/handbook) and the PRA Rulebook site: www.prarulebook.co.uk and to include extracts where appropriate. Where extracts appear, they do so without amendment. The FCA and PRA hold the copyright for all such material. Use of FCA or PRA material does not indicate any endorsement by the FCA or PRA of this publication, or the material or views contained within it. 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 author has drawn material attributed to other sources from lectures, conferences, or private communications. Typesetting, page make-up and editorial services CII Learning Solutions.  3 Using this study text Welcome to the M80: Underwriting practice study text which is designed to support the M80 syllabus, a copy of which is included in the next section. Please note that in order to create a logical and effective study path, the contents of this study text do not necessarily mirror the order of the syllabus, which forms the basis of the assessment. To assist you in your learning we have followed the syllabus with a table that indicates where each syllabus learning outcome is covered in the study text. These are also listed on the first page of each chapter. Each chapter also has stated learning objectives to help you further assess your progress in understanding the topics covered. Contained within the study text are a number of features which we hope will enhance your study: Activities: reinforce learning through Key points: act as a memory jogger at practical exercises. the end of each chapter. Be aware: draws attention to important Key terms: introduce the key concepts points or areas that may need further and specialist terms covered in each clarification or consideration. chapter. Case studies: short scenarios that will Refer to: Refer to: extracts from other CII study test your understanding of what you texts, which provide valuable information have read in a real life context. on or background to the topic. The sections referred to are available for you to view and download on RevisionMate. Consider this: stimulating thought Reinforce: encourages you to revisit a around points made in the text for which point previously learned in the course to there is no absolute right or wrong embed understanding. answer. Examples: provide practical illustrations Sources/quotations: cast further light of points made in the text. on the subject from industry sources. In-text questions: to test your recall of On the Web: introduce you to topics. other information sources that help to supplement the text. At the end of every chapter there is also a set of self-test questions that you should use to check your knowledge and understanding of what you have just studied. Compare your answers with those given at the back of the book. By referring back to the learning outcomes after you have completed your study of each chapter and attempting the end of chapter self-test questions, you will be able to assess your progress and identify any areas that you may need to revisit. Not all features appear in every study text. Note Website references correct at the time of publication.  5 Examination syllabus Underwriting practice Purpose At the end of this unit, candidates should be able to understand the principles and practices of underwriting and the environment within which they operate. Assumed knowledge It is assumed that the candidate already has knowledge of the fundamental principles of insurance as covered in IF1 Insurance, legal and regulatory or equivalent examinations. Summary of learning outcomes Number of questions in the examination* 1. Understand key influences of the regulatory and commercial environment on 10 underwriting. 2. Understand key aspects of underwriting policy and practice. 9 3. Understand how statistical data is used for underwriting. 11 4. Understand the principles and practices of risk pricing. 12 5. Understand risk exposure and control. 8 * The test specification has an in-built element of flexibility. It is designed to be used as a guide for study and is not a statement of actual number of questions that will appear in every exam. However, the number of questions testing each learning outcome will generally be within the range plus or minus 2 of the number indicated. Important notes Method of assessment: Mixed assessment consisting of two components, both of which must be passed. One component is a coursework assignment and one is a multiple choice question (MCQ) examination. The details are: 1. an online coursework assignment using RevisionMate consisting of 10 questions which sequentially follow the learning outcomes. This must be successfully completed within 6 months of enrolment; and 2. an MCQ exam consisting of 50 MCQs. 1 hour is allowed for this exam. This exam must be successfully passed within 18 months of enrolment. This syllabus will be examined from 1 May 2024 until 30 April 2025. Candidates will be examined on the basis of English law and practice unless otherwise stated. This PDF document has been designed to be accessible with screen reader technology. If for accessibility reasons you require this document in an alternative format, please contact us at [email protected] to discuss your needs. Candidates should refer to the CII website for the latest information on changes to law and practice and when they will be examined: 1. Visit www.cii.co.uk/qualifications 2. Select the appropriate qualification 3. Select your unit from the list provided 4. Select qualification update on the right hand side of the page Published February 2024 ©2024 The Chartered Insurance Institute. All rights reserved. M80 6 M80/June 2024 Underwriting practice 1. Understand key influences of the 4.3 Explain how claims data is interpreted and used in regulatory and commercial environment setting prices. on underwriting. 4.4 Explain the significance of incurred but not reported 1.1 Explain the implications of regulatory authorisation (IBNR) claims. for the underwriting function. 4.5 Explain the importance of liaison between 1.2 Explain the relationship between underwriting underwriting and claims functions, especially and capital and solvency requirements. reserving. 1.3 Explain the principles and requirements of 4.6 Explain the role and significance of the actuary in contract certainty. risk pricing. 1.4 Discuss the impact of legislation and litigation 4.7 Examine the importance of competitor analysis in on underwriting. pricing. 1.5 Explain the operation of the traditional underwriting 4.8 Discuss other risk data that can be used in pricing. cycle. 5. Understand risk exposure and control. 1.6 Discuss the impact of major events and trends on 5.1 Explain how exposure to single risks and single underwriting. events can be measured and managed to balance 1.7 Explain the importance of Consumer Duty in the account. providing positive customer outcomes. 5.2 Explain the aggregation of risks and the use of catastrophe modelling. 2. Understand key aspects of underwriting policy and practice. 5.3 Explain the role and main types of reinsurance. 2.1 Explain corporate underwriting strategy and its 5.4 Explain the importance of the interaction between influences on underwriting policy. insurer and reinsurer. 2.2 Discuss the importance of moral and physical 5.5 Outline methods other than reinsurance that can be hazards in setting an underwriting policy. used for limiting exposure. 2.3 Discuss typical criteria for policy cover, terms, conditions and restrictions. 2.4 Explain how risks are classified, categorised and improved. 2.5 Explain the interaction between underwriting and distribution channels. 2.6 Explain the use and implications of granting delegated authority. 2.7 Discuss the methods of entering international markets and the implications of writing international business. 2.8 Describe counter-fraud initiatives. 2.9 Discuss the effect of mergers and acquisitions on underwriting policy and practice. 3. Understand how statistical data is used for underwriting. 3.1 Explain the relationship between exposure and claims. 3.2 Explain the importance of averages and how they are calculated. 3.3 Interpret the distribution of data around the average. 3.4 Explain the relationship between frequency and severity. 3.5 Explain the basic principles of probability and how it can be used to calculate expected future claims. 3.6 Explain the importance of the law of large numbers in sample sizes. 3.7 Discuss the limitations of statistical data. 4. Understand the principles and practices of risk pricing. 4.1 Explain the main elements of the premium. 4.2 Explain the burning cost and prospective risk analysis methods of rating. Published February 2024 2 of 4 ©2024 The Chartered Insurance Institute. All rights reserved.  7 Reading list relating to all risks other than marine. 15th ed. Sweet & Maxwell, 2022. The following list provides details of further reading which may assist you with your Ebooks studies. The following eBooks are available via www.cii.co.uk/elibrary (CII/PFS members Note: The examination will test the syllabus alone. only): The reading list is provided for guidance Big data revolution: what farmers, doctors only and is not in itself the subject of the and insurance agents teach us about examination. discovering big data patterns. Rob Thomas, The resources listed here will help you Patrick McSharry. Wiley, 2015. keep up-to-date with developments and Fundamental aspects of operational risk provide a wider coverage of syllabus topics. and insurance analytics: a handbook of operational risk. Marcelo G. Cruz. Wiley, CII study texts 2015. Underwriting practice. London: CII. Study Handbook in Monte Carlo simulation: text M80 applications in financial engineering, Insurance, legal and regulatory. London: CII. risk management and economics. Paolo Study text IF1. Bradimarte. Hoboken: Wiley, 2014. Books (and ebooks) Risk modelling in general insurance: from Actuarial practice of general insurance. D G principles to practice. Roger J. Gray, Susan Hart, R A Buchanan, B A Howe. 7th ed. M. Pitts. Cambridge: Cambridge University Sydney: Institute of Actuaries of Australia, Press, 2012. 2007. Treatises on Solvency II. Meinrad Dreher. Bowstead and Reynolds on agency. Peter Heidelberg: Springer, 2015. Watts & FMB Reynolds. 22nd ed. London: Online resources Thomson Reuters, 2020. The Insurance Institute of London Drafting insurance contracts: certainty, (IIL) provides access to lectures from clarity, law and practice. Christopher Henley. leading industry figures and subject London: Leadenhall press, 2010. experts speaking on current issues ‘Insurance intermediaries: underwriting and trends impacting insurance and agents’ in Colinvaux’s law of insurance. 13th financial services. Available online ed. Prof. Robert Merkin. London: Sweet & at www.cii.co.uk/learning/insurance-institute- Maxwell, 2023. of-london (CII/PFS members only). The law of insurance contracts. Malcolm A Risk control. Ian Searle. Clarke. 6th ed. London: Informa, 2009. Risk identification. Ian Searle. Pricing in general insurance. Pietro Parodi. Recent developments in general insurance CRC Press, 2015.* underwriting. Massimo Vascotto. Reinsurance: the nuts and bolts. Keith Riley. Principles and trends in general insurance London: Witherby, 2012. underwriting. Massimo Vascotto. Reinsurance underwriting. Robert Kiln, Recent developments to Solvency II. Brad Stephen Kiln. 2nd ed. London: CRC Press, Baker. 2017. Insurance accounting (general business). Ian Risk management for insurers: risk control, Hutchinson, updated by Alex Barnes. economic capital, and Solvency II. Rene Doff. 3rd/2nd ed. London: Risk Books, AIRMIC. www.airmic.com. 2015/2011.* Contract certainty: an Airmic guide for risk Solvency II handbook: practical approaches managers and insurance buyers. AIRMIC. to implementation. Rene Dorf. London: Risk 2009. Available via www.airmic.com (register Books, 2014. your details to access). The role of agents in insurance business. Institute of Risk Management Chapter – MacGillivray on insurance law: www.theirm.org. * Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only). Published February 2024 3 of 4 ©2024 The Chartered Insurance Institute. All rights reserved. 8 M80/June 2024 Underwriting practice Further articles and technical bulletins are available at www.cii.co.uk/learning/elibrary/ (CII/PFS members only). Journals and magazines The Journal. London: CII. Six issues a year. Post magazine. London: Incisive Financial Publishing. Monthly. Contents searchable online at www.postonline.co.uk. The Economist. London: Economist Newspaper. Weekly. Financial times. London: Financial Times. Daily. Available online at www.ft.com. Access to further periodical publications is available from the Knowledge website at thejournal.cii.co.uk (CII/PFS members only). Reference materials Dictionary of insurance. C Bennett. 2nd ed. London: Pearson Education, 2004. Concise encyclopedia of insurance terms. Laurence S. Silver, et al. New York: Routledge, 2010.* Exemplars Exemplar papers are available for all mixed assessment units. Exemplars are available for both the coursework component and the MCQ exam component. These are available on the CII website under the unit number before purchasing the unit. They are available under the following link www.cii.co.uk/qualifications/ diploma-in-insurance-qualification. These exemplar papers are also available on the RevisionMate website (ciigroup.org/login) after you have purchased the unit. Exam technique/study skills There are many modestly priced guides available in bookshops. You should choose one which suits your requirements. Published February 2024 4 of 4 ©2024 The Chartered Insurance Institute. All rights reserved.  9 M80 syllabus quick-reference guide Syllabus learning outcome Study text chapter and section 1. Understand key influences of the regulatory and commercial environment on underwriting. 1.1 Explain the implications of regulatory authorisation for the 1A, 1B, 1C underwriting function. 1.2 Explain the relationship between underwriting 2A and capital and solvency requirements. 1.3 Explain the principles and requirements of 2B contract certainty. 1.4 Discuss the impact of legislation and litigation 2C on underwriting. 1.5 Explain the operation of the traditional underwriting cycle. 3A 1.6 Discuss the impact of major events and trends on underwriting. 3B 1.7 Explain the importance of Consumer Duty in providing positive 1C customer outcomes. 2. Understand key aspects of underwriting policy and practice. 2.1 Explain corporate underwriting strategy and its influences on 4A underwriting policy. 2.2 Discuss the importance of moral and physical hazards in setting 4B an underwriting policy. 2.3 Discuss typical criteria for policy cover, terms, conditions and 4C restrictions. 2.4 Explain how risks are classified, categorised and improved. 4D 2.5 Explain the interaction between underwriting and distribution 4E channels. 2.6 Explain the use and implications of granting delegated authority. 4F 2.7 Discuss the methods of entering international markets and the 4G implications of writing international business. 2.8 Describe counter-fraud initiatives. 4H 2.9 Discuss the effect of mergers and acquisitions on underwriting 4I policy and practice. 3. Understand how statistical data is used for underwriting. 3.1 Explain the relationship between exposure and claims. 5A 3.2 Explain the importance of averages and how they are calculated. 5B, 5C 3.3 Interpret the distribution of data around the average. 5D 3.4 Explain the relationship between frequency and severity. 5E 3.5 Explain the basic principles of probability and how it can be used 5F, 5G to calculate expected future claims. 3.6 Explain the importance of the law of large numbers in sample 5H sizes. 3.7 Discuss the limitations of statistical data. 5I, 5J 4. Understand the principles and practices of risk pricing. 4.1 Explain the main elements of the premium. 6A 4.2 Explain the burning cost and prospective risk analysis methods 6B of rating. 10 M80/June 2024 Underwriting practice Syllabus learning outcome Study text chapter and section 4.3 Explain how claims data is interpreted and used in setting prices. 6C 4.4 Explain the significance of incurred but not reported (IBNR) 6D claims. 4.5 Explain the importance of liaison between underwriting and 6E claims functions, especially reserving. 4.6 Explain the role and significance of the actuary in risk pricing. 6F 4.7 Examine the importance of competitor analysis in pricing. 6G 4.8 Discuss other risk data that can be used in pricing. 6H 5. Understand risk exposure and control. 5.1 Explain how exposure to single risks and single events can be 7A measured and managed to balance the account. 5.2 Explain the aggregation of risks and the use of catastrophe 7B modelling. 5.3 Explain the role and main types of reinsurance. 7C, 7D 5.4 Explain the importance of the interaction between insurer and 7E reinsurer. 5.5 Outline methods other than reinsurance that can be used for 7F limiting exposure.  11 Exam guidance and accessibility Before you begin the study text, we would encourage you to read about how to approach the exam. Study skills While the text will give you a foundation of facts and viewpoints, your understanding of the issues raised will be richer through adopting a range of study skills. They will also make studying more interesting! We will focus here on the need for active learning in order for you to get the most out of this core text. Active learning is experiential, mindful and engaging Underline or highlight key words and phrases as you read – many of the key words have been highlighted in the text for you, so you can easily spot the sections where key terms arise; boxed text indicates extra or important information that you might want to be aware of. Make notes in the text, attach notes to the pages that you want to go back to – chapter numbers are clearly marked on the margins. Make connections to other CII units – throughout the text you may find ‘refer to’ boxes that tell you the chapters in other books that provide background to, or further information on, the area dealt with in that section of the study text. Take notice of headings and subheadings. Use the clues in the text to engage in some further reading (refer to the syllabus reading list) to increase your knowledge of a particular area and add to your notes – be proactive! Relate what you’re learning to your own work and organisation. Be critical – question what you’re reading and your understanding of it. Five steps to better reading Scan: look at the text quickly – notice the headings (they correlate with the syllabus learning outcomes), pictures, images and key words to get an overall impression. Question: read any questions related to the section you are reading to get a feel for the subjects tackled. Read: in a relaxed way – don’t worry about taking notes first time round, just get a feel for the topics and the style the book is written in. Remember: test your memory by jotting down some notes without looking at the text. Review: read the text again, this time in more depth by taking brief notes and paraphrasing. On the Web Visit here for more detail on study skills: www.open.ac.uk/skillsforstudy. Note: website reference correct at the time of publication. 12 M80/June 2024 Underwriting practice Exam guidance Answering multiple-choice questions When preparing for the examination, candidates should ensure that they are aware of what typically constitutes each type of product listed in the syllabus and ascertain whether the products with which they come into contact during the normal course of their work deviate from the norm, since questions in the examination test generic product knowledge. Some questions are simply questions of fact, whereas others may be more progressive in nature, requiring reasoning to determine the correct option or, perhaps, being answerable by a process of elimination. Whatever the question, read it carefully to identify what it is really asking. Do not assume that you 'know' what it is asking, even if the question is on a topic about which you feel very confident; answer the question exactly as it is asked. Also, look out for the occasional negative question (Which of the following is not …?). Try to answer all of the questions. While there is no substitute for a good grasp of the subject matter, and you cannot expect to pass the examination purely on guesswork, you do not lose marks for giving a wrong answer! You can find more information on the specific unit in the exam guide (available on the unit page on the CII website and on RevisionMate). On the Web You can find more on preparing for your exam by visiting: https://www.cii.co.uk/learning/ qualifications/assessment-information/before-the-exam/. Note: website reference correct at the time of publication. Accessibility The CII has produced a policy and guidance document on accessibility and reasonable/ special adjustments. The purpose of this is to ensure that you have fair access to CII qualifications and assessments. On the Web The ‘Qualifications accessibility and special circumstances policy and guidance’ document can be found here: www.cii.co.uk/media/bxsjd2e2/cii-qualifications-accessibility- and-special-circumstances-policy-and-guidance.pdf. Note: website reference correct at the time of publication. Coursework assignments – referencing is required You must always make it clear – through italics and a citation – where content taken from the study text begins and ends in your assignment. Please see our webinar recording on how to reference.  13 Introduction Insurance like many other aspects of daily life has changed. How an underwriter understands a risk and the options available is evolving at great speed, within a far stronger regulatory environment. M80 will help you understand how the UK regulatory regime has evolved, including the most recent context and reason for those rules incorporated in The Financial Services Act 2012 and how the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) impact the underwriter’s role. We also look at significant legislative aspects that create new challenges to the way in which the underwriter is permitted to operate in a more consumer orientated environment. None of this changes the financial demands of being in business so, we look in detail at the role of capital and its impact on the underwriter. We also examine the underwriting cycle and the effect that major events can have on that and whether, as these increase in severity or frequency, the solution can be provided by the insurance market, central government or a mixture of both. While the regulatory and commercial environments evolve and become increasingly sophisticated, they remain essentially fixed elements for an insurer. It can, however, choose the sectors that it wishes to underwrite, its range of products and services, target markets and demographics, and how it delivers to those markets. These decisions begin at executive level and then cascade down through the strategies of other departments. How well these are structured, implemented and constantly monitored will determine how successful the organisation will be. Once the underwriting strategy has been established within those chosen classes, an insurer has to establish how its premium is to be calculated to achieve the required returns. There are many factors and people involved in achieving this outcome such as underwriting managers, product specialists, senior head-office underwriters, statisticians and actuaries who will study numerous forms of data to try and predict that the premium charged correctly reflects all elements of risk and expenses and will be sufficient through to the full development of all claims and other costs that may be incurred. The study text details what these may be and the process that may be applied. Statistical analysis of past experience plays a key role in determining the right price to charge for the proposition. No risk behaves exactly as it did in the past, but fundamental drivers can usually be identified from either its own experience or that of similar risks. This analysis will mainly be done by a specialist team, but underwriters should be familiar with the concepts and techniques that they use in order to fully understand their decisions and the rating structures in place. By its very nature insurance and the prediction of loss is not an exact science. As an insurer’s portfolio becomes larger, more diverse and inevitably more complicated due to emerging risks, the ability to accurately predict and ensure adequate financial reserves becomes increasingly difficult. We examine these factors and the tools, including reinsurance, that insurers use to manage their impact as each may require.  15 Contents 1: The regulatory environment A The regulatory regime 1/2 B PRA and FCA approach to regulation 1/5 C Impact on the underwriting function 1/11 2: Commercial and legislative factors A Capital and solvency requirements 2/2 B Contract certainty 2/6 C Legislative influences 2/7 3: Underwriting cycle and impact of trends and events A The underwriting cycle 3/2 B Major events and trends 3/4 4: Policy and practice A Corporate and underwriting strategies 4/2 B Physical and moral hazard 4/7 C Policy cover, terms, conditions and restrictions 4/9 D Risk classification, categorisation and improvement 4/12 E Underwriting and distribution channels 4/16 F Delegated authority 4/19 G International business 4/22 H Fraud 4/25 I Mergers and acquisitions 4/31 5: Statistical data A Exposure and claims 5/2 B Importance of averages 5/5 C Common measures of average 5/6 D Distribution of data 5/8 E Frequency and severity 5/12 F Principles of probability 5/13 G Expected value of claims 5/16 H Law of large numbers 5/18 I Limitations of statistical data 5/20 J How technology is overcoming the limitations 5/20 16 M80/June 2024 Underwriting practice 6: Pricing A Main elements of the premium 6/2 B Burning cost and prospective risk analysis 6/10 C Interpreting claims data 6/12 D IBNR claims 6/16 E Liaison between underwriting and claims functions 6/17 F The role of the actuary 6/20 G Competitor analysis 6/21 H Other risk data 6/23 7: Risk exposure and control A Single risks and single events 7/2 B Aggregation of risks and catastrophe modelling 7/6 C The role of reinsurance in controlling exposure 7/8 D Types of reinsurance and their application 7/9 E Interaction between insurer and reinsurer 7/14 F Other methods of controlling exposure 7/17 Appendix 1: Example of an employers’ liability claims triangulation A1/1 Self-test answers i Cases xi Legislation xiii Index xv  Chapter 1 The regulatory 1 environment Contents Syllabus learning outcomes Introduction A The regulatory regime 1.1 B PRA and FCA approach to regulation 1.1 C Impact on the underwriting function 1.1, 1.7 Key points Question answers Self-test questions Learning objectives After studying this chapter, you should be able to: outline the aims of the PRA and the FCA, and their activities to achieve these aims; explain the implications of regulatory authorisation for the underwriting function; and explain the importance of the Consumer Duty in providing positive customer outcomes. Chapter 1 1/2 M80/June 2024 Underwriting practice Introduction Most individual underwriters use rules or guidelines that have been established by management, either based at a central location or situated locally. Within this defined structure, decisions as to whether risks are accepted and at what terms seem reasonable or unreasonable depending on the point of view adopted. An underwriter needs to be mindful that one person’s perception of a given situation is not necessarily the same as another, and they have to be sensitive to these different points of view when working within these rules and guidelines. This chapter will help you to understand the context of those rules and guidelines. It gives particular attention to the regulatory environment and its implications for the underwriter. Key terms This chapter introduces the following terms and concepts Auditing Consumer Duty FCA Handbook Financial Conduct Authority (FCA) Financial Financial Services Principles for Prudential Ombudsman Compensation Businesses (PRIN) Regulation Service (FOS) Scheme (FSCS) Authority (PRA) PRA Rulebook Senior Managers & Training and Certification Regime competence (TC) (SM&CR) A The regulatory regime The regulatory regime for insurers is based on a number of Acts of Parliament, the most significant of which is the Financial Services and Markets Act 2000 (FSMA), as amended by the Financial Services Act 2012. A1 Financial Services Act 2012 The Financial Services Act 2012 gave regulatory responsibility to the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). A third body, the Financial Policy Committee (FPC), which sits within the Bank of England, is responsible for monitoring emerging risks to the UK financial system as a whole and providing overall strategic direction for the regulatory regime. The Rules and Guidance are split between the FCA Handbook and the PRA Rulebook. Some provisions appear in both of these, highlighting the overlap created by the dual- regulatory approach. On the Web You should continue to view the respective websites ( www.bankofengland.co.uk/ prudential-regulation and www.fca.org.uk on a regular basis to keep up to date with any new developments. How they work together Each regulator must focus on its own area while at the same time working together when that is necessary for the system to work. To help with this, the chief executive officer of each sits on the board of the other. For example, one register of authorised members is maintained by the FCA, but is used by both regulators. The following table shows the different areas that the two regulators are responsible for. Chapter 1 The regulatory environment 1/3 Chapter 1 PRA Part of the Bank of England and is responsible for promoting the stable and prudent operation of the UK financial system. The UK’s prudential regulator for banks, building societies, credit unions, insurers and major investment firms. Also carries responsibility for the prudential regulation of the Society of Lloyd’s. FCA Wholly separate from the PRA; responsible for regulation of conduct in retail, as well as wholesale, financial markets and the infrastructure that supports those markets. Also has responsibility for the conduct of the Society of Lloyd’s. Remit also includes the prudential regulation of firms that do not fall under the scope of the PRA, such as asset managers and insurance brokers. Accountable to HM Treasury and Parliament. Be aware The key principle underlying this cooperation is that each authority should focus on the key risks to its own objectives while being aware of the potential for concerns of the other. Sometimes, both the PRA and FCA will have a direct interest in the same issue, but from different perspectives or requiring different levels of detail. Example 1.1 XYZ Insurer breaks the FCA's conduct rules. The FCA decides to issue a fine and requires XYZ to pay compensation to a customer who was harmed by the breach. The PRA's interest in this will be how these payments affect XYZ's capital and profitability. The Bank of England has overall responsibility for financial stability, based upon its statutory objective to protect and enhance the stability of the financial system of the United Kingdom. In support of this objective, the FPC has been established within the Bank to identify, monitor, and to take action to remove or reduce systemic risks. The FPC has the power to make recommendations and give directions to both the PRA and the FCA on specific actions to be taken in order to achieve the FPC’s objectives. A2 Bank of England and Financial Services Act 2016 The Bank of England and Financial Services Act 2016 modified the Financial Services Act 2012. It 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 the Prudential Regulation Committee (PRC) was established. The PRA's most important supervisory and policy decisions are made by the PRC. The PRC operates alongside the other two Bank committees, namely the FPC and the Monetary Policy Committee (MPC). The current structure of the regulatory regime is shown in figure 1.1. Chapter 1 1/4 M80/June 2024 Underwriting practice Figure 1.1: Current regulatory structure 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. A3 Objectives A3A The PRA The PRA has three objectives: a general objective to promote the safety and soundness of the firms it regulates; an objective specific to insurance firms, to contribute to the securing of an appropriate degree of protection for those who are or may become insurance policyholders; and a secondary objective to facilitate effective competition. These objectives are underpinned by the principle that a stable financial system, providing the financial services the economy needs, is necessary for a healthy and successful economy. However, it is important to point out that it is not the PRA’s responsibility to ensure that no firm fails. Instead, it will seek to ensure that should a firm fail, it will not destabilised the financial system. The PRA is responsible for the prudential regulation financial institutions that would pose a threat to the financial systems if they were to fail. This includes banks, building societies, general insurers and life insurers, but not insurance brokers. This effectively means that they will regulate all institutions that accept deposits or issue insurance contracts. Be aware It is important to note that the PRA’s objective to promote the safety and soundness of all the firms it regulates applies equally to the individuals within those firms. A3B The FCA The Financial Services Act 2012 states that the single strategic objective of the FCA is to ensure that the relevant markets function well. This objective makes the FCA responsible for the conduct of business for all firms. It is also responsible for the prudential regulation of small firms, such as insurance brokers and financial advisers. Chapter 1 The regulatory environment 1/5 Chapter 1 To support the strategic objective, it has three operational objectives: Operational objectives: To promote To secure an appropriate To protect and enhance effective competition in degree of protection the integrity of the UK the interests of consumers for consumers financial system The FCA has a duty to: act in a way that promotes competition; and aim to minimise the extent to which regulated businesses may be used for a purpose connected with financial crime. It has the power to: intervene in the area of products; instruct firms to withdraw or amend misleading promotions; and publish the fact that it has issued a warning notice in relation to a disciplinary matter. The FCA will seek to intervene in a firm's activities at an early stage before a customer suffers any financial harm. The FCA is also responsible for the Financial Ombudsman Service (FOS), the MoneyHelper service, and the Financial Services Compensation Scheme (FSCS). The Consumer Duty also falls within the remit of the FCA. B PRA and FCA approach to regulation Insurance companies are dual-regulated; this means prudential regulation is carried out by the PRA, while regulation of conduct falls within the remit of the FCA. The FCA seeks to ensure that policyholders are treated fairly, whereas the PRA seeks to ensure continuity of policy provision – that is, that all insurers are in a position to meet their stated obligations to the policyholder. It seeks to achieve this through a number of measures. Prudential PRA Dual regulation Conduct FCA Each authority has its own approach to regulation, although the core themes are similar. B1 The PRA The aim of the PRA is not to stop the failure of any firm. What it does aim to do is to make sure that if one does fail, the disruption to customers and to the financial system is minimised. It uses a judgment-based approach, rather than a narrow set of rules, and aims to be forward-looking, taking a wide range of possible risks to its objectives into account. In the words of former Chief Executive Officer, Andrew Bailey: Our job at the PRA is to protect the public's access to critical financial services and thus to contribute to a healthy economy. But we recognise that the threats to safety and soundness of firms and thus the to the continuity of financial services can be complex and fast-moving. Our goal at the PRA is to focus on the things that matter most to achieving our statutory objectives and thus our responsibility to the public. The financial services that insurers provide are essential to the pooling and transfer of risk and savings, and so wider economic activity. Chapter 1 1/6 M80/June 2024 Underwriting practice Insurers’ liabilities are, in general, inherently uncertain, even down to the individual policyholder level. Given such uncertainty, it is difficult for policyholders to monitor the financial health of their insurer and make reasonably informed judgments about the levels of risk to which they are exposed. Traditional insurers do not, however, generally threaten the stability of the financial system in the same way as banks, for instance. B1A Supervision of insurance On the Web For an overview of the current approach on insurance supervision, please refer to ‘The Prudential Regulation Authority’s approach to insurance supervision’ on the PRA website: www.bankofengland.co.uk/prudential-regulation/publication/pras-approach- to-supervision-of-the-banking-and-insurance-sectors. The PRA seeks to take a forward-looking approach to the supervision of insurers. It does not just consider current risks to its objectives, but those that could plausibly arise in the future. It also focuses on outcomes rather than prescriptive rules. The way this works is that the PRA sets the outcomes it wishes to see, but leaves how they are achieved to the insurer to decide. In addition, it writes to insurers' boards annually about any areas of concern. If the issue is serious, it will check that corrective action has been taken. If the issue is less serious, it will leave it to the board to self-certify that the issue has been rectified. On the Web You can find a copy of the letter the PRA sent to the firms it regulates detailing its insurance supervision priorities for 2024 here: www.bankofengland.co.uk/prudential- regulation/letter/2024/insurance-supervision-2024-priorities. When it considers it necessary to intervene, the PRA will act at an early stage to mitigate the impact any issue has on its objectives. Intervention can take the form of making recommendations, imposing requirements and enforcement (including fines and public censure). The PRA expects insurers to cooperate with it at every stage. Despite its forward-looking and outcome-based approach, the PRA does make certain demands on insurers. Regular financial submissions and reports must be made by all regulated firms, which may be reinforced by site visits or by third party analysis. The PRA may also demand further data and information as required. Be aware It is important to note that the PRA is not a fraud regulator – this role is carried out by other bodies. On-site inspections are not designed to uncover malpractice, although the relevant authorities will be informed should it be deemed necessary. Threshold Conditions The PRA also imposes Threshold Conditions, which are the minimum requirements a firm must fulfil if it is to be allowed to trade. Unless an insurer complies with these, it will not be authorised to do business. It supervises insurers to judge whether their behaviour is consistent with the statutory objective of safety and soundness, with appropriate policyholder protection. This will reveal whether they meet (and will continue to meet) these Threshold Conditions. Categories PRA supervision is weighted towards those issues and insurers that, in its judgment, pose the greatest risk to its objectives. It divides all firms into four categories of ‘potential impact’, with category 1 firms providing the greatest risk. Category 1 is defined as: insurers whose size, interconnectedness, complexity, and business type give them the capacity to cause very significant disruption to the UK financial system (and through that to economic activity more widely) by failing, or by carrying on their business in an unsafe manner. Chapter 1 The regulatory environment 1/7 Chapter 1 The PRA assesses the impact posed by other firms as follows: Category 2 Capacity to cause some disruption to the UK financial system. Category 3 Capacity to cause minor disruption to the UK financial system, but where difficulties across the sector have the potential to generate disruption. Category 4 Almost no capacity to cause disruption individually to the UK financial system, but where difficulties across the sector have the potential to generate disruption. An authorised insurer is placed in a category after careful quantitative and qualitative analysis of its business model and a consideration of how viable it is compared to other insurers. The insurer is then told which category it has been placed into, and the level of supervision it can therefore expect. Activity Try to find out which PRA category applies to your organisation. Measures Having considered the amount of risk an insurer poses to its objectives, the PRA assesses whether it has in place adequate measures to safeguard its safety and soundness and appropriate policyholder protection. These measures include the following: management and governance; culture and competence; risk management and controls; financial resources (such as capital adequacy); and resolvability. Judgment The PRA’s approach relies significantly on judgment. Its supervisors reach judgments on the risks that each insurer runs and the risk it poses to the PRA's objectives. Is it likely to continue to meet the Threshold Conditions? How should any problems and shortcomings be addressed? In particular, supervisors must decide which risks are the most material and are, therefore, to be pursued. These judgments are based on evidence and analysis, although the PRA accepts that sometimes its view will necessarily differ from that of the insurer concerned. Solvency The PRA’s solvency requirements are currently aligned to the measures in Solvency II, which is an EU directive brought into UK law before Brexit. Solvency II’s key features include: forward-looking and risk-based solvency requirements; the requirement that insurers hold capital against a range of risks, not just insurance risks; a total balance sheet type of regime; consideration of all risks and their interactions; the requirement that insurers identify, measure and proactively manage risks; the introduction of the Own Risk and Solvency Assessment (ORSA); a supervisory review process; greater reporting and public disclosure requirements; and a strengthened role for the group supervisor. During 2023, the PRA consulted on adapting the rules of Solvency II to the UK insurance market. The focus is on simplification and aims to reduce the administrative and reporting requirements for UK insurers, thus reducing the cost of compliance. At the time of writing (January 2024), the PRA is considering the outcome of these consultations, with the aim of completing all reforms by 31 December 2024. Chapter 1 1/8 M80/June 2024 Underwriting practice On the Web If you are interested in the following the progress of this amendment to the rules, check the following link: bit.ly/2N1LOa8 PRA and the Lloyd’s Market With regard to the Society of Lloyd’s, there are two specific principles: 1. The Lloyd’s Market should be regulated to the same standard as the market outside of Lloyd’s. 2. Supervision of the various entities that constitute the Lloyd’s Market will take place at the level where the risk is managed; this means that the Society of Lloyd’s itself will be supervised in addition to each of the managing agents. The PRA is the lead regulator for Lloyd’s as a whole, although the FCA has responsibility for some conduct of business aspects. The Society of Lloyd’s and Lloyd’s managing agents are dual-regulated firms; Lloyd’s members’ agents and Lloyd’s brokers are FCA-regulated firms. Conclusion Under the PRA: firms must have sufficient controls to minimise excessive risk taking; the board must take responsibility for establishing and maintaining an organisational and operational culture that is in line with the PRA's expectations; and insurers and individuals must behave in an open and cooperative way. Question 1.1 XYZ Insurance is dual regulated. What does this mean? B2 The FCA The FCA is responsible for conduct of business and market issues for all firms. It is also responsible for the prudential regulation of small firms, such as insurance brokers and financial advisory firms. B2A Risk-based approach The FCA takes a risk-based approach. This means that it focuses on insurance operations that pose the greatest threat to the successful achievement of its objectives. Its fundamental purpose is to ensure that relevant markets function well. In doing this it aims to strike a balance between ensuring high standards of regulated activity and not stifling innovation with unnecessary rules. Outcomes It works towards the following three outcomes: 1. Consumers receive financial services and products that meet their needs, from firms they can trust. 2. Markets and financial systems are sound, stable and resilient, with transparent pricing information. 3. Firms compete effectively, with the interests of their customers and the integrity of the market at the heart of how they run their business. Therefore, it seeks to ensure consumer protection, integrity and competition. B2B General approach Similar to the approach taken by the PRA, the FCA focuses on judgment-based supervision. In principle, the FCA's general approach covers the following areas. The authorisation process The FCA promises to ensure that the application process is as smooth and efficient as possible and that there are no inappropriate barriers to entry. At the same time, its Threshold Conditions demand that an applicant proposes an appropriate, viable and sustainable business model. Chapter 1 The regulatory environment 1/9 Chapter 1 The FCA works very closely with the PRA in approving individuals for roles that have a material impact on the conduct of a firm’s regulated activities. Conduct of members The FCA aims to ensure that: member firms are focused on meeting the genuine needs of consumers; no single firm dominates the market; risks to competition are minimised or limited; and firms are not being used to facilitate financial crime. This is a top priority and severe action is taken against firms and individuals who act fraudulently. The correct selling of products The FCA can ban products that pose an unacceptable risk to policyholders and prevent a product being launched. Such products can be banned for up to twelve months without consultation. It can also ban misleading financial promotions and remove them immediately from the market. Maintenance of standards and monitoring The FCA generally has a reduced focus on specific firms, instead concentrating on more detailed reviews of particular sectors of the market. However, it will monitor and analyse a firm in-depth when the firm poses a significant risk to the FCA’s objectives. Remember, prudential supervision is based on ensuring that client assets are protected. Frequency of contact with the FCA’s supervisory function can vary from monthly for higher- risk organisations to perhaps once every four years for lower-risk categories. The FCA is committed to six consumer outcomes designed to ensure that customers are treated fairly. It expects member firms to conduct their activities in accordance with these guidelines. It also imposes a Consumer Duty demanding that firms make sure that their customers get a good outcome from the products and services they buy from them. Refer to These outcomes are detailed in Staff training and development on page 1/12 Complaints The FCA also has the ability to accept and review complaints from consumer groups. A recent, high profile example of this was its investigations into payment protection insurance (PPI), which closed in 2019. This resulted in over £38.3 billion being paid to customers who had been mis-sold the cover by April 2021. Market analysis and intelligence The work of the FCA is supported by its Policy, Risk and Research Division, which monitors what is happening in the markets and how this affects consumers. The objective here is to identify risk earlier and minimise potential harm to consumers. Competition The FCA has an obligation to promote effective competition in the best interests of consumers. Firms must compete by offering better services, better value and products that customers want and need; pricing must be in line with costs, and firms should innovate and develop new and improved products over time. B2C The supervision model The FCA’s supervision model is based on three pillars: 1 2 3 Firm Systematic Event-driven work Issues and products Framework (FSF) These are explained in the following table. Chapter 1 1/10 M80/June 2024 Underwriting practice Firm Systematic Preventative work through structured conduct assessment of firms. Framework (FSF) In other words: ‘Are the interests of customers and market integrity at the heart of how the firm is run?’ This will include analysis of the business model and ensuring that the fair treatment of customers principle has been embedded into the governance and culture, product design, sales process, and post-sales services of the firm (such as the claims service). Event-driven work Dealing faster and more decisively with problems that are emerging or have occurred, and securing customer redress or other remedial work where necessary. Issues and products Fast, intensive campaigns on sectors of the market or products within a sector that are putting or may put consumers at risk. Tough penalties are imposed where breaches are identified. Senior managers are held accountable for their actions, and the FCA has stated that it will actively pursue criminal convictions where this is deemed to be in the public interest. It will also help to obtain compensation for consumers where appropriate. The FCA must investigate when there has been a significant regulatory failure and report its findings to HM Treasury. Thematic work The FCA undertakes thematic reviews to assess current and future risks in relation to a particular issue or product. Recent reviews include a thematic review on the general insurance distribution chain in April 2019 and its expectations on firms in this sector. This was followed by a multi-firm review in 2021 assessing how firms had responded to the distribution chain review and COVID-19 guidance. In its first year of supervision alone, the FCA carried out 10 such reviews including: payment protection insurance (the validity of the automated sale); motor legal expenses insurance (at the request of the Office of Fair Trading); price-comparison websites (does the way information is presented enable the customer to make an informed decision?); general insurance add-ons (competition; is it a default sale, and is the customer able to opt out easily?); commercial insurance intermediaries (conflicts of interest and remuneration); and household and travel insurance claims (are customers happy with the way their claim is handled?). This shortlist demonstrates the diversity of products under the spotlight and the various reasons for the reviews. Much of the initial thematic work focused on personal lines insurance, in support of the general principle of protecting the best interests of the consumer. The overriding view has traditionally been that commercial customers have more product and insurance knowledge than private customers. However, these reviews are by no means restricted in this way: to this end, a thematic review on the handling of commercial claims was published in May 2015. On the Web These reports, TR15/6 Handling of insurance claims for Small and Medium-sized Enterprises (SMEs) and TR19/2 General Insurance Distribution Chain, are available at: bit.ly/2F39kfs and www.fca.org.uk/publication/thematic-reviews/tr19-02.pdf. Try to read some other reports and gain an understanding of the reason for each thematic review, its objectives, and its findings. It may also give an indication of the next steps to be followed by the industry. Remember: the report is not the end of the matter. B3 PRA Rulebook and FCA Handbook The current rules and guidance are contained within the PRA Rulebook and FCA Handbook, or both, according to each regulator’s set of responsibilities and objectives. The all-important Insurance: Conduct of Business Sourcebook (ICOBS) rules are found in the FCA Handbook, as the FCA is responsible for regulating conduct of business for both insurers and insurance brokers. Chapter 1 The regulatory environment 1/11 Chapter 1 On the Web FCA Handbook: www.handbook.fca.org.uk/handbook PRA Rulebook: www.prarulebook.co.uk C Impact on the underwriting function Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) regulation impacts the underwriting function in five principal areas: Principles for Businesses (PRIN); training and competence (TC); the Consumer Duty; monitoring and auditing the business; and complaint and dispute resolution. C1 Principles for Businesses (PRIN) The Principles for Businesses (PRIN) can be found in both the PRA Rulebook and FCA Handbook. The twelve principles are: 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 A firm must pay due regard to the information needs of its clients with 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 and its customers and between a customer and another client. 9. Customers: relationships A firm must take reasonable care to ensure the suitability of its advice of trust 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 provide appropriate disclosure to the FCA in respect of anything relating to the firm of which the regulator would reasonably expect notice. 12. Consumer Duty A firm must act to deliver good outcomes for retail customers. Note: The PRA applies Principles 1 to 4, 8 and 11 only. © Financial Conduct Authority Underwriting is a principal part of an insurer's activities and so contributes to the way the insurer fulfils these principles. One might argue, therefore, that an underwriter must be mindful of all of them. However, because it is the area that considers insurance risks and makes the promises to pay at some future time, certain of the twelve principles are particularly relevant. These are those that refer to integrity, fairness, skill, clarity of information and maintaining proper standards – especially when dealing with a proposer or existing customer. Chapter 1 1/12 M80/June 2024 Underwriting practice Senior Managers and Certification Regime (SM&CR) The FCA's Senior Managers and Certification Regime (SM&CR) is designed to ensure that firms maintain professional standards and market integrity. The SM&CR covers all individuals whose role means they may have a significant impact on customers, the firm or market integrity. It applies to all FMSA authorised firms and all staff are held accountable for adhering to individual conduct rules and professional standards. We will now look at the issues of: training and competence (Principle 2); fair treatment of customers/Consumer Duty (Principles 1, 6, 7, 8, 9 and 12); and monitoring and auditing the business (Principles 2 and 3). C2 Training and competence (TC) This relates to Principle 2: A firm must conduct its business with due skill, care and diligence. The PRA Rulebook and FCA Handbook both contain a range of sourcebooks covering business and prudential standards, each one specific to one area of business. One relevant to underwriters is the training and competence (TC) sourcebook found within the FCA Handbook. Under TC a regulated firm (insurer or intermediary) is expected to ensure that its employees: are competent; remain competent for the work they do; are appropriately supervised; have their competence regularly reviewed; and have a level of competence appropriate to the nature of the business. The challenge to regulated firms is how to both ensure they keep these rules and show to others that they have. The regulator regards a breach of TC in a regulated firm to be evidence of a wider and more serious problem of inadequate management. C2A Staff training and development Traditionally, the training of underwriting staff consisted of informal 'on-the-job' training, alongside formal study for those interested in developing a career. This has changed in recent years. Insurers now recognise that, in a competitive market, the winners are companies that can attract the best staff and then keep them through providing structured training and related pay packages. Approaches vary about how to deliver training but could include for following. Internal courses HR departments often have a separate training function. Significant investment is allocated to the design and implementation of courses that are specific to the needs of the company. The regulator sees this as more effective than generic courses held by external providers. These courses are often very technical, but can extend to soft skills, such as customer care and selling. Training academies Some insurers such as Allianz have taken this one stage further by creating training academies to cater for staff members and/or brokers. These academies can take place at a company office or off-site in a more relaxed setting. This should encourage communication between staff in different branches or segments of the company, and so improve internal structures and effectiveness. It also proves attractive to potential staff, who will view it as a sign of a company committed to the continuing professional development (CPD) of its employees. It may even reduce staff turnover. There is no doubt that the regulator sees the existence of such an academy as a positive sign of CPD commitment. Chapter 1 The regulatory environment 1/13 Chapter 1 Activity To find out more about how a leading insurer delivers training and academy courses, see: www.allianz.co.uk/news-and-insight/news/allianz-launches-excellence-in-technical-to- develop-underwriter-of-the-future.html. Internal testing Many insurers have internal audit and testing criteria that must be achieved before a staff member is granted an underwriting licence. The substance behind such an approach may be a combination of internal and external courses, or just be limited to internal learning. External qualifications As far as underwriters are concerned, the benchmark of professionalism has always been the technical qualifications offered by the Chartered Insurance Institute (CII). While many employees are aware of their need to be qualified, some employers now make achieving certain qualifications a condition of employment at certain levels. Qualifications in insurance and risk management are also offered by numerous universities in the UK, and a number of insurers are keen to promote these enhanced levels to staff hoping to rise to senior level. External courses The business world is awash with training suppliers, each claiming to offer unparalleled excellence and innovative content exclusive to themselves. While many insurers tend to use such courses for specific training needs, the quality of these courses can vary significantly from unique to generic. As the cost of training represents a significant investment, insurers are likely to employ methods to measure the effectiveness of the training received. Many have decided to build in-house training programmes based upon monitoring and feedback from staff. C2B Professionalism It is worth noting here the drive towards improving professionalism in the insurance industry has been spearheaded by the CII, independently of the regulator. Since the turn of the 21st century, membership of the CII has increased, the number sitting exams has risen and more insurance firms hold chartered status. All of which goes to demonstrate a genuine intention to create and present a more professional image to the general public. Taking the power of the regulator and the drive and influence of the CII together, it is clear that the insurance industry now has a very convincing and robust structure to underpin the creation and maintenance of standards that can truly be called professional. Question 1.2 Which of the Principles for Businesses apply to an insurer's need to ensure its employees are trained and competent for their role? C3 Consumer Duty The Consumer Duty is a major regulatory theme of the FCA and builds on two of the Principles for Businesses: Principle 6 Customers' interests: 'a firm must pay due regard to the interests of its customers and treat them fairly', which obliges firms to put the fair treatment of its customers at the heart of its values, culture and the way it does business; and a new Consumer Duty Principle 12: 'a firm must act to deliver good outcomes for retail customers', which makes the more exacting demand that firms ensure that it customers have good outcomes from the products and services they buy from the firm. The definition of 'retail customers' in Principle 12 is very broad, but it does not apply to: reinsurance, contracts of large risk sold to commercial customers or other contracts of large risk where the risk is located outside the UK. Nor does it apply to activities connected to the distribution of group insurance or the extension of these polices to new members. Source: www.fca.org.uk/publication/finalised-guidance/fg22-5.pdf Chapter 1 1/14 M80/June 2024 Underwriting practice The emphasis under the Consumer Duty is on preventing harm to consumers. Firms must consider whether the way they treat their customers is 'right', not just 'within the rules'. The FCA expects the Consumer Duty to be considered at every level of the organisation and performance against it regularly reviewed. Therefore, this theme is central to the role of the underwriter, who must ensure when developing and underwriting policies that the customer receives a good outcome. Under the Consumer Duty, the FCA expects firms to: use data and technology to test and monitor customer outcomes; then proactively detect any patterns and deal with them before they lead to customer harm; address the needs of diverse customers, particularly those who are vulnerable; have in place a culture and way of working that gives as much importance to customer outcomes as it does to revenue and profit; and be accountable for making sure that this is the case when making decisions. The Consumer Duty applies to all products and services that are in use: to new ones from 31 July 2023; and all others from 31 July 2024. On the Web FCA Policy Statement on the Consumer Duty published July 2022: www.fca.org.uk/ publications/policy-statements/ps22-9-new-consumer-duty. FCA Guidance for Firms on the Consumer Duty: www.fca.org.uk/publication/finalised- guidance/fg22-5.pdf. C3A The six consumer outcomes The Consumer Duty builds on earlier work by the regulators on the fair treatment of customers. Six consumer outcomes help insurers understand how to treat their customers fairly and how its business practices could be made to work effectively. These are as follows: 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. 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. The following FCA Principles for Businesses also affect how a firm deals with its customers: Principle 1 A firm must conduct its business with integrity. Principle 6 A firm must pay due regard to the interests of its customers and treat them fairly. Principle 7 A firm must pay due regard to the information needs of its clients, and communicate information to them in a way that is clear, fair and not misleading. Principle 8 A firm must manage conflicts of interests fairly, both between itself and its customers and between a customer and another client. Principle 9 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. Principle 12 A firm must act to deliver good outcomes for retail customers. Chapter 1 The regulatory environment 1/15 Chapter 1 C3B Key factors for firms Firms need to address business processes relating to communications, conflicts of interest and suitability of advice if they are to comply with the Consumer Duty. They will also, importantly, need to act with integrity. In addition, other important factors that need to be considered are, for example: poor customer understanding of financial products; literacy levels; numeric understanding; the complexity of a product; the quality and amount of documentation; and customer focus and priorities. Monitoring the fair treatment of customers already formed a routine part of overlooking a firm's compliance, and this has now been broadened to address the Consumer Duty. Typically, customers will have an expectation of the standards of service that they might reasonably expect and will react if their experience is not to that standard. The firm’s customer service policy should be clearly communicated to all members of staff to ensure that they understand how the firm expects its clients to be handled. Service standards should be routinely monitored. The FCA has repeated and emphasised this message throughout its existence. Good culture and the principles behind it are identical for small and large firms alike; firms that put the customer interests first in all aspects of their operations are most likely to deliver good customer outcomes. Customer retention can be a key driver of profitability, and high standards of customer service may encourage client loyalty and possibly drive a greater propensity for additional product sales and client referrals. Therefore, it is in the best interests of every insurer to ensure that all underwriting staff have a clear understanding of the Consumer Duty and its focus on delivering good consumer outcomes. These are in respect of: products and services: designed to meet the needs of distinct customer bases; price and value: offer fair value to consumers; customer understanding: having clear customer communications that are reasonable likely to be understood by their target audience; and customer support: effective support for customers throughout their journey with the firm. The training methods mentioned earlier are very relevant in this instance. An insurer may attend a Consumer Duty seminar or consider designing an internal training programme to explain its importance to its staff. In reality, a good insurer may employ a combination of methods to ensure understanding and compliance on an ongoing basis. Complaints: what to do about the customer who despite everything is unhappy? The Dispute Resolution: Complaints (DISP) section of the FCA Handbook states that any expression of dissatisfaction should be treated as a complaint. It sets standards for the approach that a firm should follow in dealing with complaints. Any customer complaint may indicate that the customer feels they have not been treated fairly. For this reason, all complaints should be carefully recorded and analysed to identify any trends at the earliest possible stage, a process known as ‘root cause analysis’. The data that such analysis produces can form key management information (MI), which itself is needed to evidence that the firm is treating its customers fairly. Correct complaints handling can have a positive impact on customer relations and identifying a systematic problem early can prevent significant costs. Chapter 1 1/16 M80/June 2024 Underwriting practice Activity If you are not familiar with it already, find out about your own organisation’s complaints procedure. It may be possible to review an actual complaint so that you can see the stages it went through and how it was res