Notes

Understand underwriting procedures relating to the insurance underwriting process:

The general and specific questions asked of proposers.
The procedure relating to quotations.
The methods by which underwriters gather material information and their legal significance.
The different ways in which premiums are calculated.
The legal significance of procedures relating to the issue of cover notes, policies and certificates of insurance.
The relevance of premium payment for valid cover.
The methods used by insurers to collect premiums including instalment facilities.
The features of Insurance Premium Tax.

Subjectivities:

This is an important condition when an underwriter offers a client terms and conditions of cover. For example : cover is subject to a survey, when the survey report is received by the underwriter, the final terms are issued by the underwriter to the proposer, who can be asked to comply with a number of requirements, or cover may even be denied. In some cases, a premium discount can even be offered to the insured.

Quotations:

In order to comply with Contract Certainty, all terms and conditions must be completed and offered to the customer prior to the commencement of cover. Within the quotation pack you will find a number of documents including a covering letter, a document outlining the risk to be insured and a statement of fact (similar to a proposal form). If requested, a copy of the policy document could also be sent by the insurer.

It is a key duty of insurers and existing best practice to ensure that their terms and the information on which the quotation is based is clear to the customer. (The consumer rights act mentions the best practice requirement).

The quotation will state for how long it is valid. Usually for say 30 days.
The quotation will also state (usually in bold) Cover Is Not Effective, Quotation only. A quotation is viewed as an offer to the proposer, in order to legally bind the contract, acceptance is required.
Unless withdrawn by the insurer, this offer to the proposer remains open for acceptance as per the terms offered.
Should the circumstances upon which the offer was made changes, the terms as in 3 above MAY no longer valid
During the quotation period, the proposer can accept the terms as quoted or decline same.
When the quotation period has expired, the insurer is no longer legally bound to accept cover on the said terms.
If no specific period was quoted by the insurer in the quotation, this will legally expire after a reasonable time. However as per the general rules under the interpretation of contracts, the insurer can withdraw the terms anytime before acceptance by the proposer.

Proposal forms and Declarations:

Consumers:-

Traditionally, Proposal forms were the most used mechanism by the underwriter to obtain materials facts from the proposers. These can be submitted directly or via an intermediary.
When using the internet and call centers, the material facts collected is called (statement of fact) a new term.

A proposal form may not always be necessary at the point of quotation. However, once a quotation is given, it will usually be subject to the completion of a proposal form.
For Consumer Insurances, proposers are only LEGALLY required to ONLY answer all questions in the proposal forms.
Insurers are LEGALLY bound to relay the above answers back to the proposer as part of the quotation, during midterm changes, and post sale. These must also be made repeated to the consumer at time of renewal negotiation.
There is a declaration at the end which the proposer must sign. Since CIDRA 2012, the proposer now only sign to their knowledge and belief (under the MIA 1906, it was signed as the BASIS of the agreement).

Telephone – based quotations and the use of the Internet:-

The internet has revolutionlised the way insurers sell certain products – motor and household insurances. The sale could be via a “direct” insurer or an intermediary entirely over the telephone.
The material facts collected is called (statement of fact), the questions follow those on a conventional proposal form.

With telephone-based quotations, the questions asked must follow a set script. The answers are captured and repeated back the insured at quotation stage, mid term and also at renewal.
Insurance is bought more and more via the internet with proposers answering questions posed on the screen. CIDRA 2012 as well as the Consumer rights act 2015 deals with assumptive statements and tick boxes. Particularly in respect of e-trades and internet routes to market. They should set out the clear spirits of the contracts and to avoid assumptive answers.
Most Insurers have a general acceptance statement about an eligibility question eg: previous convictions and insolvency. Changes in the law means that insurers cannot assume positive answers but must clearly draw the consumers attention to the above questions as well as the consequence of providing false information. The answers to these must be captured by the insurer.
Internet – based insurance products increasingly work to electronic systems and rule sets that do not require validation by insurers for individual cases unless the answer (s) provided in response to the insurer’s questions set raises a RED flag
In some cases, where the answer provided is not acceptable, the system will decline the quote entirely rather that manual referral to an underwriter.
These products (eg motor and home insurance) which are sold online or over the phone, offer the option of a quicker quote & cover, and arguably makes the cost cheaper as these rely less on underwriters (less cost to the insurer) but more rules set and questions, which are designed by central teams for use with the majority of policies they sell.

The speed of chance is fast, and it is worth considering what the next revolution in the insurance industry would be. Established insurers need to lead with innovation, every aware of the threat presented by the commoditizing of personal lines insurance (direct, aggregators, affinity routes to market e.g.(Tesco, M&S) but also of the next FACEBOOK that revolutionizes the way we transact Insurance.

A perfect example is Lemonade is an online insurer for home insurance in the USA, promising a quotation within 90 seconds and a claims settlement in 3 minutes.
A good reference is INSURTECH, which refers to the use of new technologies and digital tools to provide insurance services. There are many insurtech start-ups entering the insurance market with a view to providing more innovative and efficient insurance products than those currently available. (Yes, there are disrupters coming or already here)

Commercial Package Risks:-

Some commercial insurances are suitable for the type of transactions seen in the personal lines market. They tend to be

for compulsory insurances or part of fixed packages where cover is up to a limit, as one size fits all, rather than bespoke

to the proposer’s risk. These can be purchased via an intermediary or directly from the insurer.

Example of Packages:

1. Flats / Small Property Owners / Buy to Let Investors

2. Shops and Offices

3. Saloons

4. Small Contractors

5. Commercial Vehicles

Some insurers have their products hosted by software houses allowing brokers to access multiple quotations for one risk

by inputting the proposer and risk information once (rather than once on each insurer’s website). However,

functionality and availability vary across various software houses as follows:

1. Some only provide quotations

2. Some are “full cycle” and allow for midterm adjustments and renewal transactions to be processed in full including the issuing of a

‘point of sale’ electronic document.

A difference between the personal lines and commercial markets is the prevalence of personal lines insurance products available via

aggregators. Aggregators exist in both spaces but not to the same extent.

Larger commercial risks

Although proposal forms are used for most personal insurances (e.g., motor and household), they are often insufficient for many

large and complex risks (e.g., industrial complexes, satellites) because of the information required. This is also true of small- and medium-

sized commercial risks (e.g., shops and offices), which can also have more complex cover requirements:

i. For small- and medium-sized commercial risks, presentations (often prepared for the proposer by their insurance intermediary) will

be revised alongside online question sets and factfinders/questionnaires provided by the insurer.

ii. For large and complex commercial risks, presentations (prepared for the proposer by their insurance intermediary) are

supplemented with insurer surveys, factfinders/ questionnaires, and even face-to-face meetings with the proposer, insurance

intermediary and insurer.

Insurers may rely on a subjectivity (a condition of a quotation that must be met) as part of their quotation to proposers, but it is

important that they are not used as ways of obtaining information

Following the Grenfell Tower tragedy in June 2017, there is a serious need for clarity between brokers and insurers

to enable them to help guide customers more generally about the types of external panels and cladding available.

For example, while an insurer could add a subjectivity to a quotation clarifying their understanding that a building

has elements of composite insulation panels containing LPCB (loss prevention certification board-approved cores,

e.g. Kingspan) after the proposer had confirmed this to them during the quotation process; they could not add a

subjectivity to their quotation stating that it was based on there being no combustible composite insulation panels.

This is because the subjectivity is ambiguous (in this context, everything is combustible if it gets hot enough), and

because the insurer should be taking reasonable steps during quotation to ensure that this is not the case.

For businesses, proposal forms also include the declaration and contain a warning (or important note). The warning concerns

the material information and material circumstances which should be disclosed and points out the dangers if they are not

disclosed. It also states that if the proposer is in any doubt whether information is material or not, it should be disclosed.

Questions in a Proposal Form – These can be General or Specific:-

General questions – These are common to most general insurances and are usually as follows:

i. proposer’s name;

ii. proposer’s correspondence address;

iii. proposer’s occupation;

iv. period of insurance; and

v. past insurance history: has the proposer been insured before? Have they had insurance declined? Loss record and claims

experience?

Questions in a Proposal Form cont’d – These can be General or Specific:-

Specific questions:-

These questions are risk specific, i.e., they relate to the particular details of the risk to be insured, and help the underwriter

to determine whether or not to accept the risk and on what terms:

i. proposer’s risk address, e.g. their locality and related risks such as flood, subsidence, or even theft, malicious damage,

riot etc.;

ii. proposer’s age, e.g., higher motor premiums for younger drivers;

iii. description of the subject matter to be insured, e.g., description of buildings in commercial property insurance;

iv. business details; and

v. sum insured or limit of liability.

NOTE: Specific questions vary between insurers, risks and classes of business.

You should remember that general questions may also be specific questions for certain insurance products; for example, a proposer’s occupation is also a specific question in most commercial insurances and will influence the premium they are charged.

A premium is the amount paid to an insurer by the insured/proposer in consideration of the insurer agreeing to cover the risk.

One of the tasks of the underwriter is to calculate a suitable, or fair (equitable) premium. A suitable premium is one that reflects the risk presented by the proposer. It is a fundamental principle of insurance that the premiums collected for similar risks proposed form a common pool.

The contribution of the insured (the premium) should reflect the amount of risk they present and the likelihood of taking money out of the pool in the event of a claim.

Pricing is easier for insurers when they are dealing with a large number of similar exposures to risk, whether it is houses, cars, factories or ships. The law of large numbers enables an insurer to determine a more accurate premium chargeable to the insured than would be the case if its experience were limited to a few risks.

However, some insurers or markets (e.g., Lloyd’s), cater for one-off demands for insurance where it can be extremely difficult to estimate a premium (e.g., a pianist’s fingers or a footballer’s legs).

Premiums are usually arrived at by applying a premium rate to a premium base, with the rate reflecting the hazard associated with the insured, and the base being the measure of the exposure. In property-based insurance, this will normally be the value to the insured (replacement cost) or the limit of any payment. This could be reflected in the following formula: sum insured × rate = premium

A scale of loadings and discounts may be applied to the above rate to reflect various inherent risk features.

The rate could be a rate per cent (%) or a rate per mille (%o):

i. Rate per cent is the price in pounds for each hundred pounds of exposure (e.g. a rate of 1.5 per cent means an insurer

would charge £1.50 for every £100 of exposure).

ii. Rate per mille is the price in pounds for each thousand pounds of exposure (e.g. a rate of 2.5 per mille means an insurer would charge

£2.50 for every £1,000 of exposure).

In some classes of insurance there is no property to insure and an alternative exposure measure needs to be identified against which a rate can be applied. For example, in respect of employers’ liability, the wage roll of the insured would be used; public and products liability policies often use turnover; professional indemnity insurance uses fees earned.

Note:

i. Wage roll usually refers to payments made to staff throughout the year.

ii. Turnover refers to the amount taken by a business in a particular period.

iii. Fees earned these represents the amount of revenue generated by a company for services within a particular time period,

usually an accounting period.

Adjustable Premium:-

In certain cases, the exposure measure is unknown at the start of the period of insurance, and all that can be provided is an estimate of what the exposure measure might be.

For example, with employer’s liability insurance the insured can only estimate the total wage bill for the coming year. The rate is then applied to that figure, and at the end of the year, the insured submits a declaration showing the actual wages paid. The premium is then adjusted up or down depending on whether the actual wage bill was higher or lower than the estimate.

The initial premium is referred to as a deposit premium. A minimum and deposit premium represents the minimum amount payable to the insurer irrespective of the actual turnover figures.

It is important to note here that the provisions of the Consumer Rights Act 2015 (specifically, the prohibition of setting a price after a contract starts) do not apply, provided the insurer and insured are clear that premiums will be adjusted based on changes in exposure.

Flat Premium:-

In other cases, it is practice to charge a flat premium rather than apply a rate to a premium base; for example, motor insurance, where a premium is arrived at by consulting rating tables which take into account the hazard associated with, among other things, the individual insured and the insured’s vehicle.

The factors that influence the premium are revealed in the proposal form. These factors are often held in a computer programme and a premium can be obtained by entering the appropriate factors. Hence the premium is automatically calculated on input of answers to a series of pre-programmed questions. Many intermediaries have a computerised system which provides quotes from various insurers according to the rating factors. The advantage of this method is the ease of update for insurers, the ability to provide a range of accurate quotations quickly and easily, and overall it reduces the possibility of manual calculation errors.

Other risks which may be flat rated include one off events. For example, an insured may attend an exhibition and request public liability insurance. For such exposures an insurer may charge a flat premium.

Policies, cover notes and certificates of insurance:-

Policies:

The insured and the insurer need to be absolutely clear as to the terms and conditions agreed between them, and for this reason, a policy is issued. The policy contains all the details of the item/exposure insured, the operative perils, period of cover, exceptions, conditions, the premium and other relevant information. The policy is effectively evidence of the contract, and not the contract of insurance itself.

The contract of insurance comes into effect once the insurer has accepted the insurance proposal, terms have been agreed and the premium has been paid or has been agreed to be paid. Therefore, the contract exists irrespective of the existence of an actual policy document. The policy is useful as proof in the event of a dispute over the terms agreed, but the absence of the policy document does not invalidate the contract.

Cover Notes:

In practice, the production of the actual policy document may take some time, notwithstanding which, it may not be appropriate to issue a policy straight away for a number of other reasons. The following are examples of situations that may arise:

i. An insurer has sufficient detail to accept a property risk but wishes a surveyor to visit the premises and provide a survey

report of the risk and establish any necessary risk improvements that may be needed.

ii. An insurer may be awaiting the completion of a proposal form and is granting temporary cover until the form arrives.

iii. A new driver may need to be added to a motor policy. The insurer may want a declaration form completed regarding

age, experience and insurance record. In the interim, a cover note is issued.

There may also be mid-term changes to policies where the insurer requires some extra information and defers the issue of policy amendment documents and/or endorsements until further information is forthcoming. In each case, there may be a need to provide interim evidence that cover is in force, and a cover note is prepared by the insurer and is issued to the insured. This is particularly so in the case of some changes to motor insurance policies (and some other compulsory insurances) where evidence of insurance is a legal requirement.

A cover note is essentially a document issued as evidence that insurance has been granted, pending the issue of a policy or policy amendment document and/or endorsements. It can be a completed printed form or letter confirming cover, or it can be produced electronically. It simply states that insurance is in force and provides brief details of the cover given. The cover note is temporary and is superseded once the policy and insurance certificate are issued.

The cover note will have the following features:

i. commencement date (and time for motor insurance);

ii. a statement that the policy follows the normal terms and conditions of the insurer for that class of insurance;

iii. risk-specific information that identifies the property or liability that is covered;

iv. any special terms that apply; and

v. expiry date of the cover.

Cover notes are particularly important for motor insurance, where there is a legal requirement to have a minimum level of insurance cover, and the cover note acts as evidence of that cover being in force.

The Road Traffic Act 1988 specifies what must be contained in a certificate of motor insurance, and as the cover note incorporates a temporary certificate as well, it must also contain all the information specified (see below). For motor risks, the time and date must never be backdated on a cover note as, under the Road Traffic Act 1988, this is illegal.

Cover notes are still important, even with technological advancements and the Motor Insurance Database (MID), as there can be delays in uploading information about what an insurer is covering. For example, while insurers upload details onto the MID for their policyholders, this is usually done once a day overnight, resulting in a delay of up to 24 hours between purchase of cover and a policyholder’s details appearing on the MID. Given the penalties for driving without insurance, the existence of cover notes is key even with the use of technology.

Certificates of Insurance:

For compulsory insurances, it is a legal requirement that a certificate of insurance is issued to prove a policy is in force. It is evidence that a contract of insurance exists, and that the policyholder/insured complies with the law. It is issued by the insurer in the name of the insured.

The information to be shown on the certificate is laid down by the relevant statute which makes the certificate compulsory.

Motor insurance:-

i. The Road Traffic Act 1988 directs that the following information must be contained in the certificate:

ii. registration mark of vehicle;

iii. name of policyholder;

iv. date of commencement of cover;

v. expiry date;

vi. person or classes of persons entitled to drive;

vii. limitations as to use; and

viii. confirmation that cover complies with UK statutory requirements.

ix. It does not show the scope of the policy cover (e.g. comprehensive, third party only etc.) and is usually sent electronically.

The information to be shown on the certificate is laid down by the relevant statute which makes the certificate compulsory.

Employers’ liability insurance

It is compulsory for those who employ people to have insurance against costs they may be liable to pay in the event of the employee being injured during the course of their work.
In the case of employers’ liability insurance, the certificate needs to carry the following information:
Name of policyholder.
Date of commencement of cover.
Expiry date.
Name of insurer.
Authorised signature on behalf of insurer, i.e. usually a facsimile signature of chief executive.
Level of cover, as the certificate must show that insurance cover is provided for at least the minimum level required by law. This is currently £5 million including costs, although in practice most insurers provide higher limits, usually double the minimum limit.
A statement by the insurer declaring that the policy satisfies the relevant legal requirements.
Employers are no longer required to display the certificate at all their places of business. They used to be required to do so but an electronic certificate is now sufficient, provided it remains readily accessible to all employees.

Contract certainty

The Association of British Insurers (ABI) in its summary guide states that ‘Contract Certainty is achieved by the complete and final agreement of all terms between the insured and insurer by the time that they enter into the contract, with contract documentation provided promptly thereafter.’

The insurance industry is often called upon at very short notice to provide protection for business customers wishing to transfer risk. Insurers and insurance brokers have a history of rising to the challenge by providing protection quickly, often with limited information. In most situations this works very well and the insurance industry provides customers with clear protection and peace of mind.

However, there may be uncertainty, either on the part of the customer as to exactly what level of protection has been provided or on the part of the insurer, not knowing exactly what it is insuring.

Uncertainty may lead to disputes over what was agreed when the protection started. This may be very important if a customer needs to make a claim against the insurance contract and the terms of the contract are uncertain.

To help avoid disputes from uncertainty, the insurance industry has produced a code of good practice to help provide contract certainty before inception of the policy. The code is not compulsory, however most of the insurance industry has agreed to abide by the code. The code also has service standards for issuing insurance documents in a reasonable time.

The code does not stop the insurance industry reacting quickly to customers’ urgent needs for protection. The code sees to it that there is a form of contract agreed when protection starts. There may be a need to agree changes to the exact terms of the contract when both parties have full knowledge. However, ‘terms to be agreed’ or similar references should not be used. While the Consumer Rights Act 2015 applies to consumers, its provisions are viewed largely as best practice by the FCA and as such insurers will be expected to continue to review their processes against requirements under the Act and subsequent legislation, as part of the FCA’s thematic approach to regulation.

Premium Payment

As previously mentioned, the insurance contract comes into force once the insurer accepts the proposal and the premium has been paid. However, if the premium is not paid at the acceptance of the proposal, it is implied that the proposer promises to pay, and this promise is sufficient at law to support a valid contract (in line with the principle of ‘consideration’). Here, we will consider the methods of collecting insurance premiums and the features of insurance premium tax.
F1 Methods of collecting premiums
The payment for an insurance policy is referred to as the premium. This is calculated and due at the start of the policy period. Most general insurance policies are renewable annually, i.e. twelve months after the cover started.
Payment will usually be:
a single upfront payment (by cash, cheque or credit card);
by credit; or
in monthly instalments by direct debit.
Credit
As stated in Methods of collecting premiums on page 2/11, the insurance premium will be due to be paid at the start of the policy period. If dealing direct with an insurer then an insured will need to ensure that they have either paid the amount in full or arranged payment via the insurer’s instalment facility by the due date. If an insured has arranged their insurance via an intermediary however, then the intermediary may offer some alternative credit facilities as a customer service. The intermediary may accept payment by credit card, arrange finance with a finance house or arrange credit ‘in-house’. A fee is usually charged because of the margin charged by credit companies for each transaction. The intermediary is likely to have a credit account facility with the insurer and will, having collected the monies from the insured, arrange for the premium (less commission the intermediary is due) to be paid to the insurer on their account.
Instalments
Most insurers will offer instalment payment. Insurers will usually charge a fee to reflect the loss of interest from the premium not being paid in full at the start of the policy, and the additional administrative charges incurred in collecting on a monthly basis. It may sometimes appear that there is no additional charge, but this will be reflected in the premium rates. Instalments can be paid by direct debit, whereby monthly amounts are collected automatically from the insured’s bank account.
F2 Non-payment of premium
Most insurers will insist on payment of the first premium at the time the policy is taken out or by instalments. Cover is usually for twelve months from the start of the policy (except for some shorter period covers such as travel insurance for a single trip).
After twelve months the policy is said to be due for renewal, the renewal date being the anniversary of the day on which cover started.

Instalments:

Most insurers will offer instalment payment. Insurers will usually charge a fee to reflect the loss of interest from the premium not being paid in full at the start of the policy, and the additional administrative charges incurred in collecting on a monthly basis. It may sometimes appear that there is no additional charge, but this will be reflected in the premium rates. Instalments can be paid by direct debit, whereby monthly amounts are collected automatically from the insured’s bank account.

Non-payment of premium:

Most insurers will insist on payment of the first premium at the time the policy is taken out or by instalments. Cover is usually for twelve months from the start of the policy (except for some shorter period covers such as travel insurance for a single trip).

After twelve months the policy is said to be due for renewal, the renewal date being the anniversary of the day on which cover started.

The premium for the renewal of the policy, the renewal premium, is advised by the insurer to the insured by way of a renewal notice.

In the event of non-payment of the premium the policy is not renewed, and cover is lapsed.

Insurance premium tax (IPT):

Insurance premium tax is levied on most general insurances where the risk is located in England, Wales, Scotland and Northern Ireland. The Channel Islands and Isle of Man, as well as the Republic of Ireland, are not subject to insurance premium tax but may have local levies which are payable.

The tax is payable by policyholders, but insurers are responsible for collecting the tax and accounting to HMRC. Two broad methods are provided in the relevant legislation for calculation of IPT, but most insurers calculate the tax as a percentage of the written premium.

The current rate of IPT is 12%. This is referred to as the standard rate.

A higher rate of 20% is applicable to travel insurance and engineering inspection service fees charged by some insurers, as well as some insurances sold alongside the purchase of vehicles and electrical appliances.

Reinsurance contracts, life assurance and certain marine policies are not subject to either the standard or higher rate of IPT.

Premiums for risks located outside the UK are also exempt, but they may be liable to similar taxes imposed by other countries.

In November 2020, the Government launched a consultation to improve the administration of insurance premium tax and prevent unfair outcomes. At the time of writing, we are awaiting the outcome of this consultation.