Matthew Newman highlights key issues in risk transfer consultation

The FSA has now published its near-final rules following CP174. CP174, published in March 2003, sought consultation on proposals in relation to client money segregation and voluntary risk transfer for general insurance intermediaries. CP174 consulted on proposal for compliance with Article 4.4 of the Insurance Mediation Directive ("IMD"), which seeks to ensure that all customers be protected by "all necessary measures" against the risk that an intermediary is unable to transfer premiums to an insurer or claims monies or premium refunds to the customer.

The proposals were to provide by law or contract the transfer of risk to the insurer from the intermediary.

Transfer of the risk of client monies from brokers to insurers would be dealt with on a voluntary basis. The wording of agency agreements currently in place may be such as to effect transfer of some, if not all, risks to the insurer at law. It goes almost without saying that intermediaries will want to transfer risk and insurers will not want to take on any extra potential liabilities. Expect, therefore, intermediaries and insurers to be looking in detail at the provisions of their agency agreements to review where liability sits.

So, to comply with the IMD and effect risk transfer, what form and wording will agency agreements need to have?

The following should be checked carefully:

  • Firms must only agree to hold monies as agent for insurers if there is a written agreement in place;

  • Firms must be satisfied on reasonable grounds that the insurer's terms with the firm's clients are likely to be compatible with the agreement;

  • The agreement's terms must result in premiums paid by a client to the firm being treated in law as having been paid to the insurer. Parties should look for expressions like:

    • "insurance premiums received by the intermediary shall be the property of the Insurer at all times"; or

    "shall be transferred or deemed transferred to the Insurer immediately on receipt"; or

    "the Intermediary shall not be responsible for nor bear any liability in relation to"; or

    "all risk in relation to such monies shall be that of the Insurer."

  • Conversely, the agreement's terms must result in insurance claims money and premium refunds paid by the insurer to the firm not being treated, in law, as having been paid to the client until the client actually receives it. Parties should look for expressions like:

    • "any monies, including insurance claims monies, refunds of insurance premiums or otherwise to be paid or refunded"

    "the Intermediary shall be agent at all times"

    "monies shall remain the property of the Insurer at all times until receipt of such by the client"

    "the Intermediary not be responsible for nor bear any liability in relation to"; and

    "risk in relation to such monies shall be that of the Insurer."

    As noted, some agreements may already provide for risk transfer, in part or in whole, intentionally or not. The FSA has noted that there is no single standard of agency agreement across the industry, although many provisions can be similar.

    Points to Note

  • Agreements need to reflect not just the treatment of premiums, but claims money and premium refunds.

  • If the agency agreement does not comply with the requirements, then segregated accounts should be used. Either method can be used for the same client but different transactions.

  • Take legal advice to ensure compliance.

    • Matthew Newman, partner, corporate finance division, Davies Lavery Solicitors

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