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Writer's pictureRoland Romata

Understanding Risk Transfer in Insurance: TOBAs, Risk Transfer and CASS Compliance

Section 53(1) of the Marine Insurance Act 1906 states: Unless otherwise agreed, where a marine policy is affected on behalf of the assured by a broker, the broker is directly responsible to the insurer for the premium, and the insurer is directly responsible to the assured for the amount which may be payable in respect of losses, or in respect of returnable premium.


But don’t worry we won’t be asking you to remember that, instead we are going to set out how to interpret the rules around risk transfer and non-risk transfer agreements, why they are important and how they underpin the Terms of Business Agreements (TOBA’s) with insurers, how to stay on the rights side of the compliance rules and why section 53 no longer reflects the realities of the insurance marketplace.


What are a Terms of Business Agreement (TOBA)?


TOBAs record the general terms and conditions on which business will be transacted. Once an authorised signatory within your firm signs and returns a TOBA, you’re legally bound by its terms. This includes those relating to changes to the TOBA, termination clauses, or any other terms within the agreement – even if you later find them to be inappropriate. So, it’s vital you understand what you’re agreeing to when signing a TOBA.


What is Risk Transfer and Non-risk Transfer in Insurance Terms?

A Terms of Business Agreement (TOBA) may govern the conduct of insurance business between a broker and an insurer. TOBAs come in two types. Under a risk transfer agreement, the broker holds money as agent for the insurer. This means that once the broker has received the premium it is deemed to have been received by the insurer.

Under a non-risk transfer agreement, the broker remains the agent of the policyholder. There is some speculation on whether a TOBA between the broker and the insurer would be sufficient to contract out of section 53 unless the policyholder is a party to the agreement. If section 53 applies, the broker may remain liable to pay the premium, even if it has not received it from the policyholder.  This is important because it means that brokers are personally liable to pay premiums whether or not they have received them from the policyholder. This then potentially imposes the risk of a policyholder’s insolvency on the broker, and the risk of a broker’s insolvency on the insurer. As a result, most TOBA’s are on the basis of risk-transfer.


However, it is important that staff know the basis of the arrangement with the insurer and that this is recorded accurately. Many insurance software platforms will require this information as part of the record or placing notes.


Why is Record Keeping So Important (CASS)?

Not having appropriate systems and controls in place for reviewing and approving TOBAs could impact your ability to handle premium collection appropriately. This, in turn, could have serious consequences for your ability to operate your client money account in compliance with the FCA’s Client Asset Sourcebook (CASS) – or, if you use an insurer trust account, your ability to operate in accordance with the requirements of individual markets you enter into agreements with.


How could your TOBA affect your Client Money Handling (CASS)?

The TOBA will set out the agreement on a risk or non-risk transfer basis but there are likely to be other premium transactions during the lifetime of the policy which need handling equally carefully so that the correct rules are followed at all times, here are a couple of examples.


Adjusted premium clauses Insurance policies sometimes provide for the premium to be increased if, for example, new equipment is purchased. Currently Section 53(1) does not make any exception for such “adjusted” or “additional” premiums, and it may therefore be assumed that the broker is responsible for them as usual. We would advise clients to make sure they have clarity on this from the insurer before the TOBA is signed.


Premium payment warranties Insurance policies sometimes include conditions or a deadline on which the premium must be paid in full to the insurer. These are known as “premium payment warranties (PPC)”. It is vital that these are flagged with the client before the cover is bound and that the broker makes the necessary arrangements for the PPC to be met in order to avoid cancellation of cover.


What are the CASS Compliance Considerations for Insurance Firms?

Ensuring compliance with the FCA's Client Asset Sourcebook (CASS) is crucial for insurance firms. Here are a few pointers to keep you complaint.


  • Ensure that the risk transfer status is clearly defined in the TOBA, whether risk transfer applies to your firm, and whether there are any exceptions.

  • Make sure that you have the correct type of trust account with your that meets your client money requirements.

  • There is a mechanism in place to make sure that all monies are held under full risk transfer, there is clear permission for them to be held in the same account as client monies (called co-mingling) – or, if an Insurer Trust Account is permitted, that monies can be held in the same account as monies held on trust for other insurance undertakings.

  • Records reflect that sub-ordination has been granted, i.e. where risk transfer monies are co-mingled with client monies, the market has clearly confirmed that the interests of the insurer will be subordinated to those of the client

  • That there are clear agreements setting out which commission can be removed from the trust account (this should consistent across all agreements and should be a true reflection of the systems and controls you have in place – whether you remove commission on a received or a settled basis).


What are the consequences of non-compliance with CASS?

There are severe legal and contractual risks for non-compliance with the regulations. All your TOBA’s must allow you to operate within the FCA regulations and most will but it is worth creating a process of checks and balances that flag any areas where you cannot satisfy any of the requirements set out in the TOBA.


Examples could include:

Being asked to have a PI insurance policy in excess of the regulatory minimum limit and higher than your firm currently holds


Unreasonable terms, e.g. anything that could create a financial exposure or that goes beyond legal or regulatory requirements. We have seen some TOBA’s stipulate the timeframe which a claim must be notified to the insurer which the broker had little control over.


What Next?

We’ve provided information on the essential checks for CASS compliance, including risk transfer status, trust account compatibility, co-mingling approval, subordination agreements, and commission transfer clarity. It also addresses the importance of assessing business risks associated with Terms of Business Agreements (TOBAs) and highlighted the significance of proper documentation.


While we would advocate for changes to Section 53(1) shifting the default position to a place where the policyholders are liable for the premium payments due under their insurance policies. As it would allow the insurer to sue the policyholder for the premium, if unpaid. The policyholder receives the benefit of the insurance coverage and so it is the policyholder who should primarily be liable for it. We are also pragmatic that this change is not coming over the horizon soon, so in which time we are here to help you navigate the regulations.


So, if you have any questions about creating compliant processes in your firm, Book a free consultation today.


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