4.6 Terms of Business Agreements (TOBAs)
Key Takeaways
- A Terms of Business Agreement is the written contract between an insurer and an intermediary that governs how they will trade with each other, and it is separate from the intermediary's client-facing terms of business
- A TOBA records each party's regulatory status and permissions, the scope of any authority granted, premium and settlement terms, remuneration, claims handling authority, data protection, complaints, record keeping and audit rights, and termination and run-off
- The risk transfer clause is the most commercially important term: where the intermediary holds premium as agent of the insurer, the insured discharges the premium debt the moment the money reaches the intermediary
- A TOBA may also grant a binding or delegated authority, allowing the intermediary to accept risks or settle claims on the insurer's behalf within stated limits
- Termination provisions must deal with run-off, so that policies already written continue to be administered and claims continue to be handled after the trading relationship ends
Learning outcome 5 closes with a practical topic: what should be included in a Terms of Business Agreement (TOBA) between insurers and intermediaries. It follows directly from the law of agency in Sections 4.4 and 4.5, because a TOBA is where an agency relationship in insurance is usually reduced to writing.
What a TOBA Is
A Terms of Business Agreement (TOBA) is the standing written contract between an insurer and an intermediary that governs how the two will do business with each other. It is signed once and then applies to every risk the intermediary places with that insurer, rather than being negotiated policy by policy.
Do not confuse it with the intermediary's client terms of business, which is a different document addressed to the customer explaining the firm's services, status, fees and complaints procedure. One faces the insurer; the other faces the client.
| TOBA (insurer ↔ intermediary) | Client terms of business (intermediary ↔ client) | |
|---|---|---|
| Parties | Insurer and broker or agent | Broker or agent and its customer |
| Purpose | Governs trading between the two firms | Explains the firm's service, status and charges to the customer |
| Typical contents | Authority, premium settlement, commission, claims handling, audit, termination | Scope of service, whether advice is given, fees, remuneration disclosure, complaints and FOS rights |
Why It Exists
Three reasons, and all three are examinable:
- Certainty of authority. Section 4.5 showed how apparent authority can bind a principal to acts the agent was never actually authorised to perform. A TOBA states in writing exactly what the intermediary may and may not do, which limits the insurer's exposure to unauthorised acts and gives the intermediary a clear boundary.
- Regulatory expectation. The FCA expects firms to have clear, documented arrangements with the firms they do business with, to identify who is responsible for what, and to be able to evidence it. A TOBA is how that expectation is met in a distribution chain.
- Money. Premium and claims money moves through intermediaries in very large volumes. The TOBA determines whose money it is at each moment, which decides who bears the loss if the intermediary fails.
What a TOBA Contains
| Clause | What it deals with |
|---|---|
| Parties, status and permissions | Legal identity of each firm, FCA authorisation and permissions, and a warranty that each will maintain them |
| Scope of the agreement | The classes of business, territories and customer types covered |
| Authority granted | Whether the intermediary may quote only, or may also bind risks, issue documents or settle claims, and within what limits |
| Premium collection and settlement | Credit terms, settlement periods, how and when premium must be remitted, and consequences of late settlement |
| Risk transfer and client money | Whether the intermediary holds premium as agent of the insurer (risk transfer) or as client money on trust for the customer |
| Remuneration | Commission rates, when commission may be deducted, profit-share or contingent arrangements, and disclosure obligations |
| Claims handling | Whether any claims authority is delegated, notification obligations, and reserve and settlement limits |
| Data protection and confidentiality | Each party's role under UK GDPR, security obligations and permitted use of customer data |
| Complaints | Which firm handles which complaints and how they are referred between the parties |
| Conflicts of interest | Identification and management of conflicts arising from the relationship |
| Records and audit rights | What records the intermediary must keep, for how long, and the insurer's right to inspect or audit |
| Liability and indemnity | Allocation of liability between the parties, and any indemnities |
| Professional indemnity insurance | An obligation on the intermediary to maintain PI cover at a stated minimum |
| Termination and run-off | Notice periods, immediate termination events, and what happens to business already written |
| Governing law and jurisdiction | Normally English law and the English courts |
The Risk Transfer Clause
The single most commercially significant clause is risk transfer, and IF1 questions gravitate to it because it changes the position of the customer, who is not even a party to the TOBA.
- With risk transfer. The intermediary holds premium as agent of the insurer. The consequence is decisive: the customer's premium debt is discharged the moment the money reaches the intermediary. If the intermediary then goes into administration without passing the money on, the loss falls on the insurer, and the customer's cover stands.
- Without risk transfer. The intermediary holds the premium as client money, on trust for the customer, in a statutory trust account. The premium is not paid to the insurer until the intermediary remits it, so a failure of the intermediary before remittance is a problem for the customer rather than the insurer.
Claims money and return premiums work symmetrically: with risk transfer, money paid by the insurer to the intermediary for onward transmission to the customer is held as the customer's money.
Delegated and Binding Authorities
A TOBA may go further and grant a binding authority (in the Lloyd's market, a coverholder agreement), allowing the intermediary to accept and bind risks on the insurer's behalf inside defined classes, limits, territories and rating parameters. Where it does, the agreement will also set out:
- the underwriting guidelines the intermediary must follow and the risks it must refer back;
- claims authority, if any, with reserve and payment limits;
- bordereaux reporting — periodic returns of the risks bound and the claims handled; and
- enhanced audit rights, because the insurer has handed over the pen.
Under such an authority the intermediary is acting for the insurer, however it is described commercially. An intermediary can therefore be the client's agent when advising on cover and the insurer's agent when binding it — which is exactly the kind of dual role the duties in Section 4.5 are designed to police.
Termination and Run-Off
Ending a TOBA does not end the policies written under it. A well-drafted agreement provides for run-off: the intermediary continues to administer existing policies and handle claims for a stated period, records are transferred or retained, and the parties agree how outstanding premium, commission and claims money is settled. Because policies can generate claims for years after the trading relationship ends — particularly on liability business — run-off and record-retention terms survive termination.
A broker collects a £4,000 premium from a commercial client under a Terms of Business Agreement that includes risk transfer. Before remitting the money the broker enters administration. What is the position?
Which of the following would you expect to find in a Terms of Business Agreement between an insurer and a broker, rather than in the broker's client terms of business?