2.5 Classes and Distribution of Insurance
Key Takeaways
- General (non-life) insurance covers property, motor, liability, marine and aviation, pecuniary, and accident and health, and is usually short-term and renewable
- Long-term (life) insurance covers life assurance, pensions and annuities, and endowment policies, and builds funds over time
- The regulatory distinction between general and long-term insurance determines authorisation, solvency, and conduct rules
- Distribution channels include direct, brokers, tied agents and appointed representatives, aggregators, bancassurance, and Lloyd's brokers
- All distribution channels are subject to FCA conduct rules, including ICOBS
Classes of Insurance
UK insurance business is divided into two broad classes: general (non-life) insurance and long-term (life) insurance. The distinction matters for regulation, accounting, and the way products are designed and sold.
General (Non-Life) Insurance
General insurance is usually short-term (typically one year) and renewable. Premiums are spent in the year they are received; there is no significant fund-building.
| Class | Examples |
|---|---|
| Property / property damage | Buildings, contents, commercial property, fire, theft |
| Motor | Private car, commercial vehicle, fleet, motorcycle |
| Liability | Public liability, products liability, employers' liability, professional indemnity |
| Marine and aviation | Hull, cargo, freight, aircraft, airline liability |
| Pecuniary | Business interruption, money, fidelity, legal expenses |
| Accident and health | Personal accident, private medical, travel, income protection (when written as non-life) |
A few features deserve attention. Employers' liability is compulsory for most UK employers. Marine and aviation are often placed in the London market and at Lloyd's because of the size and specialism involved. Business interruption, a pecuniary class, does not replace the property itself - it replaces the earnings lost while the property is unusable.
Long-Term (Life) Insurance
Long-term insurance runs over many years - often decades - and builds up a fund through investment of premiums. The main classes are:
- Life assurance - pays a sum assured on death (term, whole-of-life).
- Pensions and annuities - provide income in retirement; annuities convert a capital sum into a lifetime income.
- Endowment - a savings-plus-protection policy that pays out on a fixed date or on earlier death.
General vs Long-Term: The Key Differences
| Feature | General (non-life) | Long-term (life) |
|---|---|---|
| Duration | Short-term, usually one year | Many years, often whole of life |
| Purpose | Protect against specific events | Protection plus long-term saving |
| Fund-building | None - premiums pay for current risk | Substantial fund accumulates and is invested |
| Renewal | Annual, terms can change | Usually continuous until maturity or claim |
| Pricing | Based on current loss frequency/severity | Based on mortality, interest, expenses |
The Regulatory Distinction
For regulatory purposes the FCA and PRA authorise firms separately for general insurance and long-term insurance business. A firm authorised only for general business cannot write life assurance, and vice versa. The conduct rules differ too: general business is governed by the FCA's Insurance Conduct of Business Sourcebook (ICOBS), while long-term business is subject to additional rules reflecting its savings and investment character.
Distribution Channels
Insurance reaches the customer through several channels, each with its own characteristics.
| Channel | Characteristics |
|---|---|
| Insurer direct | Telephone or internet; no intermediary; insurer owns the customer relationship |
| Insurance broker | Independent adviser; acts for the client; places cover with one or more insurers |
| Tied agent / appointed representative | Sells for a single insurer; principal bears regulatory responsibility for the AR |
| Aggregator / comparison site | Online panel of insurers; quick price-led comparison; acts as introducer |
| Bancassurance | Sold through a bank; usually tied to one insurer; convenient for the customer |
| Lloyd's broker | Specialist wholesale broker placing large or unusual commercial risks at Lloyd's |
Intermediaries and FCA Conduct Rules
All distribution channels are subject to FCA conduct rules, principally ICOBS for general insurance and the equivalent conduct sourcebook for long-term business. Key obligations include:
- Treating customers fairly and paying due regard to their interests.
- Demanding-and-needs statements for non-advised sales, and suitability statements for advised sales.
- Clear disclosure of status (who the intermediary is acting for) and of remuneration where required.
- Effective complaints-handling, including access to the Financial Ombudsman Service.
The distinction between advised and non-advised sales is significant. A broker giving advice must take reasonable steps to ensure the policy is suitable for the client; a direct insurer or aggregator conducting a non-advised sale must still provide clear information but does not owe a suitability duty in the same way.
How the Channels Fit Together
For a domestic motor risk, a customer may use a direct insurer, an aggregator, or a broker. For a large commercial property portfolio, the business is more likely to be placed through a broker, and for a specialist risk (an offshore oil rig, a satellite launch) it may go via a Lloyd's broker into a Lloyd's syndicate. Understanding which channel is appropriate for which type of risk is part of the IF1 syllabus and underpins much of the rest of the qualification.
Composite and Stand-Alone Policies
Risks can be insured either through a composite (package) policy that bundles several classes under one document (for example, a commercial combined policy covering property, business interruption, liability, and money) or through stand-alone policies covering a single class. Composite policies are cheaper to administer and give the policyholder a single point of claim, but the policyholder must read the exclusions carefully because cover for one peril can be removed without affecting the rest. Many personal lines products - home insurance with buildings and contents, or travel insurance with medical, cancellation, and baggage sections - are composite in form.
Reinsurance and the Classes
Both general and long-term insurers use reinsurance to limit their exposure. For general business, treaty and facultative reinsurance spread the risk of large individual losses (a hurricane, a single big fire) or accumulations of losses (a flood hitting many policyholders at once). For long-term business, reinsurers take portions of the mortality and longevity risk on large life and annuity portfolios. Reinsurance does not change the policyholder's contract - the original insurer remains solely liable to the insured - but it allows insurers of all classes to write larger or more hazardous risks than they could carry alone.
Business interruption insurance, which replaces the earnings lost while property is unusable after a fire, falls into which class of general insurance?
Which of the following correctly contrasts general insurance with long-term insurance?