4. The Insurance Market Flashcards
What are the components of the insurance market?
Buyers, sellers (insurers) and intermediaries
Name the 5 main types of buyers
- Private individuals
- Companies
- Partnerships
- Public bodies
- Charities, associations and clubs
Why do private individuals buy insurance?
Buy in their private capacity - mainly buildings & contents and motor
Why do companies buy insurance?
From multinational to self employed sole trade
Limited liability companies have a separate legal existence from those who own the company
Why do partnerships need insurance?
Each partner is jointly and severally liable
Most commonly medical, veterinary and legal professions catered by specialist schemes
Why do public bodies need insurance?
Major buyers include local authorities and schools
Some exempt from compulsory insurance eg police vehicles but most still choose to insure risks with catastrophic potential
Why do charities, associations and clubs need insurance?
Usually buy for liability risks and damaged to owned property
May act for members by arranging group covers or schemes
‘Unincorporated associations have special requirements as each member is liable for associations actions
What are the types of insurer in categories of ownership?
- Proprietary companies
- Mutual companies
- Captive companies
- Protected cell companies
- Lloyds
What are proprietary companies?
Registered under Companies Act 1985 and owned by shareholder
Limited liability companies (shareholder liability limited to nominal value of shares they own)
Some are publicly quoted companies (Plc) - household names
Some are private limited and shares owned by few or one shareholder and not available to general public (Ltd)
What are mutual companies?
Owned by policyholders, limited by guarantee with policyholders maximum liability limited to their premium
Trend for insurers to demutualise and become proprietary companies
- Mutual indemnity associations = self managed pools of insurers owner by policyholders. Mainly in Marine (P & I Clubs)
What are captive companies?
Captive = insurance company established by parent company that provides insurance solely to that parent company
Tax efficient method of transferring risk
What are protected cell companies?
1997 - Guernsey created new kind of captive insurer - ‘ring fenced’ assets of participating cells and allowed them to operate as distinct insurance entities
Operates in 2 parts: core and unlimited number of cells
Some insurers use to offer niche products where conventional cover is expensive or unavailable
What is Lloyds?
Not an insurer but an entity providing infrastructure for placing risks in its own market
Also acts as partial regulator
What are the types of insurer classified by function?
Composite companies and specialist insurers
What are composite companies?
Accept several types of classes of business and represent most of the market
Due to mergers and acquisitions the 6 largest companies account for over 60% premium in UK
What are specialist insurers?
Have expertise in one particular niche area
What are Takaful insurance companies?
Roots in Islamic financial services industry developed to meet specific customer base
Based on Sharia Law for financial transactions - principle that risk and profit should be shared
Takaful = guaranteeing each other
Does the State act as an insurer?
Yes in a number of areas but mainly welfare benefits and pension provision
Acts as guarantor for terrorism and flood risk
What is Lloyds?
Infrastructure for placing risk
Corporation of Lloyds oversees and supports wider market ensuring efficient and maintain reputation
Regulatory role:
- Agreement of business plans
- Setting minimum standards for performance
- Provide some central shared services
Who invests in Lloyds?
Original ‘names’ investing demonstrated certain levels of wealth
Guaranteed their shares of losses up to full extent of own personal fortune
= unlimited liability (very onerous)
What happened in the 80s that impacted investing at Lloyds?
Entry requirements were low in terms of net worth
Housing boom so modest properties were valuable enough to meet requirements and memberships given as presents
Series of major losses (hurricanes, Piper Alpha oil rig disaster, asbestos problems and pollution)
Names faced with requests for large funds which many didn’t have leading to bankruptcy and hardships
What is the Reconstruction and Renewal period?
Putting all business from 1993 and prior into specialist reinsurer Equitas
Changed investment framework to welcome corporate capital
Those with unlimited liability before problems able to remain if they wanted, new members have to have limited liability
Name the different stakeholders in Lloyds
Syndicates, Managing agent, member agent and Council of Lloyds
What are syndicates?
Groups of private individuals (names) or corporate members who carry risks by providing financial backing
Outsource day to day running to managing agent
What is a managing agent?
Employ UW and claim adjustors, lease with Lloyds and other regulators
Dual regulated - have to be approved by PRA and regulated by FCA
What is a members agent?
Specialist financial adviser and advise potential members on investing, syndicate selection, compliance etc
Communication channel between member and managing agent
Only 4 active and have to be approved by FCA and Lloyds
What is the Council of Lloyds?
Registers broking firms to act as Lloyds brokers
