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
How is business transacted in Lloyds?
Each syndicate has space on trading floor (box)
Don’t have to be Lloyds broker
Risks are placed using Market Reform Contract (slip) UW indicates the % share they are willing to share and sign the slip, other UW sign until all risk is covered = subscription underwriting
What is Xchanging?
Once slip is full details are submitted by broker to organisation called Xchanging. Manage central risk data capture and money movement for entire London market
Populate insurers database overnight
What is the London market?
Distinct part of UK insurance and reinsurance sector
What is the purpose of the London market?
Market to place sizeable or complex industrial risks from all over the world, focus on unusual
Contract certainty in the London market
Historically bad as ensuring docs were complete and accurate - 9/11 caused loads of claims and lots of litigation due to inaccurate docs
Regulators now insist on contract certainty - provide docs 30 calendar days commercial customers and 7 working days for consumers
What are the FCA rules for person in insurance mediation activities?
Must be directly authorised by FCA or exempt
Except
- AR
- Introducer appointed representative
- Member of professional body with equivalent rules
What new category of intermediary was created by the Insurance Distribution Directive Oct 2018?
Ancillary insurance intermediary - distributes insurance on ancillary purpose and primary profession is not insurance distribution eg travel operators
What is the main distinguishing feature of an independent intermediary?
Acting on behalf of client NOT insurer
Must offer advice on basis of fair analysis of market
What services are provided by all independent intermediaries?
Decide best market, negotiate, provide advice and advise on claims
Further services are specified in TOBA
What is consolidation of brokers?
- Broker networks: one organisation offers AR status to those joining, retain ownership of own broking firm but access to centralised services and greater negotiation power
- Consolidators: companies growing by formal acquisition of others in market place
What is an authorised person?
Authorised by FCA to engage in regulated activities and bound by all FCA rules
What is an appointed representative?
Individual or company appointed by authorised person (principal) under terms of contract
May be acting for insurer or intermediary and many be for more than one principal
Include organisations that are non insurance eg motor garages
What are introducer appointed representatives?
Limited to effecting introductions and distributing ‘no n-real time financial promotions’ (brochures)
Principal responsible for their actions
Marketing channel, no advice just shop front for insurers products
How is insurance distributed?
Through a distribution channel, 2 types
1. Direct - insurers employees sell products or mailing techniques / websites
2. Indirect - Intermediaries promote products on insurers behalf
What are the benefits of direct marketing channels?
- Reduced cost (no commission) so can pass on through competitive premiums
- Purchase insurance easier and quicker with immediate cover
- Insurer can control customer experience and make improvements quickly
What are the cons of direct marketing channels?
- Significant advertising and promotion cost
- Only one company’s product available
- No independent advice
Explain indirect marketing channels
Agents, brokers, consultants/advisers and price comparison websites
Complex commercial insurance suited to this
- Schemes/delegated authority - insurers delegate authority for intermediaries to act on their behalf
Managing General Agent (MGA) = specialist intermediary with DA yo act for one or more insurers and perform functions usually does by insurer, specialist expertise in niche areas
- Bancassurance - arrangement bank and insurer where insurance sold to bank’s customers
What are price comparison websites?
Aggregators
Rely on co-operation of broker and insurer to access their pricing
propose completes a question set and provided with quotes from number of providers, then approach that insurer separately
Critics - quotes not accurate/confusing
Some direct insurers eg direct line refuse to be included
What is the purpose of reinsurance?
Reinsurers accept business usually underwritten by insurers
Individual risk, event basis or portfolio
No contractual relationship between original insured and reinsurer
Purpose:
- Smooth peaks and troughs in claims experience
- Protect the portfolio
- Provide improved customer service
- Support to enter new areas of business
What is retroceding?
Reinsurers obtain reinsurance
What is an Underwriter?
Manage pool effectively and profitably - assess risk, determine terms and cover and calculate premium
What are claims personnel?
Deal quickly and fairly with claims, determine if fraudulent or others need to be involved, set realistic cost of reserving and settle claims
What does a loss adjustor do?
Expert in processing claims from start to finish
Act for insurer - investigate, negotiate and make recommendation for settlement that are fair to both insurer and insured
Independent and professionally qualified, fees paid by insurer
What is a loss assessor?
Expert in dealing with insurance claims, act for insured - preparing and negotiating
What does a surveyor do?
Variety of functions on behalf on insurers, mostly risk assessment
What does a forensic expert do?
Specialists who determine exact cause of loss or damage
Advice sought in initial investigation
What are actuaries?
Professionally qualified people who apply probability and statistical theory to problems - probability of loss and prediction of claims
What are risk managers?
Mainly in large or diverse company
Systematic identification, analysis and economic elevation/control of risk
What are compliance officers?
Ensure firms abide by rules and regulations - can be done by external consultant but responsibility and accountability cannot be delegated
What are internal auditors?
Work within firms to monitor and evaluate how well risks are managed
What is the Association fo British Insurers?
Form 1985, 250 members
- Voice of insurance industry, speaking up for insurers
- Represent to Gov, regulators and policy makers
- Advocate high standards of customer service
- Promote benefits of insurance
What is the British Insurance Brokers Association?
Major non-statutory association for insurance intermediaries
Promote member views on propose legislation, encourage training and liaise with outside bodies
What is the International UW Association of London (IUA)?
World’s largest representative organisation for international and wholesale insurance/reinsurance
What is the London Market Regional Committee (LMRC)?
June 2009 BIBA announced formation to replace London Market Insurance Brokers Committee
Lobbying role
What is the London International Insurance Brokers Association (LIIBA)?
Independent trade body - mission to ensure London remains where world wants to do business
What is the Lloyds Market Association (LMA)?
Provides representation, info and tech service to managing agents
What is the Managing General Agents Association (MGAA)?
Represents members interests and sets best practice guidelines
What is the Institute of Risk Management?
Delivers general and specialist training courses
What is the Institute and Faculty of Actuaries (IFOA)?
Provides manuals of actuarial practice, designed to ensure quality and consistency
What is the Association of Insurance and Risk Managers in Insurance and Commerce (Airmic)?
Promotes interests of corporate insurance buyers and those involved in risk management and insurance for their company
What is the MIB?
Purpose is to compensate victims of negligent, uninsured or untraced motorists
