C1 - A Flashcards
what is a subscription market?
this means is that risks are shared among a number of different insurers, rather than being insured 100% by one insurer.
an insurer can take on 100% of risk if they wish too
Reasons why an insurer may not take 100% of any risk
- capacity
- branch office controls
- aggregates
- broker influence
-licensing - client influence
- availability of reinsurance
- geographical limitations
Capacity: reason to not take on 100% of risk
- Each insurer has a limit to the amount of business that it can insure
- This is the total of all premiums that are written in any period, usually one year
- capacity is created by the input from the investors
- eg. in lloyds = memebers
- eg. in insurance company = shareholders
- The regulator wants to ensure that the insurer has enough funds both to run the organization and also to meet its liabilities
- capacity can also be measured using the limits of geographical location
- important for energy and property insurers that want to
ensure they do not have too many risks or too much exposure concentrated
in one location (such as the Gulf of Mexico)
Branch office controls
- careful attention must be paid to ensure that risks are not written in multiple offices of an insurer which, when added
together, present a far larger exposure than is wanted - insurers operate strict controls to ensure that none of its branch offices find themselves competing with each other – for example on price.
Aggregates
- All insurers keep careful records of the location of the risks they are insuring.
- this is to avoid the additional risks caused by having a concentration of exposure in one place.
Broker influence
- Brokers know the risk that they are trying to place will be popular and they often try to share it out among a number of insurers as a way of building
and maintaining relationships and leveraging the premium. - broker’s responsibility is to ensure the best placement for their client and should consider this at all times.
Licensing
- business is presented to an insurer in London by a
broker does not mean that the insurer is authorised to write that business. - Many countries around the world regulate insurance for risks which are located
within their borders and they do not authorise all insurers to insure those risks. - Lloyd’s obtains permission on behalf of all syndicates and managing agents
operating within the Lloyd’s Market - insurance companies need to
obtain their own individual permissions.
Client influence
A knowledgeable and informed client might have a view on whether they prefer
to spread their risk among a number of insurers or to concentrate on building a
relationship with a single insurer which is taking the whole of any risk.
Availability of reinsurance
Reinsurance is one way of transferring the risk to another party – being the reinsurer. This frees up capacity for the insurer to write more business until it reaches its capacity again.
If no reinsurance is available, either at all, or for a reasonable price then this curtails the insurer’s ability to take on risks
Geographical limitations
- a limitation on the
amount of business that can be insured which originates in a certain part of the world. - This is usually an internal control that insurers apply to ensure that their business is well-balanced.
-eg. an insurer might want to restrict cargo business where the insured is located, even though the subject matter of the insurance is located in different places all over the world.
Structure of the subscription market
- any insurer which is available to write the business
- A broker operating in London has not only the London Market at their disposal – they can access any market in the world that they please.
- There are often compelling reasons why a risk is only partly placed in the London
Market with the balance placed with another international insurance market
Reasons why risks may be placed partly outside the
London Market
- Location of insured
- Culture, local knowledge and
relationships - Experienced insurers
- claims service
Location of insured
many insureds have a loyalty to their home market and seek to have at least part of the risk placed there.
Culture, local knowledge and
relationships
- the client’s need to
know that their insurer understands what is important to them as a client - insurers in other markets, particularly the one from which the risk originates, usually have a superior knowledge of any specific local legislation
Experienced insurers
knowledge and experience of the overseas market encourages brokers and clients to use them as an alternative
to London or in a placing alongside London insurers.
Claims service
fundamental practical measure of service and an area in which other markets openly compete with London.
three categories
of insurers in the LM
- those operating in Lloyd’s;
- insurance companies; and
- mutual insurers
three main categories of insurer in terms of ownership:
- proprietary companies
- mutual companies and mutual indemnity associations
- captive insurers
Proprietary companies
insurance companies in this group are registered under the Companies Act 1985.
These are owned by shareholders. Therefore, company profits (after expenses and reserves) belong to the shareholders.
Proprietary companies are limited liability companies. This means that a shareholder’s
liability for the company’s debts is limited to the nominal value of the shares they own
(the originally stated face value of the shares).
Some are publicly-quoted companies with a
share value stated in the recognised financial exchanges such as the FTSE in London.
However, some insurance companies are private limited companies whose shares may be owned by a few Shareholders, or sometimes by only a single shareholder.
In the UK, such companies have the designation ‘Ltd’
after their names. They are more commonly found in the small to medium-sized insurance firms.
Mutual companies
owned by their policyholders.
The policyholders share in the profits of the company by way of lower premiums. In theory,
the policyholders are liable for any losses made by the company.
However, in reality, mutual
companies are ‘limited by guarantee’ meaning that a policyholder’s maximum liability is usually limited to their premium.
Captive insurance companies
an authorised insurance company that is owned by a non insurance parent company.
a tax-efficient method for companies to transfer risk, without using the
mainstream insurance market
Mutual indemnity associations
are owned by their
policyholders.
their origins in their members
grouping together essentially to self-insure.
Mutual indemnity associations employ professional managers to run the insurer on a day-to-day basis.
The main areas where these operate today is in marine insurance, where P&I Clubs insure certain aspects of marine liability, and professional indemnity..
Lloyd’s service companies
they are set up solely to write business on behalf of the syndicate and although
their legal structure is similar to an insurance company, they obtain their capacity and
authority from the syndicate rather than via shareholders.
decision to operate as either an insurance company or a Lloyd’s syndicate
BRAND - Lloyd’s brand is recognised and respected internationally
PERMISSION - countries reserve the right to actively grant permission to international insurers
that wish to insure business from their country. insurance companies have to negotiate with the regulator individually. the Corporation of Lloyd’s negotiates on behalf
of Lloyd’s syndicates
CAPACITY - may decide to spread its capacity across both an insurance company ‘platform’ and a Lloyd’s syndicate and seek to obtain more market share by taking two separate shares of risks.
REGULATION - Insurers must consider whether the requirement to comply with
the Lloyd’s rules is outweighed by the benefits to be gained by obtaining access to the international permissions that Lloyd’s may offer.
Managing General Agents
an organisation which holds delegated authority from an
insurer (or a number of insurers) to undertake certain tasks on their behalf.
eg. the underwriting of risks and the handling of claims.
MGA are generally permitted to take a subscription market share on a placement alongside other insurers and might even be the leader of that placement.
Governance of the Lloyd’s market
Under the Lloyd’s Act 1982, the Council of Lloyd’s was created and is responsible for the
management and supervision of the Market.
Council has three working, three external and nine nominated members
Definitions of Lloyds council memebers
working member: actively working in the Lloyd’s Market either for a broker or for a managing agent, or did so immediately before retirement.
An external member is one who is a member of the Society of Lloyd’s (i.e. a provider of
capital) but does not fulfil the criteria for a working member.
A nominated member is not a member of the Society and a capital provider but comes
from outside the market. The nearest equivalent would be the non-executive directors of a company who are not involved with the day-to-day operation of the business.
