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M92 STUDY > Chapter 1 - A > Flashcards

Chapter 1 - A Flashcards

Different types of insurance company

1
Q

The majority of insurers are what type of company?

A

Proprietary

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2
Q

In a proprietary company, who do the profits belong to?

A

Shareholders

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3
Q

In a proprietary company, how is shareholders liability measured?

A

Limited to the nominal value of their shares (hence the term limited liability).

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4
Q

In a proprietary company, who is liable for debts?

A

The company, and if the solvency margin cannot be met the company risks going into liquidation.

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5
Q

How can the public approach a proprietary company?

A

Directly or through an insurance broker or intermediary.

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6
Q

A proprietary company is most likely what type of insurance company?

A

Composite

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7
Q

How does an insurance company operate?

A

By charging small premiums compared to the exposed risk to large numbers of the same type of customers.

The losses of the few are paid for by the premiums of the many (RISK TRANSFER)

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8
Q

Reinsurance companies operate in a similar way to insurance companies and allow insurers to:

A

Pass risk onto them in return for premiums.

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9
Q

Why would an insurer reinsure? (Give 2 reasons)

A
  • To limit ANNUAL FLUCTUATIONS in the losses that affect their underwriting account (smoothing the underwriting result)
  • To protect themselves against catastrophe (man-made and natural).
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10
Q

How would you form a mutual company?

A

Either Deed of Settlement or registration under the Companies Act.

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11
Q

Who owns a mutual company?

A

Policyholders.

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12
Q

How would the policyholder benefit from profits made by a mutual company?

A

Usually through lower premiums or higher life assurance bonuses.

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13
Q

How does a shareholder in a proprietary company receive their share of a profit?

A

Dividends.

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14
Q

What is demutilisation?

A

Where a mutual company registers under the Companies Act as a proprietary company.

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15
Q

Why could a mutual company struggle in comparison to a proprietary?

A

They are unable to raise additional capital through additional shares like a proprietary company can.

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16
Q

What does AFM stand for?

A

Association of Financial Mutuals (formed in 2010).

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17
Q

In the Lloyd’s market, the underwriting members are responsible for their own profit and losses which are underwritten in administrative groups called?

A

Syndicates.

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18
Q

In the Lloyd’s market, the underwriting members appoint independent companies know as _________ to carry out what on their behalf?

A

Managing agents

Underwriting business such as agree cover and price and play claims etc.

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19
Q

The Lloyd’s market has developed a strong worldwide reputation because:

A

Of their ability to provide bespoke insurance solutions for its customers.

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20
Q

A customer of Lloyd’s will usually instruct a ________ to act for them.

A

Lloyd’s Broker.

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21
Q

Should any member of Lloyd’s be unable to pay a claim, Lloyd’s have what in place and who does it protect?

A

A unique ‘chain of security’ to protect the policyholders.

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22
Q

As a development in the modernisation and reform of Lloyd’s a new structure was created. What was the structure and what is the position of Lloyd’s and its members?

A

A franchise structure.

Lloyd’s acts as the FRANCHISOR.

The managing agents and the members for whom they act are the FRANCHISEES.

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23
Q

What is the aim for the franchise structure created by Lloyd’s?

A
  • Improve market profitability.
  • Monitoring and guidance for FRANCHISEES.
  • Lloyd’s to approve business plans and new syndicate applications.
  • Lloyd’s can eject businesses who are unable to comply with requirements.
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24
Q

In the Lloyd’s franchise structure, who carries out the role of franchisor?

A

A franchise board of members both inside and outside the Lloyd’s market.

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25
Q

What is a captive insurance company?

A

A subsidiary company formed by the parent company to underwrite its own or its group’s insurable risks.

26
Q

What type of company is most likely to use a Captive insurance company and why?

A

Large national and multinational companies as it is tax-efficient.

27
Q

Why would a company create their own captive insurance company? (List 4 reasons)

A
  • premiums are paid based on own loss experience.
  • avoids direct insurer overheads.
  • obtaining a lower overall risk premium level by purchasing reinsurance at a lower cost than that required by the direct insurer.
  • achieve risk financing objectives.
28
Q

Where do captive companies usually operate?

A

Offshore locations such as Bermuda. Some will be formed in European Economic Area (EEA) Member states to secure European passporting rights.

29
Q

What are passporting rights?

A

Allow a UK company, subject to complaince with the relevant directives, to conduct business in the EEA.

30
Q

Why would a company to set up offshore?

A

The regulatory environment and requirements are more straightforward and the regulators more accessible.

31
Q

Offshore locations can give captive companies certain advantages. Name two:

A
  • Reduces the volume of papersork to register as an insurer.
  • As many captives are in offshore centralised locations, they gain access to ancillary services, such as investment management, banking and accounting.
32
Q

What is Takaful insurance?

A
  • Has its roots in the Islamic financial industry.
  • Developed based on the rulings of Sharia law.
  • Works on the principle that in any transaction risk and profit (and loss) should be shared between the participants.
33
Q

Why was Takaful insurance created?

A

So Insurers could provide a product that met the religious principles of a specific customer group.

34
Q

What fundamental principles under Islamic (Sharia) law does traditional insurance contradict? (Name all 3)

A
  • Uncertainty (Gharar)
  • Gambling (Maisir)
  • Interest (Riba)
35
Q

What is the Islamic principle Gharar?

A

Uncertainty

Forbids sales where there is risk to the buyer unless the risk is of normal or reasonable proportion.

Traditional insurance holds a level of uncertainty as how much and when, if at all, a policy will pay is uncertain.

36
Q

What is the Islamic principle Maisir?

A

Gambling

Traditional insurance is seen as a type of gambling because some policyholders are paid whilst others are not.

Gambling is forbidden under Islamic law.

37
Q

What is the Islamic principle Riba?

A

Interest

Islamic law forbids making money from money, such as through interest.

Wealth can only be made through trade of assets and investments.

38
Q

What does Takaful mean in Arabic?

A

Guaranteeing each other.

39
Q

What Islamic principles does Takaful insurance embrace? (Name all 5)

A
  • mutuality and cooperation.
  • shared responsibility.
  • joint indemnity.
  • common interest.
  • solidarity.
40
Q

Takaful insurance products need to be approved by who to ensure they are compliant?

A

An Islamic scholar.

41
Q

What can an insurer do to help protect themselves from the risks which they take on?

A

Purchase reinsurance.

42
Q

Why are reinsurers often major international corporations?

A

Because the sums to be reinsured are generally quite significant.

43
Q

Reinsurance is a specialised area and the underwriters who write the business must have very specific skills and knowledge. What must a reinsurer assess before taking on any insurer business?

A

The overall underwriting approach and philosophy of the direct insurer to have some assurance that risks are carefully assessed and priced.

44
Q

In terms of reinsurance, what is a treaty?

A

Where a reinsurer agrees with an insurer in advance to take a part of all the business underwritten by the direct insurer. Usually an annual contract with fixed terms.

45
Q

There are two main types of treaty in reinsurance. Name both:

A
  • Proportional

- Non-proportional

46
Q

What is a proportional treaty?

A

Where the insurer and reinsurer take a stated proportion of each risk and share the premium and claims on that basis.

47
Q

What is a Non-proportional treaty?

A

Allows an insurer to retain the first layer of cover and transfer the balance to the reinsurer.

48
Q

If a reinsurer was to write facultative business, what would this mean?

A

Each reinsurance requirement is negotiated individually. This format is used when an insurer wishes to transfer cover outside of the treaty arrangements.

49
Q

Following numerous terrorist attacks in the UK, what was established by statute in 1993?

A

Pool Reinsurance Company Limited (Pool re).

50
Q

What type of company is Pool re?

A

A mutual reinsurance company.

51
Q

How would an insurer in the Pool re scheme handle terrorism cover?

A

They would offer it as part of the relevant commercial policy. They will pay losses up to a threshold, which is determined individually for that insurer. When losses exceed the threshold, the insurer can claim upon Pool re reserves.

52
Q

What would happen if the Pool re reserves were insufficient to the claims submitted?

A

Pool re will draw funds from the government to meet obligations in full.

53
Q

Following rising flood risks, it was estimated 350,000 UK households would struggle to obtain affordable flood insurance. How was this challenge tackled?

A

The government and the ABI (Association of British insurers) agreed a Memorandum of Understanding (MoU) on a not-for-profit scheme, Flood re.

54
Q

When was flood re launched?

A

April 2016.

55
Q

What is the purpose of Flood re?

A
  • promote availability and affordability of flood insurance.

- manage the transition to risk reflective pricing for household flood insurance.

56
Q

How if Flood re financed?

A
  • A £180m levy paid by UK household insurers.

- This levy also finances a £2.1bn reinsurance programme.

57
Q

How does Flood re operate?

A

Provides reinsurance cover at a subsidised fixed rate which results in an expected loss each financial year.

There is no difference to the way a customer would buy their home insurance of eligible. Claims will continue to be handled by the insurer themselves and the insurer will continue to assess the risks and set the premiums accordingly.

58
Q

How is a Customer eligible for Flood re?

A

Through their property council tax band.

Residential properties built since 2009 on flood plains, certain blocks of flats and small firms are excluded.

59
Q

What is self-insurance?

A

Where funds are set aside to meet insurable losses, usually done by large organisations as they can financially carry the costs.

60
Q

Why would a large organisation choose to self-insure?

A

Transfer of funds to there reserve fund has a lower cost than commercial premiums. An organisation which has high frequency low severity losses will have predictable losses. If these losses were to be insured then the insuring company would want to recover its costs and so would charge higher premiums than the cost of the predicted claims.

61
Q

What si the difference between self-insurance and non-insurance?

A

Self-insurance is where a conscious decision is made to create a fund, non-insurance is where no conscious decision is made at all and no fund created.

M92 STUDY (8 decks)

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