Chapter 1: Business framework of the London Market Flashcards
5 Exam qs
Domestic Market
- Serves customers within its own territory
Domestic Risk
Homeowner and household risks
Global Market
- Sources its business from both local and from beyond its borders
- Customers come from many countries
Company Market
non-Lloyd’s international and wholesale insurance and reinsurance companies operating in the London Market
Lloyds customer base
Canada/USA much higher than company market
Why would a client choose domestic market
- Already knows domestic insurers and wishes to be loyal
- broker may advise domestic market is more suitable for clients needs
- Local markets can be more responsive to cultural/linguistic needs
Why would a client have no choice about using domestic market
- Insurance regulators may only issue permits to local/domestic insurers
- Some countries have state/national insurers were risks historically had to be placed
Lloyd’s Underwriting Platforms
- China
- Singapore
- Dubai
Service Company
- Sister company of the syndicate and managing agency
- gain authority via binding authority
Singapore market
- Mini lloyd’s
- lloyds syndicates have set up service companies to write business from Singapore
Permissions (Companies)
- Companies have to obtain their own permissions individually to accept risks in territories
- May involve setting up branches
Permissions (Lloyds)
Lloyds obtains and maintains licences centrally
Permissions (USA)
Granted state by state
Admitted carrier
Insurer is on a par with the true domestic market (both with opporunities and applicable regulations)
Carrier with Excess/Surplus Status
Operating as an overseas market in which risks can be placed
i.e. London is effectively exporting insurance
Excess/Surplus risks
Can only be presented with risks that fall within an exception or if the admitted market were unwilling/unable to write
3 types of insurer operating in the London market
- LLC
- Lloyd’s syndicate
- Mutuals
Insurance-linked securities (ILS)
Transfer insurance risk to capital market investors through products such as catastrophe bonds
Syndicate in a box
Bring in new investment by adjusting the participation and entry criteria.
Manage the risk to the rest of the market by not reducing and standards of performance and oversight
Desired outcome for Shareholders in the London Market
Return on equity (investment/capital)
2 risks in investment
- Claims outweigh premium
- Investments used for premiums fail
Risk of investment: Investments used for premiums fail
Managed partially by regulators to avoid volatile investments
Risk of investment: Claims outweigh premium
Mixture of UW and pricing discipline and luck (particularly with Natural catastrophes)
Benefit of providing capacity into Lloyd’s: Double dipping
Collateral put up to support underwriting can be secured on part of their investment portfolio
Can get returns from their Lloyd’s underwriting and investment portfolio
Historic selling points in the london market
- Double digit returns in low single-digit interest environment
- Diversification of risk both by product and geography
- Capital benefit of a mutual fund (Lloyd’s central fund)
- Access to licences
- Access to distribution
- Access to surplus lines market in the US
- Unique face-to-face environment
- Underwriting and broking expertise
- Well regulated/governed market
Changes in main challenges to london market
- Overseas capacity and expertise is growing. There is more competition in the market
- London expense ratios are much higher than other counterparts
3.
Financial Services and Markets Act 2023
New objective is to encourage competitiveness and growth of the UK financial services sector
Key focuses of Blueprint 2
Digitalisation of the market
- Re-engineer how business is transacted through processing/placement of premium and claims
- Completing the processing of transactions within placement and claims in seconds
- Delivering significant cost savings through digitalisation of the marketplace
Financial Conduct Authority (FCA)
Can authorise or regulate any firm or individual carrying out what it terms a regulated activity in the UK
Unless a firm is exempt
Insurer dual regulation
FCA regulate the way they conduct business
PRA regulate them for prudential requirements
Which regulator is the lead regulator for dual-regulated firms
PRA
So a new insurer applies for regulation through them first
Who regulates brokers
FCA ONLY
Who regulates Lloyd’s and the managing agents operating within
FCA and PRA
(Also regulated by lloyd’s own internal market regulation)
Insurance Distribution Directive (IDD) in the UK post brexit
Now part of UK law so leaving the EU does not render it ineffective.
EU single licence system
Single passport system based on Home State financial regulation
If authorisation is granted by regulator in the home state (location of head office) the authorisation applies to the whole of the EU
Could still be required to comply with local policyholder protection requirements
Carrying out business: Establishment basis
Via branch office or other physical presence in the other member state
Carrying out business: Services basis
directly from home state on a cross-border basis
Conducting business outside of Home state in EU
If working on an establishment or services basis, a compnay is only required to comply with financial and solvency requirements in their home state
UK Insurer in Europe
Will need to obtain permission from regulator in every country involved
Lloyd’s gains permissions centrally for members
Lloyd’s reaction to brexit
- Set up LBS
- UW activities still performed by agents of syndicates using outsourcing agreements with LBS
- Every risk written is 100% reinsured back into syndicates
Risk with EEA and Non EEA exposure
- MRC/Slip should be split into two sections
- LBS stamp for EEA and normal syndicate for Non-EEA
- CAA is a BAA with EEA risks
Key objectives of most insurance regulation systems
- Ensure insurers have financial security to meet claims
- Ensure policyholders are treated fairly
- Ensure policyholders have access to efficient insurance markets
International Association of Insurance Supervisors (IAIS)
120 countries
- promote cooperation among insurance regulators
- set guidelines for supervision
- provide training
- coordinate work with regulators in other financial sectors
- PRA is a member
- Lloyd’s is an observer
FCA PRIN
Principles for business
- all regulated entities not just insurers
- Integrity
- Skill, care and diligence
- Risk management
- Adequate financial resources
- Market conduct
- Fair treatment of customers
- Information to be shared clearly
- Management of conflicts
- Suitable advice
- Protection of client assets
- Openness with the regulator
- Delivering good outcomes for retail custoemrs
FCA ICOBS
Insurance conduct of business
rules that apply to a number of activities in claims/underwriting
- Distance marketing of products (e.g. over the phone)
- Advising clients clearly to inform their purchasing decisions about which products are suitable
- advising clients about their right to cancel, and the effects of cancellation
- handling claims
CII Code of ethics
provides members with a framework to apply their knowledge in order to deliver positive consumer outcomes
Fifth core duty within the code says people should be treated fairly
FCA Consumer duty
Effective July 2024
4 outcomes highlighted to reinforce how important customers needs are.
- Products and services
- Price and value
- Consumer understanding
- Consumer support
Practical applications of the FCA Consumer duty
- Ending inappropriate charges and fees
- Making it as easy to cancel/change as it is to buy
- Provide helpful and accessible customer support
- Timely, clear and accessible information
- Products being provided are fit for purpose for any customer
- Focus on real customer needs, including the vulnerable
PRA Rulebook standards
- allocation of responsibilities
- conduct standards
- fitness and propriety
- senior insurance management functions
- Lloyd’s - special provisions
PRA - Prescribed responsibilities
Requirement for firms to allocate all responsibilities within the SMCR (prescribed responsibilities) to an appropriate person that fits the regulatory criteria
SM&CR
Senior management and Certification Regime
Applies to both insurers and intermediaries
3 key parts
1. Senior management regime
2. Certification regime
3. Conduct rules
PRA - Conduct standards
Requirement for actions to be taken (all standards dont apply to all people)
Conduct standards - Person performing key function
- Act with integrity
- Use skill, care and diligence
- be open with the regulator
Conduct standards - key function by a person not under the category of a notified non-executive director
- Act with integrity
- Use skill, care and diligence
- be open with the regulator
- Control business effectively
- Ensure business complies with regulation
- Delegate only where appropriate and with oversight
- Make appropriate disclosures to FCA/PRA
- Protect the interests of current and future policyholders
Non executive director does not need to do 4,5 and 6.
PRA - fitness and propriety
At all times, firms must make sure that persons performing key functions are fit and proper
Fit and proper as per PRA handbook
in order to perform a key function a person must have the following
- personal characteristics of good repute and integrity
- appropriate level of competence, knowledge and experience
- qualifications
- undergone/undergoing training
What provisions fall under the Senior Managers Regime
- Senior managers performing senior management functions (SMFs) need FCA or PRA approval before taking up role
- FCA and PRA set out which roles are SMFs
- Every manager needs to have a statement of responsibilities setting out which aspects of the firms business they manage
- some tasks are known as prescribed responsibilities that come with regulatory requirements
- New duty of responsibility that requires managers to take reasonable steps to prevent misconduct. Creates are for managers to be disciplined if misconduct occurs
Certification Regime
apply to all employees that are not senior managers by their role means they can cause significant harm to firm/customers (Certification functions)
- Dont need approval by FCA or PRA but need to be confirmed/certified by the firm they are fit and proper for their role at least once a year
Typically roles which have contact with clients or oversight of client monies fall into this category
Conduct rules
FCA has high level standards of behaviour that apply to almost all employees undertaking financial services activities
intended to drive up standards of individual behaviour. Aims to improve individual accountability and awareness of conduct issues
FCA require firms train their staff. FCA must also be notified by firms when they have taken formal disciplinary action against a person caught breaching.
2 tiers: Individual/Senior manager conduct rules
Individual conduct rules
- Act with integrity, due skill, care and diligence
- be open and cooperative with the FCA, PRA and other regulators
- Pay due regard to interests of customers and treat them fairly
- Observe proper standards of market conduct
Senior Manager conduct rules
Must take reasonable steps to ensure
- Business is controlled effectively and complies with requirements/standards
- delegation is only to appropriate people
- information regulators would expect to hear is disclosed
Managing agent disclosure to Lloyds
Obliged to provide information if there is material risk to any Lloyd’s asset (including Central fund)
UK Corporate Governance Code
Aims to facilitate effective and prudent management to deliver long-term successC
UKCGC Principles: Board leadership and Company Purpose
A. Successful company is led by an effective and entrepreneurial board
B. Board should establish the company’s purpose, values and strategy, All directors must act with integrity
C. Governance reporting should focus on board decisions and their outcomes in the context of the company’s strategy and objectives
D. The board should ensure effective engagement with shareholders and stakeholders
E. Workforce policies and practices match company’s values and support sustainable success
UKCGC Provisions: Board leadership and company purpose
- Consider basis the company creates long term value
- Assess and monitor culture within the business
- Seek regular engagement outside of formal meetings from shareholders
- if 20% of shareholders vote against board recommendation, should find out why
- Key stakeholders should be engaged in including the workforce
- Robust whistle blowing policy
- Conflicts of interest should be identified and managed
- Directors concerns should be noted in minutes if not resolved
UKCGC principles: Division of responsibilities
F - Chair responsible for overall effectiveness. Should show objective judgement and promote debate culture. Facilitates board relations and effective contribution of non-board members
G - Board = combo of exec and non exec directors so no one group dominates decision-making
H. Non-exec directors should have sufficient time to meet their board responsibilities
I. Board + Secretary should ensure that all policies/processes/resources are in order to function effectively
UKCGC provisions: Division of responsibilities
- Chair should be independent and not CEO
- Independent Non-exec directors (INED) should be identified in annual reports
- At least half of board should be non-exec
- One of the INEDs should be the sounding board for the chair
- NEDs should hold management accountable
- Responsibilities should be in writing
- Sufficient time to do the role properly
- Should have access to advice of company secretary
UKCGC principles: Composition, Succession and Evaluation
J. Board appointments should follow rigorous procedure that is based on merit and inclusivity
K. Length of service of board should be considered and regularly refreshed
L. Board should be annually evalutated
UKCGC provisions: Composition, Succession and Evaluation
- Should set up nomination committee for succession planning
- Directors should have annual re-election
- Chair should not be chair for 9+ years without reason
- Head hunting should be used to appoint chair and non-execs
- Board should be subject to performance review
UKCGC principles: Audit, risk and internal control
M. procedures should be formal and transparent to ensure independence/effectiveness of internal/external audit functions
N. Board should present assessment of company’s position
O. Risk should be managed through effective procedure established by board
UKCGC provisions: Audit, risk and internal control
- Audit committee of INEDs
- Audit committee monitors integrity of financial statements and controls
- Work should be included in annual report
- Report should state if they believe it is fair and balanced
- Board should assess current and emerging risks to the company
- Board report on risk management and control systems
- Board should identify concerns relating to operational ability for the next 12 months
- Carry out annual review of the effectiveness of risk management and internal control frameworks
UKCGC principles: Remuneration
P. remuneration policies should promote long-term sustainability
Q: No Director should be involved in deciding their own remuneration. Should have processes in place to establish executive remuneration
R. Directors should exercise independent judgment when authorising remuneration outcomes.
UKCGC provisions: Remuneration
- Remuneration committee of INEDs
- Remuneration should reflect time commitment
- Only basic salary is pensionable
- Contract periods should be 1 year or less
- Annual report must describe how they can recover or withhold funds when appropriate to do so
Solvency 2 and Insurance (amendment, etc.) (EU Exit) Regulations 2019
Creation of law in UK law to ensure there was a retention of Solvency 2 work in the UK post brexit
Financial Markets Act 2023
Revoked S2 regulations bringing regulation back in house
Equivalence
UK need to convince their solvency regime is of equivalent quality to the EU
Important for UK business to continue in the EU
Solvency 2
- Own Risk and Solvency Assessment (ORSA)
- Calculation Kernel
- Internal Model
- Minimum capital requirement (MCR)
- Solvency Capital Requirement (SCR)
Insurer’s assessment of risk and capital requirements
- must consider all the risks to the business and attribute a capital value to it, not just insurance related.
Solvency 2: Own Risk and Solvency Assessment (ORSA)
- Process used to identify, assess, monitor , manage and report short/long term risks faced.
-Determines the capital value necessary to ensure solvency is constantly met
Solvency 2: Calculation Kernel
Central method for quantifying and modelling risk and capital requirements
Solvency 2: Internal Model
- RMS developed to analyse risk position
- Under S2 may use internal model to calculate solvency capital requirements (subject to national supervisor approval)
Solvency 2: Minimum Capital Requirement (MCR)
Lower of the 2 capital levels of S2
Min level of capital to be held before regulatory intervention
Solvency 2: Solvency Capital Requirement (SCR)
Higher level of the 2 capital levels of S2
- Prudent amount of assets to be held in excess of liabilities
- breaching the level is an early warning mechanism
- Either standard or internal method
Insurance risk
risk of loss from the inherent uncertainties of insurance liabilities
Credit risk
risk of loss if another party fails to perform obligations (insured doesn’t pay premium)
Market Risk
Risk from fluctuations in value of assets
Liquidity risk
risk that sufficient financial resources are not maintained to meet liabilities
Group risk
potential impact of risk events arising for membership of corporate group
Byelaws (Lloyds)
Highest levels of rules made within Lloyds passed by the CoL
2 Types of Lloyds Byelaws
Underwriting Byelaws
Intermediaries Byelaws
Principles for doing business at lloyds
Set out fundamental responsibilities expected of managing agents
Lloyds Principles
- Underwriting profitability
- Catastrophe exposure
- Outwards Reinsurance
- Claims Management
- Customer outcomes
- Reserving
- Capital
- Investment
- Liquidity
- Governance, risk management and reporting
- Regulatory and financial crime
- Operational resilience
- Culture
Lloyds oversight framework
- Principles
- How syndicates are categorised
- Interventions and incentives
Categorisation of syndicates
5 different categories of assessment against the principles
- Outperforming
- Good
- Moderate
- Underperforming
- Unacceptable
Each principle measured
Interventions and incentives
Interventions aimed at lower end performances and aim at remediation.
Incentives aimed at other end of the scale to support and encourage growth
Maturity matrix
Guidance provided by lloyds of expected behaviours from foundational level to advanced
Single-tied agent
Insurer is principal
Only offer products of one insurer across all product lines
Multi-tied agent
Insurer is principal
offer customers different products but each product will be from only one insurer (insurer per product may be different)
Independent broker
Insured
Not tied to any insurer and can search market for best option
Coverholder
Insurer and possibly insured depending on who the coverholder is
Intermediaries who have been delegated authority by insurers
Managing general agent
Insurers are principal
- Delegated authority by insurers but only ever view them as principal.
Will never be brokers
Could be subsidiary of a company that owns brokers (i.e. DUAL owned by Howden)
Open-Market correspondent
Purely related to lloyds business
Not approved coverholder
Introducing business to lloyds either directly or via lloyds broker for OM placement
Insurance Distribution Directive (IDD)
Applied since 2018 (Still in force since leaving EU)
Sets out consumer protection provisions as well as regulatory score all firms selling insurance contracts
Key provisions of IDD
- Professionalism
- Commission Disclosure
- New product governance requirements
- Ancillary Insurance intermediaries
- IPIDs
IDD: Professionalism
Must possess appropriate knowledge and ability to complete tasks
Staff must complete at least 15 hours of development/professional training a year
IDD: Commission Disclosure
Pre-contractual disclosure
Nature not value of remuneration
IDD: New product governance requirements
In line with FCA’s requirements
IDD: Ancillary Insurance Intermediaries
Connected travel insurance providers
Dont sell or introduce insurance as their main business, but still do so
IDD: IPIDs
Insurance Product Information Documents
Short, Precontractual product summary doc
Fixed Layout
Must be released to every retail customer
Allows customers at the quotation stage to compare offers at a glance
Trust accounts
Place were intermediaries should place client money
separate and segregated from other monies and accounts to make it easier to spot when a firm becomes insolvent
Non-Statutory trust account
Allows intermediaries to hold any relevant client money provided they have the necessary systems/controls to manage it
need min 50k regulatory capital
Statutory trust accounts
Standard accounts used by intermediaries who cant meet the requirements of a non-statutory trust account
Commerical vs Consumer
Buyer of direct insurance who is not a consumer is commercial
Retail vs wholesale
Retail borker may face the buyers of an insurance product (insured)
Specialist broker may be used (wholesale) to access insurers in LM
