Chapter 1 - Business Nature Of The London Market Flashcards
Why might an insurer not take 100% of the risk? Capacity
Limited Capacity = total of all premiums written in a period (usually 1 year)
Capacity created by investors (Names for syndicates / shareholders for insurance companies)
Regulator may limit risks written in geographic locations / period of time to ensure solvency of insurer (total liabilities equal to or less than premium earnings)
Why might an insurer not take 100% of the risk? Branch office controls
Not writing same risks over multiple offices. Head office should influence branch office’s capital. Insurers have strict controls to ensure not competing with branch offices (for eg on price)
Why might an insurer not take 100% of the risk? Aggregates
Avoid concentration of exposure in one place
Eg location of risks. For satellite insurers, which launch vehicle being used
Moveable risks (ships/cargos) harder to track
Why might an insurer not take 100% of the risk? Broker influence
Brokers share risks to maintain relationships/leverage premium (always giving client best placement possible)
Why might an insurer not take 100% of the risk? Licensing
Some countries do not authorise all insurers to insure risks
Lloyds - centrally
Insurance companies - individually
Why might an insurer not take 100% of the risk? Client influence
Informed client may not want concentration of risk to one insurer
Why might an insurer not take 100% of the risk? Availability of reinsurance
Either no reinsurance available at all OR for a reasonable price
Why might an insurer not take 100% of the risk? Geographical limits
Amount of business originating from certain part of world. Usually internal control (Affects insured’s location)
Reasons why risks might be placed outside of London Market. Location of insured.
Many insureds have loyalty to home market
Reasons why risks might be placed outside of London Market. Culture, local knowledge, relationships
Client wants to know insurer understands what’s important to them. Local insurers may have better understanding of specific local legislation
Reasons why risks might be placed outside of London Market. Experienced insurers
Wealth of knowledge and experience in overseas markets
Reasons why risks might be placed outside of London Market. Claims service
Good claims service
Three categories of insurers
Lloyds
Insurance companies
Mutual insurers
Different types of insurance companies (3)
Proprietary companies
Mutuals (companies / indemnity associations)
Captives
Types of insurers.
Proprietary companies
Registered under Companies Act 1985
Owned by shareholders. Shareholders contribute share capital and own profits.
Limited liability companies. Shareholders are liable for company’s debts but limited to nominal value (face value) of the shares they own.
“Plc” publicly-quoted companies. Share value stated in financial exchanges
“Ltd” private limited companies. Shares owned by a few/one shareholder. Usually SMEs.
Types of insurers.
Mutual companies
Owned by policyholders who share profits by way of lower premiums. Mutual companies usually ‘limited by guarantee’ meaning policyholders max liability is limited to their premium.
Only 1 mutual company in Lloyds Market today - Liverpool Victoria
Why might a company demutualise?
Preliminary activity prior to being acquired
Types of insurers.
Captive insurance companies
Owned by a non-insurance parent company
Advantages / disadvantages of captives
Advantages
- Tax efficient way to transfer risk for eg Operate in offshore locations with favourable tax regimes
- Stable premium prices
- Keeping money (premiums) within the company
- Invest / benefit in returns of premium-related funds
Disadvantages
- set up organisation with funding and staff
- expertise to ensure premium paid is appropriate to the risk being transferred
- no access to insurer knowledge
- no external funds if large loss occurs
Some captives buy reinsurance to transfer some risk
Types of insurers.
Mutual indemnity associations
Mutuals - owned by policyholders
Mutual indemnity associations - members grouping together to self insure
Employ professional managers to run day to day insurer activity
Mainly P&I Clubs which insure aspects of marine liability or professional indemnity (where for eg Bar Mutual and PAIMA exist)
Types of insurers.
Lloyds service companies
Linked to syndicates
Write on behalf of the syndicate
Obtain capacity / authority from syndicate rather than shareholders
Why do insurers operate as syndicates and insurance companies? Brand
Lloyds brand globally respected
Why do insurers operate as syndicates and insurance companies? Permission
Corp of Lloyds negotiates on behalf of all syndicates
Some regulators refuse permission to insurance companies but grant to Lloyds
Why do insurers operate as syndicates and insurance companies? Capacity
Spread capacity over two platforms to obtain more market share / take separate shares of same risk
