Chapter 1 - Business Nature of the London Market Flashcards
In a subscription market (risk is shared among a number of insurers), why might an insurer not take 100% of the risk?
Capacity - limit to the possible amount of business it can ensure, whether that be due to solvency, or measured in risks written across a period of time or geographic location
Branch Office Controls - influenced by its head office, to ensure no branch offices are competing against each other.
Aggregates - stopping concentration of risks in one area
Broker Influence - broker might not let an insurer take the full risk
Licensing - operating in different jurisdictions
Client Influence
Availability of reinsurance - if no reinsurance is available, capacity is limited
Geographical Limitations - limitation on the amount of business insurable which originates in certain parts of the world
What are the reasons why risks may be placed partly outside the LM?
Location of insured - insureds may have loyalty to their home market
Culture, Local Knowledge and relationships
Experienced insurers
Claims service - open measure of level of service where other markets compete with LM
What is a proprietary company?
Most registered under the Companies Act 1985, owned by shareholders and have limited liability, public (available on stock market have plc, private have ltd)
What is a mutual company?
They are owned by their policyholders, with the policyholders sharing in the profits by way of lower premiums, but may be asked for additional capital contributions in the event of a major loss.
Rather uncommon now with demutualisation (turning into a proprietary company) being favoured for ex-mutuals.
What is a captive insurer?
An authorised insurance company that is owned by a non-insurance parent, can provide tax efficiency with many captive insurers operating from offshore locations.
Other incentives include:
Not being exposed to general premium increases in the market
Not passing funds to commercial insurers and adding to their profits
Being able to invest premium-related funds
Disadvantages:
Need to set up an organisation with staff and funding
Need to ensure an appropriate premium is charged to transfer risk
Not having access to insurer knowledge
Not having any external funds to call upon in loss
What is a mutual indemnity association?
Owned by policyholders, have their origins in members grouping together essentially to self-insure, they employ professional managers to run the insurer on a day-to-day basis, mainly operate in Marine (P&I clubs)
What is a Lloyd’s service company?
They are set up solely to write business on behalf of the syndicate with similar legal structure to insurance companies, obtaining capacity and authority from syndicates
What are the factors for insurers operating both as companies and syndicates?
Brand - Lloyd’s has a well-established brand
Permission - Lloyd’s acts on behalf of all syndicates, but insurance companies have to negotiate individually
Capacity - may decide to spread capacity across general and Lloyd’s markets
Regulation - weighing up the benefit of joining Lloyd’s against increased regulation
What is a Managing General Agent (MGA)?
Organisation that holds delegated authority from an insurer or number of insurers to undertake certain tasks on their behalf, can include UW to handling claims. They themselves do not bear any of the risk.
What is a working member (Lloyd’s)?
One who is actively working in the Lloyd’s market or did so immediately before retirement, must also be a member of the Society of Lloyd’s i.e. provide capital for the market
What is an external member?
One who is a member of the society but does not meet the criteria for a working member
What is a nominated member?
Not a society member and a capital provider but comes from outside the market, closest equivalent is a non-exec director
Why do overseas insurers either set up or acquire operations in the LM?
Close proximity to all other insurers and more importantly brokers/intermediaries, increasing opportunities for networking, market forums and passing traffic.
Many insurers rent space in Lloyd’s as it is an open trading floor.
What % of risk in Lloyd’s and company market comes from the UK and Ireland?
Lloyd’s - 12% originates from the UK
Company - 55% originates from UK & Ireland
What is a licence?
The permission given to insurers in the LM by overseas insurance regulators to write risks located in their regions, Lloyd’s obtains these for the whole market, insurers in the company market have to find it themselves
