Chapter 1 - Business nature of the London Market

Question 1

What type of market is the London insurance market?

Answer 1

Subscription market

Question 2

What is a subscription market?

Answer 2

Risks are shared among a number of different insurers, rather than being insured 100% by
one insurer

Question 3

Can an insurer take on 100% of a risk?

Answer 3

Yes

Question 4

Why would an insurer not be able to take on 100% of a risk?

Answer 4

Capacity - limit to the amount of business that it can insure
Aggregates - avoid additional risks of having too much exposure in one location
Broker influence - broker sharing the risk across insurers
Client influence - may prefer to spread their risk among a number of insurers
Licensing - regulators do not authorise all insurers to insure risks in their country
Branch office controls - ensure that risks are not written in multiple offices of an insurer, too much exposure
Availability of reinsurance
Geographical limitations - internal control to ensure that business is well-balanced

Question 5

Reasons why risks may be placed partly outside the London Market

Answer 5

Location of insured - some 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 - superior knowledge of any specific local legislation
Experienced insurers
Claims service

Question 6

What are the three categories of insurer?

Answer 6

Those operating in Lloyd’s
Insurance companies
Mutual insurers

Question 7

What are investors in the Lloyds market known as?

Answer 7

Members or names

Question 8

What are the three main categories of insurer in terms of ownership?

Answer 8

Proprietary companies
Mutual companies and mutual indemnity associations
Captive insurers

Question 9

What are proprietary companies?

Answer 9

Owned by shareholders
Registered under the Companies Act 1985
Limited liability companies - shareholder’s liability for the company’s debts is limited to the nominal value of the shares they own
Publicly-quoted companies (plc) - a share value stated in the recognised financial exchanges such as the FTSE in London
Private limited companies (Ltd) - shares are not available to the general public

Question 10

What are mutual companies?

Answer 10

Mutual companies are owned by their policyholders
Policyholders are liable for any losses made by the company but usually ‘limited by guarantee’ - maximum liability is
limited to their premium

Question 11

What are captive insurance companies?

Answer 11

Authorised insurance company that is owned by a non-insurance parent company
Tax-efficient method for companies to transfer risk

Question 12

What are the benefits of captive insurance companies?

Answer 12

Many captives operate from offshore locations due to good tax regimes
Not exposed to the general premium increases
Not passing funds in the form of premiums to a commercial insurer and adding to their profits
Able to invest, and benefit from returns from, premium-related funds

Question 13

What are disadvantages to captives?

Answer 13

The need to set up an insurance organisation with funding and staff
The need to ensure that a premium appropriate for the risk is being charged to the subsidiary company which is transferring its risk to the captive insurer
Not having access to insurer knowledge
Not having any external funds to call on should a large loss occur

Question 14

Do captives ever appear in the London market?

Answer 14

Yes - Purchase reinsurance in the commercial marketplace, including London

Question 15

What is a mutual indemnity association?

Answer 15

Like mutual companies – are owned by their policyholders
But members group together to self-insure - P&I clubs
Employ professional managers to run the insurer on a day-to-day basis

Question 16

What are Lloyd’s service companies?

Answer 16

Set up solely to write business on behalf of the syndicate
Obtain capacity and authority from the syndicate rather than via shareholders

Question 17

Why do insurers operate as both insurance companies and Lloyd’s syndicates?

Answer 17

Brand - benefit from the positive nature of the Lloyd’s brand simply by association
Permission - regulators take interest in risks located within their borders
Capacity - obtain more market share by taking two separate shares of risks
Regulation - consider whether the requirement to comply with the Lloyd’s rules is outweighed - PRA & FCA

Question 18

What is a Managing General Agent?

Answer 18

Organisation which holds delegated authority from an insurer (or a number of insurers) to undertake underwriting risks and handling claims on their behalf
MGA will not be bearing any of the risk themselves

Question 19

Can an MGA be a leader of a placement?

Answer 19

Yes

Question 20

What is the Governance of the Lloyd’s market?

Answer 20

Lloyd’s is a Society of Members
Corporation of Lloyd’s - provides the infrastructure for the marketplace with a responsibility for international liaison
Under the Lloyd’s Act 1982, the Council of Lloyd’s was created and is responsible for the management and supervision of the Market

Question 21

What does the Council of Lloyd’s usually consist of? And who elects them?

Answer 21

3 working, 3 external and 9 nominated members
The working and external members are elected by Lloyd’s members
The Chairman and Deputy Chairmen are elected annually by the Council from among its members
All members are approved by the FCA

Question 22

What % of the risks written in the Lloyd’s Market come from the UK?

Answer 22

12%

Question 23

What % of the risks written in the company market come from the UK?

Answer 23

55% of their gross income overall is from the UK and Ireland

Question 24

What is an international licence?

Answer 24

Overseas insurance regulators give licences to insurers operating in the London Market to write risks located in their
countries

Question 25

Does the Corporation of Lloyd’s obtain licences? Do individual companies have to obtain licences?

Answer 25

The Corporation of Lloyd’s obtains licences which apply to the whole Lloyd’s Market whereas insurance companies have to obtain licences individually.

Question 26

How many licences does Lloyd’s have? And what does this make them?

Answer 26

Over 200 licences to trade in different countries and territories.
Lloyd’s is either licensed or an eligible surplus lines insurer, or is authorised or registered as a reinsurer only.

Question 27

What are examples of permissions by an international regulator?

Answer 27

No requirement for actual positive permission at all.
No positive permission given when it is required, so risks located in that country cannot be written by Lloyd’s syndicates at all.
Permission to write reinsurance only, so direct risks cannot be written.
Permission to write both direct and reinsurance business, so everything can be written and the insurer can operate on the same basis as a local or domestic insurer.
Permission to write business on a surplus lines basis rather than as an admitted carrier (this often occurs in the USA).
Permission only to write direct business, although this is highly improbable as permission to write reinsurance is far more likely to be granted than permission to write direct business.

Question 28

Does licencing of US insurers operate on a state by state or Federal Government basis?

Answer 28

State by state

Question 29

How are Lloyd’s licenced in all US states?

Answer 29

For reinsurance business, Lloyd’s is licensed in all US states.
For direct business, Lloyd’s is an excess or surplus line insurer in all locations. An excess or surplus lines insurer is one that essentially sits in reserve as a market. This is in case the local admitted/licensed market is unable or unwilling to take on any risk presented to it by a broker.

Question 30

Do admitted/licensed market be shown the risk first?

Answer 30

Yes, unless an exception applies

Question 31

Do companies have to maintain their own funds within individual countries if required
by the regulators?

Answer 31

Yes although the Corporation of Lloyd’s maintains one fund on behalf of all syndicates operating within the local marketplace.

Question 32

Who is measured by Lloyd’s in-house Principles for doing business?

Answer 32

All Managing Agents

Question 32

Who’s responsibility is it for meeting the Lloyd’s Principles?

Answer 32

Rests with each managing agent’s board, whether their underwriting is undertaken in house, whether any underwriting authority is delegated to a third party (or parties), or whether underwriting-related services are procured externally.

Question 33

Why do clients come to the London Market to place insurance?

Answer 33

Quality of brokers
Reputation
Brand of an insurers name
Capacity
Knowledge of underwriters
Flexibility/entrepreneurial spirit
Licences
Claims service