Chapter 1: Business nature of the London Market Flashcards

1
Q

Subscription Market

A

Risks are shared among a number of different insurers

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2
Q

Reasons why an insurer may not want to take 100%

A
  1. Capacity
  2. Branch office controls
  3. Aggregates
  4. Broker influence
  5. Licensing
  6. Client influence
  7. Availability of reinsurance
  8. Geographical limitations
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3
Q

Why risks may be placed outside london market

A
  • Location of insured
  • Culture, local knowledge and relationships
  • Experienced insurers
  • Claims service
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4
Q

Where subscription markets are not common

A
  • Mutual clubs for marine liability (Protection and indemnity associations P&I clubs)
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5
Q

3 categories of insurers in london market

A
  • Those operating in Lloyd’s
  • Insurance companies
  • Mutual insurers
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6
Q

Proprietary companies

A
  • Registered under Companies Act 1985
  • Owned by shareholders, who contribute share capital by buying shares
  • Limited Liability Companies (LLC)
  • Shareholders liability of company’s debt is limited to the value of their owned shares
  • some are publicly-quoted companies (PLCs)
  • these companies may choose to operate under a brand
  • Limited companies (Ltd) few or single shareholders whos shares are not available to the general public
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7
Q

Mutual companies and Mutual indemnity Associations

A
  • Owned by policy holders
    *Share in profits by way of lower premiums
  • Policy holders are liable for any losses made by the company in theory
  • in practice, policyholders max liability is for the value of their premium
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8
Q

Captive Insurers

A
  • Authorised insurance company owned by non-insurance parent
  • Tax efficient way to transfer risk
  • Many operate from offshore locations
  • Bermuda, IoM, RoI
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9
Q

Incentives for setting up captive insurer

A
  • Tax efficient
  • Not exposed to general premium increases in market
  • Not passing funds in the form of premiums to commercial insurers and adding to their profits
  • Able to invest and benefit from returns from premium-related funds
  • Regularly appear in london market by purchasing RI
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10
Q

Disadvantages of captive insurers

A
  • Need to set up an insurance organization with funding and staff
  • need to ensure that a premium appropriate for the risk is charged to the subsidiary
  • Not having access to insurer knowledge
  • No external finds to call on should large loss occur
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11
Q

Mutual indemnity associations

A
  • Owned by policyholders
  • Origin comes from members grouping together to self-insure
  • Employ professional managers to run the insurer on a day-to-day basis
  • Mainly operated in marine insurance
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12
Q

Examples of MIAs

A

Mutual Indemnity Associations
- P&I Clubs
- Bar Mutual
- PAMIA
*Professional Indemnity Insurance for Patent and trademark attorneys

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13
Q

Lloyd’s service companies

A
  • Linked to lloyd’s syndicates
  • obtain authority from their syndicate
  • Write business solely on behalf of the syndicate
  • Obtain capacity and authority from syndicate rather than shareholders
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14
Q

Reasons to consider operating as a lloyds syndicate

A
  • Brand
  • Permission
  • Capacity
  • Regulation
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15
Q

MGA

A

Managing General Agent

  • Holds delegated authority from an insurer
  • Mostly based in whole or in part in London
  • Generally permitted to take a subscription market share on placement
  • MGA may be larger than insurer they will not be bearing any of the risk themselves and are just acting as an agent of the insurer
  • Not able to be certain who the ultimate insurer of their risks are
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16
Q

Lloyds act 1982

A
  • Council of lloyds created and responsible for management and supervision of market
  • 3 external and nine nominated members
  • Chairmen and Deputy elected by council from within members
17
Q

Working member of Lloyd’s

A
  • actively working in the lloyd’s market
  • Have to be members of the Society of LLoyd’s (provide capital for market)
18
Q

External Member

A
  • Member of Society of Lloyd’s
  • Does not fulfill criteria for a working member
19
Q

Nominated member

A
  • Not a member of society
  • Capital provider from outside the market
20
Q

Why insurers may set up london office

A
  • Proximity to other insurers and intermediaries
  • Lloyd’s building has space rented out for trading floor
21
Q

Benefits of proximity

A
  • Increases networking, market forums and has the benefit of passing traffic
22
Q

Source of risks

A
  • Only 12% of lloyd’s risks come from UK
23
Q

International Licenses

A
  • Permission from overseas regulators to conduct business
  • Obtain by the corporation of Lloyd’s in the LM
  • LM has them for over 200 countries
24
Q

What can regulators do

A
  • Require nothing for actual positive permission
  • Not give positive permission when required (risks cant be written)
  • Grant permission to write RI only
  • Grant permission to write both direct and reinsurance business
  • Permission to write business on a surplus lines basis rather than as an admitted carrier
25
Q

Why would a regulator only grant permission for reinsurance

A
  • want to keep funds within country borders
    *often the case in country with signifcant natural resources
    ** Local businesses purchase insurance on the assets from local insurance companies and they purchase RI from international market
26
Q

US licensing

A
  • Operates state by state
  • Have to negotiate permissions with each individual state
27
Q

Levels of permission for Lloyd’s market in the US

A
  • reinsurance licensed in all US states
  • Fills gap where local licensed market is unable/unwilling to take on any risk
28
Q

No admitted business US

A

Illinois
Kentucky
USVI

29
Q

Criteria for granting permission as an overseas regulator

A
  • Regular data provided based on risks originating in the country and the associated claims
  • Taxes and other charges payable on risks located in those countries
  • Required by some countries that specific funds of money are held there (e.g. US trust funds)
30
Q

How do Lloyd’s capture data for risks written

A
  • Specific codes attributed to premium and claims as they are processed
  • Lloyd’s undertake reporting on behalf of syndicates and MAs
  • Collect and pay some taxes
31
Q

Roles companies have that lloyds dont

A
  • Individually responsible for accurate and timely reporting to regulators
  • May need to hold funds within countries if required by regulators
32
Q

Systems and controls to ensure compliance

A
  • Underpin the entire business to ensure no risk is written that contravenes the rules
  • Safety nets to try avoid something adverse happening
  • Same concept as risk management
33
Q

Examples of compliance systems and controls

A
  • Training and education
  • Easily accessible information for staff to check
  • Operating system controls, warnings and blocks
  • peer review
  • System reports to spot problems after the fact
  • Authority limits
34
Q

Qualities of london market

A

UK insurance market is a net export of insurance

  • Quality of brokers
  • Reputation
    Brand
  • Capacity
  • Knowledge
  • Flexibility/entrepreneurial spirit
  • Licenses
  • Claims
35
Q

1st party CoB

A
  • Typical short tail
  • Cover physical loss or damage to insured property
36
Q

3rd Party CoB

A
  • Liability to others because of injury to them or loss/damage to their property
  • typically long tail
37
Q

Short/Long tail

A
  • Time lag between policy being in force and final conclusion of claims that might be made