Chapter 1: Business nature of the London Market Flashcards
1
Q
Subscription Market
A
Risks are shared among a number of different insurers
2
Q
Reasons why an insurer may not want to take 100%
A
- Capacity
- Branch office controls
- Aggregates
- Broker influence
- Licensing
- Client influence
- Availability of reinsurance
- Geographical limitations
3
Q
Why risks may be placed outside london market
A
- Location of insured
- Culture, local knowledge and relationships
- Experienced insurers
- Claims service
4
Q
Where subscription markets are not common
A
- Mutual clubs for marine liability (Protection and indemnity associations P&I clubs)
5
Q
3 categories of insurers in london market
A
- Those operating in Lloyd’s
- Insurance companies
- Mutual insurers
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
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
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
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
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
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
12
Q
Examples of MIAs
A
Mutual Indemnity Associations
- P&I Clubs
- Bar Mutual
- PAMIA
*Professional Indemnity Insurance for Patent and trademark attorneys
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
14
Q
Reasons to consider operating as a lloyds syndicate
A
- Brand
- Permission
- Capacity
- Regulation
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
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
Why would a regulator only grant permission for reinsurance
- 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
US licensing
- Operates state by state
- Have to negotiate permissions with each individual state
27
Levels of permission for Lloyd's market in the US
- reinsurance licensed in all US states
- Fills gap where local licensed market is unable/unwilling to take on any risk
28
No admitted business US
Illinois
Kentucky
USVI
29
Criteria for granting permission as an overseas regulator
- 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
How do Lloyd's capture data for risks written
- 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
Roles companies have that lloyds dont
- Individually responsible for accurate and timely reporting to regulators
- May need to hold funds within countries if required by regulators
32
Systems and controls to ensure compliance
- 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
Examples of compliance systems and controls
- 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
Qualities of london market
UK insurance market is a net export of insurance
- Quality of brokers
- Reputation
Brand
- Capacity
- Knowledge
- Flexibility/entrepreneurial spirit
- Licenses
- Claims
35
1st party CoB
- Typical short tail
- Cover physical loss or damage to insured property
36
3rd Party CoB
- Liability to others because of injury to them or loss/damage to their property
- typically long tail
37
Short/Long tail
- Time lag between policy being in force and final conclusion of claims that might be made
