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CII LM2 > Chapter 1 - Business Nature Of The London Market > Flashcards

Chapter 1 - Business Nature Of The London Market Flashcards

1
Q

What is a Subscription Market?

A

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

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2
Q

Why an insurer might not take 100% risk

A

Capacity - they don’t want to take up too much
Branch office controls - making sure more than one branch of the same company don’t write the same risk
Aggregates - avoiding having concentration of risks in one area
Broker influence - try to share it out
Licensing - obtain permission to write overseas
Client influence - informed client might have a view on whether they want to spread risk
Availability of reinsurance - frees up capacity for the insurer to write more business
Geographical limitations - limit on how much business can be written in certain places

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3
Q

Why risks might be placed partly outside the LM

A

Location of the insured - insureds having loyalty to their home market
Culture, local knowledge, relationships- client wants insurer to understand what is important to them
Experienced insurers - knowledge and experience of overseas market
Claims service

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4
Q

Where might risks be written 100% and subscription writing is the exception?

A

Marine liability written by mutual clubs (Protection and Indemnity Associations)

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5
Q

What are the three divisions of the London Market?

A
  • operating in Lloyd’s
  • insurance companies
  • mutual insurers
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6
Q

Three main categories of insurer in terms of ownership

A
  • Proprietary companies
  • mutual companies/ mutual indemnity associations
  • captive insurers
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7
Q

What are Proprietary Companies?

A
  • Limited liability companies (shareholders liability for debts limited to value of shares they own)
  • Owned by shareholders who contribute to share capital
  • Registered under Companies Act 1985
  • some stated in FTSE (publicly quoted companies: PLC)
  • some private limited, shares not available to public (LTD)
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8
Q

What are Mutual Companies?

A
  • Owned by policyholders
  • Limited by guarantee (PH max liability is limited to their premium)
  • Only mutual company in LM is LV.
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9
Q

What are Captive insurance companies?

A

An authorised insurance company owned by a non-insurance parent company.

  • tax efficient method to transfer risk
  • many operate from offshore
  • appear by purchasing reinsurance in commercial marketplace
  • most buy reinsurance to transfer sizeable risk away from their business
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10
Q

Benefits of operating a captive?

A
  • Not being exposed to general premium increases in the market
  • Not passing funds in the form of premiums to a commercial insurer and adding to their profits
  • Being able to invest, benefit from returns from premium related funds
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11
Q

Disadvantages of operating a captive?

A
  • Need to set up an insurance organisation with funding and staff
  • Need to ensure a premium appropriate for risk being charged to subsidiary company which is transferring risk to captive insurer
  • Not having access to insurer knowledge
  • Not having external funds to call on should a large loss occur
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12
Q

What is a Mutual Indemnity Association?

A
  • owned by policyholders
  • origins in members grouping together to self insure
  • employ professional managers to run day-to-day business
  • main area is Marine, P and I clubs insure aspects of marine liability
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13
Q

What are Lloyd’s Service Companies?

A

Set up solely to write business on behalf of the syndicate

  • obtain their capacity and authority from the syndicate rather than shareholders
  • often write motor using this type of arrangement
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14
Q

Decision to operate as insurance company or a Lloyd’s syndicate or both- what are the considerations?

A

Brand - Lloyd’s brand is recognised and respected internationally

Permission - granted by countries, Lloyd’s negotiates on behalf of Lloyd’s syndicates

Capacity - spread capacity across insurance company platform and a Lloyd’s syndicate, and seek to obtain more market share by taking 2 separate shares of the risk

Regulation - Lloyd’s/LM insurance companies authorised and regulated for prudential requirements by PRA, regulated for conduct of business issues by FCA. Also subject to Lloyd internal regulation

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15
Q

If a client uses a Lloyd’s syndicate as slip leader where can they obtain the rest of the insurers from?

A

Anywhere.

No fundamental rule that insurers must be any combination of Lloyd’s and companies or London and non London.

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16
Q

Lloyd’s is a society of members. What does the Corporation of Lloyd’s provide?

A

The infrastructure for the marketplace

Responsible for international liaison

17
Q

Under the Lloyd’s Act 1982, What is the Council of Lloyd’s responsible for?

A

Management and supervision of the market.

Can discharge some of its functions by making decisions and issuing resolutions, requirements, rules and byelaws.

Only the council can make byelaws and organisations like Managing Agents must comply.

Strategic decision makers but don’t engage in everyday management of Lloyd’s

18
Q

What are the three types of Council members?

A

Working members - actively working in Lloyd’s market

External members - member of the Society of Lloyd’s but not working member

Nominated members - capital provider but not a member of the Society of Lloyd’s and comes from outside the market

19
Q

What does the Franchise Board do?

A
  • Sets market strategy
  • Responsible for risk management and profitability targets across the market and day to day management.
  • Lays down guidelines for managing agents
  • Operates business planning and monitoring process to safeguard high standards of UW and risk management
  • therefore, improves sustainable profitability, enhances financial strength of market
20
Q

The Corporation Purpose, stated in the Lloyd’s strategy 2018-2020

A
  • create and maintain a competitive innovative and secure market.
  • protect and promote interests of the market and policyholders,
  • provide valued services to market participants
  • advance interests of capital providers
21
Q

How many risks written in the Lloyd’s market come from the UK?
How much of gross income in the company market comes from the UK?

A

14%

57%

22
Q

Lloyd’s has licences and authorisations to trade in over 200 countries and territories, this means Lloyd’s is…

A

Either a licensed or eligible surplus lines insurer, or authorised or registered as a reinsurer only.

23
Q

What are the basic positions a regulator can adopt? (In relation to international licences)

A
  • No requirements for positive permission
  • No positive permission given when it is required (Lloyd’s syndicates can’t write there)
  • Permission to write reinsurance only
  • Permission to write direct and reinsurance
  • Permission to write on a surplus lines basis
  • Permission to write direct only (unlikely)
24
Q

Which US states can Lloyd’s write direct business in?

A
  • Illinois, Kentucky, US Virgin Islands

Or surplus lines in every state.
This means the insurer sits in reserve as a market invade local market is unable to take on risk

25
Q

What is one of the criteria for permission granted by overseas regulators?

A

Regular provision of data concerning risks originating in that country and any claims attached.

Taxes and other charges payable on risks located in that country eg. US Trust Fund for Lloyd’s which has to be maintained within borders of USA

26
Q

Name the systems and controls to ensure compliance

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

Most important: training and education

27
Q

What does the Lloyd’s Franchise board use to achieve its goals in compliance?

A

Performance Framework of Minimum Standards

All managing agents measured using this

Responsibility for meeting standards rests with each managing agents board

28
Q

The 8 Qualities of the London Market that attract clients

A 
1 - Quality of brokers
2 - Reputation
3 - Brand
4 - Capacity
5 - Knowledge
6 - Flexibility and entrepreneurial spirit
7 - Licenses
8 - Claims services
29
Q

Measurement of an insurers capacity is primarily based on…

A

Premium income

30
Q

Most insurance companies operating in the London Market are…

A

Proprietary companies

CII LM2 (12 decks)

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