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2023 M92 Business and Finance > Chapter 1 - Structure Of The Insurance Industry > Flashcards

Chapter 1 - Structure Of The Insurance Industry Flashcards

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1
Q

What is the difference between a general insurance company and a composite insurance company?

A

A general insurance company is only able to transact general business and not life, whereas a composite transacts both life (long term business) and general insurance.

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2
Q

What are the two basic needs and reasons why insurance companies purchase reinsurance?

A
  1. To limit (as much as possible) annual fluctuations in the losses that affect their underwriting account, often referred to as smoothing out the underwriting result.
  2. To be protected in the case of catastrophe (both man made and natural)
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3
Q

Mutual companies are owned by who?

A

The policyholders

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4
Q

The shareholder in a proprietary company will receive their profits by way of?

A

Dividends

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5
Q

Within Lloyd’s what are the groups called that members underwrite for?

A

Syndicates

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6
Q

Within Lloyd’s, who do members employ to run syndicates and carry out underwriting business?

A

Companies known as managing agents

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7
Q

What has Lloyd’s set in place incase members are unable to pay a claim? And who does this protect?

A

A chain of security and this is designed to protect policyholders

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8
Q

What is a captive insurance company?

A

Tax efficient method of risk transfer, becoming more popular in recent years with large multinational companies. Parent company forms a subsidiary to underwrite certain of its own insurable risks.

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9
Q

What are the incentives of a captive insurance company?

A
  1. Pay premium based on own experience
  2. Avoidance of direct insurers overheads
  3. Obtaining lower overall risk premium level by purchasing reinsurance at a lower cost than that required by the conventional or direct insurer.
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10
Q

What is takaful insurance?

A

Roots in Islamic financial services industry, based on rulings of sharia law on financial and commercial transactions. Works on principle that any transaction, risk and profit should be shared between participants.

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11
Q

In takaful insurance, what are the three aspects that are deemed to be against Islam?

A
  1. gharar (uncertainty)
  2. Maisir (gambling)
  3. Riba (interest)
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12
Q

What does takaful mean?

A

Guaranteeing each other

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13
Q

What are the 5 Islamic principles takaful insurance embraces?

A
  1. Mutuality and cooperation
  2. Shared responsibility
  3. Joint indemnity
  4. Common interest
  5. Solidarity
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14
Q

Reinsurers are usually large multinational cooperations because?

A

Sums to be reinsured are generally quite significant

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15
Q

Insurers that participate in pool re scheme do what?

A

Offer terrorist cover as part of their commercial policies, each insurer pays losses up to a threshold, when losses exceed this threshold the insurer may call upon reserves of pool re.

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16
Q

What is the aim of flood re?

A

Ensure flood insurance remains widely affordable and available. The memorandum of understanding is a first step towards establishing flood re and confirms it as the governments preferred option.

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17
Q

Why would a large company self insure?

A

They would feel that they are large enough financially to carry such losses and because the cost to them, by way of transfer to their reserve fund is lower than the commercial premium level.

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18
Q

A large organisation self insuring usually occurs when the company have an experience of?

A

High frequency low severity losses.

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19
Q

If a large organisation was to insure high frequency low severity losses, what type of arrangement ewould there be with the insurance company?

A

Pound swapping as organisation pays a pound to insurer only to get it back when it losses. Which both parties knew would occur.

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20
Q

What is the difference between self and non insurance?

A

Self insurance is where a conscious decision is made to create a fund, whereas non insurance is when no conscious decision is made at all, or no fund is created.

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21
Q

What is the difference between a multinational and global company? List features.

A

A multinational company has a home base but many other national operations, this means it can respond to local demands whereas a global company sees the world as one potential market. The global companies aim is to be seen as one global singular brand, they are centralised businesses. An example of global would be Lloyd’s.

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22
Q

What is the core of London market business?

A

Internationally traded insurance and reinsurance business - including the very large risks of UK companies, multinationals and overseas companies.

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23
Q

Which group was established to maintain and enhance the position of the London market in the international insurance market?

A

London Market Group

24
Q

Give 10 reasons why the London market has developed into successful international centre for insurance and reinsurance?

A
  1. Political and economic stability
  2. Geographical location
  3. Quality transport system
  4. Highly qualified personnel
  5. Office space at competitive prices
  6. English is business language
  7. Stable legal and regulatory environment
  8. Time zone
  9. Foreign presence
  10. Developed financial centre
25
Q

A scheme which offers broader cover at a competitive rate and tends to target sectors of the market such as members of a particular profession, club or society are known as?

A

Affinity schemes

26
Q

Retailers having opportunity to market insurance products to very large customer base, this is also known as?

A

White labelling, where a organisation offers insurance products branded in own name but underwritten elsewhere.

27
Q

How does an aggregator work?

A

Customer completes set of questions and is provided with quotations from a number of different providers. Customer can approach that company through a link.

28
Q

What does a company need to do to understand customers expectations?

A

Market research

29
Q

How much more likely is it to retain a customer than win a new one?

A

5 times

30
Q

What is CRM and why is it important?

A

CRM is customer relationship management. This is to do with getting closer to the customer and moving proactively. This is important because it is by gaining more than once policy with a customer that they are less likely to move elsewhere.

31
Q

What are the 6 fair treatment of customers outcomes ?

A
  1. The fair treatment of customers is central to the corporate operate culture.
  2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and targeted accordingly.
  3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
  4. Where consumers receive advice, the advice is suitable and takes account of their circumstances.
  5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.
  6. Consumers do not face unreasonable post-sales barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
32
Q

What is a stakeholder?

A

Someone who has an interest in the way a company acts

33
Q

Give 9 examples of stakeholders

A
  1. Customers
  2. Shareholders
  3. Government
  4. The public
  5. Employees
  6. Suppliers/creditors
  7. Consumerists
  8. The law
  9. Regulators
34
Q

What are business ethics?

A

Standards and moral conducts that a company or business sets in its dealings within the organisation and outside the business and social environment as a whole.

35
Q

Not all commercial organisations believe they have a role beyond?

A

Their own business. This is shareholder focus.

36
Q

What is it called when companies take the view that it is in their long term interests to play a role in society beyond what is required by law?

A

Stakeholder perspective

37
Q

What are the main requirements of the CII code of ethics?

A

Members must:

  1. Comply with the code and all relevant laws and regulations
  2. Act with the highest ethical standards and integrity
  3. Act in the best interests of each client
  4. Provide a high standard of service
  5. Treat people fairly, regardless of age, sex, religion, race etc
38
Q

What is organic growth?

A

Where a company develops and expands by increasing its sales, revenue and output through its own current businesses, activities and effort, rather than through mergers or acquisitions.

39
Q

Mergers and acquisitions are also known as what type of growth?

A

Non organic

40
Q

Why would a company want to grow?

A
  • increasing consumer incomes
  • ready availability of finance
  • low interest rates
  • buoyant markets
  • opportunities for product development
  • export opportunities
  • economies of scale through lower operating costs and
  • opportunity of increased revenue, profits and shareholder value
41
Q

What are advantages of organic growth?

A
  • sound means to measure progress
  • more profitable and better investment return
  • focus on growing the business/commitment
  • good reputation and more economical
  • real sales efforts not distorted by m&a’s
  • less risky
42
Q

What are disadvantages of organic growth?

A
  • takes more time
  • heavy demand on management and resources
  • may not meet investors expectations
43
Q

What is the difference between a merger and an acquisition?

A

A merger only happens if two companies agree to join on a strategic basis whereas an acquisition is where a company gains control of another company purchasing a majority shareholding. The latter is not always seen as a welcome purchaser by the management or shareholders.

44
Q

What is the difference between horizontal and vertical integration in a merger/acquisition?

A

Horizontal is where the two companies are in the same market, vertical is where a company is attempting to control a stage closer to the source of the customer or manufacturer.

45
Q

Give 4 reasons why M&As happen, apart from growth.

A
  1. Removes duplication so improved efficiency and performance through synergy of processes or economies or of sale by lowering unit costs.
  2. Overcoming the cost of IT and resources
  3. Provides investment opportunities if an insurance company has spare capital.
  4. Spreads risk when companies join together, as diversification by being separate I.e not all book of business in one place. Likely lower solvency capital requirements p.
46
Q

What is the overall main argument for the reasons for an m&a?

A

Improve shareholder value

47
Q

What are the disadvantages to mergers and acquisitions?

A
  1. Reduced customer choice so less competition.
  2. Can impact staff negativity through lack of morale if the merge is managed poorly, and could also lead to redundancies.
  3. Clash of corporate cultures
  4. Takes away focus of core company goals as senior managers caught up in managing the merge.
  5. Reduced customer service while change is taking place
  6. M&a savings may not be realised, forecasts made by directors on how will improve shareholder value are often not achieved so savings do not actually happen and real value of change therefore not clearly evident.
48
Q

What is the key benefit of outsourcing?

A

Frees up the company to focus on profit generating activities.

49
Q

What are the advantages of outsourcing?

A
  1. Firms can use external specialists and only incur the costs for the work completed.
  2. Business is guaranteed a certain level of service.
  3. Business can budget for a pre agreed fixed cost for the agreed service.
  4. Outsourced companies are normally specialists in their area and bring new skills and working methods to a company.
  5. Many outsourcing contracts lead to new partnership opportunities as the businesses learn new ways of doing business processes.
  6. Business may develop new products and speed to their market.
  7. Business that do outsource have more time to focus on their core business areas.
50
Q

What are the disadvantages of outsourcing?

A
  1. Certain element of control is lost
  2. Poor service by the supplier can damage reputation of the main company even if it wasn’t their fault.
  3. Extreme care needs to be taken with customers confidential information, especially with overseas transfer of information.
  4. If company is too dependant on the outsourced supplier or their is lack of competition, may be higher costs.
  5. If outsourced provider gets into financial difficulty than the main company has to find alternative arrangements often at short notice.
  6. Poor communication between companies can result in lack of understanding of customer behaviour and satisfaction.
51
Q

If a firm outsources any part of its business, what can this not escape?

A

Requirements of the regulators

52
Q

How do the PRA and FCA each define material outsourcing?

A

PRA - services of such importance that weakness or failure of the services would cast serious doubt upon the firms continuing satirisation of the threshold conditions or compliance with the funda mental rules.

FCA - services of such importance that weakness of failure of the services would cast serious doubt upon the firms continuing satisfaction of the threshold conditions or compliance with the principles.

53
Q

What is an advantage of marketing insurance products to affinity groups?

A

Opportunity to reach a large group of potential policyholders through existing communication channels. This allows targeted products to be developed and sold with lower acquisition costs than in the open market.

54
Q

What is the difference between organic and non organic growth?

A

Organic growth is where the company develops and expands its sales and revenue through its existing book. Non organic growth comes about through mergers and acquisitions.

55
Q

Which type of risks are most suited to self insurance?

A

High frequency low severity

2023 M92 Business and Finance (10 decks)

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