Chapter 2 - The Insurance Market Flashcards
Market structure
Buyers (policyholders, insureds). Insurers. Intermediaries. Aggregators (comparison websites). Reinsurers.
Types of buyers
Private individuals.
Companies.
Partnerships – don’t have separate legal existence, each partner being jointly liable.
Public bodies – local authorities and schools.
Charities, associations, and clubs – legal terms are unincorporated associations and have special requirements as each member is liable.
Types of insurers
Proprietary companies. Mutual companies. Captive companies. Protected cell companies. Lloyd’s.
Proprietary companies
Are owned by shareholders.
Private limited companies
Are owned by a few or one shareholder(s). Shares aren’t available to the general public. Have Ltd at the end of their name.
Mutual companies
Are owned by policyholders who share in profits by way of lower premiums.
Mutual indemnity companies
Are self-managed pools of insurers owned by policyholders.
Primarily active in marine insurance.
Mutual companies
Are owned by policyholders who share in profits by way of lower premiums.
Mutual indemnity companies – are self-managed pools of insurers owned by policyholders.
Primarily active in marine insurance.
Captive insurers
Are established by a parent company or group specifically to provide cover for them.
More tax efficient as it can be deductible at source.
Lower premiums by using better risk control techniques, no extra premium to meet insurers overhead, risks can be placed in reinsurance due to flexible products and lower overheads.
Protected cell companies
Is a type of captive insurer, is a single legal entity with a core linked to several cells.
They ring fence the assets so cells can act as separate entities.
They are created in territories with favourable tax rates and can cover niche products at low comparable premiums.
Takaful insurance
From Islamic financial industry and based around Sharia law as traditional policies are contrary to them.
Gharar (uncertainty) – sales are forbidden unless risk is of normal or reasonable proportion.
Maisir (gambling) – traditional policies are seen as gambling as some policyholders receive pay-outs and some don’t.
Riba (interest) – forbidden to make money from money
It embraces Islamic principles of shared responsibility, joint indemnity, mutuality, and cooperation.
The state
Make certain insurances compulsory to ensure adequate insurance coverage.
Acts as an insurer in welfare benefits, pension provisions and as a guarantor for terrorism and flood risks.
What is Lloyd’s?
An entity that provides the infrastructure to place risks in its own market, mainly specialist, large scale insurance and reinsurance, and acts as a partial regulator.
Lloyds syndicates
Individuals that carry the risks. They outsource to managing agents to employ underwriters, claims adjusters and liaison with Lloyd’s. They are dual regulated by PRA and FCA
Members’ agents are a form of specialist financial adviser. They advise individual members on investing in Lloyd’s market, syndicate selection, and compliance issues.
Transacting insurance at Lloyd’s
Each syndicate has a box on the trading floor. A broker will obtain a quote from an underwriter, a leader in that class of business. They will indicate percentage share and accept terms on a Market Reform Contract (slip). When the slip is filled by other underwriters it is submitted to Xchanging, who manage central risk data capture and money movement systems for the entire London Market. Lloyd’s has only recently encouraged the market to place business electronically to improve efficiency, a lot still place business face-to-face.
Lloyd’s brokers
Brokers operating in the London Market are known as Lloyd’s brokers, it is not a requirement, but has brand benefit particularly overseas.
To become a Lloyd’s broker the firm must be fully regulated by their own regulator, and must satisfy requirements set by Lloyd’s about capability, understanding of the market and ability to transact business using central market systems.
Limited and unlimited liability
Unlimited liability is where the name guarantees their shares of losses up to the full extent of their own personal fortune.
Limited liability was introduced as part of the Reconstruction and Renewal period in the mid 90’s after a series of major losses which lead to situations of bankruptcy.
The London Market
Is a separate part of the UK insurance and reinsurance sector, is where sizeable, complex, or unusual risks are placed from all over the world.
Main providers are insurance and reinsurance companies who are members of the IUA, Lloyd’s syndicates, Lloyd’s service companies who are branch offices of syndicates in places like Singapore and Dubai, and protection and indemnity clubs who deal in marine.
Types of Intermediaries
Authorised persons – individual or firm authorised by the FCA to engage in regulated activities. Appointed representatives (AR) – individual or company appointed by authorised person under terms of an Appointed Representative Agreement. Introducer appointed representative (IAR) – scope of appointment is limited to introductions and distributing e.g. brochures and proposal forms. Lloyd’s brokers – intermediaries (sub-broker) might approach Lloyd’s broker (wholesale broker) to access the market.
Services provided by intermediaries
Independent intermediaries act on behalf of the client to negotiate terms and conditions, provide advice on policy wording and validity of claims, and decide the best market to place the risk.
Intermediaries on behalf of the insurer may collect the premium, settle claims, and commit the insurer to cover the risk depending on the Terms of Business Agreement (TOBA).
Marketing and distribution
The marketing mix consists of product, price, promotion, and place.
Distribution is very important as choice of distributing channel will affect price and may affect the shape or presentation of the product.
Direct marketing channels
Employees of the insurer sell products by direct mailing techniques and websites.
Benefits – more competitive premium by not paying commission to intermediaries, cover can be purchased quicker and more easily, insurer can control customer experience.
Drawbacks – higher premiums due to advertising and promotion cost, only one company’s product is available, no independent advice.
Indirect marketing channels
Intermediaries paid by the insurer to promote products on their behalf.
Intermediaries have an incentive to sell as they earn commission. Independent Intermediaries will provide advice.
Delegated Authority Schemes gives the intermediary flexibility and the ability to grant immediate cover and a profit-sharing provision. The policy wording would be specifically negotiated to fit a certain category of client.
Bancassurance
An arrangement where insurance products are sold to the banks’ customers.
Benefits are access to each party’s scale efficiencies, improved value chain efficiency, access to previously unavailable resources and market development.
Aggregators
price comparison websites
They use web-based extraction tools to collect and analyse information from different data sources and rely upon cooperation with brokers and insurers to access their pricing for different risks.
Problems are that limiting the number of questions may affect the accuracy of quotes and it can be difficult to compare terms offered by various providers.
Reinsurance
Main difference between reinsurance and co-insurance is that the insured need not know that it happened. Its purpose is to:
Smooth peaks and troughs – spreads cost of large losses over a period of time.
Protect the portfolio – can arrange reinsurance on a single known risk (facultative reinsurance). Can arrange to place a range of risks that fall within agreed criteria (treaties). Specialist treaties pay out when the overall loss ratio exceeds a certain figure.
Provide improved customer service – can accept more than their net capacity, can place risks easier.
Provide support for insurers entering new areas of business – they register intention with PRA and will usually need support of reinsurers.
Types of reinsurer
Main types are insurance companies acting as reinsurers, Lloyd’s syndicates, and specialist reinsurance companies.
They provide reinsurance for insurance companies, Lloyd’s syndicates, and other reinsurers.
Retroceding is when reinsurers transfer risk to other reinsurers.
Underwriters
They manage the pool as effectively and profitably as possible.
The term comes from, in the days of the Lloyd’s coffee shop, merchants would put details on the board of their next adventure seeking support. Anyone prepared to invest would write their name under the details, hence underwriter.
Claims personnel
Deal quickly and fairly.
Distinguish between real and fraudulent claims.
Determine the realistic cost of a claim prior to payment (reserving).
Determine whether others need to be involved.
Loss adjusters
They are experts in processing claims and work with larger claims or complex policy wordings for the insurer. They:
• Investigate the circumstances surrounding a claim
• Determine what extent the policy covers the loss
• Facilitate emergency measures
• Negotiate amounts claimed
• Make a recommendation for settlement to the insurer
Loss assessors
Experts in dealing with claims for the insured.
They prepare and negotiate claims on their behalf.
Surveyors and those providing forensic services
A surveyor’s role is to:
• Give advice on immediate action necessary following a loss
• Recommend if any underwriting action is necessary
• Establish whether requirements made by the insurer have been complied with
Insurers employ specialists for different investigative areas to determine proximate cause of a loss
Actuaries
Are professionally qualified persons who apply probability and statistical theory to problems of insurance, investment, risk management, and demography.
Play a key role in pricing and reserving methodology.
Risk managers
Systematic identification, analysis and economical elimination or control of risks that threaten the business.
Provide guidance on best practice.
Transfer identified risks by contract or insurance.
Compliance officers
They ensure the firm abides by rules and regulations set by the regulator and must report to the governing body of the authorised company. They:
• Communicate company policy to staff and arrange appropriate training
• Complete regular reports for the FCA
• Maintain the company’s compliance manual
• Act as the money laundering reporting officer
Internal auditors
Monitor and evaluate how well risks are being managed
Provide assessment of the effectiveness and efficiency of the company’s internal control structure.
Advise management on how to improve systems and processes.
Association of British Insurers (ABI)
The largest of the insurance market associations. Formed in 1985 and has 250 member companies of insurers operating in the UK
Objectives are to:
• Be the voice of the UK insurance industry
• Advocate high standards of customer service
• Represent the UK insurance industry to Government, regulators, and policy makers
International Underwriting Association of London (IUA)
Worlds largest representative organisation for international and wholesale insurance and reinsurance companies. Formed in 1998 after the merger of the ILU and LIRMA
Aims to:
• Improve London’s process efficiency and its business attractiveness
• Influence public policy and compliance
• Promote expertise and innovation in underwriting and claims
British Insurance Brokers Association (BIBA)
The major non-statutory trade association for insurance intermediaries. Membership of 2,000 regulated firms.
Key roles include:
• Promote members’ views on proposed legislations
• Liaising with outside bodies
• Provides training
• Nominating members to sit on joint committees
London Market Regional Committee (LMRC)
Formed by BIBA in June 2009 to replace the LMBC. It was integrated into BIBA’s existing regional committee structure.
They intend to:
• Represent the sector
• Work with other London market bodies to avoid duplicate work
London and International Insurance Brokers’ Association (LIIBA)
An independent trade body who represents insurance and reinsurance brokers. Took over from the LMBC in January 2009.
Their mission is to ensure that ‘London remains where the world wants to do business by continuing the transformation of market processes and maintaining the highest professional standards’.
Key priorities are to:
• Represent members’ interests
• Strengthen relationships with Lloyd’s, LMA and IUA
• Support members with legislative and technical changes
Lloyd’s Market Association (LMA)
Provides representation, information, and technical services to underwriting businesses in the Lloyd’s market.
Key partners are LIIBA, LMRC and IUA.
Their purpose is to identify and resolve issues and work to influence the course of future market initiatives.
Managing General Agents’ Association (MGAA)
Formed in 2012 to give the insurance industry better understanding of what an MGA is and what they contribute to the industry.
Key roles:
• Represents members’ interests
• Sets best practice guidelines
• Seek to improve sector professionalism, stability, and competitiveness
Chartered Insurance Institute (CII)
Has been at the forefront of insurance education and professionalism for over 100 years.
Their activities include:
• Setting high standards in its code of conduct
• Promoting professional growth
• Training in technical subjects
• Offers a range of qualifications
• Library and information services
Chartered Institute of Loss Adjusters (CILA)
The leading authority on insurance claims issues. Was set up under a Royal Charter and is recognised worldwide.
Code of conduct states members must be impartial at all times.
Institute and Faculty of Actuaries (IFoA)
UK’s only chartered body dedicated to actuaries.
Its’s functions are to:
• Provide education
• Promote the benefits of actuarial skills
• Encourage the development, sharing of knowledge and research in actuarial science
Institute of Risk Management (IRM)
Founded in 1986 to meet growing demand for a diploma course in risk management.
They deliver general and specialist training, events, a risk management magazine, and a variety of other work around the world.
Association of Insurance and Risk Management in Industry and Commerce (Airmic)
Formed in 1963 and promotes the interests of corporate insurance buyers.
Members mainly come from multinational businesses and include secretaries, finance directors, internal audit, and risk managers.
They are support to members by:
• Training and research
• Sharing information
• Encouraging best practice
• Representing members
Insurtech UK (IUK)
Formed as a trade body in 2019 and aims to position the UK as a leading force in technological innovation in insurance.
It is growing quickly with already over 100 members.
Motor Insurers’ Bureau (MIB)
Established in 1946 to enter in agreements with the Government to compensate the victims negligent uninsured or untraced motorists.
Their mission is to:
• Reduce the impact of uninsured driving in the UK
• Compensate victims fairly and promptly
• Provide first class asset management and specialist claims services
Composite companies
Accept several types of business.
Specialist insurers
Issue policies for only one class of business.
Contract certainty
Achieved by the complete and final agreement of all terms by the time the insured and insurers enter into the contract, with documentation
