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.
