Chapter 2: The Insurance Market Flashcards
Who make up the five main components of the insurance market?
- Buyers (insureds)
- Sellers (insurers)
- Intermediaries (brokers)
- Comparison websites (aggregators)
- Reinsurers
Who authorises companies to transact insurance in the UK?
Prudential Regulation Authority (PRA)
What are the five types of insurer by ownership?
Not including reinsurers
- Proprietary
- Mutual
- Captive
- Protected cell
- Lloyds
What is a proprietary insurer?
Owned by shareholders. Limited liability companies registered under the Companies Act 1985
What is a mutual insurer?
Owned by their policyholders who share in the profits by way of lower premiums. Limited by guarantee (policyholders liability for loss is limited to their premium)
What is a captive insurer?
An insurance company established by a company whose business is not insurance in order to primarily, often solely, manage the parent company’s risk
What is a protected cell company (PCC)?
A special type of captive insurer. Operates in two parts, with a core and an unlimited number of “cells” overseen by one board. The assets of each cell are ring fenced and they can operate as distinct insurance entities
What is a composite insurer?
Issues policies for several classes of business
What is a specialist insurer?
Tend to issue policies only for one class of business
What is a takaful?
An insurance company that embraces Islamic principles under Sharia law. Works on the principle that in any transaction risk, profit, and loss bearing should be shared between the participants. Means “guaranteeing each other”
What type of insurance company does not provide insurance to members of the general public?
A captive insurer
What is the Corporation of Lloyd’s?
Oversees and supports the wider Lloyd’s of London market. Ensures it operates efficiently and acts as a regulator
Who provides the underwriting capacity at Lloyd’s?
Private individuals (known as names) or corporate members
What is a Lloyd’s syndicate?
Groups of names or corporate members
What is a managing agent?
A company established to manage one or more Lloyd’s syndicates on the members behalf
What is a members agent?
A specialist financial advisor that advises potential members on investing in the Lloyd’s market and the syndicates. Also act as an intermediary between members and the syndicates they have invested in
How are most risks placed at Lloyd’s?
Using a Market Reform Contract (MRC), also known as a “slip”
Where does the term underwriting come from?
In the days of the Lloyd’s coffee shop a merchant would put up details of their next venture on a board. Anyone willing to cover the venture would write their name under the details - hence underwriting
The signature at the bottom of a slip is sometimes called scratch because of the sound made when someone wrote their name on the board
What happens when the slip is fully placed, either at Lloyd’s or in the wider London market?
(Bureau cases)
The information is submitted to an organisation called XChanging by the broker. XChanging Ins-Sure Services will capture details of the risk and manage the collection of premiums less brokerage from the broker and distribution to the insurers. They may also prepare formal policy documentation on the insurers behalf if requested
What is the IUA?
International Underwriting Association of London
What is the agreed definition of contract certainty?
Contract certainty is achieved by the complete and final agreement of all terms between the insured and insurers by the time they enter into the contract, with contract documentation issued promptly thereafter
What are the 3 elements of contract certainty?
- Details of the contract
- Final signed line
- Issuance of documentation
When should policy documentation be issued by?
30 calendar days for commercial customers, seven working days for retail customers
Who is responsible for contract certainty?
Underwriters and brokers
What is an agent?
An agent is one authorised by one party (called the principal) to bring that principal into a contractual relationship with a third party
Who regulates insurance brokers in the UK?
Financial Conduct Authority (FCA)
Under FCA rules what must all intermediaries be?
Either be an authorised person by the FCA or be an:
- Appointed representative (AR)
- Introducer appointed representative (IAR)
- Member of a designated professional body
- Ancillary insurance intermediary (AII)
What is an appointed representative (AR or IAR)?
Someone appointed by an authorised person to act on their behalf via an Appointed Representative Agreement
What is an AII?
Ancillary Insurance Intermediary - A person that distributes insurance as an ancillary purpose, eg a travel agent who offers travel insurance add-ons, but insurance is not their primary business
What is a TOBA?
Terms of Business Agreement. Sets out what a broker is authorised to do. Usually the broker will have a separate TOBA with both the client/insured and the insurer
What is a broker network?
An organisation authorised by the FCA that appoints those joining the network as an appointed representative
What is direct and indirect marketing?
Direct - The insurers products are promoted by it’s employees (salespeople) or via marketing to consumers
Indirect - The insurer pays intermediaries to promote it’s products on it’s behalf (eg brokers)
What is a delegated authority scheme?
Also called binders. An intermediary is authorised to act and issue cover on an insurer’s behalf, subject to agreed restrictions and limits
What is bancassurance?
An agreement between a bank and insurance company for the bank to sell the insurance companies products to the bank’s customers
What is reinsurance?
An insurer passes on part of an accepted risk by transferring it to another insurer (or specialist reinsurer). The first insurer pays a premium to the second and will be able to claim back part of the settlement in the event of a loss
What is the purpose of reinsurance?
To share risk. Smooths out the peaks and troughs of claims and protects the line of business
What is it called when a reinsurance company seeks to further share their risks with other reinsurers?
(Reinsurance on reinsurance essentially)
Retroceding or retrocession
An insurance company who purchases reinsurance cover is known as what?
Reinsured or cedant or ceding office
What is the role of an underwriter?
Assess the degree of risk being proposed, decide whether or not to accept the risk (and if so what percentage), determine the scope of cover to offer and calculate the premium
What is the role of claims personnel?
Deal with submitted claims, filter out fraudulent claims, set reserves for expected payments, settle claims
What is the role of a loss adjuster?
Investigate/process complex or large claims, decide if the loss is covered, negotiate or recommend settlement to the insurer
What is the difference between a loss adjustor and a loss assessor?
Loss adjustor acts on behalf of the insurer
Loss assessor acts on behalf of the insured
What is the role of a surveyer?
Assess risk or provide forensic analysis for claims investigations that requires more speciality than a loss adjustor
What is the role of an actuary?
Use mathematical modelling and statistical analysis to assess risks and probabilities. Also model and predict future claims to place reserves to ensure solvency
What is the role of a risk manager?
To identify, analyse, and control risks. May be hired by the insured or by the insurer as part of their services to the insured
What is the role of a compliance officer?
Must be appointed by the insurer to carry out a number of key roles as prescribed the FCA and PRA. Ensures compliance with regulation eg money laundering reporting
What is IPT?
Insurance Premium Tax levied by the government on some insurance premiums.
Standard rate of 12%
A higher rate of 20% for travel insurance, some vehicles, and domestic and electrical appliances
Most long-term insurances, reinsurance and insurance on ships, aircraft, and goods in transit (internationally) are exempt, as well as premiums for risks outside the UK (may be subject to local tax)
How often does the insurer report IPT to the government?
Insurers must account IPT due to HMRC quarterly
What is the ABI?
Association of British Insurers
What is the role of the ABI?
Set out codes of practice for insurers, work to prevent fraud, conduct market research and statistics, and act as a voice for the insurance industry to promote awareness
What is BIBA?
British Insurance Brokers Association
What is the MIB?
Motor Insurers’ Bureau
What two agreements with the government do the MIB function under?
Untraced Drivers’ Agreement - Claims where the 3rd party driver cannot be traced (requires vehicle to be ID’d for property claims but not injury)
Uninsured Drivers’ Agreement - Claims where the 3rd party has no motor insurance
How are brokers usually remunerated?
Commission (brokerage) based on the premium charged
If person A signs an agency agreement with Company B, what can person A do?
Enter into legal agreements on behalf of Company B and bring them into legal relationships with others
What are the two main examples of consolidation in the insurance broker industry?
- Consolidators - buying smaller brokers to create a larger one
- Broker networks - an FCA authorised firm who grants appointed representative status to those who join the network
What kind of buyers can be exempt from compulsory insurance requirements?
Public bodies
eg the police do not have to carry motor insurance
What is a mutual indemnity assocation?
Self managed pools of insurers owned by their policyholders, similar to mutual insurers. Primarily associated with marine insurance, also called protection and indemnity clubs
What are the 5 main types of buyers of insurance?
- Companies
- Private individuals
- Public bodies
- Charities + unincorporated assocations/clubs
- Partnerships
“A meeting of minds” is a key requirement for a contract to be valid. What is essential for fulfilling this requirement?
Contract certainty
What is an MGA and what is their main benefit?
A managing general agent - A specialist broker who has delegated authority from one or more insurers. Able to offer specialist expertise in niche fields
How is the MIB funded?
From a levy on all FCA authorised UK motor insurers
Who authorises UK insurance companies?
Prudential Regulation Authority
