Chapter 2 - The Insurance Market Pt1 Flashcards
What are the 5 main participants of the insurance market?
- Buyers (policyholders/insureds)
- Insurers (sellers)
- Intermediaries (Broker)
- Aggregators (Price comparison sites)
- Reinsurers
What are the 5 buyers in the insurance market?
- Private individuals
- Companies
- Partnerships (diff. to companies)
- Public Bodies (local authorities/schools)
- Charities/associations/clubs -
What is an unincorporated institution?
Charities, associations & clubs - theoretically each member is liable for the association’s actions. Often look for liability and property risk
What are the 5 types of Insurer defined by ownership?
- Proprietary Companies
- Mutual Companies
- Captive Companies
- Protected Cell Companies
- Lloyd’s
What is a proprietary company?
A company who is owned by shareholders and registered under the Companies Act 1985. They are limited liability companies (LLCs). This means a shareholder’s liability is limited to the nominal value of the shares they own and profits are shared between them. LLCs can be publicly quoted (plc) or privately owned (limited or ltd)
What is a mutual company?
Mutual companies are owned by the policyholders. Policyholders share the profits of the company by way of lower premiums. Theoretically this means they are liable for the losses made by the company but in reality they are limited by guarantee and a policyholder’s maximum liability is their premium.
What does it mean when a mutual company demutualises?
Trend of mutual companies to demutualise and become proprietary companies
What is a mutual indemnity association & in what space are they commonly used?
Self-managed pools of insurers who are owned by the policyholders. Active in marine insurance, where Protection and Indemnity Associations insure certain aspects of marine hull liability. The contribution ‘call’ is set initially and further calls are possible dependent on overall result
What is a captive insurer?
An insurance company established by its parent company or group that provides insurance cover primarily, if not solely, to that parent company. They do NOT offer services to the general public
What is captive insurance useful for? And in what 2 ways are they tax efficient?
They are tax efficient methods of risk transfer & are common for large MNCs & useful when a parent company cannot find an outside source to Insure the risks
1. Premiums payable to the captive may be deductible at source.
2. Captives are established in territories with favourable tax rates (Bermuda)
What are other incentives for captive insurers?
- Ability to benefit from a group’s risk control by paying premiums based on own experience.
- Avoiding the payment of extra premium designed to meet the direct Insurers overheads.
- Obtain lower overall risk premium by reinsuring
What is a Protected Cell Company (PCCs)?
A special type of Insurer which operates with a core and unlimited number of cells. It ‘ring-fences’ the assets of particular cells and allows them to operate as distinctive insurance entities. It is a single legal entity with a single board of directors which manage the affairs of the PCC as a whole
What are the benefits of PCCs?
- Favourable tax rates on profits
- Lower administration cost
- The minimum establishment?
How do PCCs work? (4 factors)
- An agreement is made between prospective cell owner & cell manager which is bound by the PCCs Memorandum & Articles of Association
- Entry is subject to approval by the PCC board who agrees parameters of how the business will operate
- PCCs file single tax returns but regulatory approval is required for the business plan of each cell
- Offer ‘captive’ facilities to clients who offer niche products or where conventional cover is unavailable or too expensive
Difference between composite & specialist Insurer?
Composite insurers accept all (mostly all) types of business whereas specialists only take one
What is takaful insurance?
Takaful is insurance that has roots in Islamic financial services & is based on the rulings of Sharia law. Works on the principle that any transaction, risk and profit should be shared between the participants. Need to be approved by Islamic scholars
Why is ‘traditional’ insurance contrary to the principles of Islam?
- Gharar (uncertainty)
- Maisir (Gambling)
- Riba (Interest)
What principles do Takaful Insurers work from?
- Mutuality and co-operation
- Shared responsibility
- Joint Indemnity
- Common interest
- Solidarity
In what 3 ways does the state act as an Insurer?
- Welfare benefits
- Pension provision
- Acts as a guarantor (re-insurer) for terrorism risk and flood.
What is Lloyd’s?
- Marketplace, not insurer. Has never provided insurance
- Society of members
What does the corporation of Lloyd’s do?
Provides the infrastructure of the market
When was the council of Lloyds created and what is it responsible for?
Created under the Lloyd’s Act 1982 and is responsible for the management and supervision of the market.
Who are the society of Lloyd’s and Lloyd’s managing agents regulated by?
FCA and PRA
Who are Lloyd’s brokers and Member’s agents regulated by?
Solely the FCA
What is a Lloyd’s syndicate?
Groups of private individuals or corporate investors who carry the risks (financially back). They are also referred to as underwriting members of Members.
What is a manging agent?
Provides day-to-day administration of a syndicate by employing U/W, claims adjusters and liaise with regulators.
What is Capital and members/names?
Capital is the term used for the investment into the market by the investors known as names or members. Can still be private individuals but mostly corporate. however both need to show can handle the risk of any claims.
What is a members’ agent?
Advises potential corporate and individual members Names on the adv & disadv of investing in Lloyd’s. Includes syndicate selection & performance and reserve requirements and compliance issues.
- Act as a communication channel between members and managing agents running the syndicates the members have invested in
