Chapter 7: General Insurance Markets

Question 1

Reinsurance for insurance providers can be obtained from (5):

Answer 1

• the London Market
• Lloyd’s
• specialist reinsurance companies
• direct insurers who also write reinsurance
• capital markets

Question 2

Direct insurers

Answer 2

provide insurance for individuals and companies

Question 3

3 Groups of direct insurers

Answer 3

• Composite insurance companies
• Insurance companies that specialise in writing business in a selection of classes of general insurance
• Insurance companies that write all classes of general insurance

Question 4

Composite insurance companies

Answer 4

Insurance companies that write both general insurance and life insurance

Question 5

Corporate structure of general insurers

Answer 5

Most insurance companies are proprietary companies limited by shares.
However, some mutual insurance companies do exist; they are more common in some markets than in others.

Question 6

Reinsurance companies

Answer 6

Provide cover for insurance providers.

Question 7

London Market

Answer 7

That part of the insurance market in which
insurance and reinsurance business is carried out
on a face-to-face basis
in the City of London.

Question 8

Focus of the London Market

Answer 8

Commercial insurance:

insurance & reinsurance cover to COMPANIES.

Question 9

3 specialisations of the London Market

Answer 9

• larger direct insurance risks (both property and liability) that are beyond the capability of other direct insurance companies.
• international risks
• reinsurance

Question 10

8 Participants in the London Market

Answer 10

• Lloyd’s syndicates
• captives
• P&I Clubs
• Pools
• companies owned by a group of insurance or reinsurance companies
• UK subsidiaries or branches of overseas companies or reinsurance companies
• reinsurance departments of UK composite companies, or reinsurance subsidiaries of these companies
• small professional reinsurance companies set up by (or acquired by) large broking firms for the specific purpose of transacting London Market business

Question 11

Lloyd’s of London

Answer 11

A unique insurance institution.
It began in Edward Lloyd’s coffee shop in 1860s, before being incorporated by the Lloyd’s Act of 1871.

It is NOT an insurance company -
it is a marketplace made up of members
who provide capital
and accept liability for risks that are underwritten
in return for a share of profits earned on those risks.

Question 12

Corporate Name

Answer 12

A limited-liability company
whose only business is to provide capital
to Lloyd’s.

Question 13

“Limited liability”

Answer 13

means that the corporate member cannot lose any more than the capital it has provided.

Question 14

Syndicates

Answer 14

Groups of Lloyd’s members who collectively coinsure risks.

Individual syndicates often specialise in particular types of insurance.

Question 15

Captive insurance company

Answer 15

An insurer that is
… wholly owned by an industrial or commercial enterprise
… and set up with the primary purpose of insuring the parent or associated group companies
… and retaining premiums and risk within the enterprise.

Question 16

Authorised captive

Answer 16

“open market captives”

A captive that is free to provide insurance to risks other than those of its parent - providing this does not change its main purpose.

They often provide insurance to the parent company’s customers.

Question 17

5 Usual reasons for setting up captives

Answer 17

in order to:

• FILL GAPS in insurance cover that may not be available from the traditional insurance market
• MANAGE the total INSURANCE SPEND of large companies or groups of companies
• enable the enterprise to buy cover directly from the reinsurance market rather than direct insurers
• FOCUS effort on RISK MANAGEMENT
• to gain TAX and other LEGISLATIVE or REGULATORY ADVANTAGES

Question 18

Protection and Indemnity (P&I) Clubs

Answer 18

Mutual associations of ship owner
that were originally formed to cover certain types of marine risks (marine liability)
that could not be covered (at an acceptable price) under a commercial marine policy.

P&I Clubs still provide around 90% of the world’s coverage against marine liability claims.

Question 19

Pool

Answer 19

An arrangement under which the parties agree to share premiums and losses for specific insurance classes or types of cover in agreed proportions.

Question 20

Critical difference between insuring with a conventional insurer and insuring with a pool

Answer 20

The insured’s liability to an insurer is limited to the premium charged, whereas the liability to the pool will be related to the insured’s share of the total claims and other costs that arise.

Question 21

World insurance markets differ in 4 ways:

Answer 21

• the concentration of market shares of major insurers
• whether business is written directly with policyholders or through brokers
• the importance of mutual companies
• whether or not composite companies are permitted.

Question 22

Securitisation

Answer 22

A mechanism whereby insurers borrow money from capital markets and repay the money subject to the experience on the insurance book being satisfactory.

Question 23

Catastrophe bonds

Answer 23

A bond where the repayment of capital (and possibly interest) is contingent on a specified event not happening.

Question 24

Sidecar

Answer 24

A financial structure that is created to allow investors to take on the risk of a group of insurance policies.

A sidecar acts like a reinsurance company
… but it reinsures only one cedant
… and the investors need to place sufficient funds in the entity to ensure that it can meet any claims that arise.

Question 25

Weather derivatives

Answer 25

it is a a derivative contract based on the weather where standard derivative techniques such as put and call options and swaps are used

Question 26

Advantages of using a derivative approach as opposed to traditional insurance.

Answer 26

• there is no need for an insurable interest because the parties have no control over the weather
• there is no need to understand the underlying business for which cover is being purchased
• there is no need to prove the extent of the loss to a claims handler because the claim payout is based purely on the weather index.

Question 27

Committed / contingent capital

Answer 27

Based on a contractual commitment
to provide capital to an insurer
after a specific adverse event occurs that causes financial distress.
The insurer purchases an option to issue its securities at a predetermined price in the case that the defined situation occurs
on the understanding that the price would be much higher after such an event.

Question 28

3 Channels for obtaining insurance business

Answer 28

• intermediaries such as brokers, banks, building societies, shops, etc
• staff directly employed by the insurance provider
• internet, telesales, post and off-the-page advertising

Question 29

Brokers

Answer 29

Brokers act as intermediaries between the seller and buyer of a particular insurance or reinsurance contract without being tied to either party.
They are likely to be paid by commission (brokerage) from the insurance.

Question 30

Binding authorities (binders)

Answer 30

Contracts that set out
… the scope of the delegated authority
… and thus allowing the broker to enter into contracts of insurance and to issue insurance
… and to issue insurance documents on behalf of an insurance company (or on behalf of Lloyd’s managing agents in the case of Lloyd’s)

Question 31

Line slip

Answer 31

A facility under which underwriters delegate authority to accept a predetermined share of certain co-insured risks on their behalf.

The authority may be exercised by the leading underwriter on behalf of the following underwriters..

Question 32

Tied agents

Answer 32

Organisations such as banks and building societies are sometimes tied to a particular insurer and sell that insurer’s products alongside their own.

Question 33

London Market business:

The slip system in the subscription market

Answer 33

1. Insured approaches a London Market broker
2. Broker proposes a slip with the main features of the risk
3. Broker shows the slip to one or more quoting underwriters who quote a premium
4. The cedant will then select a lead underwriter and a «firm order» price for the broker with which to approach the market.
5. The lead underwriter accepts a share of the risk by stamping and signing the slip.
6. The broker then approaches other underwriters to accept the risk on the same terms. All underwriters act as coinsurers.
7. Broker continues until he or she has finished placing the risk.
8. If the written lines exceed 100% then they are reduced.
9. If it is not possible to find capacity to place 100% of the risk, an additional shortfall cover may need to be placed at different terms