Chapter 7 - Underwriting Flashcards
What is meant by a Subscription Market?
More than one insurer can participate in any single risk, rather than just one.
Does not mean a single insurer cannot take 100% of any one risk.
What are some reasons why an insurer would take less than 100% of any risk?
- Capacity
- Appetite
- Aggregation
- Broker influence
- Insured’s influence (often a preference for lead insurer)
What does ‘aggregation’ mean?
Accepting too many risks in one location can lead to far higher losses if a large single event occurs (e.g. earthquake).
Insurers protect themselves by accepting smaller shares of each risk as well as plotting the location for each risk.
What 2 categories of insurers are there in a ‘subscription market’?
- Leaders
- Followers
Can insurers outside of London participate in a subscription market?
Yes. Brokers may choose insurers from outside the London Market.
Why might international markets be used in a subscription market?
Lack of capacity in London:
- some risks may be too large for London alone.
Loyalty of brokers or insured:
- broker/insured may wish to support their home market as well as the London Market.
- means part of the risk will be placed in another market (e.g. Scandinavia), and part in the London Market.
What does ‘electronic placing’ provide the opportunity for?
Does not intend to remove the need for face-to-face negotiation of risks.
But provides the opportunity to remove the face-to-face element when it adds no real value to the transaction.
This increases efficiency.
Name 2 electronic placing platforms used in the market?
- Platform Placing Limited (PPL)
- Whitespace
What is the Law of Agency?
Agent is the broker.
Principal is the insured.
Insurer is the third party.
The agent acts on the behalf of the principal, and brings the principal and third party into a contractual relationship.
In what market does a broker have to be used?
The Lloyd’s Market.
In other areas of London this may not be the case.
What is an important factor for brokers when considering markets?
Rating Agencies ratings of insurers.
Brokers can utilise these publicly available ratings created by rating agencies.
What 2 factors do rating agencies rate insurers on?
- the financial position of the insurer.
- the management & operation of the business as a whole.
Who compares insurers to their peer groups?
Rating Agencies do this.
They compare insurers of a similar size and structure.
When might a drop in an insurer’s rating NOT cause business issues for the insurer?
When all insurer’s have their ratings reduced, this effectively neutralises the decrease.
When might a drop in an insurer’s rating cause a business issue for the insurer?
If ONE insurer has their rating reduced & all of its peers remain at the same level this can cause a problem for the insurer.
When might an insurer face a claim of negligence from their client?
If an insurer is unable/does not have enough funds to pay future claims.
(brokers choose insurers with high ratings to avoid this).
What is important for a ‘Leader’ to do?
- set good terms & conditions for the client.
- be credible to other insurers so a following market will support the leader if they don’t take 100% of risk.
Can a broker approach a number of possible leaders?
Yes. The broker then reviews the best quotation with the client.
How is the Market Reform Contract (MRC) used?
The brokers present the client’s risk on the MRC and present it to potential leaders to allow them to consider the risk.
Describe the ‘Market Cycle’?
- There are very few insurers in a class of business.
- Insurers increase premium with no loss of business.
- The insurance market is making a profit.
- New insurers come into the market.
- New insurers reduce their premiums to try capture market share.
- A large catastrophe loss occurs which causes large
losses for many insurers that don’t have large reserves
as they’ve not been charging enough premium. - Some insurers leave the market altogether, and some leave that particular class of business.
- The remaining insurers can raise premiums to more
reasonable levels as there is less competition for the
business.