Chapter 8: General insurance markets Flashcards
1
Q
Insurance providers can obtain reinsurance from:
A
- the London Market
- Lloyd’s
- specialist reinsurance companies
- direct insurers who also write reinsurance
- capital markets (in some cases)
2
Q
Direct insurance companies
A
Provide insurance for individuals and companies
3
Q
Direct insurers can be grouped into:
A
- composite insurance companies
- insurance companies that specialise in writing business in a selection of classes of general insurance (or even just a single class)
- insurance companies that write all classes of general insurance
4
Q
Composite insurance companies
A
Insurance companies that write both general insurance and life insurance
5
Q
Corporate structure of general insurers
A
Most are proprietary companies limited by shares.
Some mutual insurance companies do exist and are more common in some markets than in others
6
Q
London Market
A
That part of the insurance market in which insurance and reinsurance business is carried out on a faceto-face basis in the City of London. These companies tend to be located physically close to one another.
7
Q
Focus of the London Market
A
Concentrates on mainly providing insurance and reinsurance cover to companies (i.e. commercial insurance)
8
Q
London Market specialises in:
A
- larger direct insurance risks (both property and liabilit) that are beyond the capability of other direct insurance companies (e.g. energy and aerospace)
- international risks
- reinsurance
9
Q
Participants in the London Market
A
- Lloyd’s syndicates
- UK subsidiaries or branches of overseas insurance or reinsurance companies
- the reinsurance departments of UK composite companies, or reinsurance subsidiaries of these companies
- small professional reinsurance companies set up by (or aquired by) large broking firms for the specific purpose of transacting London Market business
- captives
- P&I Clubs
- companies owned by a group of insurance or reinsurance companies
- Pools
10
Q
Lloyd’s of London
A
A unique insurance institution.
Began in Edward Lloyd’s coffe shop in late 1860s before being incorporated by the Lloyd’s Act of 1871.
NOT an insurance company - it is a market place made up of members who provide capital and accept liability for risks that are underwritten in return for their share of any profits that are earned on those risks.
11
Q
Names (Lloyd’s)
A
The members of Lloyd’s who accept the liability for (and profits from) the risks underwritten in their name. Names may be individuals or corporate entities.
12
Q
Corporate Names
A
A limited-liability company whose only business is to provide capital to Lloyd’s.
13
Q
Limited liability
A
Means that the corporate member cannot lose any more than the capital it has provided.
14
Q
Syndicates (Llyod’s)
A
A group of Lloyd’s Names who collectively coinsure risks. The syndicates often specialise in particular types of insurance.
15
Q
Advantage that operating a Lloyd’s syndicate has
A
Access to Lloyd’s global licences that enable Lloyd’s syndicates to write business almost anywhere in the world.
Enables syndicates to strat writing business in new territories more easily than most insurance companies.
16
Q
Self-insurance
A
Retention of risk by an individual/organisation, as distinct from obtaining insurance cover.
17
Q
Captives
A
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.
May also accept risk on a commercial basis.
18
Q
Authorised captive
A
AKA open market captives.
A captive that is free to provide insurance to risks other than those of its parent, providing this doesn’t change its main purpose.
Often provide insurance to parent company’s clients.
19
Q
Conditions under which a company may consider setting up a captive
A
- to fill gaps in insurance cover that may not be available from the traditional insurance market
- to manage the total insurance spend of large companies or groups of companies
- to enable the enterprise to buy cover directly from the reinsurance market rather than direct insurers
- to focus effort on risk management
- to gain tax and other legislative or regulatory advantages - usually set up in location where it’s possible to gain such an advantage
20
Q
Protection and Indemnity (P&I) Clubs
A
Mutual associations of ship owners that were originally formed to cover certain types of marine risks (mainly 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.
21
Q
Pools
A
An arrangement under whichthe parties agree to share premiums and losses for specific insurance classes or types of cover in agreed proportions.
22
Q
Difference between insuring with a conventional insurer and insuring with a pool
A
The insured’s liability to an insurer is limited to the premium charged, whereas liability to a pool will be related to the insured’s share of the total claims and other costs that arise.
23
Q
Insurance (World) markets tend to differ in:
A
- the concentration of market shares of major insurers
- whether insurance is written directly with policyholders or through brokers
- the importance of mutual companies
- whether or not composite companies are allowed.
24
Q
Bermuda
A
A market that has become a major international centre for insurance and reinsurance, despite not being a large economy in its own right.
Number of large insurance companies and groups are domiciled there.
One of the most important domicile for captives.
25
Non-traditional products
- insurance-linked securities incl. catastrophe bonds
- sidecars
- weather derivatives
- committed (or contingent) capital
26
Securitisation
A mechanism whereby insurers borrow money from capital markets and repay the money subect to the experience on the insurance book being satisfactory.
27
Catastrophe bond
A bond where the repayment of capital (and possibly of interest) is contingent on a specified event not happening.
28
Possible advantages of using securitisation products to cede insurance risk
- insurance risk may be uncorrelated with other risks that capital markets are exposed to, and so capital markets are prepared to take on this risk (at a lower costs than insurers and reinsurers)
- no reinsurance default risk (funds are received up-front)
- may be cheaper than conventional reinsurance
- provide cover that reinsurers may not be willing to, or have the capacity to, accepts
- more effective or tailored provision of risk management
- additional source of capital
- possible tax advantages
29
Sidecars
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 it can meet any claims that arise.
30
Weather derivatives
Where standard derivative techniques, such as put and call options and swaps are used to make a derivative contract based on the weather.
31
Advantages of using a weather derivative approach as opposed to traditional insurance
- 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.
32
Committed/contingent capital
Based on a contractual commitment to privide 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.
The option will allow the insurer to sell its securities after the adverse event at a higher price than their market price.
33
Ways in which insurance business is obtained
- through intermediaries such as brokers, banks, building societies, shops, etc.
- through staff directly employed by the insurance provider
- through internet, telesales, post and off-the-page advertising
34
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 paid a commission (brokerage) from the insurer, but when placing business legally (under the law of agency) they are the agent of the insured.
35
Binding authorities (binders)
The contracts that set out the scope of deligated authority and thus allowing the broker to enter into contracts of insurance and to issue insurance documents on behalf of an insurance company.
36
Line slip
Facility under which underwriters delegate authority to accept a predetermined share of certain coinsured risks on their behalf. The authority may be exercised by the leading underwriter on behalf of the following underwriters; or it may be extended to the broker/some other agent authorised to act for all the underwriters.
37
Tied agents
Organisations such as banks and building societies are sometimes tied to a particular insurer and sell that insurer's products alongside their own. They are usually paid by commission for this service. They may also act asbrokers or gave an insurance-broking subsidiary.
Sale of a particular line of business alongside a tied agent is exclusive to a particular insurer.
38
London Market buisness
| The slip system in the subscription market
1. The insured approaches a London Market broker.
2. The broker prepares a slip that shows, in standard format, the main features of the risk to be insured.
3. Broker shows slip to one or more quoting underwriters who quote a premium (on the basis of the slip and further information).
4. The cedant (with the broker's advice) will then select a lead underwriter and a "firm order" price for the broker with which to approach the market. The firm order price may be below the quoted prices.
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. The following underwriters indicate the share they're willing to take by stanmping and signing the slip under the lead underwriter. All the underwriters act as coinsurers.
7. The broker continues until they've finished placing the risk.
8. If the written lines exceed 100% then they are reduced so that the signed lines total 100%.
9. If it isn't possible to find capacity to reach 100% of the risk, an additional shortfall cover may need to be placed at different terms (a higher premium rate or renegotiated cover/terms)
39
Regulatory restrictions on underwriting
- restrictions on type/amount of business a general insurance company is authorised to write
- restrictions on contract terms and premium rates that can be charged
- restrictions on information that may be used in underwriting and premium rating
- requirements to file/publish premium rates before they can be used
- restrictions on countries a general insurance company can write business in
- mandatory restrictions on cover, e.g. no deductible on employers' liability
- prohibiting illegal products from being sold
- requirements to offer certain cover
40
Reason for restrictions on the type/amount of business a general insurance company is authorised to write
This ensures companies have appropriate expertise/sufficient capital to write the business classes
41
Reason for limits on contract terms and premium rates that can be charged
This ensures premium rates are sufficient to meet future claims/ensures policyholders aren't overcharged
42
Reason for restrictions on information that may be used in underwriting and premium rating
This is for ethical/anti-discrimination reasons
43
Reason for requirements to file/publish premium rates before they can be used
This prevents anti-competitive practices and therefore protects policyholders
44
Reason for restrictions on countries a general insurance company can write business in
This prevents exposure to volatile risks and unfamiliar legal systems and regulation
45
Reasons for mandatory restrictions on cover (e.g. no deductible on employers’ liability)
This protects policyholders and claimants and ensures consistency of cover
46
Reason for requirements to offer certain cover (Motor 3rd party)
This promotes social responsibility and helps the economy as a whole
47
Regulatory capital requirements
- the requirement to deposit assets to back claim reserves
- the requirement to hold a claims equalisation reserve
- the requirement to maintain a minimum level of solvency
- the use of prescribed bases to calculate premiums, asset values and liabilities to demonstrate solvency
- the requirement for risk-based capital calculations
48
Reason for the requirement to deposit assets to back claim reserves
This ensures the company has sufficient funds to pay claims
49
Reason for the requirement to maintain a minimum level of solvency
This ensures that if claims are significantly worse than expected the company will still remain solvent
50
Reason for the use of prescribed bases to calculate premiums, asset values and liabilities to demonstrate solvency
This ensures accurate estimates of liabilities and uncertainty
51
Reason for the requirement for risk-based capital calculations
This ensures accurate estimates of liabilities and uncertainty
52
Regulatory investment requirements
- restrictions on the type or amount of certain assets allowed to demonstrate solvency (admissable assets)
- prevention from holding certain assets
- requirement to hold prescribed assets
- restriction on the currency, domicile and duration of assets allowed to demonstrate solvency (or mismatching reserves)
- restrictions on the amount of investment in any one group/company
- custodianship of assets
53
Admissable assets
The assets that can be considered for the purposes of demonstrating statutory solvency
54
Custodian
A party that holds the assets for the insurer and is responsible for safekeeping of those assets and all administrative matters relating to those assets
55
Reason for restrictions on the type or amount of certain assets allowed to demonstrate solvency
This is to prevent high-risk assets from backing liabilities, or to encourage diversification
56
Reason for restrictions on the currency, domicile and duration of assets for demonstrating solvency
This ensures assets match liabilities by term and currency so that short term changes in interest rates and exchange rates will not have an impact on solvency margins
57
Reasons for requirements to hold prescribed assets
This may be to promote investment in certain assets, e.g. government bonds/local companies
58
Regulatory reporting requirements
- disclosure/transparency of reporting requirements, e.g. requirement to provide detailed reports and accounts at prescribed intervals
- requirement for a Statement of Actuarial Opinion to be produced by approved actuary
- restrictions on type of reinsurance that may be used
- restrictions on the discounting of liabilities and discount rates that can be used
- requirements for general insurance companies to be audited
59
Reason for requirements on disclosure/transparency of reporting requirements
This helps regulators, investors, capital providers and policyholders assess the soundness of the company
60
Reason for requirement of a Statement of Actuarial Opinion
This promotes confidence in the level of reserves and helps prevent the failure of the general insurance company
61
Reason for restrictions on the type of reinsurance that may be used
This prevents exposure to risky reinsurers or reinsurance products
62
Reason for restrictions on the discounting of liabilities and discount rates that can be used
This ensures consistency and that reserves are sufficient
63
Reason for requirements for general insurance companies to be audited
This gives regulators and investors confidence in the company and prevents fraud
64
Regulatory authorisation requirements
- initial authorisation of new insurance companies
- licensing agents to sell insurance and requirements on the method of sale
- requirements for management to be fit and proper, e.g. restrictions preventing certain individuals from holding key roles in companies
65
Reason for initial authorisation requirement of new insurance companies
This ensures companies have appropriate expertise/sufficient capital to write the business classes
66
Reason for licencing agents to sell insurance and requirements on the method of sale
This ensures that the company has the necessary expertise and that the insured is well informed
67
Reason for requirements for management to be fit and proper
This promotes confidence in the industry and prevents fraud
68
Other regulatory requirements to protect policyholders
- requirement to purchase reinsurance
- legislation to protect policyholders should general insurance companies fail
- the requirement to pay levies to consumer protection bodies
- A cooling off period, e.g. fourteen day cancellation rules on policies issued
- advertising restrictions
- regulations with respect to treating customers fairly
- restrictions with respect to anti-competitive behaviour
69
Reason for legislation to protect policyholders should general insurance companies fail
This protects policyholders and maintains faith in the insurance market
70
Reason for the requirement to pay levies to consumer protection bodies
This protects policyholders and maintains faith in the insurance market
71
Reason for a cooling off period
This protects policyholders and promotes confidence in the industry
72
Reasons for regulations with respect to treating customers fairly
This protects policyholders and promotes confidence in the industry
73
Reason for restrictions with respect to anti-competitive behaviour
This prevents the formation of cartels, concentrations of risk and protects policyholders
74
Disadvantages of regulatory proposals
Surround the following general issues:
- cost in terms of resource and finance to comply with and supervise the rules
- loss of business opportunities that arise from any restraint on the free market
- inability to maximise investment returns when there are controls on the investment decision
- extent or amount of administrative and regulatory hurdles that make it difficult for new businesses or competitors to enter the market
- difficulties and potential inaccuracies in complying with complex (risk-based) liability and capital calculations
- increased premium costs to public arising from levies and general increase in insurer expenses
- inability of companies to benefit from economies of scale and cost reductions due to anti-competitive legislation
- failure of insurance to reach certain sectors of the population due to the increased cost of and restrictions on methods of distribution
