P92 Chapter 1 Flashcards
Three types of insurance companies
- Composite 2. Life 3. General
Composite Insurance Company
transacts both long term business (life) and general business such as motor household, aviation, and public liability.
Life Company
Life assurance and Pensions company - only transact long term business
General Insurance
Only general business
UK insurance industry
- largest in Europe, third largest in the world 2. accounted for 7% of worldwide premium income 3. employed 290K peope 4. responsible for investments of 1.8 trillion pounds - 26% of UKs net worth 5. was a major exporter - almost 30% of its net premium income came from overseas business
Market Roles
Sellers, buyers, middlemen
Different types of Insurance organization (companies) (8)
Proprietary, mutual, lloyds, captive, takaful, reinsurers, state, self
Proprietary Companies
majority of insurance sellers - issue share capital with shareholders - limited liability - often a broker is involved -most are composite company
Why do insurance companies get reinsured?
to limit annual fluctuations in the losses that affect underwriting account - smoothing underwriting result - protected in case of a catastrophe
Mutual Companies
Formed by Deed of Settlement or registration under the Companies Act - Owned by policyholder who share profits made - may enjoy lower premiums or higher life assurance bonuses because profits are returned to policyholders
Many companies which were mutual organizations have now registered as proprietary companies (demutualisation) - Problem is that mutual companies find it hard to raise capital because they cannot issue additional shares
Lloyds Market (syndicates)
administrative groups in the Lloyds market that underwrite for their own profit and loss - Use managing agents to underwrite
Lloyds structure
creation of a franchise structure - Lloyds is the franchisor and managing agent and members syndicates are franchisees - structure to help improve market profitability and monitor franchisees - approve business plans, set requirements, etc…
Captive Insurance Companies
tax efficient method of transacting risk transfer - more common with large national or multinational companies - Parent company forms a subsidiary company to underwrite certain of its own or its group’s insurable risk (many operate from offshore places like Bermuda or Guernsey) - reduces paperwork, because they are abroad - tap into all necessary ancillary services
Incentives of Captive Insurance Companies
- To obtain the full benefits of the group’s risk control techniques by paying premiums based on its own loss experience 2. avoid of direct insurer’s overheads
- obtaining a lower overall risk premium level by purchasing reinsurance at a lower cost than that required by the conventional or direct insurer
Takaful Insurance Companies
Islamic financial services industry - sharia law on financial and commercial transactions - works on principle that in any transaction, risk and profit and loss should be shared between the participants
Reasons why traditional products are not compliant with Sharia Law
- Gharar (uncertainty) - islamic law forbid sales where there is a risk to the buyer unless the risk is of a normal or reasonable proportion - because with traditional policies, you do not know how much and when, if at all, a policy will pay out
- Maisir (gambling) - seen as gambiling because some policyholders receive payouts and others do not
- Riba (interest) - forbids making money from money such as through interest - wealth can be made only through assets and investments
Takaful
Takaful means “guaranteeing each other.”
- Mutuality and cooperation
- Shared responsibility
- Joint indemnity
- Common interest
- Solidarity
Need to be approved by Islamic scholars
Reinsurance
Insurers purchase protection for themselves - often major international corporations as sums to be reinsured are generally quite high - very specialized area of business - need to have ability to assess proposals and set a price - must understand the underwriting approach and philosophy of the insurer
Types of reinsurance
Treaty (proportional and nonproportional) and facultative
Treaty (reinsurance)
reinsurer tkae a part of all insurances that direct insurer underwrites - agreed in advance and terms are fixed
Proportional - insurer and reinsurer takes a stated proportion of each risk and share premiums and claims - non-proportional allows insurer to retain the first layer of cover and transfer balance to reinsurers
i.e. insurer may provide fire insurance for a building at 10 million but shares 50% with a reinsurer
Facultative
Each reinsurance requirement is negotiated individually - insurer wishes to transfer cover outside treaty arrangements
The State
Set up Pool Reinsurance Company (Pool Re) after 1993 after terrorist attacks
insurers that participate offer terrorism cover - each insurer pay losses up to a threshold determined individually for that insurer - when losses exceed threshold, insurer can claim upon reserves accumulated by insurance industry in Pool Re. Should it exceed reserves, Pool Re can draw funds from government - insurers can quote the premium they want
Self Insurance
set aside funds to meet insurable losses - cost to them is lower than commercial premium levels - When organization decides that it has an exposure to loss involving a large number of incidents, all of which are of fairly low severity, high frequency, low severity losses are predictable - would be pound swapping so no point getting it reinsured
Global Perspective Companies
Sees the world as one potential market - aim is to create one single brand - centralized business - Maybe some local products
Multinational Perspective Companies
Operates in a number of countries - maybe with one base - aim is to respond to local demands
London Market
Not just London - UK is a leading insurance and reinsurance market - includes insurance companies, foreign companies, pools, lloyds, brokers - Is a true international insurance market - usually high risk business usually non life
Requirements for an international insurance market
political economic stability, geographical location, quality transport system, high quality personnel, office space at competitive prices, English, Stable legal and regulatory environment, time zone, foreign presence, developed financial center
Direct Insurers
With technology, less of a need for lots of branches to write business
Various channels of indirect distribution
internet, intermediaries, agents (usually rep only one company), banks (building societies), retailers and affinity groups, travel agents and tour operators, aggregators
Retailers and Infinity Groups
Retailers with a big grand name and large customer base can white label an insurance product and get it to be underwritten by a company or a lloyds syndicate. Or affinity group - i.e. Institute of Chartered Accountants offer indemnity and office contents insurance to their members
Aggregators
Like brokerfish! - negatives are not questions may not accurately represent client requirements, dont get good advice, insurers may decline to join even
Customer Importance
Bunch of common sense info about customer service, managing expectations, understanding what they want and providing it or giving them realistic information, making sure your whole team is customer oriented - positively analyzing complaints
Customer Relationship Management (CRM)
The more products you sell sometimes - the harder it is for a client to move to a competitor - obviously also some negatives - important to develop relationship and understand customer as a whole - so technology can help if u had a system that can represent the client as a whole
Treating customers “fairly”
FSA regulation - really important apparently and CII has issued guidances to companies, brokers, employees, etc…
Stakeholders
customers, shareholders, government, regulators, public, employee, suppliers/creditors, consumerists, the law, regulators
Stakeholder Management
Managing expectations of all especially when a few may have conflicting interests
Business Ethics
self explanatory - need to think about this - no organization can divorce itself from society it operates in - will have impact - especially those operating in small countries - some only have shareholder focus but can still be “ethical”
Ethical Standards issued by CII
- Comply with code and laws and regulations to highest standards and integrity
- Act in the best interests of each client
- Provide a high standard of service
- Treat people fairly regardless of race or racial group, sex, religion, age, disability, etc..
Organic Growth
where a company expands and develops by increasing its sales, revenues, and output through its own current busienss activities and efforts rather than mergers, acquisitions - only possible when a business has the financial resources - organic growth is the rate of business expansion through increasing output and sales - can be negative as shows a business is contracting
Non-Organic Growth
Mergers/Acquisitions
Organic Growth Drivers
seen as a better measurement of progress and success without mergers distorting growth figures, more profitable and better investment in the long run, shows long term commitment by executive management, focus on growing business instead of integrating mergers - i.e. RSA’s subsidiary MORE TH>N - Need to bear in mind insurance industry is special because of lag between business on books and true pattern of claims disguises true profitability
Benefits of Organic Growth
- Deliver Ling term benefits and profitable relationships - encourages innovation, good reputation
- Mergers lower productivity usually because staff expect cuts and difficulty in integrating cultures
- Organic growth more economic because with acquisitions, usually pay above market value so reduces value
- measure business’s effectiveness of internal efforts - is growth real, sustainable?
- Less risky than mergers
Disadvantages of organic growth
takes longer and require employees who can handle it - commitment of time
- may not meet investors’ expectations for that reason
Merger
two companies agree to join forces on a strategic basis
Acquisition
One company taking control of another by purchasing majority shareholding
Different types of M and A
Horizontal - two companies in same market - improve mediocre performance to a better position, achieving economies of scale, improving competitiveness, possible opportunities for diversification
Vertical - a company attempts to control a stage closer to manufacturer or customer - reduce costs, gain more control over market, add value to customer proposition i.e. AXA acquired Bluefin which was a brokerage
Why M and A?
Growth - gain new distribution channels, local knowledge, advance IT systems, etc.. Also, duplication is removed, efficiency and improved performance, overcoming cost of IT through sharing of resources, ivestment opportunity, spread risk (i.e. one insurer in USA, and one in Europe) different books of business, increase shareholder value
Disadvantages of M and A?
- reduce customer choices/competition 2. impact on staff and redundancies. Lower staff morale, clash of corporate cultures, “eye off the ball” directing energy to this, reduced customer service, expected M and A savings are not being realized
Outsourcing
Advantages - Frees up time and resources for insurer to focus - Can prebudget for a fixed cost, these are USUALLY specialist in the area and can bring new skills, learn new business practices
Disadvantage - Loss of control, maybe bad service, may not understand client as much, if outsourced company gets into financial trouble
Selecting an outsourced company
Make sure transition is smooth - no change in quality - Must meet FSA requirements and prior notification given to FSA
