P92 Chapter 1

Question 1

Three types of insurance companies

Answer 1

1. Composite 2. Life 3. General

Question 2

Composite Insurance Company

Answer 2

transacts both long term business (life) and general business such as motor household, aviation, and public liability.

Question 3

Life Company

Answer 3

Life assurance and Pensions company - only transact long term business

Question 4

General Insurance

Answer 4

Only general business

Question 5

UK insurance industry

Answer 5

1. 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

Question 6

Market Roles

Answer 6

Sellers, buyers, middlemen

Question 7

Different types of Insurance organization (companies) (8)

Answer 7

Proprietary, mutual, lloyds, captive, takaful, reinsurers, state, self

Question 8

Proprietary Companies

Answer 8

majority of insurance sellers - issue share capital with shareholders - limited liability - often a broker is involved -most are composite company

Question 9

Why do insurance companies get reinsured?

Answer 9

to limit annual fluctuations in the losses that affect underwriting account - smoothing underwriting result - protected in case of a catastrophe

Question 10

Mutual Companies

Answer 10

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

Question 11

Lloyds Market (syndicates)

Answer 11

administrative groups in the Lloyds market that underwrite for their own profit and loss - Use managing agents to underwrite

Question 12

Lloyds structure

Answer 12

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…

Question 13

Captive Insurance Companies

Answer 13

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

Question 14

Incentives of Captive Insurance Companies

Answer 14

1. 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
2. obtaining a lower overall risk premium level by purchasing reinsurance at a lower cost than that required by the conventional or direct insurer

Question 15

Takaful Insurance Companies

Answer 15

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

Question 16

Reasons why traditional products are not compliant with Sharia Law

Answer 16

1. 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
2. Maisir (gambling) - seen as gambiling because some policyholders receive payouts and others do not
3. Riba (interest) - forbids making money from money such as through interest - wealth can be made only through assets and investments

Question 17

Takaful

Answer 17

Takaful means “guaranteeing each other.”

• Mutuality and cooperation
• Shared responsibility
• Joint indemnity
• Common interest
• Solidarity

Need to be approved by Islamic scholars

Question 18

Reinsurance

Answer 18

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

Question 19

Types of reinsurance

Answer 19

Treaty (proportional and nonproportional) and facultative

Question 20

Treaty (reinsurance)

Answer 20

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

Question 21

Facultative

Answer 21

Each reinsurance requirement is negotiated individually - insurer wishes to transfer cover outside treaty arrangements

Question 22

The State

Answer 22

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

Question 23

Self Insurance

Answer 23

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

Question 24

Global Perspective Companies

Answer 24

Sees the world as one potential market - aim is to create one single brand - centralized business - Maybe some local products

Question 25

Multinational Perspective Companies

Answer 25

Operates in a number of countries - maybe with one base - aim is to respond to local demands

Question 26

London Market

Answer 26

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

Question 27

Requirements for an international insurance market

Answer 27

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

Question 28

Direct Insurers

Answer 28

With technology, less of a need for lots of branches to write business

Question 29

Various channels of indirect distribution

Answer 29

internet, intermediaries, agents (usually rep only one company), banks (building societies), retailers and affinity groups, travel agents and tour operators, aggregators

Question 30

Retailers and Infinity Groups

Answer 30

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

Question 31

Aggregators

Answer 31

Like brokerfish! - negatives are not questions may not accurately represent client requirements, dont get good advice, insurers may decline to join even

Question 32

Customer Importance

Answer 32

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

Question 33

Customer Relationship Management (CRM)

Answer 33

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

Question 34

Treating customers “fairly”

Answer 34

FSA regulation - really important apparently and CII has issued guidances to companies, brokers, employees, etc…

Question 35

Stakeholders

Answer 35

customers, shareholders, government, regulators, public, employee, suppliers/creditors, consumerists, the law, regulators

Question 36

Stakeholder Management

Answer 36

Managing expectations of all especially when a few may have conflicting interests

Question 37

Business Ethics

Answer 37

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”

Question 38

Ethical Standards issued by CII

Answer 38

1. Comply with code and laws and regulations to highest standards and integrity
2. Act in the best interests of each client
3. Provide a high standard of service
4. Treat people fairly regardless of race or racial group, sex, religion, age, disability, etc..

Question 39

Organic Growth

Answer 39

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

Question 40

Non-Organic Growth

Answer 40

Mergers/Acquisitions

Question 41

Organic Growth Drivers

Answer 41

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

Question 42

Benefits of Organic Growth

Answer 42

1. Deliver Ling term benefits and profitable relationships - encourages innovation, good reputation
2. Mergers lower productivity usually because staff expect cuts and difficulty in integrating cultures
3. Organic growth more economic because with acquisitions, usually pay above market value so reduces value
4. measure business’s effectiveness of internal efforts - is growth real, sustainable?
5. Less risky than mergers

Question 43

Disadvantages of organic growth

Answer 43

takes longer and require employees who can handle it - commitment of time
- may not meet investors’ expectations for that reason

Question 44

Merger

Answer 44

two companies agree to join forces on a strategic basis

Question 45

Acquisition

Answer 45

One company taking control of another by purchasing majority shareholding

Question 46

Different types of M and A

Answer 46

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

Question 47

Why M and A?

Answer 47

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

Question 48

Disadvantages of M and A?

Answer 48

1. 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

Question 49

Outsourcing

Answer 49

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

Question 50

Selecting an outsourced company

Answer 50

Make sure transition is smooth - no change in quality - Must meet FSA requirements and prior notification given to FSA