SA3-01: GI Market

Question 1

5 Major providers of short-term insurance in UK

Answer 1

1. Direct insurers
   
   1. Composite insurers
   2. General insurers
2. Reinsurers
3. Lloyd’s of London
4. Self-retention groups
5. State for terrorism cover, Property flood cover and Nuclear pool

Question 2

Lloyd’s was incorporated by which legislation

Answer 2

The Lloyd’s Act of 1871 in the UK.

Question 3

Lloyd’s

Answer 3

Provides a market framework (premises, resources, etc) within which insurance may be conducted by the members. It does not act as an insurer in its own right and, therefore, carries no insurance risk. The actual business is insured directly with the members (a.k.a. Names or underwriting members).

Question 4

Lloyd’s syndicates

Answer 4

Members are grouped into syndicates. The members of a syndicate share the risks written by the syndicate’s underwriters. Liabilities or profits are allocated to the members on a “several basis” in proportion to their agreed participation at the start of the year.

Question 5

Lloyd’s syndicate managing agent

Answer 5

A company appointed to manage the affairs of the syndicate, appoint the underwriter, and provide technical and administrative services.

Question 6

Funds at Lloyd’s

Answer 6

If a member defaults on their liabilities, the other members of the syndicate are not responsible for them - there is no joint liability. Because of this, each member is required to provide capital as security to support their total Lloyd’s underwriting business. These funds are held by Lloyd’s in trust and Lloyd’s has absolute authority to use it to pay claims or other liabilities arising from the member’s activities at Lloyd’s.

Question 7

Lloyd’s Member’s agents

Answer 7

Look after the interests of individual members - introduce members to syndicates - advise members on how to spread their capital among different syndicates - responsible for the regular audit of a member’s wealth - responsible for submitting all financial statements to Lloyd’s

Question 8

How long must a syndicate’s year of account must remain open (at minimum)

Answer 8

3 years

Question 9

Reinsurance to close (RITC)

Answer 9

(not really reinsurance) A transfer of assets and liabilities from one group of members (the ceding syndicate) to another (the receiving syndicate).

Question 10

6 Reasons for setting up captives

Answer 10

• to FILL GAPS in insurance cover that may not be available from the traditional insurance market. - to MANAGE THE INSURANCE SPEND of large companies - to FOCUS EFFORT on risk management - to reduce the impact of market cycles on risk pricing - to gain TAX / LEGISLATIVE / REGULATORY ADVANTAGES - to gain ACCESS TO REINSURANCE (directly)

Question 11

Authorised captive

Answer 11

Free to provide insurance to risks other than those of its parent, provided that this does not change its main purpose.

Question 12

Disadvantages of owning a captive

Answer 12

• there may be a lack of risk transfer and the captive may suffer from a concentration of risk - lack of know-how when dealing with more complicated claims.

Question 13

The FSB 2013 discussion paper: “Review of 3rd party cell captive insurance and similar arrangements” made 14 NOTABLE PROPOSALS:

Answer 13

• the requirement that cells may only be owned by a binder holder (either an underwriting manager or a non-mandated intermediary in terms of an approved affinity scheme) - prohibition on cell arrangements with independent intermediaries due to conflicts of interest - allowance for cell arrangements with affinity schemes under certain conditions - similar arrangements to be converted to cell arrangements - prohibition on cell captive insurers doing any business other than cell arrangements - prohibition on a mix of first party and third party cell business in one cell or arrangement - prohibition on captive insurers conducting third party business - MCR to be prescribed for each cell - recapitalisation by cell owner must be conditional and included in the shareholder agreement - proportional share of risk between cell owner and insurer: Insurer to assess the credit worthiness of the cell owner to determine upfront the proportional risk sharing arrangements - prior approval from the Registrar for cells provided to affinity schemes - prior notification to the Registrar for all other cell arrangements - specific reporting requirements - standard licensing conditions for various third party cell captive insurers

Question 14

Protection and Indemnity (P&I) clubs

Answer 14

P&I clubs exist in the UK and were originally formed to cater for certain types of marine risks that could not be covered at an acceptable price under a commercial marine policy, for example: - indemnity of liability in respect of claims for loss of life or personal injury resulting from accidents - indemnity of liability for damage to harbours, wreck removal and pollution

Question 15

P&I clubs share of the world’s shipping coverage against liability claims

Answer 15

90%

Question 16

Insurance business is obtained through 3 channels:

Answer 16

INTERMEDIARIES - brokers - banks - underwriting managers STAFF DIRECTLY EMPLOYED by the insurance provider TELESALES, internet, post, off-the-page

Question 17

Binder agreement

Answer 17

An outsourcing agreement between an insurer and a third party (typically a broker, administrator or underwriter). Upon the conclusion of a binder agreement of an insurer mandates a third party (or binder holder) to perform certain functions for and on its behalf.

Question 18

5 Activities that constitute binder functions

Answer 18

• Enter into, vary or renew a policy (other than a reinsurance policy). - Determine the wording of a policy. - Determine premiums under a policy. - Determine the value of policy benefits. - Settle claims under a policy.

Question 19

Binder regulations

Answer 19

govern the manner in which insurers outsource binder functions. The regulations specify who may be a binder holder as well as what such a person may and may not do. E.g. - a binder holder may not further delegate binder functions - fees have to be commensurate with the actual costs incurred by the binder holder in fulfilling its function, with a reasonable rate of return. - fees cannot be linked to profits - a binder holder cannot hold a general mandate to act on its client’s behalf.

Question 20

Reinsurance broker

Answer 20

Provide technical expertise, modelling capacity and knowledge of the reinsurance market to the insurer. For the majority of reinsurance programmes, brokers continue to be remunerated through reinsurance commission paid by the reinsurer. In some cases insurers with large existing reinsurance programs follow a tender process and contractually agree the remuneration with the successful broker in advance of placement.

Question 21

Slip system

Answer 21

Co-insurance in the London Market has traditionally been arranged using the slip system. This is a face-to-face approach under which proposed risks are described by a broker on a standard form (known as a “slip”). Terms and the premium rate are added after negotiation with a lead underwriter (who also signs for a certain proportion of the risk), before the slip is circulated by the broker among other underwriters who sign the slip to confirm the proportion of risk that they will accept. The broker will aim to over-place the risk - to receive offers for more than 100% of the risk. If this happens, then in agreement with the insured, the shares of the underwriters are reduced so that they total 100%.

Question 22

Captives

Answer 22

Captives are insurance companies that are set up with the primary purpose of providing insurance to a parent company.