ST7-08-GI Mkt Flashcards
Reinsurance for insurance providers can be obtained from (5):
- the London Market - Lloyd’s - specialist reinsurance companies - direct insurers who also write reinsurance - capital markets
Direct insurers
provide insurance for individuals and companies
3 Groups of direct insurers
- Composite insurance companies - Insurance companies that specialise in writing business in a selection of classes of general insurance - Insurance companies that write all classes of general insurance
Composite insurance companies
Insurance companies that write both general insurance and life insurance
Corporate structure of general insurers
Most insurance companies are proprietary companies limited by shares. However, some mutual insurance companies do exist; they are more common in some markets than in others.
Reinsurance companies
Provide cover for insurance providers.
London Market
That part of the insurance market in which insurance and reinsurance business is carried out on a face-to-face basis in the City of London.
Focus of the London Market
Commercial insurance: insurance & reinsurance cover to COMPANIES.
3 specialisations of the London Market
- larger direct insurance risks (both property and liability) that are beyond the capability of other direct insurance companies. - international risks - reinsurance
8 Participants in the London Market
- Lloyd’s syndicates - UK subsidiaries or branches of overseas companies or reinsurance companies - reinsurance departments of UK composite companies, or reinsurance subsidiaries of these companies - small professional reinsurance companies set up by (or acquired 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
Corporate Name
A limited-liability company whose only business is to provide capital to Lloyd’s.
“Limited liability”
means that the corporate member cannot lose any more than the capital it has provided.
Syndicates
Groups of Lloyd’s members who collectively coinsure risks. Individual syndicates often specialise in particular types of insurance.
Captive insurance company
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.
Authorised captive
“open market captives” A captive that is free to provide insurance to risks other than those of its parent - providing this does not change its main purpose. They often provide insurance to the parent company’s customers.
5 Usual reasons for setting up captives
in order to: - FILL GAPS in insurance cover that may not be available from the traditional insurance market - MANAGE the total INSURANCE SPEND of large companies or groups of companies - enable the enterprise to buy cover directly from the reinsurance market rather than direct insurers - FOCUS effort on RISK MANAGEMENT - to gain TAX and other LEGISLATIVE or REGULATORY ADVANTAGES
Protection and Indemnity (P&I) Clubs
Mutual associations of ship owner that were originally formed to cover certain types of marine risks (marine 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.
Pool
An arrangement under which the parties agree to share premiums and losses for specific insurance classes or types of cover in agreed proportions.
Critical difference between insuring with a conventional insurer and insuring with a pool
The insured’s liability to an insurer is limited to the premium charged, whereas the liability to the pool will be related to the insured’s share of the total claims and other costs that arise.
World insurance markets differ in 4 ways:
- the concentration of market shares of major insurers - whether business is written directly with policyholders or through brokers - the importance of mutual companies - whether or not composite companies are permitted.
Securitisation
A mechanism whereby insurers borrow money from capital markets and repay the money subject to the experience on the insurance book being satisfactory.
Catastrophe bonds
A bond where the repayment of capital (and possibly interest) is contingent on a specified event not happening.
Sidecar
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 that it can meet any claims that arise.
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
Advantages of using a 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.
Committed / contingent capital
Based on a contractual commitment to provide capital to an insurer after a specific adverse event occurs that causes financial distress. The insurer purchases an option to issue it 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.
