Underwriting In The London Market Flashcards
What is main difference about underwriting in the London Market?
Subscription Market-multiple insurers on one risk
Why are multiple insurers usually on one risk in the London Market?
- Insurer capacity is limited per year
- Appetite to spread exposure and minimise loss impact.
- Consider aggregation (avoid concentration in 1 area)
- Brokers want best deal for clients
- Client may only want particular insurers on risk
At what point, are international markets used?
Risk is too big to be written in LM alone
Brokers and/or client want to support home market
What are the benefits of PPL and Whitespace?
Cost effective (reduced 30-40%)
Efficient
Why is selecting insurers a vital role for LM brokers?
To ensure insurer is solvent and can pay future claims.
To get best deal for client.
To prevent claims of negligence if insurer rating drops and becomes insolvent.
Explain the relationship between broker and the Leader.
Broker approaches insurer they would like as Lead.
Risk presented to insurers in MRC. Slip and Bureau leads confirmed.
*Leads chosen for credibility and known to see good terms.
Can an overall leader be overseas?
Yes
At what point in the placing process are followers selected?
After Leads selected (slip and bureau) and agreed.
NB followers still entering into individual contract of insurance
Who should have a duty of care when conducting business?
Broker with client
Broker with insurers
Insurer with investor
Insurer with client
The FCA requires all parties to evidence positive client outcomes.
What does broker need to consider when approaching Leads?
They have all material information pertinent to the risk.
Insurance Act 2015- non-consumer make fair presentation of the risk, disclosure of MI.
What are the main FCA requirements for brokers and insurers conducting business?
-Products must be fit for purpose and not disadvantage client.
-Clients get value for money and no large charges for changes.
-Understandable information for client
-Ensure client gets product benefit.
What is a Leader’s main role in a subscription market?
Calculate a suitable premium
Reflect degree of risk and contribution to pool
How are risks measured for premium?
By frequency and severity
How does Law of Large Numbers contribute to premium calculation?
By predicting likelihood of similar losses occurring.
Can all risk premiums be calculated using Law?
No. In LM types of risk and newer risks.
What is the difference between premium rate and premium base?
Premium rate- risk hazards
Premium base- measure of exposure
Example: What is premium for vessel valued at £10m, if insurer charges £2 per £100 of cover?
Answer: £200,000
Calculation: value (£10m) / cover (£100) x rate (£2)
How are liability premiums calculated?
-EL payroll
-P + P annual turnover
-PI fees earned
Why are Cargo premiums calculated in stages?
Goods value fluctuates during policy year
What is Open Cover?
Cargo insurers give declarations about goods regularly.
Premium calculated in stages
Do followers accept rate set by leader?
No. They don’t have to unless they have already agreed to it.
What else does Leader consider in calculating premiums?
-Operational costs (UW, claims, business, office)
-Reinsurance costs
-Profit Margin
-Claims reserves
-Taxes
What triggers market cycle?
Few insurers in class of business that increase premiums.
Why do insurers leave the market?
Cannot maintain aggressive pricing
Large loss, reserved too low, insolvency
How does exposure modelling assist insurers when looking at risks?
Ensures there are no concentration of risks in one area.
Potential for losses to multiple risks from one event
How are exposures managed by insurers?
Producing accurate data (postcodes for property risks)
Calculating PML (realistic total SI)
Reinsurance
What is PML?
Probable Maximum Loss
Calculation of realistic max of total SI for risk
Why might PML not be accurate for some risks?
Risks in certain areas may be less affected by certain perils.
E.g. Property risk on coast of Jamaica more liable to flood but not fire
Why is it difficult to map exposure of Cargo risks?
Constantly on the move
How does loss modelling help insurers looking at risks?
Allows insurers to predict financial impact of losses
How is loss modelling managed by insurers?
Follow Lloyd’s Realistic Disaster Scenarios.
Assesses gross and net* financial exposure for different outcomes.
*After reinsurance
What RDS are advised by Lloyd’s that must be completed by insurers?
-Windstorms (Atlantic, FL, Gulf of Mexico, Europe)
-Earthquake (Japan, California, Nee Madrid)
-Flooding
-Terrorism (NYC)
-Cyber
How is catastrophe modelling different from loss modelling?
Assess non-financial impact of loss.
E.g. claim frequency, severity, claims staff.
What is reserving?
When Insurers put aside capital to pay claims.
How do household and motor insurers reserve differently?
Blanket reserve
What has been UK government impact on reserving?
2019 Personal Injury claims, insurer discount reduced to -0.25%
Consequence: reserving higher
Why is it important for insurers to reserve?
-Balance solvency equation
-Long Tail business impacted by inflation and new legislation
-IBNR: claims happened but not reported
-IBNER: claims known but reserve insufficient
What is Open Years Management?
-Policy years that remain open due to claims being too big.
-Cannot be closed by RITC.
-Handled by MGA
-Central fund used if other level’s exhausted
What is Reinsurance To Close?
Syndicate closes previous YOA by buying reinsurance from next YOA.
What is the purpose of RITC?
-Close previous YOA and pay any OS claims from reinsurance.
-Report profit or loss to investord
Why should insurers avoid over or under reserving?
Under-false image of profits, misleading
Over-not necessary as money has to be set aside
