Types of insurance Organisations 3b Functions within insurance organisations Flashcards
Proprietary Companies:
Majority of insurance sellers fall under this category.
Shareholders have subscribed to the authorized and issued share capital.
Shareholders’ liability is limited to the nominal value of their shares.
Company is liable for its debts and may go into liquidation if solvency margin is not met.
Public can deal directly with proprietary companies, but intermediaries like brokers are often involved.
Keen competition exists among proprietary companies and other sectors of the market.
Examples of insurance and reinsurance classes: accident and health, motor, aviation, fire and other property damage, liability.
Mutual Companies:
Owned by policyholders who share in the profits.
Operate alongside proprietary companies in the long-term sector.
Policyholders may enjoy lower premiums or higher life assurance bonuses.
Some originally mutual companies have demutualized or registered as proprietary companies.
Difficulty in raising additional capital compared to proprietary companies.
Examples of long-term business: life and annuity, permanent health, critical illness, pension fund management, unit-linked investments, endowment savings, assurance contracts.
Lloyd’s:
Lloyd’s does not transact insurance itself.
Underwriting members of Lloyd’s make up the Lloyd’s market.
Members underwrite for their own profit and loss through syndicates.
Managing agents carry out underwriting business on behalf of underwriting members.
Customers generally work with Lloyd’s brokers who specialize in specific risk categories.
Lloyd’s has a unique ‘chain of security’ to protect insurance policyholders.
Franchise structure introduced for modernization and reform of Lloyd’s.
Captive Insurance Companies:
Tax-efficient method used by large national and multinational companies.
Parent company forms a subsidiary to underwrite its own or group’s insurable risks.
Incentives include obtaining benefits of group’s risk control techniques and avoiding direct insurers’ overheads.
Captives often operated from offshore locations for regulatory advantages.
Reduces paperwork and allows access to ancillary services.
Takaful Insurance Companies:
Based on Islamic financial services principles.
Risk and profit/loss sharing among participants.
Developed to meet the needs of customers with specific religious principles.
Takaful products need approval from Islamic scholars.
Significant potential market for takaful insurance products.
Reinsurers:
Help spread risks by purchasing reinsurance protection.
Reinsurers may underwrite both direct insurance and reinsurance.
Reinsurers are often major international corporations.
Reinsurance market is global in view of high values involved.
Treaty and facultative are common forms of reinsurance.
Treaty can be proportional or non-proportional.
Reinsurers require specific underwriting skills.
The State:
Pool Reinsurance Company Limited (Pool Re) established as a mutual reinsurance company.
Insurers participating in the scheme offer terrorism cover.
Insurers pay losses up to a threshold, and beyond that, claims are covered by reserves accumulated by the insurance industry.
Pool Re can draw funds from the government if reserves are exceeded.
Insurers in the scheme can decide the price of terrorism cover.
Self-insurance:
Definition: Self-insurance is an alternative to purchasing insurance in the market, where public bodies and large industrial concerns set aside funds to cover potential losses instead of relying on insurance policies.
Retained Risk:
When organizations self-insure, they retain the risk within the organization and do not transfer it to an insurance company. This means there is no market transaction involved in buying or selling insurance.
First Layer Coverage:
Self-insurance is often used as a supplement to commercial insurance policies, especially when the first layer or proportion of a claim is not insured in the commercial market. Organizations may choose to self-insure for this initial layer of risk.
Financial Considerations:
Organizations opt for self-insurance when they believe they have the financial capacity to handle potential losses. They evaluate the cost of self-insurance, which involves transferring funds to a reserve fund, and compare it to commercial premium levels. If the cost of self-insurance is lower, they choose this option
Predictable Losses:
Self-insurance is suitable for organizations facing a high frequency of incidents with low severity. When losses are predictable and expected to occur, insuring them would be inefficient since the premiums paid to an insurer would exceed the cost of the predictable claims.
Fund Creation:
Self-insurance involves a conscious decision by an organization to create a fund to cover potential losses. It differs from non-insurance, where no such decision is made, and no fund is established.
The global perspective:
B The global perspective:
Multinational Companies: Multinational companies operate in various countries while maintaining a home base. They have semi-independent operations in different regions and respond to local demands while working under a global brand. Prudential plc is an example of a multinational organization.
Global Companies: Global companies view the entire world as a potential market. While they may adapt their products or services to suit local markets, their goal is to establish themselves as a singular global brand. These companies are highly centralized, and their competitive advantage comes from their global brand. Lloyd’s is an example of a global organization.
Shift in Premium Spend: Advanced economies like the USA, Japan, and Europe traditionally accounted for the majority of world insurance premiums. However, the rapid growth of BRIC economies (Brazil, Russia, India, and China) and other regions will lead to a significant shift in global premium spend.
Emerging Markets: Developing countries with large populations and low average wages have limited insurance awareness and penetration rates. This makes them attractive targets for multinational and global insurers. Insurance markets in these countries are growing rapidly, but they are still less advanced compared to developed nations.
B1 The London Market:
Definition: The London insurance market is a distinct part of the UK insurance and reinsurance industry centered in the City of London. It includes insurance and reinsurance companies, Lloyd’s, and brokers, and accepts risks from around the world.
Core Business: The London Market focuses on internationally traded insurance and reinsurance business, primarily non-life insurance and reinsurance. It specializes in large risks of UK companies, multinationals, and overseas companies, with a growing emphasis on high-exposure risks.
Participants: The main participants in the London Market include insurance companies, Lloyd’s of London, insurance brokers, P&I clubs (marine associations), and pools such as International Oil Insurers and the British Insurance (Atomic Energy) Committee.
Market Size: The London Market accounts for over one-third of the total non-life insurance and reinsurance business written in Great Britain.
Requirements for an International Insurance Market:
1.Political and economic stability: The UK’s long history of stable government and bias towards free trade promotes economic growth, making it an attractive location for insurance and reinsurance businesses.
Geographical location: A successful international insurance market requires access to both domestic and global insurance markets. London’s location provides convenient access to various insurance markets worldwide.
Quality transport system: London boasts some of the best-connected and busiest airports globally, allowing easy accessibility for foreign insurers.
Highly qualified personnel: A pool of specialized staff, including underwriters, claims professionals, and accounting personnel, is essential for servicing the insurance industry. London benefits from having a talented workforce to support its insurance market.
Office space at competitive prices: The City of London offers an abundance of high-quality office space, including iconic buildings like Lloyd’s of London, attracting insurers and reinsurers with competitive rental prices.
English as the business language: English is the primary language used in insurance business globally, positioning London as an international market due to its English-speaking environment.
Stable legal and regulatory environment: English law has a well-developed background in insurance and reinsurance law, making it a preferred choice for resolving disputes. The UK regulatory authorities have a track record of making sound decisions and supporting the insurance market.
Time zone: London’s location between Asia and North America allows for overlapping time zones with relevant markets, enabling direct communication during certain periods.
Foreign presence: London’s insurance market is not solely dominated by domestic insurers. The presence of foreign insurers fosters the development of international insurance and reinsurance business.
Developed financial center: London serves as a premier financial market, including banking and currency trading, providing a strong foundation for the insurance industry.
Different Sellers and Distributors of Insurance:
C1 Direct insurers:
Direct underwriters leverage telecommunications and telesales techniques, eliminating the need for extensive branch networks.
Administrative and underwriting centers can be located anywhere, with customer contact primarily through telephone and email.
Location choice is influenced by office accommodation costs and proximity to a suitable workforce.
Direct insurers still handle claim settlements and loss assessments locally, similar to traditional insurers.
The direct market continues to grow due to increasing customer comfort with remote communication.
C2 The internet:
The internet has become a significant platform for insurance transactions, offering consumers various options on coverage and price.
Major UK insurers sell motor, home, and travel insurance online.
Online insurance market for small and medium-sized businesses is experiencing rapid growth.
Competitive pressure from banks, online insurance brokers, and high street companies adds to the competition faced by direct insurers.
Obtaining an annual travel insurance quotation via the internet provides convenience and access to multiple options from different insurers.
C3 Independent intermediaries:
Independent intermediaries are full-time insurance experts offering various personal and commercial insurance products from multiple companies.
They provide personalized service, advising customers and negotiating with insurers on their behalf.
Intermediaries often collect premiums and issue policy documents, providing guidance during claims.
Some intermediaries have their own schemes underwritten by insurance companies or Lloyd’s underwriters, targeting specific market sectors (affinity schemes).
C4 Agents:
Agents, such as estate agents and travel agents, act as intermediaries alongside their main business activities.
They typically offer policies from a specific insurance company.
Examples include estate agents providing home insurance and veterinary surgeons acting as agents for pet insurance.
C5 Building societies:
Building societies, traditionally focused on mortgages, now engage in insurance intermediary activities alongside other services.
They offer mortgage-related life assurance products, household buildings insurance, and mortgage guarantee business.
Building societies now compete similarly to banks in the personal insurance marketplace.
Different Sellers and Distributors of Insurance: group 5
5 Building societies:
Traditional focus on mortgages: Building societies traditionally provided mortgages as their primary service.
Expansion into insurance: Building societies now engage in insurance intermediary activities, offering products such as mortgage-related life assurance, household buildings insurance, and mortgage guarantee business.
Diversification of services: Building societies have the freedom to engage in activities beyond property loans, including estate agency services and insurance intermediary activities.
Similarity to banks: There is now little difference between a building society and a bank from the customer’s perspective.
C6 Banks:
Powerful force in personal insurance marketplace: Banks have a large customer base and an extensive distribution network, giving them a significant advantage in the personal insurance market.
Ownership of insurance operations: Many banks have acquired or established their own insurance companies and have substantial ownership stakes in insurance operations.
Partnerships with insurers: Some banks act as intermediaries and form partnerships with selected insurers or Lloyd’s syndicates to offer household, motor, and travel insurance.
Own schemes and special covers: Banks have their own insurance schemes, offering coverage for various needs such as household, motor, hospital plans, and travel. They may also provide specialized covers for specific situations or customer groups.
C7 Retailers and affinity groups:
Marketing insurance products: Retailers have the opportunity to market insurance products to their large customer base as an additional service.
White labeling: Retail organizations offer insurance products branded with their own name, but underwritten by an insurance company or Lloyd’s syndicate.
Broad commercial opportunities: Combining a retailer’s well-regarded brand name and distribution network with an insurer can create broader commercial opportunities.
Offered personal insurance products: Retailers and affinity groups offer a range of personal insurance products, including household, travel, credit insurance, extended warranty insurance, and motor vehicle insurance.
Commercial insurances through affinity groups: Affinity groups such as professional associations and membership organizations also provide commercial insurances tailored to their members’ needs.
C8 Travel agents and tour operators:
Travel insurance offered by tour operators: Travel and tour operators, who provide package holidays, usually offer travel insurance facilities to their customers. The cover is often underwritten by an insurance company.
Opportunity for travel agents: Travel agents have embraced the opportunity to sell their own travel insurance schemes to customers, earning commission on the sales.
Point-of-departure distribution: Travel insurance can also be purchased at the point of departure, particularly in airports, where travelers can obtain policies in coupon form.
C9 Aggregators:
Definition and function: Aggregators are internet-based price comparison websites that aim to provide customers with quotations from multiple insurance providers by completing one set of questions.
Access to multiple quotes: Aggregators allow customers to compare quotes from different insurers conveniently in one place.
Direct purchase: Customers can approach the chosen insurer directly, often through a link from the aggregator’s website, to complete the purchase of their insurance.
Criticisms: Aggregators have faced criticism for potentially providing inaccurate or incomplete quotes, as they often ask limited questions at the initial quotation stage. The rankings may focus solely on price, ignoring the cover offered. Default positions on questions have also been criticized.
Growing popularity: Despite criticisms, aggregator websites continue to grow in popularity as a distribution route for insurers.
Think about how aggregators promote their services – what advantages do they offer?
Regarding the question about how aggregators promote their services and the advantages they offer, aggregators typically promote their services by highlighting the convenience of comparing multiple quotes in one place, saving time and effort for customers. They emphasize the ability to find competitive prices and potentially save money on insurance premiums. Aggregators also emphasize the direct purchase option, allowing customers to complete their insurance purchase easily through the aggregator’s website. The advantages of using aggregators include access to a wide range of insurance providers, the ability to compare prices and coverage quickly, and the convenience of making an informed decision in one place. However, it’s important to note the potential limitations and criticisms mentioned earlier, such as the accuracy of quotes and the focus on price rather than comprehensive coverage.
Customer expectations:
1 Customer expectations:
Identifying customer expectations: Market research is essential for a company to identify and understand its customers’ expectations.
Measuring customer satisfaction: Companies need to assess their performance against customer expectations through customer surveys and analysis of complaints.
Customer satisfaction and business success: Meeting customer expectations and delivering a quality service is crucial for business success, as it costs significantly more to acquire new customers compared to retaining existing ones.
