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Lm2 > Chapter 1 - Business Nature Of The London Market > Flashcards

Chapter 1 - Business Nature Of The London Market Flashcards

1
Q

Why might an insurer not take 100% of the risk? Capacity

A

Limited Capacity = total of all premiums written in a period (usually 1 year)

Capacity created by investors (Names for syndicates / shareholders for insurance companies)

Regulator may limit risks written in geographic locations / period of time to ensure solvency of insurer (total liabilities equal to or less than premium earnings)

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2
Q

Why might an insurer not take 100% of the risk? Branch office controls

A

Not writing same risks over multiple offices. Head office should influence branch office’s capital. Insurers have strict controls to ensure not competing with branch offices (for eg on price)

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3
Q

Why might an insurer not take 100% of the risk? Aggregates

A

Avoid concentration of exposure in one place

Eg location of risks. For satellite insurers, which launch vehicle being used

Moveable risks (ships/cargos) harder to track

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4
Q

Why might an insurer not take 100% of the risk? Broker influence

A

Brokers share risks to maintain relationships/leverage premium (always giving client best placement possible)

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5
Q

Why might an insurer not take 100% of the risk? Licensing

A

Some countries do not authorise all insurers to insure risks

Lloyds - centrally
Insurance companies - individually

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6
Q

Why might an insurer not take 100% of the risk? Client influence

A

Informed client may not want concentration of risk to one insurer

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7
Q

Why might an insurer not take 100% of the risk? Availability of reinsurance

A

Either no reinsurance available at all OR for a reasonable price

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8
Q

Why might an insurer not take 100% of the risk? Geographical limits

A

Amount of business originating from certain part of world. Usually internal control (Affects insured’s location)

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9
Q

Reasons why risks might be placed outside of London Market. Location of insured.

A

Many insureds have loyalty to home market

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10
Q

Reasons why risks might be placed outside of London Market. Culture, local knowledge, relationships

A

Client wants to know insurer understands what’s important to them. Local insurers may have better understanding of specific local legislation

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11
Q

Reasons why risks might be placed outside of London Market. Experienced insurers

A

Wealth of knowledge and experience in overseas markets

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12
Q

Reasons why risks might be placed outside of London Market. Claims service

A

Good claims service

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13
Q

Three categories of insurers

A

Lloyds
Insurance companies
Mutual insurers

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14
Q

Different types of insurance companies (3)

A

Proprietary companies
Mutuals (companies / indemnity associations)
Captives

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15
Q

Types of insurers.
Proprietary companies

A

Registered under Companies Act 1985

Owned by shareholders. Shareholders contribute share capital and own profits.

Limited liability companies. Shareholders are liable for company’s debts but limited to nominal value (face value) of the shares they own.

“Plc” publicly-quoted companies. Share value stated in financial exchanges

“Ltd” private limited companies. Shares owned by a few/one shareholder. Usually SMEs.

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16
Q

Types of insurers.
Mutual companies

A

Owned by policyholders who share profits by way of lower premiums. Mutual companies usually ‘limited by guarantee’ meaning policyholders max liability is limited to their premium.

Only 1 mutual company in Lloyds Market today - Liverpool Victoria

17
Q

Why might a company demutualise?

A

Preliminary activity prior to being acquired

18
Q

Types of insurers.
Captive insurance companies

A

Owned by a non-insurance parent company

19
Q

Advantages / disadvantages of captives

A

Advantages

  • Tax efficient way to transfer risk for eg Operate in offshore locations with favourable tax regimes
  • Stable premium prices
  • Keeping money (premiums) within the company
  • Invest / benefit in returns of premium-related funds

Disadvantages

  • set up organisation with funding and staff
  • expertise to ensure premium paid is appropriate to the risk being transferred
  • no access to insurer knowledge
  • no external funds if large loss occurs

Some captives buy reinsurance to transfer some risk

20
Q

Types of insurers.
Mutual indemnity associations

A

Mutuals - owned by policyholders

Mutual indemnity associations - members grouping together to self insure

Employ professional managers to run day to day insurer activity

Mainly P&I Clubs which insure aspects of marine liability or professional indemnity (where for eg Bar Mutual and PAIMA exist)

21
Q

Types of insurers.
Lloyds service companies

A

Linked to syndicates
Write on behalf of the syndicate
Obtain capacity / authority from syndicate rather than shareholders

22
Q

Why do insurers operate as syndicates and insurance companies? Brand

A

Lloyds brand globally respected

23
Q

Why do insurers operate as syndicates and insurance companies? Permission

A

Corp of Lloyds negotiates on behalf of all syndicates

Some regulators refuse permission to insurance companies but grant to Lloyds

24
Q

Why do insurers operate as syndicates and insurance companies? Capacity

A

Spread capacity over two platforms to obtain more market share / take separate shares of same risk

25
Q

Why do insurers operate as syndicates and insurance companies? Regulation

A

Insurance companies & Lloyds managing agents are regulated by PRA for prudential requirements , FCA for conduct of business issues.

Managing agents subject to additional Lloyds internal rules

26
Q

What is a MGA?

A

MGA - agent of insurer - delegated authority to act on insurer behalf whether through underwriting and/or claims handling. Takes no risk.

Insured should always consider who is the ultimate insurer as well as the agent

27
Q

Define the governance of Lloyds

A

Lloyds - marketplace - society of Members - insurance brand

Corporation of Lloyds - day to day management and responsible for international liaison. Reports to Council.

Council of Lloyds - made up of 3 working (active - broker or a managing agent), 3 external (member ie provides capital but not working criteria) and 9 nominated members (outside of market, non exec)

Working and external elected by Members. All approved by FCA

Council discharges functions by issuing byelaws/rules. Only council can do this.

28
Q

US licensing

A

Licensing given on a state by state basis

Lloyds focussing on surplus lines placements - when admitted/licensed market unable or unwilling to support

Insurance companies may have to maintain funds within individual countries by regulators. For Lloyds this is done centrally as a marketplace. Companies have to do this on an individual basis.

29
Q

Lloyds Principles

A

Each Managing Agent’s board has responsibility for meeting these. Training and education.

30
Q

Qualities of the London Market that attracts clients. Quality of brokers

A

Quality and knowledge of London market brokers (on a retail or wholesale basis)

31
Q

Qualities of the London Market that attracts clients. Reputation

A

Long-standing reputation of excellence

FCA regulations - professional and ethical standards. Focus on customer services.

FCA Customer Duty - standards across financial services industry to protect customers (communication is clear, relevant and they are supported)

CII code of ethics - delivering positive consumer outcomes

ESG focus

32
Q

Qualities of the London Market that attracts clients. Brand

A

Visibility of Lloyds
Easily identifiable

33
Q

Qualities of the London Market that attracts clients. Capacity

A

Subscription market - several insurers, larger risks can be placed

34
Q

Qualities of the London Market that attracts clients. Knowledge

A

London market has accumulated knowledge. Is focused on R&D into new products

35
Q

Qualities of the London Market that attracts clients. Flexibility/entrepreneurial spirit

A

Flexible, competitive on price, bespoke products

36
Q

Qualities of the London Market that attracts clients. Licensing

A

Lloyds - central licensing
IUA - individual licensing

Clients have international business so want insurer that can provide cover worldwide for 1 peril

37
Q

Qualities of the London Market that attracts clients. Claims service.

A

Knowledgeable and proactive claims personnel

Lm2 (9 decks)

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