Chapter 1 - Structure of the Insurance Industry Flashcards

Question

What is meant by SDRs?

Answer 1

Sustainability Disclosure Requirements - they offer a framework for companies to handle sustainability opportunies, potential risks, and effects, whilst also establishing measurable goals and objectives. Full mandatory disclosure is not expected to be a legal requirement until 2025.

Answer 2

1. Comply with the Code and all relevant laws and regulations 2. Act with the highest ethical standards and integrity 3. Act in the best interests of each client 4. Provide a high standard of service 5. Treat people fairly regardless of age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion and belieg, sex and sexual orientation

Answer 3

From Peter Drucker, organic growth is the rate of business expansion through increasing output and sales. I.e. not through mergers or acquisitions.

Answer 4

- increasing consumer incomes - ready availability of finance - low interest rates - buoyant markets - opportunities for product development - export opportunities - economies of scale through lower operating costs; and - the opportunity of increased revenue, profits and shareholder value

Answer 5

- Encourages a business to closely examine their own resources, assets and finances to find ways to use them effectively - Can be less expensive than non-organic growth as it can offer improved returns but also forces a company to build a strong base for further growth - Higher productivity for staff than other methods (acquisitions and mergers can often bring uncertainty to employee jobs, reducing productivity) - Involves less risk than external growth - Can be financed through internal funds (e.g. retained profits) - Buildings a on business' existing strengths (e.g. brands, customers) - Allows the business to grow at a more sensible and predictable rate in the long run

Answer 6

- It makes heavy demands on management, as creativity and innovation will be essential to achieve a high level of growth - A business will usually need more time to grow as it requires employees who can handle the growth process along with other actions that are needed to move the business forward (this can mean an enormous committment of time and resources and personnel may need to be found, recruited and trained, premises and equipment acquired, sales conduits established with extensive marketing to get products known in their new field) - Relatedly, the extra time taken to grow may mean that the business has insufficient income to disperse its fixed overheads meaning growth of organisation (staff, IT, facilities) should be matched to growth in premium, where possible - Organic growth takes longer to achieve than a purchase of an existing book of business, which may not meet investors' expectations

Answer 7

- It provides a sound means to measure progress and success. This is because the growth figures are not distorted by a merger or acquisition = you are only measuring as against your own success, not the success of others brought into the fold - Organic growth is seen as a more profitable route with a better investment return - It enables executive management to demonstrate long-term commitment to a business by building it through effective use of internal resources - With the organic growth approach, management can fully focus on growing the business and the achievement of goals, and not be deflected from these because of merger or acquisition structural changes and integration

Answer 8

RSA - in 2001, they formed a bespoke subsidiary, MORE TH>N, to specialise in high-quality personal insurances, thereby taking a significant share of this market. Building upon a well-established brand, they now offer a wide range of life and general business, including commercial insurances.

Answer 9

Due to the lag between putting business on the books and the emergence of the true pattern of claims (which shows whether the business being written is actually profitable or not), business growth must be handled by insurance managers with a good understanding of long-term profitability. This makes insurance unusual from a management perspective - it is long-term business yet many managers are under pressure to manage their business on essentially a short-term basis to give rapid returns to investors.

Answer 10

A merger only happens if two companies agree to join forces on a strategic basis, whilst an acquisition is where a company gains control of another company by purchasing a majority stakeholding.

Answer 11

A merger is when two companies agree to join forces on a strategic basis

Answer 12

An acquisition is where a company gains control of another company by purchasing a majority stakeholding

Answer 13

With regards to M&As, horizontal integration is where two companies are in the same market and the integration is aimed at - improving a mediocre performance to a better market position - achieving economies of scale - improving competitiveness - possible opportunities for diversification

Answer 14

With regard to M&As, vertical integration is where a company is attempting to control a stage either closer to the source of the manufacturer or closer to the source of the customer. The aims can be to - reduce costs, through economies of scale - gain more control over the market, including sources of supply - add greater value to the whole customer proposition, such as when an insurer acquires a back-office service company

Answer 15

A proportionate saving in costs gained by an increased level of production. In essence, the larger a business is, the larger the scale of costs which can be saved. Such savings can come from buying supplies in bulk, specialisation of labour, more integrated technology and investment, function costs (such as IT) are spread across the business etc.

Answer 16

- As duplication is removed, efficiency and improved performance can be gained through synergy of processes or economies of scale by lowering unit costs - Overcoming the cost of IT by being large enough, through the sharing of resources, which are becoming ever more expensive if the latest IT platforms are to be used - Provides investment opportunities if an insurance company has spare capital - Two companies joining together to spread risk. For example, if one is based in the USA and one is based in Europe, and the two books of business are uncorrelated, this will give the new company greater diversification and therefore they are likely to hafve a lower solvency capital requirement than if they remained as separate companies - Increases shareholder value

Answer 17

- Reduced customer choice through the reduction in the number of organisations offering products to customers. This means there can be a reduction in competition - Impact on staff affected and cost of redundancies. - Clash of corporate cultures. - "Eye off the ball" while change is taking place. - Reduced customer service while changes are being implemented. - Expected M&A savings not actually being realised

Answer 18

The expected advantages are: * Only paying for what volume or level of service is required. * Agreed service level benchmarks, with regular performance reporting. * Access to specialist skills. * Access to new partnership opportunities and new business processes * Increased capability to develop new products * More time to focus on core business areas

Answer 19

* Any form of contract that allows the business to outsource processes will mean that a certain control and direction will be lost. * In the event of poor service, the business will lose customers and the firm’s reputation will suffer. Customers will either not be interested or aware that the diminished services are caused by a poor supplier of services. * Extreme care should be taken with customers’ confidential information and data should be protected equally well at outsourced suppliers as it is within the firm. Care needs to be exercised when engaging an outsourced service provider located overseas, as data protection law restricts the transfer of personal data overseas in certain circumstances. * If the business is too dependent on a limited number of suppliers then it will be open to higher costs where competition may be lacking. * If the outsourced company gets into financial problems the business will be faced with problems of finding an alternative provider, possibly at short notice. * Full understanding of customer behaviour and satisfaction can be lost if communication between the business and outsourced company is inadequate. This is an increasing concern when firms desire to be close to their customers and create a loyal customer base.

Answer 20

Disruptors can be existing organisations who deliver substantial innovation in the products and experiences they offer.

Answer 21

- On electronic placement, such as the London Market PFL platform - Claims payment and services - Control of distribution channels - Provision of bespoke solutions - Mass marketing and business communications; and - Management information

Answer 22

Fintech, Big Data and AI

Answer 23

Fintech refers to activities of businesses that have been created to offer new software solutions for financial services. Generally the areas in which Fintech can be applied include: - money transfer - loans - movile payments - risk assessment - asset management The development of Fintech in the insurance sector includes Big Data and data analytics

Answer 24

BigData refers to the substantial amount of information stored by companies regarding their customers and potential customers.

Answer 25

Malware, Ransomware and Hacking

Answer 26

A form of malicious software that can install itself in your systems via phishing scams and by exploiting software vulnerabilities. Once installed, the attacker can spy on online activities and steal private data.

Answer 27

A form of malware that attacks your computer system and encrypts data. The attacker will then demand a ransom payment in exchange for the return of the data. It's worthwhile to formulate a data recovery plan as a precaution and maintain at least one backup of your data.

Answer 28

A term used for the partial or complete acquisition of a computer system or certain functions within it. There are various methods of doing so, but the aim is generally to access important data.

Answer 29

Cyber Business Interruption Loss Privacy Breach Costs Protection Privacy Liability Protection Cyber Extortion Digital Asset Replacement / "Hacker Damage" Cyber Forensic Support

Answer 30

A key feature of a typical cyber insurance policy. If an IT failure or cyber-attack interrupts business operations, insurers will cover the loss of income during the period of interruption, including if this is caused by increased costs of conducting business in the aftermath of the attack.

Answer 31

A key feature of a typical cyber insurance policy. Covers the business for costs arising from dealing with a security breach. For example, notifying customers of a cyber breach, the costs of hiring a call centre to answer customer enquiries, the costs of public relations advice, IT forensic costs, any resulting legal fees or the costs of responding to regulatory bodies.

Answer 32

A key feature of a typical cyber insurance policy. Covers the business against claims of infringement of privacy and associated legal costs in the event of a breach.

Answer 33

A key feature of a typical cyber insurance policy. Protects the business from ransomware and other malicious attempts to seize control of, and withhold access to, operational or personal data until a fee is paid. Typically, this will provide reimbursement of the ransom amount demanded by the attacker as well as any consultant's fees to oversee the negotiation and transfer of funds to solve the ransom request.

Answer 34

A key feature of a typical cyber insurance policy. Protects the business from damage inflicted by a hacker on digital assets.

Answer 35

A key feature of a typical cyber insurance policy. Provides 24/7 support from cyber specialists recommended by your insurer in the period following a hack or data breach.

Answer 36

Lloyd's Product Launchpad encourages and supports product innovation for non-standard risks that might not fit the traditional market such as risks relating to intangible assets, new technologies and others.

Answer 37

It means that the shareholder liability is limited to the nominal value of their shares

Answer 38

Mutual companies may transact life or general business, although the majority operate in the long-term (life) sector

Answer 39

* Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture. * Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly. * Consumers are provided with clear information and are kept appropriately informed before, during, and after the point of sale. * Where consumers receive advice, the advice is suitable and takes account of their circumstances. * Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect. * Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

Answer 40

Organic growth is where the company develops and expands its sales and revenue through its existing book. Non-organic growth comes about through mergers and acquisitions.

Answer 41

Business ethics can be described as the standards and conduct that the firm sets itself in its dealings within the organisation and outside the business within the business and social environment.