Chapter 1 - Structure Of The Insurance Industry Flashcards
1
Q
What is an advantage to a client for using a broker?
A
Can obtain independent advice on a wide range of insurance matters.
2
Q
What is an advantage to an insurance company through gaining business through a broker?
A
Negotiations are quick and easy with a broker because only intricate points or special requirements require discussion, both saving time and money on routine matters.
3
Q
In a proprietary company, who do the profits belong to?
A
Shareholders
4
Q
What are the two basic needs and reasons why insurance companies purchase reinsurance?
A
- To limit (as much as possible) annual fluctuations in the losses that affect their underwriting account, often referred to as smoothing out the underwriting result.
- To be protected in the case of catastrophe (both man made and natural)
5
Q
What are the two ways a mutual company can be formed?
A
Deed of settlement or registration under the companies act
6
Q
Mutual companies are owned by who?
A
The policyholders
7
Q
The shareholder in a proprietary company will receive their profits by way of?
A
Dividends
8
Q
What is demutualisation?
A
When a mutual company decides to register under the companies act as a proprietary company.
9
Q
What difficulty do mutual companies have?
A
Difficulty in raising additional capital to expand the business as they cannot issue additional shares in the way proprietary companies can.
10
Q
Give 6 examples of long term business
A
- Life and annuity
- Permanent health
- Critical illness
- Pension fund management
- Unit-linked investments
- Endowment savings and assurance contracts
11
Q
Within Lloyd’s what are the groups called that members underwrite for?
A
Syndicates
12
Q
Within Lloyd’s, who do members employ to run syndicates and carry out underwriting business?
A
managing agents
13
Q
What has Lloyd’s set in place in case members are unable to pay a claim? And who does this protect?
A
A chain of security and this is designed to protect policyholders
14
Q
What is an important development in the modernisation and reform of Lloyd’s?
A
Creation of a franchise structure in which Lloyd’s as the franchisor and managing agents and the members for whom they act are the franchisees.
15
Q
Who makes up the franchise board in Lloyd’s?
A
Members drawn from both inside and outside the Lloyd’s market.
16
Q
What is a captive insurance company?
A
Non insurance parent company forms an insurance company subsidiary to underwrite certain of its own insurable risks.
17
Q
What are the incentives of a captive insurance company?
A
- Pay premium based on own experience
- Avoidance of direct insurers overheads
- Obtaining lower overall risk premium level by purchasing reinsurance at a lower cost than that required by the conventional or direct insurer.
18
Q
What are passporting rights?
A
Allows a UK company, subject to compliance with the relevant directives, to conduct business in the EEA
19
Q
What is takaful insurance?
A
Roots in Islamic financial services industry, based on rulings of sharia law on financial and commercial transactions. Works on principle that any transaction, risk and profit should be shared between participants.
20
Q
In takaful insurance, what are the three aspects that are deemed to be against Islam?
A
- gharar (uncertainty)
- Maisir (gambling)
- Riba (interest)
21
Q
What does takaful mean?
A
Guaranteeing each other
22
Q
What are the 5 Islamic principles takaful insurance embraces?
A
- Mutuality and cooperation
- Shared responsibility
- Joint indemnity
- Common interest
- Solidarity
23
Q
When a reinsurer is deciding whether to accept business, they must consider?
A
The overall underwriting approach and philosophy of the direct insurer to have some assurance that the risks are carefully assessed and priced.
24
Q
What is treaty insurance?
A
When the reinsurer agrees to take on a part of all the insurance portfolio that the direct insurer underwrites. Usually an annual contract agreed in advance and terms are fixed so both the insurer and reinsurer have certainty of the deal for the next year.
25
What are the two types of treaty reinsurance and how do they differ?
Proportional and non proportional.
Proportional is when the insurers and reinsurers take a stated proportion of each risk and share the premium and claims on the same basis.
Non proportional is when an insurer retains the first layer of cover and the balance is transferred to the reinsurers.
26
What is facultative reinsurance?
This is where each reinsurance requirement is negotiated individually in respect of an individual risk.
27
What is the AFM?
Association of financial mutuals. A trade body that represents 47 mutual insurers, friendly societies and other financial mutuals across the UK
28
If an insurer provides cover for a building worth £10 million but decides to share 50% with a reinsurer on an equal basis, what is this reinsurance?
Proportional reinsurance, quota share.
29
Pool re was established in 1993 because of?
Numerous terrorist incidents in the UK
30
Should pool re not have sufficient reserves, who can be called upon?
The government
31
What is the aim of Flood Re?
Ensure flood insurance remains widely affordable and available.
32
Why would a large company self insure?
They would feel that they are large enough financially to carry such losses and because the cost to them, by way of transfer to their reserve fund is lower than the commercial premium level.
33
What is the difference between self and non insurance?
Self insurance is where a conscious decision is made to create a fund, whereas non insurance is when no conscious decision is made at all, or no fund is created.
34
What is the difference between a multinational and global company? List features.
A multinational company has a home base but many other national operations, this means it can respond to local demands whereas a global company sees the world as one potential market.
The global companies aim is to be seen as one global singular brand, they are centralised businesses. An example of global would be Lloyd's.
35
Which act meant that non Lloyd's brokers could place business with Lloyd's syndicates?
Legislative reform (Lloyd's) order 2008
36
Which group was established to maintain and enhance the position of the London market in the international insurance market?
London Market Group
37
Give 10 reasons why the London market has developed into successful international centre for insurance and reinsurance?
1. Political and economic stability
2. Geographical location
3. Quality transport system
4. Highly qualified personnel
5. Office space at competitive prices
6. English is business language
7. Stable legal and regulatory environment
8. Time zone
9. Foreign presence
10. Developed financial centre
38
Independent intermediaries often have what with insurers other than delegated authority?
Schemes
39
A scheme which offers broader cover at a competitive rate and tends to target sectors of the market such as members of a particular profession, club or society are known as?
Affinity schemes
40
Agents including estate and travel agents will often be what type of intermediary?
Appointed representatives and therefore dealing with one particular insurance company.
41
When agreeing a loan a bank may provide?
Creditor insurance
42
Retailers having opportunity to market insurance products to very large customer base, this is also known as?
White labelling, where a organisation offers insurance products branded in own name but underwritten elsewhere.
43
How does an aggregator work?
Customer completes set of questions and is provided with quotations from a number of different providers. Customer can approach that company through a link.
44
What does a company need to do to understand customers expectations?
Market research
45
How much more likely is it to retain a customer than win a new one?
5 times
46
Insurance companies should have a good customer focus both to retain business, gain new business and comply with...
Fair treatment of customers under the FCA
47
What is a positive of a complaint?
Analysing complaints is a positive way to find out the cause of the problem and why it happened, helping to improve quality.
48
What is CRM and why is it important?
CRM is customer relationship management. This is to do with getting closer to the customer and moving proactively. This is important because it is by gaining more than once policy with a customer that they are less likely to move elsewhere.
49
What are methods of implementing CRM?
- offering a relationship focus rather than a transaction focus
- understanding buying patterns of customers
- moving proactive not reactive -adopting total relationship management such as direct mail, telemarketing, direct selling, cross selling, email etc.
- enhancing/complementing additional revenue generation efforts.
50
What is the biggest challenge in a company developing CRM capability?
Developing effective computer systems to be able to support this, having relevant information stored, captured and relevant etc.
51
What are the 6 fair treatment of customers outcomes ?
1. The fair treatment of customers is **central to the corporate culture.**
2. **Products and services marketed and sold in the retail market are designed to meet the needs of** identified consumer groups and targeted accordingly.
3. Consumers are provided with **clear information** and are kept appropriately informed before, during and after the point of sale.
4. Where consumers receive advice, the **advice is suitable** and takes account of their circumstances.
5. 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.
6. **Consumers do not face unreasonable** **post-sales** **barriers** imposed by firms to change product, switch provider, submit a claim or make a complaint.
52
What is a stakeholder?
Someone who has an interest in the way a company acts
53
Give 9 examples of stakeholders
1. Customers
2. Shareholders
3. Government
4. The public
5. Employees
6. Suppliers/creditors
7. Consumerists
8. The law
9. Regulators
54
What are business ethics?
Standards and moral conducts that a company or business sets in its dealings within the organisation and outside the business and social environment as a whole.
55
What is it called when companies take the view that it is in their long term interests to play a role in society beyond what is required by law?
Stakeholder perspective
56
Because the CII consider ethical standards very important, what have they said their members should follow?
A code of ethics
57
What are the main requirements of the code of ethics?
Members must:
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, sex, religion, race etc
58
The CII code of ethics is principle based because?
This is flexible and helps wide range of different roles in the sector be accounted for
59
What can happen to members of the CII who do not follow the code?
May have disciplinary action taken against them.
60
What is organic growth?
Where a company develops and expands by increasing its sales, revenue and output through its own current businesses, activities and effort, rather than through mergers or acquisitions.
61
Organic growth simply defined by peter drucker is?
Rate of business expansion through increasing output and sales
62
Mergers and acquisitions are also known as what type of growth?
Non organic
63
Why would a company want to grow?
- 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
- opportunity of increased revenue, profits and shareholder value
64
Organic growth is usually less expensive than non organic as?
Improved returns and forces a company to build a base for further growth.
65
What are advantages of organic growth?
- sound means to measure progress
- more profitable and better investment return
- focus on growing the business/commitment
- good reputation and more economical
- real sales efforts not distorted by m&a's
- less risky
66
What are disadvantages of organic growth?
- takes more time
- heavy demand on management and resources
- may not meet investors expectations
67
What is non organic growth?
This is where a company merges with or acquires another company with the aim of rapidly growing its business.
68
What is the difference between a merger and an acquisition?
A merger only happens if two companies agree to join on a strategic basis whereas an acquisition is where a company gains control of another company purchasing a majority shareholding. The latter is not always seen as a welcome purchaser by the management or shareholders.
69
What is the difference between horizontal and vertical integration in a merger/acquisition?
Horizontal is where the two companies are in the same market,
vertical is where a company is attempting to control a stage closer to the source of the customer or manufacturer.
70
What are the reasons for a horizontal merger and acquisition?
1. Improves mediocre performance to a better market position.
2. Achieving economies of scale.
3. Improving competitiveness
4. Possible opportunities for diversification
71
What are the reasons for a vertical merger and acquisition?
1. Reduce costs, through economies of scale
2. Gain more control of the market, including sources of the supply
3. Greater value to the whole customer proposition, such as when an insurer acquires a back-office service company.
72
Give 3 alternative benefits/reasons for an M&A
1. Acquiring an advanced IT system
2. Employee know how
3. Local licensing in an overseas company
73
Give 4 reasons why M&As happen, apart from growth.
1. Removes duplication so improved efficiency and performance through synergy of processes or economies or of sale by lowering unit costs.
2. Overcoming the cost of IT and resources
3. Provides investment opportunities if an insurance company has spare capital.
4. Spreads risk when companies join together, as diversification by being separate I.e not all book of business in one place. Likely lower solvency capital requirements.
74
What is the overall main argument for the reasons for an m&a?
Improve shareholder value
75
What are the disadvantages to mergers and acquisitions?
1. Reduced customer choice so less competition.
2. Can impact staff negativity through lack of morale if the merge is managed poorly, and could also lead to redundancies.
3. Clash of corporate cultures
4. Takes away focus of core company goals as senior managers caught up in managing the merge. 5. Reduced customer service while change is taking place
6. M&A savings may not be realised, forecasts made by directors on how will improve shareholder value are often not achieved so savings do not actually happen and real value of change therefore not clearly evident.
76
What is the definition of outsourcing?
Outsourcing is the use of a skilled resource outside the company to handle work that was previously performed by in house staff.
77
What is the key benefit of outsourcing?
Frees up the company to focus on core profit generating activities.
78
How do the legalities of outsourcing usually work?
Working relationship governed by legal contract, an agreed for for the outsourced company is promised in return for an agreed service over an agreed period. If the outsourcing company fails to deliver the required service then contract may be terminated and damages sought against it.
79
What are the advantages of outsourcing?
1. Firms can use external specialists and **only incur the costs for the work completed.**
2. Business is **guaranteed a certain level of service.**
3. Business can budget for a **pre agreed fixed cost for the agreed service.**
4. **Outsourced companies are normally specialists** in their area and bring new skills and working methods to a company.
5. Many outsourcing contracts lead to new **partnership opportunities** as the businesses learn new ways of doing business processes.
6. Business may develop new products and **speed to their market**.
7. Business that do outsource have more time to **focus on their core business areas.**
80
What are the disadvantages of outsourcing?
1. Certain element of control is lost
2. Poor service by the supplier can damage reputation of the main company even if it wasn't their fault.
3. Extreme care needs to be taken with customers confidential information, especially with overseas transfer of information.
4. If company is too dependant on the outsourced supplier or their is lack of competition, may be higher costs.
5. If outsourced provider gets into financial difficulty than the main company has to find alternative arrangements often at short notice.
6. Poor communication between companies can result in lack of understanding of customer behaviour and satisfaction.
81
Why have many insurance companies brought back in house functions as oppose to outsourcing them?
Outsourced services often suffer from poorer customer service and lower standards of care. Resulting in increased complaints. Also sometimes costs are greater than expected and the gains in using dedicated technology have not been achieved.
82
As regulated businesses are required to outsource in accordance with regulatory guidelines, where can the rules relating to this be found?
PRA and FCA handbooks in the high level standards senior management arrangements, systems and controls, section 8
83
What are the essential important features of outsourcing regulation?
1. Take reasonable steps to ensure that there is no undue additional operational risks in outsourcing an activity as opposed to retaining the function in house.
2. The quality of internal control is not impaired.
3. The ability of the regulators to monitor the firms regulatory compliance is not hampered by any outsourced arrangements.
84
If a firm outsources any part of its business, what can this not escape?
Requirements of the regulators
85
The PRA and FCA handbook states what regarding material outsourcing must be given to the regulators?
Prior notification
86
What do the FCA and PRA also require a business that is outsourcing to do with regards to its supplier?
Suppliers deal in an open an cooperative way with the regulators, give them access to the business premises with or without prior notice and give the firms auditors accesses to books and records.
87
How do the PRA and FCA each define material outsourcing?
PRA - services of such importance that weakness or failure of the services would cast serious doubt upon the firms continuing satirisation of the threshold conditions or compliance with the funda mental rules.
FCA - services of such importance that weakness of failure of the services would cast serious doubt upon the firms continuing satisfaction of the threshold conditions or compliance with the principles.
88
The requirements of the European insurance and occupational pensions authority detail the expectation of insurers that mange outsourced contracts. These include the requirements for the terms to cover what:
1. The duties and responsibilities of both parties is clearly stated
2. Service providers commitment to comply with applicable laws, regulatory requirements and to cooperate with the firms appropriate regulator.
3. Notice period of the termination by the service provider to be sufficient to allow the firm to make alternative arrangements.
4. The firm, its external auditors and the regulators will have effective access to all information related to outsourced function.
5. The firm must ensure that the outsourced provider has effective risk management and internal controls.
89
What is an advantage of marketing insurance products to affinity groups?
Opportunity to reach a large group of potential policyholders through existing communication channels. This allows targeted products to be developed and sold with lower acquisition costs than in the open market.
90
What is the difference between organic and non organic growth?
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.
91
An insurer provides property insurance for a building values at £50m. It has an automatically facility to share 40% of the risk with a reinsurer. This is an example of what type of reinsurance?
Quota share reinsurance
92
Which type of risks are most suited to self insurance?
High frequency low severity
93
What is the London Market Group's (LMG's) Target Operating Model (TOM)
Comprehensive programme to make the London market a more accessible and cost effective place to do business
94
