Chapter 8: General insurance market

Question 1

Where reinsurance can be obtained by insurers:

Answer 1

• From the London Market
• From Lloyd’s syndicates
• From specialist reinsurance companies
• From direct insurers who also write reinsurance
• In some cases, from the capital markets

Question 2

Participants in the London Market:

Answer 2

• Lloyd’s syndicates
• Captives
• P&I Clubs
• Companies owned by a group of insurance or reinsurance companies
• Pools
• UK subsidiaries/branches of overseas insurance or reinsurance companies
• Reinsurance departments of UK composite companies/reinsurance subsidiaries of these companies
• Small professional reinsurance companies set up by large broking firms for the specific purpose of transacting in the London Market

Question 3

Reasons for setting up captives

Answer 3

• To fill gaps in insurance cover that may or may not be available in the traditional insurance market
• To manage the total insurance spend of large companies or groups of companies. No additional margin going towards a reinsurer’s profit needs to be spent. It allows managing insurance spending at a group level
• To enable the enterprise to buy cover directly from the reinsurance market rather than direct insurers
• To focus effort on risk management
• To gain tax and other legislative or regulatory advantages
• By consolidating the risk across multiple companies, the risk pool may benefit from diversification
• It may benefit from economies of scale and the captive can be tailored to specific aggregate risks faced by the group
• Given all the above, it may be cheaper than traditional reinsurance or what is currently available in the market

Question 4

Non-traditional markets:

Answer 4

• Securitisation – Insurance-linked securities, including catastrophe bonds
• Sidecars
• Weather derivatives
• Committed (or contingent) capital

Question 5

The slip system in the subscription market:

Answer 5

1. The insured approaches a London Market broker
2. The broker prepares a slip that shows, in a standard format, the main features of the risk to be insured.
3. The broker shows the slip to one or more quoting underwriters, who, on the basis of the slip and further information as appropriate, quote a premium.
4. The cedant (with the broker’s advice) will select a lead underwriter and a “firm order” price for the broker with which to approach the market.
   o This firm order price may be below any of the quoted prices.
5. The lead underwriter accepts a share of the risk by stamping and signing the slip.
6. The broker then approaches other underwriters (the following market) to accept the risk on the same terms. The following underwriters indicate the share that they are willing to take by stamping and signing the slip under the lead underwriter line.
   o All the underwriters act as coinsurers with several liability.
   o Each underwriter is separately liable for their obligations
7. The broker continues until they have finished placing the risk (received offers for 100% of the risk)
8. If the written line exceeds 100% then, in agreement with the insured, they are reduced so that the signed lines total to 100%
9. If it is not possible to find capacity to place 100% of the risk, an additional shortfall cover may need to be placed at different terms (a higher premium rate or renegotiated cover or terms)

Question 6

Regulation may affect the following areas:

Answer 6

• Amount/mix of business written, including location of business, mandatory cover, restrictions on selling illegal products, etc.
• Authorisation of insurance companies and management
• Restrictions on sales methods, e.g. licensing of agents and cooling off periods
• Underwriting and premium restrictions, e.g. approval required for premium rates
• Capital requirements, e.g. requirement to hold reserves, minimum capital requirements, risk-based capital calculations, restrictions on discounting, etc.
• Investment restrictions, e.g. assets held, matching requirements, etc.
• Contributions to consumer protection bodies
• Requirement to treat customers fairly
• Restrictions on anti-competitive behaviour
• Reporting and disclosure requirements
• Audit requirements and requirements to produce a statement of actuarial opinion
• Reinsurance requirements

Question 7

Disadvantages of regulatory proposals:

Answer 7

• The cost in terms of resource and finance to comply with and supervise the rules
• The loss of business opportunities that arise due to any restraint on the free market
• The inability to maximise investment returns when there are controls on the investment decision
• Barriers to entry caused by difficulty of complying with regulations
• The difficulties and hence potential inaccuracies in complying with complex (risk-based) capital calculations
• The increased premium cost to the public arising from levies and general increase in insurer expenses
• The inability of companies to benefit from economies of scale and cost reductions due to anti-competitive legislation
• The failure of insurance to reach certain sectors due to the increased cost of and restrictions on methods of distribution