LM2 - Chapter 7 Flashcards
(28 cards)
Risk Appetite
An insurer has to consider the risks it accepts in terms of its whole portfolio.
Spreading its exposures over a number of different risks enables an insurer to protect its
investors better against the risk of loss
Placing Platform Limited
The system can handle the whole process from quote, through binding the
final risk and post bind endorsements. The system also provides a full audit trail and the
opportunity to tie in with back office systems.
Rating Agencies
One of the determining factors for selecting an insurer
is its security or ability to pay any claims in the future
Rating agencies give grading both to individual insurers and also separately to Lloyd’s
as an entire marketplace. As well as London Company Market insurers, they also rate
overseas insurers.
How are companies rated?
Rating agencies do not only consider the financial position of any insurer; they also look
at the management and operation of the business as a whole. In addition, an insurer is
compared to its peer group in the market.
However, a good rating
from one or more of the agencies is very important to an insurer because the higher
the grading the more secure the insurer appears to potential clients.
Why brokers are so concerned about ratings
Should an insurer be unable to pay a future claim then the broker may
face a claim of negligence from their client. Therefore, to avoid that possibility, the broker will
consider only those insurers with high ratings which, while it is not an absolute guarantee of
survival, at least provides some level of assurance
How is leader determined
The choice of a leader is important as they should:
* set good terms and conditions for the client; and
* be credible to other insurers so that a following market will support the leader, should the
leader decide to not take 100% of the risk
Types of Lead
a number of leaders may appear to exist, as there will be a
Lloyd’s lead and a company market lead if the placement is mixed (known as bureau
leads.) In addition, if part of the risk is placed in another market, there may be an overall
lead overseas.
In relation to the MRC, a slip lead and bureau leads will be identified in the document.
The slip lead will normally be one of the two bureau leaders, unless the slip is being led in
London by an insurer that does not operate through the central data and money movement
bureau operated by Xchanging
DIfference between lead/following
Within the Lloyd’s market
for example, the expectations on the leaders are often more onerous than on the followers.
Broker duty to underwriter
The broker’s fundamental duty is to their principal (or as they are better known: their client),
which is usually the insured; however, care must be taken if there is a situation where the
broker also owes a duty of care to the insurer as their principal. This can occur if the insurer
delegates any authority for underwriting or settling claims on any account to the broker.
Insurer duty
An insurer owes a duty to its investors (whether they are Names in Lloyd’s or shareholders
in an insurance company) to produce a return on their investment. A key means of doing so is by engaging in sensible underwriting at the right price.
The insurers also owe a duty to the client as well as defined by the FCA
FCA consumer duty
- The products and services being provided
Is the product fit for purpose and properly designed and marketed to customers for whom
it is aimed at? - Price and value
Is the customer getting value for money? Are there large charges to make changes or cancel
the policy? - Consumer understanding
Are the communications provided to the customer presented in a way they can understand,
and at the right time? - Consumer support
This concept is about: ensuring that customers actually get the benefit of the product
they have purchased
Probable Maximum Loss (PML)
The PML calculation is very important, for example to calculate how much reinsurance
should be purchased.
Lloyds realistic disaster scenarios
The analysis at its heart is quite simple:
* For each of the scenarios, the managing agent works out which of the risks they have
written might be exposed and their maximum claim on each one.
* Next, they work out whether they have any reinsurance to cover those risks.
* Finally they work out how much the reinsurance cost and how much of the original claims
they would cover.
* Having done those calculations, the final result is firstly the gross financial exposure to
the insurer of the RDS (i.e. without the impact of any reinsurance) and secondly the net
result (taking the applicable reinsurance into consideration as well as any reinsurance
reinstatement costs)
Who calculates the premium
The slip lead
How are premiums calculated
Premiums are usually arrived at by applying a premium rate to a premium base, as follows:
* Premium rate – the hazards that are being faced with a particular risk or
particular insured.
* Premium base – a measure of the exposure
How is premium expressed
The premium rate can be expressed generally as a rate per cent which is a price per £100
insured, or as it sometimes seen as a rate per mille which is a rate per £1,000 insured.
Premium base
While the sum insured is a suitable premium base for many property insurances, it would not
be appropriate for liability insurance, which operates as follows:
* Employers’ liability insurance. The payroll of the insured is used as a basis for
premium calculation, often broken down into different categories of work undertaken.
* Products/Public liability insurance. This is often rated on turnover.
* Professional indemnity insurance. This is rated on fees earned
EL insurance premium example
The insured is able to
estimate the total salary cost for the coming year. The rate is applied to the estimated figure
and at the end of the year the insured submits a declaration showing the actual salaries paid.
At this point, the premium is adjusted up or down, depending on whether the actual salary
cost is higher or lower than the estimated figure. This also applies to products or public
liability risks where the premium is usually related to turnover (i.e. the value of income the
business receives, which bears a relationship to the amount of products manufactured).
Following market premiums
there is no obligation on any member of the following market to accept the premium rate that
the leader has set and they can choose to request a different rate (usually higher). If they
do so, the broker cannot return to the underwriters from whom they have already obtained
commitments to ask if they want to alter their agreement to the higher premium figure.
BIPAR ( European Federation of Insurance
Intermediaries)
- The intermediary shall, based on information provided, specify the demands and needs of
the client as well as the underlying reasons for any advice. - Before placing a risk, an intermediary will review and advise a client on market structures
available to meet its needs and, in particular, the relative merits of a single insurer or a
multiple insurer placement. - If the client, on advice of the intermediary, instructs the latter to place the risk with multiple
insurers, the intermediary will review, explain the relative merits and advise the client on a
range of options for multiple insurer placement.
Intermediaries will expect insurers to give careful independent consideration to the
option requested. - In the case of a placement of a risk with a lead insurer and following insurers on the
same terms and conditions, the previously agreed premiums of the lead insurer and
any following insurers will not be aligned upwards should an additional follower require
a higher premium to complete the risk placement. Indeed, the intermediary should not
accept any condition whereby an insurer seeks to reserve to itself the right to increase the
premium charged in such circumstances. - During the placement of the risk, the intermediary will keep the client informed
of progress.
Components of premium calculation
Operational costs, reinsurance costs, profit margin, contribution to claims reserves, taxes
How does reserving work
For the larger types of claims
that arise on the business written in the London Market, claims are reviewed and reserved
individually. ‘Individually’ means that that each claim is reviewed on a case by case basis,
rather than on a group or aggregated basis. For the smaller value and higher volume claims
such as household and motor, it is quite usual for the insurer to use statistical data to create
a ‘blanket reserve’ across an entire book of business.
Other claims info
There are a number of areas which the adjuster should take into account when considering
an appropriate reserve for a claim, such as the country (or jurisdiction) in which any legal
proceedings might be held and whether the likely amount awarded in those courts might be
higher than the courts would award in the UK
Incurred but not reported (IBNR)/incurred but not enough
reported (IBNER)
Essentially, the insurer applies some uplift to the known reserves to provide for those losses
which have happened but which have not yet been advised to them. The uplift should not be
an arbitrary amount but a calculated figure based on previous experience of how claims, in
relation to any particular class of business, have developed
