Upgrade to remove ads
Only $35.99/year

Chapter 2 - The insurance Market

Terms in this set (15)

Buyers
Private Individuals - For private individuals buildings and contents will be high on the list, as well as motor Insurance.

Companies - These buyers range from multinational companies to self employed sole traders.

Partnerships have insurance needs, especially in the area of professional negligence that specialist schemes tend to cater for.

Public Bodies are major buyers of insurance and include local authorities and schools.

Charities, associations and clubs all have some insurance needs, they may also act for members by arranging group covers or schemes.
Insurers - Defined By Ownership

Proprietary Companies
Mutual Companies
Mutual Indemnity Associations
Captive Insurers (and PCCs)
Any insurer wishing to work in the UK must be authorised by PRA - Prudential Regulation Authority.

Proprietary Companies - registered under the Companies Act 1985, owned by shareholders who share company profits, they are limited liability companies.

Mutual Companies - Owned by policyholders, who share in the profits of the company by way of lower premiums, in theory they're also liable for any losses made by the company, however in reality mutual companies are limited by guarantee.

Mutual Indemnity associations
Self managed pools of insurers that are also owned by their policy holders.

Primarily active in Marine insurance where protection and Indemnity Associations (or P&I clubs) insure certain aspects of marine Hull insurance.

Captive Insurers is an insurance company established by a parent group that provides insurance primarily, if not solely to that parent company.
It's a tax efficient method of transferring risk and has become more common in recent years among large nation and international companies.

PCCs
A special type of captive insurer that operates in two parts with a core and an unlimited number of cells.]It ring fences the assets of the participating cells and allows them to operate as distinct insurance entities.
Types of insurer as defined by function.

Composite companies and specialist insurers

Takaful insurance companies
The state
Lloyd's
The London Market
Composite companies accept several types of business (called classes of business) and represent the major part of the company market.
Specialist Insurers tend to issue policies for only one class of business.

Takaful Insurance has its roots in the Islamic financial services Industry and is based on Sharia law. It works on the principle that any transaction risk and profits (and loss bearing) should be shared between the participants. It also needs to be approved by Islamic scholars to ensure they are compliant, and many providers consult specialist Sharia advisory committees during the development process.

it embraces the Islamic principles of
- Mutuality and cooperation
- Shared responsibility
- Joint indemnity
- Common interest
- Solidarity

The State
In the UK the state acts as an insurer in the areas of welfare benefits and pension provision. It also acts as a guarantor (a kind of reinsurer) to the insurance sector for terrorism risks and flood risks.

Lloyds
Is not an insurer, but an entity providing an infrastructure for the placing of risks in its own market, also acting as a partial regulator

Corporation of Lloyds oversees and supports the wider market, ensuring its efficiency and the maintenance of its reputation.
Syndicates carry the risk and provide financial backing, each syndicate outsources the day-to-day running of the business to a managing agent who may manage one or more syndicates.
Managing agents are dual regulated by the PRA and FCA.
Most risks are not placed using a proposal form but using a Market Reform Contract (MRC) still known as slip.

The London Market is the place where many sizeable or complex industrial risks from all over the world are placed

Contract Certainty is achieved by the complete and final agreement of all terms between the insured and insurers by the time they enter into the contract, with contract documentation provided promptly thereafter.
Intermediaries

These are agents, however perform a wider range of functions than simply bringing two parties (the insured and the insurer) together.

The FCA is the regulator for all aspects of insurance sales and advice The rules that relate to intermediaries apply to insurers in connection with their mediation activities, their advice, promotion and sales functions, and complaints handling.

Authorised persons
Appointed representatives
Introducer appointed representatives
Lloyd's Insurance brokers
Authorised person is an individual or firm authorised by the FCA to engage in regulated activities, once authorised, a firm is bound to abide by all FCA rules.

Appointed representatives may be individuals or companies that are appointed by an authorise person (the principal) under the terms of a contract.
An AR may act for more than one principal provided there is a suitable contract in place with each one, there must therefore be adequate oversight arrangements be put in place over the AR.

Introducer appointed representative is one whose scope of appointment is limited to distributing 'non-real time financial promotions' thing such as brochures and proposal forms.

Lloyd's insurance brokers must satisfy the Council as to their expertise, integrity and financial standing. The requirements of Loyd's are in addition to those of the FCA for authorised persons.
Services Provided by Intermediaries
In the market, the main feature of an independent intermediary is the fact that the intermediary is acting on behalf of the client, not the insurer.

They must be capable of offering advice on the basis of a fair analysis of the market. There is an obligation under FCA rules to make available a list of product providers if the market has not been fully explored.

Remuneration from the insurer is traditionally a percentage of the premium payable , though increasingly thee is a tendency is larger commercial insurance for intermediaries to charge a fee.

The services that intermediaries provide for their clients vary considerable. All independent intermediaries:

- Decide the best market in which to place the risk
- negotiate terms and conditions initially for mid term changes;
- provide advice to the client regarding the detail of the policy wording;
- review client needs;
-negotiate renewals; and
- advise the client on the validity of claims.

Other functions could include:
- Collecting the premium
- committing tot he insurer to cover the risk (if authorised)
-settling claims on behalf of the insurer (if authorised)
- issuing motor or other cover notes to give evidence of cover.
Consolidation of the Insurance Sector

In recent years there has been considerable consolidation in the insurance broking sector. There are many reasons for this consolidation, including the difficulty that many smaller intermediaries have encountered in coping with regulation.

- Broker Networks
- Consolidators
Broker Networks is one business model used by an organisation authorised by the FCA, offering AR status to those joining the network.

There are other networks where all firms are individually authorised by the FCA but join together to access a defined range of centralised services

Consolidators are companies that are growing by the formal acquisition of others within the marketplace.
Insurance Marketing and Distribution

In Insurance terms, the marketing process involves making decisions on product, price, promotion and place (the latter two involving distribution). Together these are sometimes referred to as the marketing mix.

The distribution of insurance is a very important component of the marketing mix. The distribution channels used for insurance can be divided into two main types: Direct and Indirect.
Direct - employees of the insurer sell the insurance products or direct mailing techniques and websites are used to promote sales.

Indirect - Intermediaries paid by the insurer to promote products on their behalf.
Direct Marketing Channels
- Direct Insurers
- Company Sales staff
Benefits and Drawbacks

Benefits
- Where products are marketed directly to the public the insurer saves on brokerage etc, this saving can be passed on to the customer in the form of competitive premiums.
- Although savings are made, there is usually significant advertising and promotion cost that has to be passed to the customer
- The customer can purchase insurance a lot quicker meaning immediate cover can be obtained over the internet or telephone, subject to a return of a pre printed proposal confirmation form or statement if facts duly signed or simply relying upon the recorded voice responses to questions. The insurer can control the customer experience, and make improvements to its service quickly without having to engage a third party.


Drawbacks
- Only one company's product is available, unless the customer makes several telephone calls or reviews quotes on a price comparisons website.
- No independent advice is available regarding suitability and no independent assistance available in the event of a claim (this is, to an extent, balanced by the regulatory obligation that insurers have to treat customers fairly at each stage of the value chain for an insurance product.
Indirect Marketing Channels

- Schemes and Delegated Authority
- Bancassurance

There are many reasons why indirect marketing channels may be beneficial for an insurer.
- The intermediary will earn commission, so there is an incentive to sell the product on the insurer's behalf and the insurer benefits from any promotional activity.
- The insurer must decide what type of intermediary will be appointed, if it chooses an AR or IAR, the insurer will broadly speaking be responsible for their actions.

Independent intermediaries will provide advice to their client (the buyer) about a whole range of things, for many insurers this is a helpful aspect.
Schemes and Delegated Authority
- Many insurers delegate authority to intermediaries to act on their behalf, the intermediary is authorised to issue cover within defined limits.
- The attraction of these schemes for insurers is a flow of business.

Bancassurance
This is the arrangement between a bank and insurance company whereby insurance products are sold to the bank's customers - traditionally through its bank branches.

The first bancassurance operations were established in Europe and have led to several mergers and acquisitions across continent. the momentum has been building outside Europe in recent years, as countries seek to replicate this success in their own financial markets.

- Access to each party's 'scale efficiencies'
- Lower risk to the business
- Access to previously unavailable resources.
- Improving 'value chain efficiency'
- Opportunities for joint product development.
- Market development
Price comparison websites
The internet has facilitated different ways of comparing insurance prices. It has led to the development of consumer focused price comparison websites (PCW's) or 'aggregators'.

- A price comparison website uses web-based extraction tools to collect and analyse ('aggregate') information from different data sources.

- They aim to work with a number of direct insurers and intermediaries, delivering a service to the proposer whereby the completion of one question set provides quotations from a number of insurance providers.
- The proposer can then approach that company and purchase their insurance at competitive rates.
Reinsurance and it's Purpose
Reinsurance may be on an individual risk basis, an event basis or on a portfolio (wide range) of risks.

Purpose of reinsurance
An insurer is able to reinsure a risk that it holds because it stands to lose financially as a result of any claim payment. The insurer is therefore able to pass any (or all) of the risk to another insurer as reinsurance.
In summary the purpose of reinsurance is to:

- Smooth peaks and troughs in the claims experience ;
- protect the portfolio (class of business);
- Provide improved customer service; and
- provide support for insurers entering new areas of business.


Types of Reinsurer
1. Specialist reinsurance companies that do not transact original (direct)( insurance business.
2. Lloyd's Syndicates
3. Insurance companies that also act as reinsurers.


Insurer (Reinsured/Cedant/Ceding Office) --> Buys Reinsurance (Reinsuring) --> Reinsurer --> Buys Reinsurance (Retroceding) --> Reinsurer


Reinsurance is an international business, and insurers usually spread their risks over a number of reinsurance companies at home and abroad. Many Lloyd's syndicates also buy and sell reinsurance. The UK reinsurance market transacts most of its business in the 1. City of London.
2. The IUA
Insurance Professionals

- Underwriters
- Claims Personnel
- Loss adjusters/assessors
- Surveyors.
Underwriters
Main Functions are to:
- Assess the risks that bring people to the pool;
- Decide whether or not to accept the risk (or how much of it to accept;
- Determine the terms, conditions and scope of cover to be offered; and
- Calculate a suitable premium

Claims Personnel
An efficient claims department, staffed by competent and professional claims personal, is vital to ensure the proper management of an insurance company's funds. The role of the claims personnel is to:
- Deal quickly and fairly with all claims submitted;
- Distinguish between real and fraudulent claims;
- Determine the realistic cost of a claim prior to payment (reserving);
- determine whether others, e.g. loss adjusters, need to be involved; and
- settle claims with the minimum of wastage.

Loss adjusters
Loss adjusters are experts in processing claims from start to finish and act for the insurer.

Their aim is to negotiate a settlement, within the terms of the policy, which is fair to both the insurer and the insured. Chartered loss adjusters are members of the Chartered Institute of Loss adjusters (CILA). Loss adjusters are independent, professionally qualified persons. Invariable. their fees are met by the insurers who instruct them.

Loss assessors are experts in dealing with insurance claims and act for the insured/policyholder, preparing and negotiating claims on their behalf.

Surveyors and those providing forensic services

A surveyors role (linked to a claims situation) may involve:
- Giving advice on the immediate action necessary following a loss (e.g. employing a night watchman);
- making recommendations as to any underwriting action necessary (e.g. reduction in theft cover until premises are again adequately protected); and
- Establishing whether previously advised requirements made by the insurer have been complied with.
Insurance Professionals

- Actuaries
- Risk Managers
- Compliance officers
- Internal auditors
Actuary
An actuary applies probability and statistical theory to problems of insurance, investment, financial and risk management, and demography.

Actuaries have for many years been associated with life insurance companies, applying mortality statistics and time value of money techniques to determine the adequacy of funds to meet future liabilities. They are also employed by non-life insurance companies.

Techniques applied by actuaries will include the probability of loss and the prediction of claim numbers and future values.

the company's actuarial function has a key role to play in meeting Solvency II requirements.

Risk managers
The functions of risk managers may be summarised as follows:
- The systematic identification, analysis and economic elimination or control of risks that threaten the business.
- Providing guidance on bets practice in these areas to management.
- The transfer of appropriately identified risks by contract or insurance.

Compliance Officers
Their main role is to ensure that their firm abides by the rules and regulations set down by the regulator.
Their range of functions undertaken by a compliance officer will usually include:
- Communicating the company's policy to members of staff, setting up any associated training.
- Completing regular reports on governance, finance and complaints for the FCA;
- Reviewing all stages of the business processes to ensure that they are appropriate and compliant.
Maintaining the company's compliance manual;
- performing the role of money laundering reporting officer as required by regulation.


Internal auditors
- These work within firms to monitor and evaluate how well risks are being managed, the business is being governed and the internal processes are working.
- They provide an independent and objective assessment of the effectiveness and efficiency of a company's operations, specifically its internal control structure.
- Unlike external auditors also advise management on how to improve systems an processes.

under Solvency II regime internal auditors have a key role to play in assessing the reliability of financial reporting and compliance with laws and regulations.

HMRC and Insurance premium tax
Insurance premium tax (IPT) is levied by the Government on general insurance premiums in the UK. There are two main rates:
- A standard rate of 12%
- A higher rate of 20% for travel insurance and some vehicles, and domestic and electrical appliances.
Market Organisations
- Association of British Insurers (ABI)
- International Underwriting Association of London (IUA)
- British Insurance brokers Association (BIBA)
- London Market Regional Committee (LMRC)
- London and International Insurance Brokers Association (LIIBA)
- Lloyd's Market Association (LMA)
- Managing General Agents' Association (MGAA)
Association of British Insurers (ABI)
The ABI is the largest of the insurance market associations.

- It is engaged in a variety of work, including the gathering of relevant market statistics, framing of codes of practice and playing a major role in public relations, creating a greater awareness of the role of insurance/ - The ABI also confers with the Government on matters of interest to its members.

International Underwriting Association of London (IUA)
- The IUA is the world's ;largest representative organisation for international wholesale insurance and reinsurance companies.
- The IUA exists to protect and strengthen the business environment for its member companies operating in or through London.

British Insurance Brokers Association (BIBA)
- BIBA is a major non-statutory trade association for insurance intermediaries.
- BIBA seeks to maintain and improve the highest standards of business behaviour and to protect and enhance the interests of its members for the benefit of the general public.

London Market Regional Committee (LMRC)
- The intention of the LMRC is to maintain a lobbying role and represent the sector to the FCA, Europe, the UK Government and other stakeholders.

London and International Insurance Brokers Association (LIIBA)
- LIIBA is an independent trade body, representing the interests of insurance and reinsurance brokers operating in the London and international markets.

Lloyd's market Association (LMA)
The LMA provides representation, information and technical services to underwriting businesses in the Lloyd's market.

Managaing General Agents' Association (MGAA)
- The MGAA was formed with an elected board in February 2012 to give the insurance industry a better understanding of what MGA is and what they contribute to the industry.
Market Organisations
- Chartered Insurance Institute (CII)
- Chartered Institute of Loss adjusters (CILA)
- Institute and Faculty of Actuaries (IFoA)
- Institute of Risk Management (IRM)
- Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC)
- Insurtech UK (IUK)
- Motor Insurers' Bureau (MIB)
Chartered Insurance Institute (CII)
- The CII has been at the forefront of insurance education and professionalism for over 100 years. Since the turn of the 21st century, membership has risen from 65,000 to over 125,000 throughout the UK and overseas.
- The CII's examination programmes and membership services ensure that members are equipped with the knowledge and understanding of insurance needed to perform their roles effectively.

Chartered Institute of Loss adjusters (CILA)
- The CILA was set up under Royal Charter and it is a leading authority on insurance claims issues. The institute is recognised worldwide and embodies core values of education, examination and professional standards.
- The code of conduct states that members must at all times preserve impartiality. To maintain standards, the CILA has its own complaints handling mechanism.

Institute and Faculty of Actuaries (IFoA)
- The IFoA is the Uk's only chartered body dedicated to actuaries and has a membership of more than 12,000 fellows, associates, affiliates and student members. For practical purposes they operate as a single entity.

Institute of Risk Management (IRM)
- The IRM actively works with partner organisations to develop new educational programmes, thought leadership and continuing professional development.


Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC)
- Airmic promotes the interests of corporate insurance buyers and those involved in risk management and insurance for their organisation. Members include company secretaries, finance directors, internal audit, and risk and insurance managers.

Insurtech UK (IUK)
- IUK was newly formed as a trade body in 2019 and aims to position the UK as a leading force in technological innovation in the insurance sector. It represents the interests of a range of business types operating in the sector - in particular, those that describe themselves as 'insurtech' companies.

Motor Insurers' Bureau (MIB)
The MIB's mission is to:
- Significantly reduce the level and impact of uninsured driving in the UK;
- Compensate victims of uninsured and untraced drivers fairly and promptly; and
- Provide first class asset management and specialist claims services.
Sets with similar terms