General Insurance Markets The Major Providers Marketing Strategies Regulatory and Fiscal Regimes Professional Guidance

The major providers Direct insurance companies Direct insurance companies provide insurance for individuals and companies. In this context “direct” means a company that writes insurance directly for an insured person or company as opposed to one that writes reinsurance. Note: The alternative meaning of a “direct” insurance company – one that deals directly with its customers rather than through an intermediary such as a broker – is not meant in this context.

Direct insurers can be divided into three groups: ● Composite insurance companies — insurance companies that write both general insurance and life insurance. ● Insurance companies that specialize in writing business in only a few classes of general insurance (or even just a single class). ● Insurance companies that write all classes of general insurance.

Corporate structure of general insurers General insurance companies may be: Proprietary (i.e. owned by shareholders in order to make profit) Mutual (i.e owned by policyholders).

Reinsurance companies Reinsurance companies provide cover for insurance providers. Some reinsurance companies will specialize in only writing some types of reinsurance, while others write all types of reinsurance. Some insurance groups write both direct insurance and reinsurance.

The London Market The London Market is that part of the insurance market in which insurance and reinsurance business is carried out on a face-to-face basis in the City of London. These companies tend to be physically located close to each other. The London Market concentrates mainly on providing insurance and reinsurance cover to companies, although Lloyd’s does provide certain personal lines cover.

The London Market It specializes in: ● the larger direct insurance risks – both property and liability – that are beyond the capability of other direct insurance companies (for example, energy and aerospace risks) ● international risks ● reinsurance.

Participants in the London Market ● Lloyd’s syndicates ● UK subsidiaries or branches of overseas insurance or reinsurance companies ● the reinsurance departments of UK composite companies, or reinsurance subsidiaries of such companies ● small professional reinsurance companies set up by large broking firms for the specific purpose of transacting London Market business ● captives ● P&I Clubs ● companies owned by a group of insurance or reinsurance companies ● pools

Lloyd’s syndicates Lloyd’s, a major component of the London Market, is a special insurance market where wealthy individuals and corporate bodies, known as Names, group together in syndicates to collectively coinsure risks. Lloyd’s itself does not provide the insurance. Most members are companies (corporate names) and have limited liability. Private members may have unlimited or limited liability. Lloyd’s syndicates can write business almost anywhere in the world.

Lloyd’s syndicates Lloyd’s of London is a unique insurance institution. It began in Edward Lloyd’s coffee shop in the late 1680’s before being incorporated by the Lloyd’s Act of 1871. It is not an insurance company − it is a marketplace made up of members who provide capital and accept liability for risks that are underwritten in return for their share of any profits that are earned on those risks.

Lloyd’s syndicates The members of Lloyd’s are wealthy individuals and companies known as “Names” A corporate Name is a limited-liability company whose only business is to provide capital to Lloyd’s. A key advantage of a Lloyd’s syndicate is that it has access to Lloyd’s global licenses that enable Lloyd’s syndicates to write business almost anywhere in the world.

SELF-INSURING GROUPS Def: self insurance is the retention of risk by an individual or corporate as distinct from taking up an insurance cover. Captives These are insurance companies entirely owned by an industry or commercial enterprise and set up with the primary purpose of insuring the parent or associated group companies and retaining premiums and risk within the enterprise.

Reasons why an enterprise will set up captives. To fill up gaps not covered by traditional insurance. To manage insurance cost for large companies and groups of companies. To enable the enterprise to buy cover directly from the reinsurer To focus effort on risk management. For tax and other legislative advantages. NB:IN SOME CASES CAPTIVES MAY BE ALLOWED TO TAKE IN EXTERNAL RISKS ON COMMERCIAL LINES.

Self insurance cont.: 2. Protection and Indemnity (P&I) Clubs These are mutual associations of ship owners originally formed to cover for marine risks mainly liability that could not be covered in the commercial market policy at an acceptable price. P&I still provide about 90% of marine coverage owing to their mutual nature and technical expertise. P&I clubs also provide technical assistance and advice on shipping industry to ship owners.

Self insurance cont.: 3.Pools Pool refers to an arrangement where parties agree to share premiums and losses in an agreed proportion especially where risks are very large. A key difference between conventional insurance and pools is that for the former liability is limited by the paid premium while for pool it is related to the share of total claims and other costs.

Non- UK markets All markets tend to be made of similar participants i.e mutual and joint stock insurance companies. However markets can differ in: Concentration of market shares of major insurers If business is written directly with policyholders or with brokers Importance of mutual companies Whether or not composite insurance is permitted

BERMUDA most developed insurance markets tend to be in large developed economies, notably the USA, Japan, Canada, France, Germany, Italy and Spain. However Bermuda stands out being one of the international centers for insurance despite not being among the lead economically. The reasons for this may include: A favorable tax environment. Regulatory advantage because it meets international standards. A government that encourages growth of the financial industry. It is a major tourist attraction Strong historical and cultural links to UK thus attracting business from UK based companies and LLOYD’S businesses.

NON-TRADITIONAL MARKETS This involves the transfer of insurance risk to banking and capital markets (securitization) The capital markets are increasingly involved in taking insurance risk through : Industry Loss Warranties (ILWs):these is reinsurance or derivative contracts where a party takes up protection based on total loss from an event to the entire industry rather than their own loss.

catastrophe (cat) bonds: this is similar to a traditional bond by an insurer or reinsurer where repayment of capital is contingent on a specified event not occurring. “sidecars": is a financial structure that is created to allow investors to take on the risk of a group of insurance policies. They allow insurers to be exposed to reinsurers market without them investing in the reinsurer. and even traditional reinsurance contracts.

Advantages of securitization insurance risk may be uncorrelated with other risks that capital markets are exposed to, and so capital markets are prepared to take on this risk no reinsurance default risk may be cheaper than conventional reinsurance provide cover that reinsurers may not be willing to, or have the capacity to accept more effective or tailored provision of risk management Source of capital Tax advantages.

Marketing strategies This section explains how insurance business is obtained in: Non-London Market business London Market business Independent brokers Tied agents Direct marketing The slip system

Marketing strategies: Non-London Brokers They act as intermediaries between the buyer and the seller of the insurance or reinsurance contract without being tied to either party. They are paid by commission by the insurer. However, under the “law of agency”, they are agents of the insured when placing business. Exception: when operating binding authorities; and when operating line slips. Binding authorities allow the broker to enter into contracts of insurance and issue documents in behalf of the insurance company Line slips will be explained in detail in the next sextion: quick definition: where underwrite delegate authority to accept a predetermined share of coinsured risks

Marketing strategies: Non-London ii. Tied agents they are tied to a particular insurer and sell that insurer’s products alongside their own. Include organizations such as banks and building societies. Exclusivity Binding authorities allow the broker to enter into contracts of insurance and issue documents in behalf of the insurance company Line slips will be explained in detail in the next sextion: quick definition: where underwrite delegate authority to accept a predetermined share of coinsured risks Insurer A Insurer B Motor Insurance = Motor Insurance Other eg. Property, marine etc Tied Agent

Marketing strategies: Non-London iii. Direct marketing Employees who are paid by fixed salary, commission or a combination of both. It involves advertising, telephone, internet and cold call sharing. The method employed varies by country and line of business. Eg. Mass advertising is used for personal lines and small commercial lines With large commercial lines, direct contact with the insurer’s sales force is preferred or employment of specialist brokers.

Marketing strategies: Non-London Monitoring of the efficiency of sales channels is done by observing: Number of sales made through the sales outlet Expenses incurred e.g. through commissions And, most importantly, the quality of business sold

Marketing strategies: London market London market insurance providers acquire business through specialist brokers using the slip system. The slip system involves; Insured Specialist broker Lead underwriter Following underwriters Each underwriter acts as a coinsurer with several liability. Adjustment of risk If more than 100% is placed… If less than 100% is placed…

Regulatory and Fiscal Regimes THE NEED: One of the reasons is that there is more scope for the purchaser to lose out financially. However, with insurance, you pay the price at the start of the contract and you have to trust the insurer to pay valid claims as and when they arise in the future (basically selling a promise, unlike other cases where a good/service is exchanged) The insurer may be very well meaning, but if the insurer’s business is not soundly managed, you may find that the insurer has collapsed by the time you need to make a claim.

Effect of the regulatory regime Restrictions on the type of business that a general insurer can write or classes for which the insurer is authorised. Limits or controls on the premium rates that can be charged. Restrictions on the information that may be used in underwriting and premium rating. A requirement to deposit assets to back claims reserves. requirement that the general insurer maintains a minimum level of solvency, measured in some prescribed manner Restrictions on the types of assets or amount of a particular asset that the GI can take into account for the purposes of demonstrating solvency. Legislation to protect policyholders if a general insurer fails.

Effect of the fiscal regime In most countries the taxation of general insurers broadly follows that for other businesses although there may be special features, such as allowing equalisation reserves to be held to allow for the uncertain nature of general insurance business. For example, transfers to equalisation reserves or catastrophe reserves may be allowable against taxable profit. Some countries impose a tax on general insurance premiums for some or all classes of business.

Professional guidance For example, for IFOA members there are 5 Guidance notes relating to General Insurance; Guidance Note 12,18, 20,33 and 50 The Guidance notes are to be replaced by Technical Actuarial Standards (TASs). These will be more principles based than the Guidance Notes. As at April 2010, the following TASs have been published; TAS D (Data) TAS R (Reporting) TAS M (Modelling) An actuary should also bear in mind guidance on professional standards, i.e Actuarial Code Furthermore, the professional body may issue advice from time to time on specific issues