                                      ' CHAPTER 3 '                                                          
                           'STRUCTURE OF THE MARKET.                                                         
                                                                                                            
 3A NTRODUCTION                                                                 3J 1NTERMEDIARIES            
                                                                                                            
                                                              Agent                                          
 3B THE INSURANCE MARKET                                         Broker                                      
                                                            Lloyd"s Broker                                   
                                                            Insurance Consultant                             
 3C PROPRIETARY 1NSURANCE                                              Industrial Assurance Consultant       
  COMPANIES                                                                                                  
 3D MUTUAL COMPANIES                                                              3K SELF-INSURANCE          
 3E INDUSTRIAL LIFE ASSURANCE                                                   3L REINSURANCE               
  COMPANIES                                                                                                  
 3F COLLECTING FRIENDLY SOCIETIES 3M MARKET ASSOCIATIONS                                                     
 3G CAPT1VE INSURANCE COMPANIES Association of British Insurers                                              
                                                                         Loss Prevention Council             
 3H MUTUAL INDEMNITY COMPANIES Motor Insurers" Bureau                                                        
                                                            British Insurance and Investment                 
 31 LLOYD'S UNDERWR1TERS                                                  Brokers" Association               
                                                                                                            
                                                            TEST No 3                                        
                                                                                                            
  3A INTRODUCTION                                                                                            
                                                                                                            
  The term 'market' denotes a place where people buy and sell 'goods. There is, of course, no good           
  reason why services should not also be sold in a market. F'or many years Lloyd's of London was the         
  only place where representatives of buyers could meet sellers faye to face but there are now similar       
  markets in the United States.                                                                              
    Most insurance today is arranged by intermediaries acting on behalf of clients. Their job is to          
  arrange insurances on behalf of people who ask them to do so but also to encourage people to insure        
 in respect af needs which the intermediary - being experienced in insurance and risk - makes them           
 aware of,                                                                                                   
    'I'he diagram 3B shows the general stnicture of the insurarice market. The buyers in ihe market are      
  ihe i.ublic, irdustry and commerce as well as some local government and nationalised enterprises.          
  Cbviously there is a difference in the' sizes of risks offered ragging from the contents of very small Oats
  insured against fire, to large office blocks in the centre ot a big.'town.                                 
    The people who offer insurance cover are the insurers who may be proprietary companies,                  
  cieties, mutual indemnity associations or L)oyd's Vndenvriters, Insurance may be bought directly           
 : frc.n companies at their branch offices or through their represepta!ives. Most insurance, however, is     
  arranged through intermediaries who are approached by prospective insureds or bring the need for           
  insurance to the notice. of their clients. '                                                               
    Intermediaries are brokers and agents who act on behalf of their clients but are usually paid in the     
 form of commission by the insurers.                                                                         
                                                                                                            
 3C PROPRIETARY INSURANCE COMPANIES                                                                          

 The early companies were created by Royal Charter. They are the'London Assurance (now part of                  
 the Sun Alliance 8c London Group) and the Royal Exchange Assurance (part of the Guardian                       
 Royal Exchange Group) created in 1720. Another way that companies have been formed is.by                       
 Act of Parliament but the more usual way - especially at the present tirhe - is under the Companies Acts.      
  Proprietary companies are owned by the shareholders whose liability for losses is restricted to the           
 nominal value of their shares (basically that is the originally stated face value of the shares).              
                                                                                                               
 3D MUTUAL COMPANIES                                                                                            
                                                                                                               
 Mutual companies have been formed by Deed of Settlement of registration.under the Companie                     
 Acts. They are owned by the po]icyholders who share any profits made. The shareholder in the                   
 proprietary company receives his share of the profit by way of dividends,' but in the mljtual company          
 the policyholder ovmer may enjoy lower premiums or higher life assurance bonuses than woQd                     
 otherwise be the case.                                                                                         
   It is no longer possible to tell from the name of a company whether it is proprietary or mutual. Many        
 companies which were originally formed as mutual organisations have now registered under the                   
 Companies Acts as proprietary companies although they have retained the word mutual in their title,            
 Others, registered as companies limited by guarantee and without the word mutual in their title, are, in       
 fact, owned by the policyholders.                                                                              
  There are other ways of.classifying insurance companies.                                                      
  (a) Specialist companies- are those which undenvzite one type of insurance business only, e.g.                
      life companies, engineering insurance companies,                                                          
  ,(b) Composite companies- are those which underwrite several types of business.'                              
                                                                                                               
 3E INDUSTRIAL LIFE INSURANCE (HOME SERVICE INSURANCE)                                                          
                                                                                                               
 These are proprietary companies transacting "industrial' life ance and increasingly, "ordinary'                
 life assurance as well, Their activities in industrial life assurance are controlled by the Industrial         
 Assurance & Friendly Societies Acts. Premiums are collected weekly, fortnightly or,monthly,'                   
 Collectors are emp)oyed to call at the homes of the policyholders and new business is aho transacted '         
 in this way.                                                                                                   
  Ordinary Branch life assurance premiums are collected quarterly, half-yearly'or annually, or paid             
 by Direct Debit monthly, If the premiums were physically collected more frequently than every two              
 months the policies would be considered to be Industrial Life Assurance and subject to the '                   
 appropriate laws,                                                                                              
                                                                                                               
 3E COLLECTING FRIENDLY SOCIETIES                                                                               
                                                                                                               
 These societies are run qn a mutual basis and are formed bylregistration under the Friendly                    
 Societies Acts. They transact industrial life assurance and, in some cases, personal accident and              
 sickness cover,                                                                                                
  While some of these societies are nationally known names, the ma)oiity dpeiate within ihe area of             
 their registered o5ce.                                                                                         
   Their growth arose out of the Industrial Revolution'when the industrial.worker required funeral              
 benefits, at least, and these societies provided small policies with the pr'emiums being.co]lected             
 weekly and therefore at a cost the worker could afford, for example,'the equivalent of less than )/2p.         
 per week. Levels of cover and premiums have now risen to keep pace with the needs of society and:              
 the large home service insurers of today grew from these small beginnings"Friendly societies can.              
 issue specially attractive life assurances subject to an overall premium )imit qf quite a low level; this      
 premium limit does not app)y to Industrial Life Assurance companies..-:,                                       
                                                                                                               
  3G CAPTIVE INSURANCE COMPANIES                                                                                
                                                                                                               
  Captive insurance is a method of transacting risk transfer which hds become more common in recent             
  years among the large national and international industrial compahies. The parent company forms a             
  bwb<! diary company to underwrite certain of its insurable and sometimes otherwise uninsurable risks.         
   1ndeed the incentive to form a captive company for many largq industrial concerns was ihat the               
  insuiarice market generally was not prepared to write particuhr risks or provide, full cover (an              
  exa .ipk. would be insurance guaranteeing a product's performance). The main 'incentives are                  
  to obtain the full benefit of the group's risk control techniques by paying premiums based on its             
  own experience, avoidance of the direct insurers' overheads and obtaining a lower overa)1 risk                

 preiniurn level by purchasing reinsurance at )ower cost than that required by the conventional or            
 direct in.:urer.                                                                                             
    Ail diect insurers ret-in only a portion of many risks and reinsure (or insure again) the portion         
 which is above their financial ability to retain. As the direct or commercial market insurer has all the     
 y-rocuiation and survey costs to bear, the net cost of reinsurance issub "tantially less thanlhe cost of     
 uii-.:t.insurance. Hence, the captive company can have access to the lower cost reinsurance market           
 : -,i4, i wough the proportion of the risk retained, still have the advantages to the group of self-         
 insurance for that amount of risk. The premiums paid to the captive company are allowable against            
 curiwraiion tax, although in America the IRS (the US equivalent of our Inland-Revenue) has                   
 disaHov"ed such premiums where the captive transacts no business from risks created outside the              
 pa16f)t company.                                                                                             
    Several captives now transact business from other sources, and many captives are operated from            
  offshore tax havens such as Bermuda and Guernsey in order to obtain additional savings through              
 taxation concessions in these areas. Only the largest concerns tend to create captives.                      
                                                                                                             
  3H MUTUAL INDEMNITY ASSOCIATIONS                                                                            
                                                                                                             
  hfutual ii indemnity associations differ from mutual companies in thai ihe latter wi11 accept business      
 from                                                                                                         
  tlute public at large, whereas an indemnity association originally wou)d only accept business               
 from                                                                                                         
  irisrnbers of a particular trade. Over the years many of the associations have had to accept                
 business                                                                                                     
  'iom members of the public in order to have greater financiel stability ar.d spread of risk and have        
  'been reformed as mutual or proprietary companies.                                                          
    '1'I;e true mutual indemnity associations grew out of trade associations and are common pools             
 into                                                                                                         
  which members of a particular trade contribute, and from which they can make a claim                        
 when                                                                                                         
  necessary"The associations were formed because members'of a' particular trade fell that the cost            
 of                                                                                                           
  coaimercia! insurance was too high relative to their particular claims experience, or that they had         
 an                                                                                                           
  insurance need which was not being met by the commercial market at that time.                               
      Many associations have been taken over by the conventional insurance markel,                            
                                                                                                             
  31 LLOYD'S UNDERWRITERS                                                                                     
                                                                                                             
   There are just over 26,000 members of Lloyd's grouped into approximately 400 syndicates. The trend         
   seems to be a reducing number of richer members (names) grouped into larger syndicates. These              
   syndicates can be made up of on)y a few members or in some ca.-es more than a thousand. Each               
   syndicate in managed by an underwriting agent who appoints professional underwriters to work for           
   syndicate.We should note that the "names", the underwriting members, are not normally                      
   insurance professionals. They come from many walks of life including the professions, the world of         
   entertainment, the aristocracy etc, Each underwriting mern Mr is, however, fully and personally liable     
   for all the business written on his behalf by the underwriter'ol the syndicate,                            
    In view of this unlimited liability it iy essential that strict regulations apply to any person wishing to
   become an underwiting member. For example to become a Lloyd's'underwriting member a person                 
 must:                                                                                                        
                                                                                                             
 (1) be recommended by other members;                                                                         
 (2) transact business with unlimited personal liability;                                                     
 (3) satisfy the Council of Lloyd's of his financial inte-ity;                                                
 (4) furnish security in an approved form to be held in trust by the Corporation of Lloyd's; the              
    amount varies according 1 o the volume of business to be transacted. A UK member must                     
    nowadays provide evidence of minimum means of f.250,000 ahd also-de -sit a bio rtion at                   
    loyd's;                                                                                                   
 (5) giay- all premiums into Premium Trust Funds under deeds of trust approved by the Department              
    of Trade and 1ndustry and the Council of Lloyd's from which only claims, expenses and probe               
 proposer) The o-eeptieas-archer e ..they- may-km-administering - 'Binding-Authorities'-or - (6) subject      
 underwriting accounts annually to an independent audit which requires underwriting                           
    may be paid; assets to be suEciept to meet his liabilities for all classes of business; .,                
 (7) contribute by means of a levy on premium income to a Central Fund intended to meet                       

 preiniurn level by purchasing reinsurance at )ower cost than that required by the conventional or            
 direct in.:urer.                                                                                             
    Ail diect insurers ret-in only a portion of many risks and reinsure (or insure again) the portion         
 which is above their financial ability to retain. As the direct or commercial market insurer has all the     
 y-rocuiation and survey costs to bear, the net cost of reinsurance issub "tantially less thanlhe cost of     
 uii-.:t.insurance. Hence, the captive company can have access to the lower cost reinsurance market           
 : -,i4, i wough the proportion of the risk retained, still have the advantages to the group of self-         
 insurance for that amount of risk. The premiums paid to the captive company are allowable against            
 curiwraiion tax, although in America the IRS (the US equivalent of our Inland-Revenue) has                   
 disaHov"ed such premiums where the captive transacts no business from risks created outside the              
 pa16f)t company.                                                                                             
    Several captives now transact business from other sources, and many captives are operated from            
  offshore tax havens such as Bermuda and Guernsey in order to obtain additional savings through              
 taxation concessions in these areas. Only the largest concerns tend to create captives.                      
                                                                                                             
  3H MUTUAL INDEMNITY ASSOCIATIONS                                                                            
                                                                                                             
  hfutual ii indemnity associations differ from mutual companies in thai ihe latter wi11 accept business      
 from                                                                                                         
  tlute public at large, whereas an indemnity association originally wou)d only accept business               
 from                                                                                                         
  irisrnbers of a particular trade. Over the years many of the associations have had to accept                
 business                                                                                                     
  'iom members of the public in order to have greater financiel stability ar.d spread of risk and have        
  'been reformed as mutual or proprietary companies.                                                          
    '1'I;e true mutual indemnity associations grew out of trade associations and are common pools             
 into                                                                                                         
  which members of a particular trade contribute, and from which they can make a claim                        
 when                                                                                                         
  necessary"The associations were formed because members'of a' particular trade fell that the cost            
 of                                                                                                           
  coaimercia! insurance was too high relative to their particular claims experience, or that they had         
 an                                                                                                           
  insurance need which was not being met by the commercial market at that time.                               
      Many associations have been taken over by the conventional insurance markel,                            
                                                                                                             
  31 LLOYD'S UNDERWRITERS                                                                                     
                                                                                                             
   There are just over 26,000 members of Lloyd's grouped into approximately 400 syndicates. The trend         
   seems to be a reducing number of richer members (names) grouped into larger syndicates. These              
   syndicates can be made up of on)y a few members or in some ca.-es more than a thousand. Each               
   syndicate in managed by an underwriting agent who appoints professional underwriters to work for           
   syndicate.We should note that the "names", the underwriting members, are not normally                      
   insurance professionals. They come from many walks of life including the professions, the world of         
   entertainment, the aristocracy etc, Each underwriting mern Mr is, however, fully and personally liable     
   for all the business written on his behalf by the underwriter'ol the syndicate,                            
    In view of this unlimited liability it iy essential that strict regulations apply to any person wishing to
   become an underwiting member. For example to become a Lloyd's'underwriting member a person                 
 must:                                                                                                        
                                                                                                             
 (1) be recommended by other members;                                                                         
 (2) transact business with unlimited personal liability;                                                     
 (3) satisfy the Council of Lloyd's of his financial inte-ity;                                                
 (4) furnish security in an approved form to be held in trust by the Corporation of Lloyd's; the              
    amount varies according 1 o the volume of business to be transacted. A UK member must                     
    nowadays provide evidence of minimum means of f.250,000 ahd also-de -sit a bio rtion at                   
    loyd's;                                                                                                   
 (5) giay- all premiums into Premium Trust Funds under deeds of trust approved by the Department              
    of Trade and 1ndustry and the Council of Lloyd's from which only claims, expenses and probe               
 proposer) The o-eeptieas-archer e ..they- may-km-administering - 'Binding-Authorities'-or - (6) subject      
 underwriting accounts annually to an independent audit which requires underwriting                           
    may be paid; assets to be suEciept to meet his liabilities for all classes of business; .,                
 (7) contribute by means of a levy on premium income to a Central Fund intended to meet                       

   underwriting liabilities of any member in the unlikely event of his security and personal assets               
   being insufficient to meet his underwriting commitments. This Central Fund is not intended to                  
   protect the underwriter, who is still personally liable to the full extent t his private wealth; it is         
   intended to protect the insured person.                                                                        
                                                          I                                                       
 3J 1NTERMEDIARIES                                                                                                
                                                                                                                 
 The intermediaries in the market are insurance brokers, agents, consultants and a variety of oiher               
 people operating with differing titles. 1n some respects they all vary slightly in wha they do, how they         
 do it and in their responsibility for their actions. An agent acts on behalfofsomeqne else and as such he        
 has a legal duty to act in good faith. In insurance there is a particular problem because the agent acts as      
 a rule on behalf of the proposer but can also be acting for the insurer in certain instances (this does not      
 apply to Lloyd's brokers who are agents for the proposer.                                                        
                                                                                                                 
 Agent                                                                                                            
 As was mentioned above, for example, estate agents, solicitors, accountants, garage proprietors and              
 building societies could be appointed as agents since their clients may require insurance cover and              
 these intermediaries would arrange it.                                                                           
                                                                                                                 
 Broker                                                                                                           
                                                                                                                 
 A broker is an individual or arm whose full-time occupation is the placing of insurance with insurers.           
 There are two categories of brokers:                                                                             
 (a) 1 1oyd's brokers: they are the only persons permitted to place business at Lloyd's (see later).              
  They a)so place business in the company market;                                                                 
 (5) other brokers (just termed "brokers"). I                                                                     
 Path categories are fu)1-time professionals who must be registered in accordance with the                        
 Insurance Brokers (Registration) Act 1977.                                                                       
 They normally act as agents for the insured (Lloyd's brokers always so), and ard general)y                       
 remunerated by a higher rate of commission than agents. By calling themselves 'brokers' they are                 
 holding themselves out to be experts in the field of insurance and have a higher duty of aare to their           
 client.s than agents.                                                                                            
 Increasingly the broker will provide a service which seeks to identify and then minimise risks to which a        
 business may be exposed, This is termed risk management.                                                         
  From the insurers' point of view, negotiations with brokers are easier and speedier as only the                 
 intricate points or special requirements require detailed discussion, thus saving time and money on              
 routine matters.                                                                                                 
                                                                                                                 
 Lloyd's Brokers                                                                                                  
                                                                                                                 
 The Lloyd's broker represents the insured in the transactions with the uriderwriter.                             
 ( Although only approved brokers can enter 'The Room" an( place business, the Lloyd's brokers are                
 otherwise the same as other insurance brokers in their dealings with insurance companies.                        
                                                                                                                 
 Insurance Consultant                                                                                             
                                                                                                                 
 Another category of intermediary is the insurance consultant, who may act in a similar manner to                 
 an insurance broker, If he does not call himself 'an insurance broker' he does not require to register           
 under the insurance Brokers'(Registration) Act 1977, However, consultants engaged in life                        
 assurance will be subject to one of the self regulatory bodies set up under the Financial Service's Act,         
 1986. Most will be members of the Financial Intermediaries and Brokersf Regulatory Association                   
 (FIMBRA).In the selling of General insurances a new code of practice for intermediaries who are                  
 not registered brokers has been issued by the Association of British Insurers.                                   
                                                                                                                 
 Industrial Assurance Agent                                                                                       
                                                                                                                 
 The  industrial life  insurance offices  and friendly  societies employ  representatives to  ca!) at  the homes
 of  their  policyholders  to  collect the  weekly premiums  and hopefully  to sell  furthez policies.  They are
 not  intermediaries  in  the  same  way  as the  others. In  this case  the representative  is employed  by the
 insurance company but nevertheless he or she performs the functions of an intermediary.                          
                                                                                                                 
 ,. 3K SELF-INSURANCE                                                                                             

 As an alternative to purchasing insurarice in the market, or as an adjunct to i 1 where the first layer or
 proportion of a claim is not insured in the commercial market, some public bodies and large indus(ria)     
 concerns set aside funds to meet insurable losses, As the 'risk is retained within the organisation, there
 is no market transaction of buying and selling, but such arrangements have an overall effect on the        
 ' funds of the market in general and on premium levels where the organisation is carrying the first layer
 : (this is called an excess or deductible. If it is a very large 'sgm, the latter term is usually used).
   These organisations have made decisions to self-insure peruse they fee] they are large enough            
 ; financially to cany such losses, and because the cost to them, by way of transfers to the fund, is lower
 . than commercial premium levels as they are saving the insurer's administration costs and profit.         
                                                                                                           
   The advantages of a self-insurance scheme may be summarized as follows.                                  
   (a) premiums should be lower as there are no costs in respect pf broker's commission, insurers           
      adminislration and profit margins;                                                                    
   (b) interest on the investment of the fund belongs to the insured. This cah be used lo increase the      
      fund or to reduce future premium contributions;                                                       
   (c) the insured" s premium costs are not increased due to the adverse claims experience of other firms
   (d) there is a direct incentive to reduce and control the risk of loss;                                  
   (e) no disputes will arise with insurers over claims, .                                                  
   (f) as the decision to self-insure is likely to be limited to large organisations; they will already have
      qualified insurance personnel on their staff to administer the fund;                                  
   (g) the profits from the fund accrue to the insured,                                                     
   The dzawbacka to self-insurance anangements are as follows:                                              
   (a) a catastrophic loss, however remote, could occur, wiping out the fund and perhaps forcing the        
      organisation into liquidation;                                                                        
   (b) while the organisation may be able to pay for any individual loss, the aggregate effect of           
      several losses in one year could have the same effect as on@ catastrophic loss, particularly in       
      the early years after formation of the fund;                                                          
   (c) it may be necessary to increase the number of insurance staff employed at an extra cost;             
   (d) the claims statistics df the organisaiion mll be derived from too narrow, a base for predictions to
    , be made with confidence as to future claims costs;                                                    
   ,(e)' there may be criticism from shareholders and other departments                                     
      (i) pressure may be brought to bear on the managers of tlie fund, to pay losses which are             
            outside the cover, with the resultant reduction of the fund for its intended poses, and         
            thus making analysis more difficult;                                                            
   (j) the basic principle of insurance, that of spreading the risk (jee chaptei 4);is de eated;            
   (k) the contributions made to the fund do not qualify as a charge against corporation x, whereas         
      premium payments are allowable.                                                                       
                                                                                                           
  3L REINSURANCE                                                                       .I                   
                                                                                                           
 Having decided on the maximum that it is prepared to lose in the event of a.'ma-or )oss, an inkier is      
 faced with a number of choices. He may refuse the risk, agree to accept a part of it ("coinsurance") or
 accept it wiih the intention ofreinsuring. What is important to know here is that an insurer is faced with
 the same pioblem as the insured- to share his risk so as not to suffer a loss that wou)d be catastrophic.
 In the case of co-insurance, insurers share the risk (in the same way 'as L)oyd's underwriters share       
 risks) In such cases the leader' issues the po)icy, deals with the changes of cover and renewals and       
 arranges claims settlements. Co-insurance differs from re-insurance inasmuch as the insured has a          
 refationship wth every insurer whose name appears on the policy document. in re-insurance the              
 in-i-r-r i- himself fi-1 1 v liable in the insured because he (the insurhr) has inide arrangements for "
