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2010 Deloitte MCS Limited

Agenda

Time Topic Sign Off

09:00 09:30 Introduction & Insurance Basics Craig Russell

09:30 10:15 General Insurance Overview Craig Russell

10:15 11:00 Lloyds of London Life Insurance Overview Andrew McNeill

11:00 11:15 Break -

11:15 12:00 Insurance Broking Jamie Lamont

12:00 12:45 Life Insurance Overview William Conner

12:45 13:15 Lunch -

13:15 14:00 GI Processes Finance John Middlemiss

14:00 14:45GI Processes Underwriting & Actuarial

Rakhee Chatwani

14:45 15:30GI Processes Claims

Andrew Ward

15:30 15:45 Break -

15:45 16:15 Regulation Solvency II / FSAVikki Jones Parry,Craig Russell

16:15 - 17:00 Project SpotlightCraig Russell, Vikki JonesParry, Jamie Lamont, GrahamRobertson

17:00 DRINKS / Wrap Up

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Insurance 101 Introduction

and Insurance Basics.

FSI Industry Training

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Introduction

3

This section of the course aims to provide an overview of insurance, looking at the various types of insuranceand an understanding of how insurance companies function.

Over the next hour or so we will aim to provide and understanding of:

Purpose and function of theinsurance industry

Different types of insurancecompanies, lines of business and

their differences

How an insurance company is

structured and the roles thateach department performs

How the current insurancemarket looks and market cycles

How insurance companies makemoney and the flow of cash

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Why do we need insurance?

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What is Insurance?

Insurance is a risk transfer mechanism where the insurer, in return for a premium, agrees to

compensate the insured for the loss experienced if a particular event should happen

Insurance exists because people need security. They want to travel, to operate businesses and to

own homes; but with each of these activities there arises the possibility of loss. Insurance provides

financial compensation. It does not remove risk: a car may still be in an accident, or a factory

may still burn down; but the cost that has been incurred by the risk becoming a reality can be

covered by the insurance industry

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The earliest references to insurance can be

traced to the beginning of the fourteenth

century, when the merchants and bankers of

from Lombardy introduced to Britain the practiceof insurance for marine and overland

transportation risks

Today the insurance is providing protection and

financial compensation against such diverse

occurrences as loss or damage to satellites, to

computer installations and for political risks suchas hijack and ransom

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Why do we need insurance?

Protect against unforeseen events

Legally obliged (e.g. car insurance)

Required for other reasons (e.g. mortgage contractual obligations)

Mitigate risk

To sleep soundly

Free up capital

Business confidence

Reducing reliance on state support

Reducing the occurrence of risks

Catastrophe protection

Many other reasons

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What do we insure?

Motor

House contents

Buildings

Health / life

Travel

Payment protection on creditcards / mortgage etc.

Extended warranties on electricgoods

Mobile phones

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Marine cargo, hull, specie,energy, war

Aviation hull, liability, cargo

Motor commercial, fleet

Property buildings & contents,political risk, accident & health,business interruption, terrorism

Liability employers, contract,product, errors & omissions,

professional indemnity

Aerospace

Non-Marine political, kidnap &ransom, transactional

Speciality - fine art, bloodstock,hacker, celebrities

Contingency event cancellation,non-appearance,death/disablement

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Explaining risk and insurance

Insurance exists to cover the financial consequences of an event which is undesired by theinsured person or organisation these events are called pure risks

Core to risk are elements of uncertainty, unpredictability or danger

The level of risk is assessed in terms of likelihood and severity

Risk often refers to the subject of insurance (e.g. property) or the type of insured peril(e.g. fire)

Pure risks can be measured in monetary terms and refer to the possibility of a loss

Insurance is a risk transfer mechanism where the insurer, in return for a premium,

agrees to compensate the insured for the loss experienced if a particular event shouldhappen

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Explaining perils

Insurance companies generally label a particular risk as a peril: the actual event thatcauses a loss or damage.

Examples of perils:

Fire

Flood Earthquake

Windstorm

Theft

Accidental Damage

Insurance companies will also detail

the primarily cause of the loss.

Example causes of loss:

Fire Arson

Fire Non-arson

Fire Smoke Only

Flood By sea

Flood By river

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What are the different types of

insurance?

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Insurance Lines of Business

The insurance market can be considered in terms of Life and Non-Life insurance business

Life insurance companies sell long-term life insurance, annuities and pensions products

Non-Life insurance is also called General Insurance or Property & Casualty Insurance

and typically comprises any insurance not determined to be long-term

Most of the large Composite Insurers will work across Life and Non-Life

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Example products: Pensions

Annuities

Life Insurance

Example products: Pensions

Annuities

Life Insurance

Life InsuranceLife Insurance

Example products: Property

Motor

Travel

Liability

Example products: Property

Motor

Travel

Liability

General Insurance (Non-Life)General Insurance (Non-Life)

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Types of Insurance Companies

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GeneralInsuranceCompanies

General Insurance companies offer the following types of products: Motor Property Liability Professional Risks Marine Aviation and Transport (MAT)

CompositeCompanies

Composite insurers offer a mix of General (Non-Life) and Life products.Examples include:-

Aviva AXA Zurich

Health ServiceOrganisations

Health service organisations offer care to individuals on a pre-arranged basis: Most people are enrolled with a health care provider through an employer

group health plan (e.g. BUPA) Some health care providers are organised by life insurance companies (e.g.

Pru Health)

Life InsuranceCompanies

Life Insurance companies offer the following types of products: Life insurance to protect against the risk of (unexpected) death or disability Health insurance to protect against the costs of medical expenses Annuity products that are generally used to protect against the risk of

outliving retirement assets (e.g. pensions)

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Types of Insurance Companies

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CaptiveInsuranceCompanies

A Captive Insurance Company is an insurance company that is owned andoperated by the organisation it insures:

Captives will normally set up a reinsurance programme for losses over acertain level (i.e. catastrophe insurance).

Captives are often domiciled in tax havens (e.g. Bermuda).

InsuranceExchanges

Insurance Exchanges are: Comprised of groups of individuals or companies carrying out underwriting

activities in a real market. The underwriters share facilities and operate under a common attorney in

fact.

Self Insurers

Self-Insurers are Companies that choose to cover their own losses: Typically money is set aside to provide a loss fund. Technically this is not insurance. Example: A company with a large company car fleet regularly puts aside a

sum of money to pay for loss or damage to their motor cars.

ReinsuranceCompanies

Reinsurance Companies offer the following types of products: Risk carrier for other insurance companies (reinsurance). Risk carrier for other reinsurance companies (retrocession). Used as an effective risk management vehicle for other risk carriers.

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Exercise: Put these insurance companies into the most appropriate type

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General InsuranceCompanies

CompositeCompanies

Health ServiceOrganisations

Life InsuranceCompanies

ReinsuranceCompanies

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How do insurance companies make

money?

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2010 Deloitte MCS Limited16

Premiums and Claims

INSURANCE

COMPANY

CUSTOMER

premiums

claims

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Investment Income and Expenses

INSURANCECOMPANY

premiums

claims INVESTMENTSEquityBondsDeposit A/cs

CUSTOMER

EXPENSESCommission

AcquisitionGeneralTax

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How insurance companies make money

Premium

Underwriting Expenses

(operations,

commissions etc.)

Losses

(paid and reserves, loss

adjustment expenses)

Underwriting

profit/lossProfit/Loss+- = +

Investment

Income =

Underwriting Ratio = Underwriting Profit or Loss / Premium

A company can still make a profit even if they have an underwriting ratio over 100%because of Investment Income

The Underwriting Ratio and Investment Income determine if the insurance company makesa profit or loss

Combined Operating Ratio (COR) = Underwriting Ratio + Investment Ratio

On a Combined Operating Ratio basis, a sub 100% ratio means that the business is trulyprofitable, whereas over 100% indicates that the business is a drain on the companysresources

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Key Performance Indicators for Insurance Companies

The insurance industry monitors key financial metrics

The key ratio to understand is combined ratio. This is the ratio of how much thecompany spends (claims and operating costs) divided by the amount the companybrings in (premium income)

Commissions

Premiums Written

Commission &BrokerageExpense

Vendor and OtherUnderwritingRelated Costs

Premiums Written

OtherAcquisition

Expense Ratio

General Expenses

Premiums Written

GeneralExpense Ratio

Taxes

Premiums Written

Tax IncurredRatio

Expense Ratio

Cost of Acquiring& Managing Premium

Premiums Written

Claims Paid +Change in Reserves

Premiums Earned

Losses IncurredRatio

Loss AdjustmentCosts

Premiums Earned

LossAdjustment

Expense Ratio

Loss Ratio

Cost of Losses &Adjusting Losses

Premiums Earned

Dividend Ratio

Dividends toPolicyholders

Premiums Earned

Gain or Loss onCore Insurance Operations

(Under 100 = Gain on Underwriting)(Over 100 = Loss on Underwriting)

Investment Income

Premiums EarnedCombined

Operating Ratio

Overall Profitability of Company(Under 100 = Profit)(Over 100 = Loss)

InvestmentIncome Ratio

UnderwritingRatio

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Intro to Reinsurance

What is reinsurance?

The insurance of insurance

Spreading of risk

Solvency

Increasing market share

Why do insurance companies purchase reinsurance?

Capacity

Balance and Diversification

Stability of Earnings

Solvency Protection, Catastrophe Protection

Financial Results Management

Expertise of Reinsurer

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Intro to Reinsurance: Spreading the Risk

A reinsurance company insures risks from by a primary insurance company

The reinsurer assumes the risk, the reinsured company, or cedant, cedes the risk

The reinsurer has a contract with the cedant but not the cedant's clients

INSURANCECOMPANY

REINSURANCECOMPANY

ReinsuranceRecoveries

Premiums

ReinsurancePremiums

CUSTOMERClaims

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Intro to Reinsurance: Different Types and Contracts

Treaty Reinsurance

Covers a set of subject policies for agiven period of time

Subject policies are often defined interms of lines of business, e.g. "allcommercial auto liability policies" or"all homeowners policies"

Quota Share Reinsurance Contract

A fixed percentage of the premiumsand a fixed percentage of the losses

are ceded to the reinsurer. For thisreason, quota shares are calledproportional reinsurance

Excess of Loss Reinsurance Contract

The reinsurer covers losses in excessof an attachment, so the recovery isnot directly proportional to thecedant's loss

Facultative Reinsurance

Covers a single underlying insured

Unlike a treaty, facultative ("fac")reinsurance is underwritten by thereinsurer one account at a time.

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Functions within an insurancecompany

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Key Functions of an Insurance Company

Cu

stomers

Intermediaries

Insurance Company

Underwriting

Investment &Reinsurance

Actuarial

PolicyAdministration

Claims

Sales/MarketingRisk

Management

Customer FacingFunctions

SupportFunctions

There are 9 key internal insurance functions: Underwriting, Claims, Sales andMarketing, Policy Administration, Actuarial, Risk Management , and Investments &Reinsurance. These split broadly into Customer Facing and Support categories.

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Functions of an Insurance Company (1/2)

Underwriting

Underwriters underwrite risks on behalf of the insured: Identifying and underwriting the most profitable risks Classifying the risks appropriately into rating categories Ensuring profitability of the overall book of business.

Sales/Marketing

Generates revenue for the insurance company through various distributionchannels by offering various insurance products to customers

Selling products, managing sales force and distribution channels Identifying sales needs and target markets and building brand awareness Liaising with product development to establish demand for new products

PolicyAdministration

Handles the back office functions, including: Issuing policies New Business and Renewals Issuing bills and collecting premiums Making changes, often known as endorsements, to existing policies

Claims

Ensures the insurance company fulfils its promise to provide protection by: Investigating losses and negotiating settlements Ensuring fair and prompt payment of claims to those who suffer losses Making surrender and maturity payments on life policies.

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Functions of an Insurance Company (2/2)

Actuarial

Actuaries are responsible for managing the interplay of cash flows: Setting premium levels to ensure price represents the risk Support product development and rating engines Calculating the amount of premium that must be kept in reserve Calculating the amount of capital needs to hold to maintain solvency

Investments &Reinsurance

Ensures the financial stability of an insurance company through: Investments, which provide additional income that may be needed to pay

claims and cover unexpected losses Reinsurance, which provides protection against catastrophic losses

RiskManagement

This function takes responsibility for loss control Loss control specialists advise the insured on procedures they can implement

to reduce frequency and severity of losses Catastrophe modellers analyse and predict the impact of large events on the

insurers book of business

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The Interdependence of Insurance Operations

Actuarial

LossControl

Underwriting

MarketingClaims

Setting Loss Reserves

Claims Data Coding

Product Development

Competitive Analysis

Market Information

Target Markets

Eligibility Criteria

Eyes & Ears

RiskImprovement

Selling

LCServices

Identify

ProblemExposures

LC ServicesNeeded

ConditionsPrior to Loss

Good Claims Service

Advance Notice of Denials

InterpretCoverageIntent

Class &

RatingSystems

ExposureProblems

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Current Insurance market

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UK Insurance Market Overview

The UK insurance industry is the largest in Europe and the third largest in the world,accounting for 11% of total worldwide premium income

It employs 313,000 people. This is almost a third of all financial services jobs,and twice as many as employed in both motor vehicle manufacturing and in theelectricity, gas and water supply sectors combined

Source: ABI, UK Insurance Facts Sep 2009

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General Insurance Market Overview

Source: Association of British Insurers, UK Net Written Premium 2008

Premium (m)2008 (2007) 2008 (2007)

1 (1) Aviva 5,415 5,8552 (2) RBS Insurance 4,646 4,5443 (3) AXA Insurance 2,979 2,9694 (4) RSA 2,569 2,6045 (5) Zurich Insurance plc 2,227 2,172

6 (6) BUPA 1,608 1,5467 (7) Allianz Insurance 1,213 1,4048 (18) AIG UK 1,029 3249 (8) HBOS 964 80010 (9) NFU Mutual 835 80011 (10) Fortis Insurance 729 72312 (11) Lloyds TSB Insurance 628 60913 (22) Munich Re 608 270

14 (12) Brit Insurance 438 45915 (15) QBE Insurance Group 413 38616 (16) Groupama Insurance Company 402 38017 (17) LV = 399 33618 (14) CIS General Insurance 375 39619 (13) Barclays insurance 348 43620 (19) QUINN-direct 315 292

Total Net Written Premium (m): 33,799 32,859Share of Largest 5 Companies: 52.77% 55.34%Share of Largest 10 Companies: 69.49% 71.43%Share of Largest 20 Companies: 83.25% 83.35%

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Life Insurance Market Overview

Source: Association of British Insurers, UK Net Written Premium 2008

Premium (m)2008 (2007) 2008 2007

1 (4) Aviva plc 10,028 9,7592 (1) HBOS Financial Services 8,695 11,9413 (3) Alico 8,016 10,7174 (5) Legal & General Insurance 7,841 8,4165 (9) Prudential Insurance 7,643 5,969

6 (6) Aegon 7,227 7,8597 (7) Lloyds TSB Group 6,353 7,2548 (8) AXA Insurance 6,167 6,9079 (64) Zurich Financial Services 2,890 -312

10 (2) Standard Life 2,780 11,33911 (12) Friends Provident 2,685 2,31012 (11) Old Mutual 2,589 3,86213 (13) HSBC Insurance 2,416 2,231

14 (15) Canada Life 1,917 1,80915 (16) Royal London Mutual Insurance Society 1,811 1,61916 (10) Swiss Re 1,013 5,00217 (17) Cardif Pinnacle 865 1,08318 (14) Resolution 742 2,17119 (23) Hartford Life 707 45520 (27) LV = 677 277

Total Market 87,248m 107,823mShare of top 5 companies 48.40% 48.95%Share of top 10 companies 77.53% 79.55%Share of top 20 companies 95.21% 95.28%

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Market Consolidation

The insurance market has shown a lot of consolidation in previous years. Thistrend appeared to have reached a plateau until 2009 when the tie upbetween Lloyds TSB and Halifax Bank of Scotland created bancassurer LloydsBanking Group, expected to be the largest Life Insurance provider, andsecond largest Insurance Group of 2009.

This has continued in 2010 with the recent news that UK based insurerPrudential will acquire AIGs Asia Pacific life insurance business AIA. This is to

take advantage of Asias growing insurance market and could be a trend setto continue.

There also continues to be consolidation in the UK broker market with thelikes of Towergate, Oval and Giles making acquisitions in 2009.

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Market Forces

Increasing competition destroyingshareholder value; commercial lines theweakest performer

New entrants (mainly foreigners)

Powerful large international competitors

Greater focus and specialisation to win;emergence of value chain specialists

Squeeze on small, mid size players

Increasing acquisitions to drive growth;organic growth minimal to modest

Competition

Business rules innovation

Reengineering and outsourcing

Improved customer informationcapture and integration

Internet opening up personal sales/

business exchanges for commercial

Technology

Corporate globalising drivingdynamics in middle/large corporateinsurance

Growing cross bordermergers/alliances

Growing foreign presence in localmarkets

Globalisation

Global deregulation

Elimination of cartels

Reduction in cross financial servicesentry barriers

Solvency 2

Regulatory Behaviour

Aging population with improved risk profile; sophisticatedcorporate risk managers

Increasing risk appetite of customers driving self insurancegrowth

Improved monitoring of customer behaviour

Weakening customer loyalties

Customers

Multi-channel distribution;increasing use of direct, banks andinternet

Shrinking pool of agents/brokers

Leveraging the Internet

Workforce

Emerging GrowthOpportunities

ChangingBusinessModels

ChangingIndustry

and MarketStructure

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Insurance Industry Cycle Definition

Periodic expansion and contraction of market conditions, usually dependent on industryprofit (real, perceived, or anticipated), affecting availability and affordability of the product

of insurance.

There is an insurance cycle where:

Strong premium level creates good profits for insurers

New capital is attracted to the market by the large profits

The market has greater competition and the extra supply causes premium levels to drop

Underwriting becomes unprofitable and insurers make losses

These losses force capital out of the market

Reduced supply pushes up the equilibrium price of insurance

Premium levels rise and the cycle starts again

Also called underwriting cycle, profit cycle, market cycle.

Market Cycles

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Characteristics of changes in the market

Focus is on production

Oversupply of the product

Carriers cut price to attract businessTerms and conditions are loosened to

provide more coverage at less cost

Business moves from E&S to standard

The industry loses money

Prices begin to rise

Terms and conditions are tightened

Underwriting discipline returns

Supply of insurance, especially in moredifficult lines, decreases

The standard market gets out ofunprofitable classes

E&S business increases

Soft Market Hard Market

Hard Market - a sellers market in which insurance is expensive and in short supply

Soft Market - an environment where insurance is plentiful and sold at a lower cost

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Insurance Cycle Features

During periods of weak premiums insurers have to make a decision about whether towrite business for profit or for market share.

The former means turning down renewals where premiums are not high enough and candamage relationships with brokers, which can be painful when the market recovers.

The latter causes losses in the short term in the hope of larger profits in the long term,but if the downturn is long the insurer may not survive until the upturn.

When rates of return on investments were high many insurers survived on theirinvestment income, i.e. ran their core insurance business at a loss and treated it as asource of assets to invest.

When an insurer is in difficulty it can go into run-off and stop writing new business. Inthis situation insurers tend to reduce costs and become more sceptical when paying outon claims.

Examples of large scale economic, environmental, and business losses that have had asignificant impact on the insurance market are:

September 11

Hurricane Katrina

Enron

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Insurance 101 GI.FSI Industry Training

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General InsuranceOverview

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General Insurance Distribution

General insurance is predominantly soldthrough Brokers or Direct.

This is a big change from 1998 when 54%of people bought through a broker.

The last ten years has also seen a rise indistribution through bank and building

societies from less than 5% to 17%. The distribution of GI Is forever changing

the most recent development being therise of the aggregator.

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Who Sells Products and How they are Distributed

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Insurance aggregators websites Insurance aggregators do not take any risk themselves

but act as an intermediary between insurer andcustomer.

There are currently four big players: gocompare.com,Confused.com, moneysupermatket.com and

comparethemarket.com.

They display prices from numerous (but not all) brandsand allow easy comparison for the consumer.

Minimal information is needed from the customer toprovide a quote saving time and effort.

HOWEVER Aggregators tend to provide low quality business to

insurer as few customer details are validated.

Aggregators have led to intense price competitionbetween insurers, particularly in the motor market.

Both of these facts have significantly dented insurerprofitability in markets where products are seen asgeneric, leading to a backlash against aggregators.

In addition it has been suggested that headline quoteson the websites are wildly inaccurate, resulting inwasted time.

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Rise of the Aggregators

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Premiums of 33.8 billion in 2008. This breaks downas:

Motor - 10.7bn

Property - 8.8bn

Accident & Health - 3.8bn

General Liability - 3.8bn

Other - 5.8bn

Payments to policyholders in 2008 amounted to 22

billion. This includes:

Motor - 8.7bn

Property - 4.8bn

Accident & Health - 3.2bn General Liability - 2.7bn

Other - 2.6bn

.

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The UK GI Market

Premiums and Payments

Claims by insurance type 1998 - 2008

Premium by insurance type 1998 - 2008

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Outlook for 2010 GI Market

The industry hoped for a harder market in 2009 that did not materialise. It now expects2010 to be the year in which the underwriting profit is favoured over market share, for twomain reasons:

minimal investment returns mean underwriting losses are no longer viable; the majority of available reserves have already been released.

However, insurers and reinsurers still have adequate capital meaning price competition mayremain. Coupled with a potential improvement in returns from the stock market this maydampen any rate increases.

It is not certain that any increase in rates will translate to improved results for insurers. Thisis due to a decline in risk size caused the economic downturn, specifically:

increased unemployment; decreased business volumes; the view of insurance as an needless expenditure.

If no improvement materialises more market withdrawals are expected, as seen with HSBCInsurance who put their motor business into run off in 2009.

A continued rise in claim volumes seems inevitable across the industry. Personal lines will beaffected by a continuing increase in fraud, whilst commercial lines are expected to sufferfrom reduced maintenance and a rise in crime / vandalism caused by vacant premises.

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Outlook for 2010 GI Market (continued)

This creates a need to improve claims handling departments, but may also bring about anopportunity for brokers to expand their claims management functions and earn substantialincome.

Many are predicting an aggregator crunch over the next year caused by the sheer numberof price comparison sites that cannot be sustained by the market. This is compounded by

the fact that insurers are pressing aggregators to alter their business models, to reducecosts to insurers and improve underwriting results from aggregator generated business.

A tough year is also predicted for consolidators and broker networks as pressure is put onthe their high commission payments, and insurers start to favour smaller independentbrokers. Many of these consolidators are also saddled with large debts from previous

acquisitions which may cause trouble in 2010.

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General InsuranceProducts

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Products

In the UK, General Insurance is broadly divided into three areas: Personal Lines, Commercial Lines and Lloyds of London

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GeneralInsuranceGeneral

Insurance

Lloyds of London

Deals with extremely large and complex risks includingsatellites, oil tankers, football players, supermarkets andfamously Tina Turners legs!

Given the individual nature of these risks they need bespokeunderwriting to work out how they should be insured

See the Lloyds section for more detail

Lloyds of London

Deals with extremely large and complex risks includingsatellites, oil tankers, football players, supermarkets andfamously Tina Turners legs!

Given the individual nature of these risks they need bespokeunderwriting to work out how they should be insured

See the Lloyds section for more detail

Commercial Lines Sold to businesses from small corner shops to large

corporations

Has to cover not only the business premises, contents andfleets but also insures the interruption to business and liabilityof employees and products

Commercial Lines Sold to businesses from small corner shops to large

corporations

Has to cover not only the business premises, contents andfleets but also insures the interruption to business and liabilityof employees and products

Personal Lines

Sold to individuals like the home and car insurance that you

buy for yourself Sold in large quantities Covers your home, car, pets, loans etc.

Personal Lines

Sold to individuals like the home and car insurance that you

buy for yourself Sold in large quantities Covers your home, car, pets, loans etc.

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Personal Lines Insurance

Some Examples of Personal Lines Insurance:

Automobile

Homeowners

Secondary/Seasonal Home

Mobile Home Boat/Yacht

Jewellery/Fine Arts/Collections/Firearms

Umbrella/ Excess Liability

Travel

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Commercial Lines

Some Examples of Commercial Lines Insurance:

Property Lines

Financial Lines

Casualty

Marine

Political Risks insurance

Credit insurance

Contingency insurance

Livestock Insurance

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General Insurance: Difference between Commercial and Personal Lines?

When an accident happens at the home, you can make a claim on your personal insurancefor damage to your house and contents. For a business there is a lot more that go wrong!

Scale: a business often has more than just one property and a whole fleet of vehicles

E.g. a supermarket chain with numerous outlets and a large fleet of delivery vans

Nature of Business: the type of business and stock that a business manages can have asignificant influence on the scale of the risk

E.g. an oil company faces a wide range of challenges in drilling off-shore andtransferring crude to refineries

Business Interruption: if an incident affects a business property, an insurer needs to help

fix the building, they also support a business for the loss in trading

E.g. During the Carlisle floods a supermarket building was unaffected but their car parkwas flooded and they had to submit a large claim for their trading losses due to businessinterruption

Liability: businesses need to ensure that if something goes wrong with their product or an

accident affects their employees in the workplace, that they can help cover the damages E.g. Famously the Ford Pinto fuel tank was positioned too high, which meant that rear-

end collisions often resulted in the tank exploding. Businesses need cover the damagesand legal costs that can arise from such defects

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Commercial Lines

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Description of GI Commercial Lines

Insurance Business is often termed long-tail or short-tail

Long-tailbusiness describes a risk that may have claims notified or settled long afterthe policy has expired (e.g. liability risks)

Short-tail business describes a risk where all claims are likely to arise and be settled

within the policy period or shortly after (e.g. claims for physical damage)

The main classes of business that may be transacted are:

Marine insurance

Aviation insurance

Property insurance Liability insurance

Other insurance

M i i

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Marine insurance

Marine insurance provides an indemnity against losses whilst a vessel is at sea or whilst a cargo is atriskduring a maritime transit

Marine insurance can be broken down into three categories:

Insurance of hulls

Provides cover against perilsof navigable watersincludingfire; explosion; violent theft;

jettison; piracy; earthquake;accidents in loading; contactwith other structures

Policy is subject to adeductible an amount orpercentage of any claims isborne by the insured

Insurance of cargo

Covers physical damage to, orloss of, goods whilst in transit

It is impractical to insureshipments individually, soinsurers offer long-termcontracts, popularly:

Open cover an agreementbetween merchant/ shipperand insurer under which allmovements in a certain timeperiod are insured

Cargo policies are freelyassignablebecause oftengoods are bought and soldwhilst in transit

Energy insurance

Presents some of theindustrys most complex riskmanagementchallenges

Generally written in the marinemarket because theexploration and production

elements are often offshoredrilling platforms

But property insurers may alsodeal with onshore energyfacilities

Typical coverage involves amix of exposures, which mayinclude business interruptionand liabilities that arise fromthis sector, as well as propertyphysical damage

A i ti i

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Aviation insurance

Aviation policies are purchased by a range of buyers, including commercial airlines, component andairframe manufacturers, airport operators andprivate owners

Standard aviation policies cover:

Loss or damage to aircraft

Legal liability to third parties other than passengers Legal liability to passengers

The London market also insuresspace risks covering satellites and other space vehicles. Risk is usually

split between launch riskand in orbit riskand cover can be purchased separately or as a package.

A range of other aviation risks are insured, including:

Products legal liability covering the legal liability of manufacturers or repairers

Airport liability

Cargo

Loss of licence covering aircrew who lose their licence, in the event of being unfit through accidentor illness

Loss of Use covering loss of earnings following an aircraft being laid-up for repairs Personal Accident for passengers or aircrew

Property insurance

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Property insurance coversphysical loss or damage to property

The main classes of property insurance are:

Fire additional perils can be added on for a premium e.g. chemical explosion (no fire needed)

Business Interruption extension to cover the financial consequences of a loss, such as loss ofearnings or additional expenses incurred re-establishing/maintaining the business

Theft following entry to or exit from the premises by forcible and violent means

Money

Jewellers block one of the first non-marine classes developed at Lloyds, to protect stock onpremises, in vaults or in transit

Bankers blanket bond covers all bankers insurance needs, including counterfeit currency loss,forgery and damage to office and contents

Builders and contractors

Fine Art

Property insurance

Liability insurance

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Liability insurance

Liability insurance protects the insured in respect of their legal liability to others

Liability can arise through negligence, breach of contract or breach of statutory duty

The main types of liability insurance available are:

Public liability (third party) insurance policies are issued for all classes of business and trades

Employers liability (EL) and workers compensation (WC) insurance EL insurance is a legalrequirement in the UK, whilst WC policies are provided outside the UK to a number of countries with ano-fault system of compensation

Products liability insurance covers liability for injury or damage caused by goods manufactured,constructed, altered, repaired, serviced, treated, sold, supplied or distributed

Professional indemnity insurance covers liability for professional negligence causing financial orpersonal injury to clients

Directors and officers (D&O) liability insurance used to recover costs and resulting damages ofaction brought against a company and/or its past or present directors and officers for wrongful acts

Other insurance

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Other insurance

There also exist a wide range of other insurance products, in many cases requiring specialist knowledge andAn entrepreneurial approach. The market leader for many of these products is Lloyds of London:

Political Risks insurance offers protection to businesses trading internationally against the risk offinancial losses resulting from foreign government interference or the non-performance of acontractby a contracting party. Contract frustration insurance is one example, covering againstthe cost of a contract being unilaterally terminated by a foreign government or frustrated due to

political perils.

Credit insurance policies provide cover to a lender against default or insolvency of the contractingcounter-party

Intellectual Property insurance protects patents, copyrights, trade and service marks, businessesand creative artists

Contingency insurance provides cover where an organisation or business has a financial interest inan event taking place, or not taking place. These events are known as contingencies. Examplesinclude Cancellation, Non-Appearance (of a key performer) and Products Recall.

Livestock Insurance provides cover against the death of animals as a result of accident, illness ordisease. Cover is also available for stud animals and breeding stock, for non-performance, infertility orbirth defects

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Insurance 101 Lloyds.FSI Industry Training

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History of Lloyds

History of Lloyds

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History of Lloyd s

Founded in the 17th century City of London at thecoffee house owned by Edward Lloyd near theThames;

Lloyds coffee house was in existence by 1688, andwas frequented by merchants, or underwriters(they would sign their names at the foot of theinsurance contracts) and ship-owners;

Lloyd supplied shipping information throughpublishing a news sheet called Lloyds News

superseded by Lloyds List, Londons oldestnewspaper;

Lloyds coffee house developed as a marketplacefor insurance provided by individuals in 1771 acommittee was formed which placed the running ofLloyds into the hands of the insurance fraternity

Lloyds of London is the worlds leading specialist insurance marketplace through whichLondon market insurance is written

Eminence and importance in global markets

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p g

Lloyds is now the worlds leading insurance and reinsurance market and enjoys aunique status in the global insurance industry, offering a marketplace for those risks thatcannot easily be placed in local markets, including policies that may contain complexfeatures.

It has recently moved into emerging markets with Lloyds Reinsurance Companyreceiving formal approval in China (2007) and Lloyds being authorised as the firstadmitted reinsurer in Brazil (2008).

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Structure of Lloyds

Lloyds Structure

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Lloyds is not an insurance company but a Society of members

Members, often known as capital providers, accept insurance through syndicates on aseparate basis

Each syndicate is managed by a managing agent, responsible for employing theunderwriting staff and managing the syndicate

Members agents are responsible for bringing in suitable new members to join syndicates

*covered in next 2 sub-sections

Lloyds participants

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There are two classes of people and firms active at Lloyd's Members or providers of capital, that form syndicates

Agents, brokers and other professionals who support the members, underwrite the risks,and represent outside customers

Members ofLloyds

Historically, rich individuals (Names) backed policies written at Lloyd's with all of

their personal wealth (unlimited liability) Since 1994, Lloyd's has allowed corporate members into the market, with limitedliability

The losses in the early 1990s devastated the finances of many Names and scared awayothers

Today, individual Names provide only 10% of capacity at Lloyd's, with corporationsaccounting for the rest

No new Names with unlimited liability are admitted the importance of individual Nameswill continue to decline as they withdraw, convert (generally into LLPs) or die

Lloyd's members conduct their insurance business in syndicates Syndicates tailor solutions to respond to the specific risks of the client base Syndicates compete for business, offering choice, flexibility and continuing innovation

Syndicates cover all or a portion of the risk and are staffed by underwriters

ManagingAgents

Managing agents sponsor and manage syndicates They canvas members for commitments of capacity and create the syndicate They employ the underwriting staff The managing agent must be a company specifically established for the purpose of

managing a syndicate, and it may not carry out any other function

A managing agent may be responsible for more than one syndicate

Lloyds participants

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MembersAgents

Members' agents coordinate the members' underwriting and act as a bufferbetween Lloyd's, the managing agents and the members

They were introduced in the mid 1970s and grew in number until many went bust thereare now only three left: Argenta, Hampden and LMAS (which has no active names)

It is mandatory that unlimited Names write through a members' agent

Lloyds Brokers

Outsiders, whether individuals or other insurance companies, cannot dobusiness directly with Lloyd's syndicates they must hire Lloyd's brokers, whoare the only customer-facing companies at Lloyd's

Lloyd's brokers shop for customers' policies among the syndicates, using theirspecialist knowledge to negotiate competitive terms and conditions for clients

There were 162 firms of brokers working at Lloyd's (as at July 2006), many ofwhom specialise in particular risk categories

Each Lloyd's broker is required to demonstrate an understanding of the Lloyd's market,as part of Lloyd's assessment of its suitability to be accredited as a Lloyd's Broker

Any local broker can access the expertise and resources of Lloyd's by makingcontact with an accredited Lloyd's broker

IntegratedLloyds Vehicles

An Integrated Lloyds vehicles (ILV) is a company which owns a corporatemember of a syndicate and the managing agent of that syndicate

Some members did not like the traditional structure when they became admitted asLloyds members the insurance companies did not want to rely on the underwritingskills of syndicates they did not control, so they started their own

Some ILVs allow minority contributions from other members, but most now try to operateon an exclusive basis

Duties of managing and members agents

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Lloyds underwriting agents (managing and members agents) are either limitedcompanies orpartnerships and act on behalf of the members

A members agentprovides the following services

Guides new members through the application process

Undertakes administration of the affairs of existing members

Assists members to comply with applicable rules and requirements relating to their Lloyds affairs

Advises members as to the syndicates in which they should participate

Places the member on syndicates subject to their agreement and purchase of capacity

Acts as a liaison between the Corporation of Lloyds, managing agents and the member

Each Lloyds syndicate is managed by a managing agent, as a franchisee their dutiesinclude:

Determining the underwriting and reinsurance policyfor each managed syndicate

Appointing and supervising the active underwriterof the managed syndicate(s), and associated

underwriting, claims, administrative and accounting staff Accepting risks on behalf of the syndicates

Managing the reinsurance programme

Agreeing andpaying claims on behalf of each managed syndicate

Determining the appropriate levels of reserve and premium for the reinsurance to close

Producing the annual accounts of the syndicates, reflecting profits and losses made

Making a syndicate quarterly return to Lloyds to give an indication of the progress of all open years

these figures are the total cumulative amounts for premium and claims for open years and a forecastfor each closed year

Each managing agent has a standard managing agents agreementwith each member onits managed syndicate, setting out the powers and duties to be provided

Key players

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As at 31st

December 2008 Lloyds was home to 51 managing agents running 80 separatesyndicates

(Source: Lloyd's Quick Guide 2009)

Parties involved

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An important competitive strength lies in the number, diversityand expertise of the

competing insurers

The London market enables close ties to be formed between buyers, brokers and insurers,

and facilitates access and the flow of information amongst all participants

It also contains an unrivalled pool ofservice providers such as leading law firms, IT

support and professional bodies


Brokers can find the capacity and capability required forthe underwriting of virtually any type of risk

Brokers know the strengths and specialisms of theunderwriters and can tap the combined underwritingcapacity for all market sections

The judgements on rates and terms of LeadUnderwriters are followed by other insurers in London

and other global market

Lloyds market structure

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Lloyds market structure encourages innovation, speed and better value

Lloyds members underwrite in syndicates on whose behalf professional underwritersaccept risk

Supporting capital is provided by investment institutions, specialist investors,international insurance companies and individuals

Lloyd's brokers bring business to the market the risks placed with underwritersoriginate from clients and other brokers and intermediaries all over the world

Brokers have immediate

access to decision-makers,which means that answers onwhether a risk can be placedare made quickly, enablingthe broker to provide fast,good value solutions

Lloyds Market Association

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The Lloyds Market Association (LMA) represents underwriting businesses in the Lloydsmarket

It was formed in 2001 by merging five previously independent associations:

Lloyds Underwriters Association

Lloyds Underwriters Non-Marine Association

Lloyds Aviation Underwriters Association Lloyds Underwriting Agents Association

Lloyds Market Association

Through the LMA the interests of Lloyds syndicates and managing agents are promotedfor decisions that affect the market

The mission of the LMA is to provide a single voice for the Lloyds market and a rangeof quality services including representation, information and technical services


Reinsurance to close

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A Lloyd's accounting practice, known as 'reinsurance-to-close, means that currentmembers can be liable to pay for historical losses

Members officially join a syndicate for 1 year only the 'Lloyd's annual venture the syndicate would commonly re-form for the next calendar year with more or less thesame membership and the same identifying number

A syndicate therefore appears to have a continuous existence, but in fact there arenumerous separate incarnations, each one a unique trading entity that underwritesinsurance for 1 year only

Claims take time to be reported and paid, so Lloyd's practice is to wait 3 years beforeclosing a yearand declaring aprofit and loss result

For example, a 2003 syndicate will declare its results at the end of December 2005 thesyndicate's members are paid any underwriting profitin 2002 in proportion to theirparticipation, but have to reimburse the syndicate during 2006 for their share of anyunderwriting loss

Part of the result includes setting aside reserves for future claims payments forclaims that have been notified but not yet paid, and estimated amounts required for

'incurred but not reported' claims

The estimation process is difficult and can be inaccurate in particular for liability (orlong-tail) policies

Reinsurance to close

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The reserve for future claims liabilities is set aside in a unique way the syndicate buys areinsurance policyto pay any future claim

The premium is the exact amount of the reserve thesyndicate transfers liabilitytopay future claims to a reinsurer this is 'reinsurance-to-close' a transaction thatallows the syndicate to be closed, and a profit or loss declared

The reinsurer is always another Lloyd's syndicate usually thesucceeding year of thesame syndicate, the membership of which might be the same or might have changed

Liability for past losses is therefore transferred until it reaches the current syndicate

A member joining a syndicate often picks up liability for losses on policies writtendecades before the arrangement works if the reserves have been correctly estimated,and the appropriate reinsurance-to-close premium paid every year

However sometimes this has not been the case for example with the surge inasbestos, pollution and health hazard (APH) losses in the 80-90s the amounts of

money transferred from earlier years by successive 'reinsurance-to-close' premiumswere insufficient, and the current members had to pay the shortfall

Lloyds governance

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The Lloyds Act 1982 repealed many of the provisions of earlier Acts and provided for theestablishment of the Council of Lloyds, charged with overall responsibility for and control of

the Lloyds market

As Lloyds is a society, its activities are governed by statute, principally Lloyds Acts1871 to 1982, and parts of the Financial Services and Markets Act 2000

The Council is chaired by the Chairman of Lloyds and is responsible for ensuring thatthe Society acts in accordance with the above acts

The Council comprises 18 members: 6 working members, 6 external members and 6nominated members (one of whom is the Chief Executive Officer)

Society members who occupythemselves with the businessof insurance at Lloyds by aLloyds broker or underwritingagent, or did so immediately

before retirement

Working member External member

Society members who are notworking members

Include both elected corporateentities (who nominate arepresentative for the council)

and individual externalmembers

Nominated member

Not society members independent persons regardedas non-executive councilmembers (except the CEO)

Appointments are made by the

council and confirmed by theGovernor of the Bank ofEngland

Lloyds governance

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Introduction of the franchise business model was accompanied by changes to Lloydscorporate governance structure, which included the establishment of the Franchise Board

In respect of a number of its functions, the Council acts through the Franchise Board

Members are appointed by the council and drawn from inside and outside the Lloydsmarket

It sets the franchise strategy and has further policy, planning and budgetaryresponsibilities

Chain of security

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Lloyds has a unique capital structure, which is often presented in the form of a chain ofsecurity, underlying policies underwritten at Lloyds

Members are only liable for the portion of the policy that they have subscribed to, calledseveral liability the Society of Lloyds is not legally liable for claims arising frominsurance contracts

Lloyds chain of security has developed to ensure that the valid claims of Lloydspolicyholders will always be met

In 2007 the Secure Chain ofSecurity 2007 was released byLloyds with 3 links (previously 4)

and comprising 2 elements requirements for the financialresources that members mustpossess and arrangements forassets to be held centrally

Chain of security

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Consists of memberspremium trust funds (PTFs),managed by the managingagent

Premiums and other monies

paid into PTFs Payments from PTFs onlymade to meet permittedtrust outgoings

Members cannot receiveprofits from PTFs untilunderwriting account has

been closed

The first link The second link

Consists of members fundsat Lloyds (FAL)

Comprise 3 trust fundswhere members assets maybe held the Lloyds

deposit, the special reservefund, and the personalreserve fund

Assets must be readilyrealisable, and equal themembers net FALrequirement (minimum

capital ratios = 35%)

The third link

Consists of Lloyds centralassets, including LloydsCentral Fund

Lloyds Central Fund isavailable at the discretion of

the Council to ensure thatclaims are met if membersare unable to meet theirliabilities

Members contribute eachyear based on a percentageof their allocated premium

limit

Financial resources requirements Central assets

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Trading at Lloyds

Underwriting process Lloyds

U d iti i th b hi h i th t bilit d th t f

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Underwriting is the process by which an insurer assesses the acceptability and the transfervalue of a risk for a price to be paid by the insured

The underwriter is an individual, who acts on behalf of the insurer

After consideration of the facts presented, the underwriter offers terms of insurance ifthese are accepted, the underwriter accepts the risk in exchange for a premium

Within Lloyds, underwriters work for a syndicate and sit at the syndicates box in the Lloydsbuilding brokers usually walk up to them, and present a slip containing the details ofcover requested by their client

The underwriter assesses all the facts available and, if willing to accept transfer of therisk, adds the details of the terms, conditions and premium required on the slip

Underwriters have personal terms of reference they are only able to underwrite certainclasses of business and are limited by a maximum line size per risk, which is a cap onthe value of risk they can accept on any one slip

Underwriters are on risk, in other words the risk has been transferred to them:

if they subscribe a line to the slip, unless the slip is over-subscribed (in which case theextent of commitment is determined when the broker stops adding lines to the slip)

if a slip is placed Subject to Acceptance, No Risk (SANR), which occurs when theassured has gone to a number of brokers for quotes, but in this case the assured is notbound to the slip

if an underwriter subscribes a line after the attachment date, and an event giving rise toa claim has already occurred (unknown to the insured or the broker)

Subscription market

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The subscription market refers to the process whereby insurance risks are placed amongmore than one syndicate/company there will normally be one syndicate that leads forthe subscription market, while the others follow

The purpose of a subscription market is to spread the risk

The Leading Underwriter will be approached due to their reputation and expertise in the areaand will underwrite the terms which govern the contract of insurance

It is important they have the confidence of other underwriters they normallyunderwrite a substantial line (although not always the largest percentage) of the totalrisk (e.g. 40% of 100%), and will be liable for the same percentage of any subsequentclaims (i.e. 40%)

The Following Underwriter(s) will underwrite an equal or smaller portion of the remainingpercentage of risk (e.g. 13% of 100%)

They have to decide if they wish to accept the terms outlined by the leader if they do,they still have to assess the risks using the same care and consideration as if they wereleading

Due to their market share position, the following underwriter(s) may not receive fullpolicy data from the broker/cover holder

Broking in the Lloyds market

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Brokers essentially act as intermediaries between the Insured and Insurer They also represent the interests of customers and act a professional advisor on

insurance matters

All brokers must be formally regulated by the FSA or another national regulator to trade

At Lloyds, business can only be underwritten when placed by Lloyds brokers, whomust accredited by Lloyds to trade with Lloyds syndicates

To achieve Lloyds accreditation, brokers must fulfil the following:

Provide a business plan explaining the classes of business they trade & a three-yearforecast of how much business they expect to trade with Lloyds

Obtain Errors & Omissions insurance, which provides cover for breach of duty of care this will be directly related to how much the broker gets paid (net retainedbrokerage)

To trade in the London market, each broking firm has to sign a Terms of BusinessAgreement (TOBA) with every insurer that it transacts business with

A TOBA outlines the way in which the broker operates, what services it providesand how it is remunerated

When dealing with Lloyds syndicates, a separate TOBA is required for each managingagent

Unique features of Lloyds market transactions

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The London market has a number of unique features, compared to other insurance andreinsurance markets around the world, including:

The journey of a slip/policy in the subscription market

Lloyds brokers seek a lead underwriter, and hand over a London Market Principles (LMPslip) setting out the details of a request for cover (see example later in this sub-section)

The underwriter will subscribe a proportion and signify terms and the premium on theslip (known as the written line) any subsequent underwriters on the same slip arebound to the same terms and premium

The broker takes this document and creates a cover slip for the client, summarising thecover a full policy document will then be created, either by the broker or by XchangingIns-sure Services, to be sent to the client (with a copy sent to the underwriter)

Premiums will usually be paid by the broker through Xchanging

Methods of Conducting Business Most transactions take place face-to-face, but some are

accepted through binding authorities, line slips and direct dealing

Binding Authorities Lloyds brokers may approach cover holders rather than go straightto the underwriter (Delegated underwriting explained in Underwriting sub-section)

Line slips an agreement between a group of underwriters and a Lloyds broker for aspecific class of business certain underwriters may accept the risk on behalf of thewhole group

Direct dealing Lloyds managing agents may establish service companies to deal withthe public, as extensions of the syndicate they offer insurance processing and relatedservices

Unique features of Lloyds market transactions

Proposal Forms are questionnaires used by underwriters to obtain information before

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Proposal Forms are questionnaires used by underwriters to obtain information beforeunderwriting risks, usually for personal lines they are handed to the underwriter by thebroker

Contract Certainty is vital for the London market to deliver the service customers demandand to remain competitive all terms must be agreed before inception anddocumentation delivered promptly

When the potential insured has made a proposal, via the broker, to the underwriter and

the underwriter accepts the proposal, terms have been agreed and the premium hasbeen paid, then there is a contract

As it is not always possible to create a policy document as soon as the terms have beenagreed, brokers in the London market may issue the insured with a cover note,summarising the details of the cover, to be followed promptly by the Policy document

Policy documents elaborate on the details and conditions placed in the wording slip theymust construct the wording from the original terms and conditions

Policy documents can be created by the broking firm, or by Xchanging Ins-sure Services

LMP slip with schedule Information

For open market transactions, the broker provides a schedule detailing the aggregate

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For open market transactions, the broker provides a schedule detailing the aggregateinformation that makes up the risk

For example the geographical and structural information about each building in aninsurance policy for a commercial property portfolio

For binding authorities, London market insurance companies collect information aboutpremium and/or claims over a defined period

This provides a 'snapshot' of the compliance and underwriting and operationalperformance of a Binder and is called a bordereau an LMP slip of this kind is shownbelow

List ofInsured

Period ofcover

Gross premium

paid by insured

Deductions

Net premium (after

deductions)

Signing slip for Xchanging

The broker creates a cover slip for the client, summarising the cover

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e b o e c eates a co e s p o t e c e t, su a s g t e co e

a full policy document will then be created, often by Xchanging Ins-sure Services, to besent to the client

An example of a signing slip for a policy written through a DUA is shown here:

Policyreference no.

Gross premiumbefore deductions

Settlement duedate for broker

Net premium to

Insurer afterdeductions

Commission tocover holder

Amount of

Brokeragededucted

Insurers uniquemarket reference

3 letter BrokerAcronym & Code

Name of insured

Handling claims payments

Settlement of Lloyds claims is subject to the requirements of the Lloyds claim schemes

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y j q y

Depending on the inception date of the policy, settlement may be governed by Lloyds1999 Claim Scheme, or the Lloyds 1999 Claim Scheme (Amended)

Schemes include specified duties for leading underwriters and detail the involvement ofXchanging Claims Services (XCS) in the claims handling process

XCS is a claims agreement party for subscription business placed at Lloyds

The Claims Loss Advice and Settlement System (CLASS) is being trialled to manage claimsin the company market

This system allows claims advice, reports, reserves and settlements to be disseminatedfaster, but depends on the use of Electronic Claim Files

83

Introduction to London Market

Notification comes from the insuredto the broker there may be aclaims notification clause, givingspecific methods or timescales formaking a claim

The broker creates a claims adviceand send this to the leadingunderwriterand any other

agreement parties, including XCS An expert (lossadjuster/surveyor/lawyer) isappointed as necessary by theleading underwriter and XCS toreview the claim

Claims Notification Claims Submission

The broker checks that the insuredhas met all premium paymentobligations and policyconditions, then submits the claimto the underwriter

The obligation is usually on theinsured to prove a losshas beensuffered

The insurer must be satisfied that anumber of conditions have beenmet, e.g. that the cover was in forceat the time of the loss; and that thequantum(amount) of the claim iscorrect

Claims Settlement

The amount payable depends onthe extent of loss or damage andthe nature of the cover provided

XCSprocess the settlement,triggering a payment to thenominated payee, via the LloydsCentral Settlement System

In the case of company market

claims, the completion of theCLASS process will trigger thepayment to the nominated payee

Nominated payees can be brokers,policyholders, 3rd partyadministrators or cover holders

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Lloyds statistics

Market performance

In 2008 Lloyds was markedly unaffected by the economic climate, in contrast with the rest

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of the financial sector

Consistent growth in capacity over the

past five years.

Higher levels of catastrophes andattritional claims partially offset bycurrency movements and prior year

releases

Profitable core underwriting fromspecialty business, unlike largeparts of the retail market.

Lloyds Syndicates

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(Source: Lloyd's Close Up 2006)

The number of syndicates operating at Lloyds has consolidated in recent years in line withglobal insurance trends

Syndicates have increasingly transformed into to multi-line businesses.

The reduction in syndicate numbers can also be attributed in part to the changing profile of capitalproviders Names have traditionally tended to support a spread of syndicates, whereas corporatemembers have gravitated towards underwriting through a single syndicate

Key players and market share

8 corporates provide 50% of the capitalto the London market

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(Source: Lloyds of London)

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Insurance 101 - Brokers.FSI Industry Training

Introduction

This section of the course aims to provide an overview of intermediaries, their roles in the market, the

different types and what they do

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2010 Deloitte MCS Limited 89

different types and what they do.

This module will aim to provide and understanding of:

Why Brokers are needed

Trends in the MarketWhat Brokers do and how theymake money

What Brokers value

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What Brokers do and how they

make money?

Who Does What? (Non Internet Channels of Distribution)

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Independentagent

Independent agents represent more than one company (about six on average).

Ownership of renewals means that the agent and not the company owns the client list. If a

company terminates the independent agent, the agent retains control of the business and

is free to switch it to another company.

ExclusiveAgents

Exclusive Agents represent only one company. In the exclusive agency system, the

company and not the agent owns the client list.

Direct writers Direct Writers do not use agents but instead use company employees who sell insuranceby telephone.

Brokers A Broker represents the buyer, while the agent represents the Insured, providingspecialized services to business clients.

Additional Broker Distribution Segments

The terminology below is also used to describe various distribution segments:

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Segment Definition

Nationals Intermediaries with a national and international presence, typically publiclylisted.

Consolidators Leading consolidators and network aggregators, excluding insurer ownedbrokers.

Insurer owned brokers Brokers wholly owned or where a controlling interest is owned by an insurer.

(SBJ is owned by AXA)

Large regional brokers Next top 30 independent brokers.

Other brokers Remaining brokers and intermediaries.

Bancassurance & affinity Banks, building societies and affinity organisations distributing commercial linesinsurance.

Direct Direct commercial insurance arrangements between consumers and insurers.

Other Company agents, tied agents, and other historical arrangements.

Whos Who

UKs 10 Largest Insurance Brokers 2009

Rankings are based on 2009 Insurance Times Top50Brokers report:

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a gs a e based o 009 su a ce es op50 o e s epo t

93

RankCY (PY)

CompanyRevenue

000

1 (1) Aon 686,760

2 (2) Marsh 472,900

3 (4) Willis 461,176

4 (3) Saga / AA Insurance Services 450,000

5 (5) Jardine Lloyd Thompson 448,500

6 (6) Towergate Partnership 372,200

7 (7) Swinton 278,925

8 (8) BGL Group (Budget) 261,427

9 (11) HSBC Insurance Brokers(since bought by Marsh)

146,300

10 (10) Bluefin Insurance Services 140,000

How are Brokers Paid?

Brokers are paid for the services provided to clients, usually through a brokerage, which is

calculated based on a percentage of the premium:

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calculated based on a percentage of the premium:

This is not paid directly to the broker, but is deducted from the premiums paid (this does not make thebroker an agentof the insurer the broker is acting on the behalf of the client).

The fact that a broker receives remuneration, and the amount involved may need to be disclosed bythe broker at the outset of their principal/agent relationship, depending on the type of business.

Brokers may also receive a fee paid directly by the insured this is often subject to a specific legal

agreement. The broker may also earn a commission, although this should only be with the Insureds full

knowledge.

Where a broker is operating a binding authority(acting under delegated authority from insurers),they may also receive payment for managing this scheme.

Brokers may also earn remuneration for providing additional services:

Carrying out property, liability, health and safety risk surveys.

Advice on alternative risk transfer methods.

Advise Insureds on New insurers on the market and what they offer.

New types of insurance cover.

Setting up and managing captive insurance companies.

Advice on changes to health and safety regulation where it may affect the client.

Commission

An insurance agent or broker is normally paid on commission:

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Paid by the insurance company where business is placed

Billed into the premium of the risk

Ranges from 8 to possibly 20%, depending on the relationship

In addition, some companies provided contingent commissions/ overriders a fee

paid on the basis of the profitability and volume of the brokers portfolio rather than theindividual risk

This commission practice led to brokers colluding with top insurance companiesto fix prices and divert business towards favoured accounts, rather than actingin the best interests of their clients. n investigation in 2004 by New York

Attorney General Eliot Spitzer led to worldwide changes in commission practices

95

Bid Rigging:

Spitzer alleges that many large insurers have been complicit in Marshsschemes. They have paid hundreds of millions of dollars for Marsh to steer

business their way, he says. At times, says the complaint, the insurancecompanies have gone much further, colluding with Marsh to rig bids and

submit false quotes to unwitting clients.

Changes in Regulation and Disclosure

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FSA Confirms industry guidance status over disclosure:

The FSA has formally confirmed Industry Guidance status on the market solution inrespect of conflicts of interest, disclosure and transparency in the commercial insurance

sector for brokers.

What this Means

Although not compulsory, the guidance has been given confirmed status by the FSA,meaning that before considering any enforcement action the regulator will take intoaccount whether the firm was following the guidance appropriately

Commercial customers will receive clear and accurate information regardingintermediaries services and how they are remunerated

Transparency as respects the level of commissions earned as well as overriders

Customers will be alerted where there is a chain of intermediaries involved in arrangingthe cover

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Why are Brokers/ Intermediaries

Needed?

The Role of the Broker/ Intermediary

Intermediaries play a crucial role in advising their clients on the right coverage needed for their operations, findingthem the best premium, and providing support during a claim. They represent the interests of customers and act aprofessional advisor on insurance matters. All brokers must be formally regulated by the FSA or another national

l t t t d

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Adequate Exposure Protection

Brokers ensure that the customer does not

end up with unnecessary cover, or evenworse- without the cover they really do

need!

Expertise

Brokers understand coverages that areneeded and the nuances of policy wordings.

Niche markets require Broker knowledgeon coverage availability

Decreased CostsBrokers have knowledge of the marketplace

and the ability to negotiate competitivepremiums

Commercial Insureds may have multiplepolicies. Brokers manage day to day

issues, allowing the Insured to focus on

their business

Policy Management

regulator to trade.

It is difficult for the Insured to understandthe complex nature of Commercial risks, orhave the ability to discern among the many

insurance products available

Complexity in Commercial Lines

Who owns the customer relationship?

direct relationship

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Customer Insurer

direct relationship

Agent

liaise

Distribution Network

The Buyers( h d)

Intermediaries The Sellers( h )

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Commerce

(The Insured)

Brokers

Agents

InternetAggregators

(The Insurers)

Captive insurancecompanies

General Insurancecompanies

The State

Industry

The Public Direct

The above diagram shows a picture of how sales/ distribution channels in the UK are

organised. Insurers sell either sell directly to Buyers or through Intermediaries.

Traditionally intermediaries such as brokers, agents and consultants used to be the only typesof distribution channels.

Today there exist a plethora of channels in the marketplace and we have seen a dramatic rise in

direct insurance from the emergence of internet channels.

Distribution Channels: General vs. Long Term Insurance

The following pie chart displays the breakdown of distribution channels used in General and Life Insurance in 2008.

Despite the growth of different distribution channels, Independent intermediaries remain the most populardistribution channel for General Insurance:

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The broker and other intermediary channel is far more important for General

Insurance

Distribution Channels: Personal vs. Commercial Insurance

The following pie chart displays the breakdown of distribution channels used in Commercial Insurance in 2009. Despite

the growth of different distribution channels, Independent intermediaries remain the most popular distributionchannel for Commercial Lines of business:

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The broker and other intermediary channel is far more important for commercial

lines

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Trends in the Market

Current Industry Trends

The Insurance marketplace is increasingly competitive. Flexibility and responsiveness will bethe key imperatives for insurers and brokers going forward.

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Replace, leverage or outsource

fragmented legacyenvironments

Replace, leverage or outsource

fragmented legacyenvironments

Growing demands of global

regulation increasinglyrequiring back office

investment

Growing demands of global

regulation increasinglyrequiring back office

investment

Changing product mixChanging product mix

Ongoing industry consolidation

and M&A

Ongoing industry consolidation

and M&A

Adopting flexible plug and

play distribution channels andbetter intermediary integration

Adopting flexible plug and

play distribution channels andbetter intermediary integration

Increasing number of Broker

networks

Increasing number of Broker

networks

Requirementsfor flexibility

andresponsiveness

Distribution Future Features and Trends

Customer Alignment

Ease of Doing Business

Clearly defined target market Well defined TCF policy

Target market understood, segmented

Sales and submission processes Service

Reward Structure

Media

Meet requirement for low cost Balance incentives and career building

Aligned to TCF and quality business

Multi-media

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Ease of Doing Business

Strong Risk Management

Product Proposition

Service Adviser support

Quality Management Framework Control systems well defined

Market competitive range Aggregation capabilities Own brand + selective additions

Media

Technology Support

Recruitment and Training

Telephone, internet, limited face-to-face

Technology to support sales and service Business support services

Clearly specified recruitment brief Training aligned to multi-media and TCF

High

HighLow Control

Profitability

Todays distributionEntrepreneurial, high commissionLimited use of technologyLow persistency

Customer loyalty to distributorPoor control environmentProviders left to pick up pieces

Tomorrows distributionStructured recruitment and trainingLow cost advisers, efficient processesFace-to-face the exceptionOptimal use of technologyProvider ownership of customer

Value proposition for consumer clearStrong control environmentAligned to new regulatory themes

Low

Current topics in the Broker world

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I- Market

Brokers role in Commercial Insurance

Consolidation in the Broker Landscape

Distribution and Future Trends

Distribution Channels in the UK Insurance Market - iMarket

iMarket is an e -commerce portal which allows brokers to have online access to insurance

products and services in the UK. It facilitates access to13 commercial classes by filling in a

single data capture form

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Market Share of Top 5 Companies (%)

Switz

erland

Luxem

bourg

single data capture form.

It has the following key benefits:

- Simple Single sign-on access to a range of insurers to find most competitive quote.

- Quick - Ability to issue policy cover immediately.

- Cost-effective - Reduction in amount of paperwork and administration time.

Currently ten insurers have joined: Allianz, Aviva, AXA, Brit, Fortis, Groupama, MMA, NIG,

Royal & Sun Alliance, Zurich and the underwriting agency iPrism.

Over 3000 brokers have now signed up to iMarket representing around 70% of UK brokers

Three major broker software houses are partners of iMarket - Acturis, Insurecom and

Software Solutions Partners / Sirius. IT has recently been criticised for slow take-up but

has developed common standards in the industry.

The challenge for brokers is to ensure that they are adding value through their advice andexpertise, so that they can clearly differentiate their offering from that of the direct

channel. This is particularly true in the lower end of the market, where products are more

likely to be commoditised, and advice less likely to be needed.

Consolidation in the Broker World

Current pressure on Broking firms have forced some to sell or merge in the effort

to remain solvent. The following are examples of these trends:

Current pressure on Broking firms have forced some to sell or merge in the effort

to remain solvent. The following are examples of these trends:

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SignificantConsolidationwithin BrokerMarketplace

SignificantConsolidationwithin BrokerMarketplace

Aging Broker PopulationAging Broker Population

Increasing Compliance CostsIncreasing Compliance Costs

Commodisation of Small Commercial LinesCommodisation of Small Commercial Lines

Broker networks offer the following to independent insurance brokers:Broker networks offer the following to independent insurance brokers:

Enhanced Commission Rates - Ability to negotiate enhanced commission rates with some of the leadinginsurers due to combined buying power

Specialised Products - Brokers have access to a range o

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