'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. For many years Lloyd's of London
was the only place where representatives of buyers could meet sellers face 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
of needs which the intermediary - being experienced in insurance and risk - makes them
The diagram shows the general
structure of the insurarice market. The buyers in the market are the public, industry and
commerce as well as some local government and nationalised enterprises. Obviously there is
a difference in the sizes of risks offered ranging from the contents of very small flats
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, societies, mutual indemnity
associations or Lloyd's Undenvriters. Insurance may be bought directly from companies at
their branch offices or through their represeptatives. 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.
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).
Mutual companies have been
formed by Deed of Settlement or registration under the Companies Acts. They are owned by
the policyholders who share any profits made. The shareholder in the proprietary company
receives his share of the profit by way of dividends, but in the mutual company the
policyholder owner may enjoy lower premiums or higher life assurance bonuses tha would
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 as proprietary companies.
There are other ways of
classifying insurance companies.
(a) Specialist companies- are
those which underwrite one type of insurance business only, e.g. life companies,
engineering insurance companies.
(b) Composite companies- are
those which underwrite several types of business.
(HOME SERVICE INSURANCE)
proprietary companies transacting "industrial" life assurance
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
employed to call at the homes of the policyholders and new business is also transacted in
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
These societies are run on a
mutual basis and are formed by registration under the Friendly Societies Acts. They
transact industrial life assurance and, in some cases, personal accident and sickness
Friendly societies can issue
specially attractive life assurances subject to an overall premium limit of quite a low
level; this premium limit does not apply to Industrial Life Assurance companies.
Captive insurance is a method of
transacting risk transfer which has become more common in recent years among the large
national and international industrial compahies. The parent company forms a subcidiary
company to underwrite certain of its insurable and sometimes otherwise uninsurable risks.
Indeed the incentive to form a
captive company for many large industrial concerns was that the insurance market generally
was not prepared to write particular risks or provide full cover (an example would be
insurance guaranteeing a product's performance).
Mutual indemnity associations
differ from mutual companies in that the latter will accept business from the
public at large, whereas an indemnity
association originally would only accept business from members of
a particular trade. Over the years many of the associations have had to accept business
from members of the public in order to have greater financial stability and spread of risk
and have been reformed as mutual or proprietary companies.Examples of trades which had
such associations at one time were pharmacists, farmers, furntiure manufacturers
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 only a few members or in some cases more than a thousand.
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 member is, however, fully and personally liable for
all the business written on his behalf by the underwriter of the syndicate.
In view of this unlimited
liability it is essential that strict regulations apply to any person wishing to become an
underwriting member. For example UK member must nowadays provide evidence of minimum means
of 250,000 pounds and also deposit a proportion at Lloyd's.
The intermediaries in the market
are insurance brokers, agents, consultants and a variety of oiher people operating with
differing titles. In some respects they all vary slightly in what they do, how they do it
and in their responsibility for their actions.
An agent in law is one who acts
for another but in insurance the term is usually reserved for the individual or firm whose
main occupation is in another field.
A broker is an individual or
firm whose full-time occupation is the placing of insurance with insurers.
There are two categories of
(a) Lloyd's brokers: they are the only persons permitted to place business at Lloyd's.
They a)so place business in the
(b) other brokers (just termed "brokers").
Both categories are full-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 are generally 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 care to
their clients than agents.
Another category of
intermediary is the insurance consultant, who may act in a similar manner to an insurance
The industrial life insurance
offices and friendly societies employ representatives to call at the homes of
their policyholders to collect the weekly premiums and hopefully to
sell further 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
As an alternative to purchasing
insurarice in the market, or as an adjunct to it where the first layer or proportion of a
claim is not insured in the commercial market, some public bodies and large industrial
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.
These organisations have made
decisions to self-insure because they feel they are large enough financially to carry 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
Having decided on the maximum
that it is prepared to lose in the event of a major loss, an insurer is faced with a
number of choices. He may refuse the risk, agree to accept a part of it
("coinsurance") or accept it with the intention of reinsuring. 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 would be catastrophic. In the case of
co-insurance, insurers share the risk (in the same way as Lloyd's underwriters share
Co-insurance differs from
re-insurance inasmuch as the insured has a relationship with every insurer whose name
appears on the policy document. In re-insurance the insurer is himself fully liable to the
insured because he (the insurer) has made arrangements for reinsurance and the failure of
the reinsurer cannot therefore affect the insured.