The Money Myth

Insurance comfort

Introduction

Insurance is about putting safeguards in place, in case the worst happens.

This enables people to go on living their lives and running businesses in the

full knowledge that they are covered against risks. They seek insurance pro-

tection for peace of mind, just as, in ancient Greece, people sacrificed to the

gods as a safeguard against future misfortunes.

In this chapter, we will look at how insurance works, and the tripartite

relationship between insurers, broker and client. We will look at regulatory

developments, particularly Solvency II, and the reputational problems that

the industry faces.

Insurance

Companies buy plenty of insurance. For example, banks take large amounts

of errors and omission insurance to cover them against the risk of giving

wrong advice. They buy directors’ and officers’ liability insurance to protect

the company, its officers and its directors against corporate liability claims,

and insure against property damage risk.

The insurance must be precisely tailored to the firm’s needs for cover.

The wrong insurance is useless. Similarly in The Odyssey, Odysseus’s men

sacrificed to the gods after they had killed the sun god’s cattle but this did

not save them from divine retribution.

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15 4 Safet y f irs t

The profitability of business varies,

according to rates and the incidence of

claims. The rates are impacted by cycles

shifting from soft to hard markets and back

again. In a soft market, rates are low, based

on supply and demand, and underwriters

prefer to take on really good risk. When a hard market comes, rates rise,

and underwriters become more relaxed.

Let us now take a look at how the London insurance market works.

The London market

Insurance or reinsurance programmes have to be multifaceted and expertly

crafted to meet the needs of buyers. The London market concentrates

mainly on non-life insurance and is famed for covering a high proportion of

very large or complex risks. The range includes marine, aviation and trans-

port, home–foreign; and some treaty reinsurance (covering a class or classes

of business) for general risks, meaning non-transport.

The unique structural elements of the London market are the cause of

some misunderstandings in the US, Europe and beyond. London is split

approximately 60:40 between Lloyd’s and the London company market.

The overall London market is worth about £40 billion, some £10 billion

more than the traditional figure given, according to new statistics from the

Insurance Underwriting Association.

It is a subscription market where various underwriters, from Lloyd’s

syndicates and insurance companies, together underwrite a single risk, sub-

scribing to percentage lines of the risk on a several, not joint, basis. Lloyd’s

consists uniquely of around 80 syndicates, each consisting of individuals

and companies that have agreed to join together to underwrite insurance

risks at Lloyd’s.

Lloyd’s and reputation

Lloyd’s insurers are seen as the best in the world at what they do. The

Lloyd’s underwriters share a public-school type of camaraderie, addressing

each other as ‘old boy’ or ‘squire’. There is a reputation to keep up. Lloyd’s

In a soft market, rates are

low. When a hard market

comes, rates rise.