WHAT IS INSURANCE?
Almost everyone in the country has insurance of one form or another whether it is for their house, their car or their life. Most have insured all these and more besides. Companies need insurance as much as individuals – for damage to factory buildings or equipment and even against claims for damages for aggrieved customers. The result is a multi-billion-pound industry represented by insurance institutions which lay a vital part in the financial system and in the economy, because of their role as investors in industry.
Insurance companies, in return for assuming an insurance risk, charge a premium. They hope that their premium income will exceed the money they have to pay to those with legitimate insurance claims. If an insurance company feels that the risks it runs are too great, it can pass some of them on to a second company, the process known as reinsurance.
Life and general insurance companies make up a distinct branch of the institutional investment family (See the asset management sector). The capital employed by the underwriter can be invested so that it earns interest or invested in equities. This is the secret of how Warren Buffett made his fortune. He applied his immense skill to investing the capital of an insurance company. The premium income that results from assuming risk can also be invested; the key is that the premiums are received long before any claims have to be paid out. If premiums exceed claims, there is also a profit. An underwriter’s money is thus working several times over. In addition there are several tax privileges.
Lloyd's of London
London’s most famous insurance market is Lloyd’s (not to be confused with commercial bank LloydsTSB). There are six classes of individual which are involved in Lloyd’s insurance:
- The clients
- The brokers
- The underwriters
- The names
- The underwriting agents
- The members agents
Clients
Lloyd’s provide insurance for a wide variety of customers and products, including film stars’ legs, potential kidnap victims, merchant shipping and space satellites. Sometimes the clients may be other insurance companies and markets for whom Lloyd’s provides reinsurance.
Brokers
Brokers link clients with underwriter in return for a commission. There business is rather less risky than the underwriters’, since they are not liable to pay out for any claims. Brokers provide a service which goes beyond merely broking; they advise clients on the best type of insurance protection for their needs and they act for clients by administering their insurance business and by collecting any legitimate claims they may have.
Underwriters
Underwriters actually take on the insurance risk in return for premiums. Many underwriters put up their own capital but it is a business only for those with strong nerves and large wallets. So great are the risks that underwriters club together in syndicates, to spread the cost among many.
Names
The names are wealthy individuals who club together in syndicate to bear the risk of underwriting but allow the underwriting decisions to be made by a specialist on the floor of Lloyd’s. Being a name was standard practice for wealthy and upper class individuals for much of this century.
Underwriting Agents
Underwriting agents decide whether to accept business on behalf of their syndicate. If they are a working name themselves, the agents can underwrite business on their own behalf and earn fees from using their syndicates’ money to ensure a proportion of the same risk.
Members Agent
Member agents act as a sort of dating agency for names; they earn a fee in return for introducing names to Lloyd’s and for placing them on profitable syndicates.
