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2/4 W01/March 2017 Award in General Insurance

Having looked at the types of insurance buyer we now move on to look at the insurance market itself, i.e.
who participates in it and what their roles are.

2 B Insurers
Chapter You will remember from chapter 1 that an insurance company enables individuals and businesses to

An insurance
company is primarily transfer risks that they are not willing or able to bear for themselves. Insurance companies operate by
in the business of the ‘law of large numbers’ where they pull these risks together and, with the premiums collected from
taking risks
their policyholders, pay claims to those who suffer the insured loss or peril known as the ‘insured event’.
Insurers may be distinguished from one another in terms of ownership and function. Firstly, in terms of
ownership, there are a number of categories:
• Limited liability/proprietary companies.
• Mutual companies.
• Captive companies.
• Protection and indemnity (P&I) clubs.
• Lloyd’s.
We will now look at the main features of these different types of these and consider Lloyd’s on its own
later in section D.

B1 Types of insurer – defined by ownership

B1A Limited liability/proprietary companies

These companies are owned by shareholders (also known as proprietors) who, in buying shares,
contribute to the share capital of the firm. Therefore, company profits, after expenses, taxes, reserves,
and, in the case of life business, bonuses for with-profits policyholders, are distributed to the
shareholders. Reference copy for CII Face to Face Training
Limited liability means that a shareholder’s liability for the company’s debts is limited to the nominal
value of the shares they own (the original face value of the shares). Some are publicly quoted companies
with a share value stated in recognised financial exchanges.

B1B Mutual companies
In contrast to limited liability/proprietary companies, mutual companies are owned by the policyholders.
In theory, the policyholders are liable for any losses made by the company, although in reality mutual
companies are limited by guarantee, with a policyholder’s maximum liability usually limited to their
premium. Insurers owned in this way can demutualise, which means they become limited liability
companies.

B1C Captive insurers

A captive is an insurance company established by its parent company or group (usually large
corporations) that provides insurance coverage primarily, if not solely, to that parent company.
Under this arrangement, the parent company buys insurance from its own captive company, which then
transfers part of the risk to reinsurance companies. From this, the parent company expects several
benefits: it can price risk based on its own loss experience instead of the average premium that an
insurance company charges; it can avoid payments for expenses and profits that would otherwise be
incurred by an insurance company; captive insurers can tap directly into the reinsurance market, so the
parent company of a captive insurer can access a lower cost reinsurance market; premiums paid to the
captive company can be treated as a business expense for corporate tax purposes, although in the USA
the Internal Revenue Service (IRS) disallows such deductions if a captive insurance company transacts
no other business outside the parent company.
You should note that captive insurers do not offer insurance to the general public.