Life, Pensions and Investment Companies
Life and pensions is the historic term for the part of the financial services sector that aims to support life and health, and through investments aims to ensure people have financial security in retirement.
The main business involves:
- Life assurance policies (life cover) – these provide a lump sum of money, or a monthly income, in the event of the policyholder’s death before an agreed date. The funds of the policy will go to the policyholder’s beneficiaries – usually the policyholder’s family, or can be used to pay off certain large debts, such as a mortgage.
- Income protection policies – these can be taken out to ensure an income is maintained in the event of a policyholder being unable to work due to long-term illness, injury or disability.
- Pensions – investments to provide financial security in later life. This is now one of the most important areas of the sector, drawing significant media coverage and political attention.
- Investments – as well as being the means by which funds are built up to pay out against the promises made in policies or pension schemes, investments are also an important way of saving for significant future payments – from properties to private education, or simply to make the most of spare funds for the future. Factors to consider include the length of time available to save money, what sort of risks can affect how that money grows, or how we feel about taking risks.
Predicting how much money someone might need or want in the future is a tricky business and making sure that that amount is reached even trickier. Understanding the risks involved and the needs of clients means that this can be a very challenging part of financial services but ultimately very rewarding, knowing that you are part of preparing someone’s future and helping them reach their goals.
Financial advisers, who are concerned with life and related insurances as well as other forms of retail investment product, are currently required to hold, as a minimum, the Certificate in Financial Planning, a qualification run by the Chartered Insurance Institute (CII). From the end of 2012 onwards, the minimum qualification requirement will be at Diploma level.
There are three different kinds of adviser:
- Independent financial advisers (IFAs) who can choose from all available products to select the one that will best suit an individual’s needs
- Multi-tied advisers who can only sell products from a limited number of companies – the ones to which they are ‘tied’. They still have to find the best product in their range to suit you.
- Tied advisers who only sell products from the one financial company to which they are ‘tied’ – usually their employer. They will choose from the limited range of products available but will still try to find the best one in their range for you.
Because this is such a crucial part of everyday life now and for the future, the Financial Services Authority (FSA), regulates the activities of the companies, banks and financial advisers operating in this sector in the UK.
Give the enormous range and variety of risks covered by the insurance profession, it is not surprising that there are several different kinds of insurers, each specialising in a particular kind of risk, market or client.
These range from companies providing off-the-shelf insurance products to companies and individuals to those offering entirely bespoke services to cover unusual, specific or very large risks.
Personal and Commercial
Commercial or ‘corporate insurance’ companies enable commercial enterprises to operate effectively and to continue ‘business as usual’ even in the face of unwelcome events like fire or flood.
Personal or ‘general insurance’ protection allows individuals to minimise the impact of household and car accidents, theft and even cancelled holiday flights.
For businesses, corporate insurance is crucial, enabling proprietors and managers to carry on despite suffering unexpected events – like the 2007 floods in the UK and hurricanes that regularly hit the Caribbean. Insurance enables business people to protect property, equipment, stock, employees and the general public, who might suffer injury or damage as a result of commercial activities.
Corporate insurers offer various types of commercial insurance relating to:
- Public, employers’ and product liability insurance, which pays compensation when someone or something has been held legally liable for an adverse event such as an industrial injury
- Professional indemnity insurance, to protect against claims of negligence in business, for example doctors, lawyers or other professionals
- Business interruption, to enable commercial enterprises to protect their income at times when they are unable to trade
- Commercial property – buildings and contents insurance for business and industrial premises
- Commercial vehicles – motor insurance for fleets.
In a constantly changing market, businesses require new kinds of insurance to protect against emerging risks – ranging from theft of identity to intellectual property rights. Latest developments have involved devising protection for companies against the effects of global climate change and the natural disasters that may occur as a result.
For individuals, general insurance companies principally provide:
- Property and home insurance to protect buildings and their contents, separately or together
- Motor insurance, compulsory if you want to drive a vehicle in the UK
- Travel insurance, protecting belongings and paying compensation if travel arrangements are disrupted
- Consumer credit – for example, repaying your loan if you are ill or become unemployed.
- Personal accident insurance.
Frequently, the scale of risks underwritten is too great for one insurer to carry safely. In these circumstances, companies use reinsurance to mitigate their own risk exposure.
Specialist reinsurance companies take on part of the risk that insurers assume from their personal or commercial clients. They can do this by sharing the losses among several carriers in the event of a claim. For this service, the reinsurer is paid a share of the insurance premium in accordance with its level of participation in the risks.
But reinsurance is not just sought for large risks like power plants, but also for smaller risks for specific losses such as roof damage to houses. Such smaller losses – as occur after small tornadoes in Britain – while affordable individually could have a damaging impact on an insurance company when they occur in significant volumes.
A reinsurer therefore assumes individual risks or assumes risks en bloc – that is, a share in a large number of individual risks.
Because of the scale involved, reinsurance companies need to be adept at looking into the future, to identify new types of risks early. Many operate globally, with specialist experts looking at the impact – worldwide – of the latest developments in areas such as genetic engineering, nanotechnology and extreme weather events.
The London Market
The London Market is a distinct, separate part of the UK insurance sector centred in the City of London. Its core activity is the conduct of internationally traded insurance – mostly non-life (general) insurance and reinsurance, with an increasing emphasis on high-exposure risks.
Reflecting the City’s status as a dominant international financial centre, the London Market’s character is global, with a large number of foreign or foreign-owned underwriting companies.
It is the only market in which all of the world’s 20 largest reinsurance groups are represented.
The number, diversity and expertise of insurers competing in the London Market means that brokers can find the capacity and expertise required for the underwriting of virtually any type of risk.
Lloyd’s of London
Lloyd’s of London is neither a bank, nor an insurance company. It is an insurance market of members, an independent corporation that provides a building and facilities for its members, who actually carry the insurance risks.
Lloyd’s members conduct their insurance business in syndicates, each of which is run by a managing agent. Syndicates – which compete for business – cover either all or a portion of the risk and are staffed by underwriters, the insurance professionals on whose expertise and judgement the market depends. The capital that backs the syndicates comes mainly from corporate sources, with a small proportion of funding from individual members (known as ‘Names’).
Lloyd’s syndicates write a diverse range of policies, both direct insurance and reinsurance, covering a vast category of risks.
Lloyd’s underwriters participate in marine, aviation, motor and non-marine business and exercise considerable commercial influence over shipping, aircraft and energy related insurances, many of which are placed on a global basis. Lloyd’s is also well known for specialist business such as catastrophe reinsurance, kidnap and ransom insurance and fine art insurance, as well as for the type of innovative or unusual policies it has written in the past.
Lloyd’s has insured the smile of Ugly Betty; The All England Lawn Tennis Club against disruption of the world-famous Wimbledon tennis tournament; and even the tongue of Costa Coffee’s Chief Taster!
Lloyd’s even took on the task of insuring a Czech television programme whose title translates to ‘I will do everything’ – the basic premise of which was ‘Don’t try this at home’, insuring contestants about to be immersed in a barrel of snakes or forced to eat creepy crawlies.
Individual and business insurance buyers often need expert advice to enable them to assess the risks they have, to help them minimise those risks in a practical way, and to match their needs to the best seller of insurance in the market.
Many people and businesses choose to buy insurance directly, but others – and in particular commercial buyers – use an intermediary.
- Insurance brokers – a person or firm that provides independent advice to meet specific customer needs, choosing from a range of providers
- Insurance agents – act as authorised representatives of a specific insurance company.
With the increasing complexity of risk facing businesses and individuals, the role of the broker has evolved during the past 20 years from pure intermediation to providing additional services for clients and insurance companies. Many brokers offer risk management services, helping companies to develop new ways to mitigate risks, for example, by adding security measures like fencing, surveillance cameras or lighting to commercial premises with a view to reducing the likelihood of break-ins.
Brokers today use their market knowledge to structure complex risk solutions for clients, primarily in the key broker markets of non-life commercial insurance and reinsurance. These solutions may be limited to cover in the UK but in an increasingly globalised economy the role of brokers is taking on an increasingly international dimension, with brokers handling multinational risks and working with providers in more than one country.
Whenever an individual or a company suffers a loss, they may be entitled to make a claim under the terms of their insurance policy. Once a claim is made, the key role of the claims function within an insurance company, a dedicated claims management company or the claims team of an insurance broker is to enable the party to carry on their life or business as normal, without interruption.
Claims professionals work on behalf of insurance policyholders and the insurance companies, investigating claims, determining their extent and validity, and negotiating the claim on behalf of the insured.
Loss adjusters, who operate independently of insurance companies, aim to mitigate loss and get businesses back up and running with the minimum amount of disruption. They look into the circumstances surrounding a claim – establishing the cause of a fire, for example – before negotiating a fair sum to replace the loss or repair the damage.
Having checked the authenticity of the claim and negotiated an acceptable amount, loss adjusters will report the facts to the insurers and make recommendations for interim and final payments. Although they cannot commit the insurers to payment, or determine the actual amount paid, they are deemed to be fair and impartial. Most insurance companies maintain a panel of loss adjuster firms.