Understanding Insurance in the Financial Services Industry
The financial services industry encompasses various sectors, including insurance providers, to manage financial risks effectively. This includes personal and corporate insurance types, along with concepts like syndication. Explore examples related to motor insurance and oil rig insurance to grasp how risks are managed and transferred within the industry.
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Presentation Transcript
Fundamentals of Financial Services Fundamentals of Financial Services Insurance Chapter 2.5 Chapter 7.3
Lesson Objectives By the end of the lesson: Everyone MUST Know that the financial services industry also includes insurance providers to enable financial risks to be managed Most SHOULD Know the types of insurance available: personal; corporate; Explain the concept of syndication
The Financial Services Industry Links those with surplus money to those with a need to borrow money Includes markets to enable investors in equities and bonds or sell investments Financial Services Industry Includes foreign exchange dealers to allow one currency to be exchanged for another to facilitate international trade Includes insurance providers to enable financial risks to be managed LO: Outline the key components of the financial services industry
Motor Insurance Example Charlie s profile Age: 24 Passed Test: A month ago Car: 7 year old VW Golf worth 3,000 PREMIUM 100 p/m Why does Charlie pay a higher premium? Sarah s profile Age: 48 Passed Test: 20 years ago Car: BMW worth 10,000 Driving history: has never had an accident PREMIUM 50 p/m
Oil Rig Example Explo Inc Recently established oil exploration company Completed construction of first oil rig in the ocean off West Africa Rig Worth: $100 million The company wants to insure against damage due to mechanical failure or adverse weather. This is a HUGE risk for the insurer. Is there anything they can do to protect themselves in the event of the risk materialising? An insurance company decides to insure the oil rig. This means Explo Inc has PASSED ON THE RISK to the insurance company in exchange for a premium of $5 million each year.
Oil Rig Example Explo Inc Recently established oil exploration company Completed construction of first oil rig in the ocean off West Africa REINSURANCE Rig Worth: $100 million Where the insurance company also takes out insurance to protect themselves The company wants to insure against damage due to mechanical failure or adverse weather. OR SYNDICATION could take place This is a HUGE risk for the insurer. Is there anything they can do to protect themselves in the event of the risk materialising? An insurance company decides to insure the oil rig. This means Explo Inc has PASSED ON THE RISK to the insurance company in exchange for a premium of $5 million each year.
SYNDICATION Syndication allows a group of insurers to take on a share of the risk associated with a specific insurance policy. Total Shipping 100% of the risk This is normally in circumstances where the risk is too high for one insurer to take by themselves. Syndicate of Insurers Insurance Co. 1 20% of the risk Insurance Co. 5 20% of the risk Each member would receive a percentage of the premium being paid by the insured party and at the same time would bear the same percentage of any claim made. Insurance Co. 4 20% of the risk Insurance Co. 2 20% of the risk Insurance Co. 3 20% of the risk
Safety Net A safety net, to protect against any future risks that may occur. The insurance policy is provided by an insurance company in exchange for a payment, referred to as the insurance premium.
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