The story

Where to buy the book

International Insurance Market and Insurance Glossary

The business of insurance is the spread of risk. An earthquake in Chile affects insurance companies in New York, London, Munich, Zurich and around the world. No insurance company could handle higher value exposures without the ability to pass on part of the risk to other companies.

When it comes to major catastrophes, such as earthquake or hurricane, it is essential to spread risk to other countries across the world. The ultimate limit to what can be insured at any one location is up to world markets and is beyond the control of any one nation. Property values continue to concentrate along the south east coast of the United States at the same time as hurricane strength and frequency increases. A major capacity crunch becomes more probability than speculation. Interestingly, while international reinsurers like MunichRe and SwissRe consider the catastrophic effects of global warming to be the crucial risk facing them today, US insurers have remained focused on the dramatic but less consequential threat of terrorism.

Use of insurance or reinsurance for money-laundering is strictly fiction. However, since nations, whatever their political or economic ideologies, need to trade with each other by reinsurance, this money flows freely across national boundaries and is usually subject to the fewest restrictions.

While the few technical references to insurance in A Foreign Policy are briefly explained, these notes are for those who would like to know more about London and international insurance practice.

Glossary of Insurance Terms

Agent	Though widely used to describe insurance representatives, the legal meaning is narrower. An insurance agent is appointed by an insurance company. Though not an employee, he/she represents the company, not the client.  A Lloyds Agent is not an insurance agent at all but an appointee of the corporation of Lloyds responsible for reporting on shipping.
Binder	An undertaking  given to a broker or agent to accept an insurance risk. Underwriters will entrust an agent or a broker to accept risks on their behalf according to set terms.
Broker	A broker represents his/her client, the insured, and may deal with any insurer to negotiate the best terms. With a binding authority from an underwriter, a broker may act as an agent and it is not uncommon for a broker to own an agency.
Captive company	An insurance company which accepts no outside business, having been formed to serve the internal self-insurance or tax mitigation needs of the corporation which owns it.
Coinsurance	In British-English, coinsurance is insurance by two or more companies or underwriters. In American-English it means the obligation of an insured to bear a proportion of a loss if insurance is not for full value (a principle referred to as "average" in British terminology).
Excess of Loss	A reinsurance treaty which pays up when the total loss from a single event exceeds the specified amount. A company may be able to afford the loss of a home in Florida for $500,000, for example, but not a $500,000,000 loss from a hurricane destroying 1,000 such homes. The company will look for excess of loss coverage.
Lloyds of London	The world's oldest insurance exchange. Syndicates of investors, members of Lloyds, appoint underwriters to accept risks on their behalf. Lloyds cannot sell directly to the public but only to brokers, companies or individuals, who have been accepted as members. Usually one syndicate will accept only a small percentage of a risk, meaning that for each policy placed at Lloyds, several syndicates will be involved.
Loss Adjuster	Since a Lloyds policy is usually underwritten by several syndicates, there was an early need in the London market for independent claims handlers to act for all parties. Hence the evolution of independent loss adjustment firms which today act for most London insurers on larger claims. Standards and codes of practice for British adjusters are set by the Chartered Institute of Loss Adjusters.
Reinsurance	Insurance of the insurer. Since the spread of risk is essential to the insurance business, the system of reinsurance evolved among underwriters in order to pass a proportion of risks they accept to other companies and countries.
Slip	A Lloyds broker is able to place a policy with several syndicates by visiting each and asking underwriters to sign or initial against the percentage of their acceptance on a "slip."
Stop Loss	Reinsurance which pays out when the loss ratio of the insured underwriter exceeds a defined percentage. Used mostly with captive insurance companies.
Treaty	A policy of reinsurance, or a legal agreement defining the terms on which business is passed from one insurer to another. The most common types are Facultative (the reinsurance of a portion of a single risk), Quota Share (reinsurance of a fixed percentage of all risks falling within an underwriting classification), Excess of Loss, and, much rarer, Stop Loss.
Underwriter	An insurance underwriter is responsible for the assessment of risk and deciding the individual insurance contracts to accept and how to rate them.
Utmost Good Faith	This is the underlying legal principle of London insurance. It is the assumption that all contracts are based on full and complete honesty. The Latin form, Uberrimae Fidei, is occasionally confused with the Lloyds motto, Fidentia, meaning confidence.