JOURNALS

Journal of Insurance Research and Practice

Volume 20 part 2 (July 2005)

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Effect of captives on stock returns and systematic risks
By Wah Chin Yee and Yuan Wu

Abstract

The financing of risks by the formation of a captive insurance company has been the subject of some academic study and comment. However, there has been a conspicuous lack of empirical research, while much of the published work applies to the US and European countries and therefore may not be very useful for organisations in the Asia-Pacific region.

There has also been a great deal of development and growth in the captive sector within the region, which justifies a study in this increasingly important form of risk financing. In this study, we evaluate the possible impact on the value and market returns of parent companies, which are those holding a captive insurer, compared to similar companies which do not hold such subsidiaries.

The findings are indicative that there is no significant change in the stock returns of parent companies upon formation of a captive. The findings reinforce those of other academic studies carried out in the US (eg Diallo and Kim, 1989) and the UK (eg Adams and Hillier, 2000). They are also consistent with observations reported in the general risk management literature (eg Bawcutt, 1997).

The results suggest that in the Asia-Pacific region, the financial advantages of the captive insurance concept, relative to other risk transfer or financing strategies (eg conventional insurance), need to be more closely scrutinised by stockholders, prospective investors and financial analysts. This is essential to help improve understanding of the optimum operation of captive insurance and consequently enhance the maximisation of stockholders' value.

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The influence of insurers upon the system of compensation for personal injury
By Richard Lewis

Abstract

To what extent has insurance influenced our system of compensation for personal injury? On the one hand, some academics have suggested that insurance has been no more than a “makeweight” argument in the development of tort liability. On the other hand, others have claimed that insurance has had a substantial effect, even if this is often hidden or not discussed openly.

This article lends support to one side of this debate by describing the enormous importance of insurers to personal injury litigation. It argues that all cases, in theirwider context, have been affected by the practices of insurance companies. This is the case even though insurance is rarely mentioned by judges and largely ignored by textbooks on tort law. Insurers provide the lifeblood of the system.

The article looks at the number of tort claims brought in recent years and gives details of how many cases involve insurers. As the paymasters of the system, insurers not only compensate claimants but also fund almost all legal representation. It is insurance bureaucracy which determines whether, when and for how much claims are settled and it is insurance offices, rather than courts of law, that are the key places for tort in practice.

Changes in the extent that insurers issue formal legal proceedings and use lawyers are examined, while insurers' wider influence over the settlement system is noted. The scope for compensation is directly related to the incidence of insurance protection and it is argued that the level of damages can only be understood against the insurance background. Finally, the influence of insurers in responding to potential changes in the law is considered. Without insurance, it is concluded, the system of compensation for personal injury would have collapsed long ago. The importance of insurers and their influence upon the system cannot be underestimated.

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The 1992 international oil pollution compensation regime: the challenges ahead
By Sophie Drake

Abstract

The international oil pollution compensation regime, implemented through the International Oil Pollution Compensation Funds 1971 and 1992, was established to compensate victims of pollution from spills of persistent oil from ships.

The regime has recently marked two significant events: the 25th anniversary of its establishment during 2003; and the coming into operation of the supplementary fund for oil pollution damage on March 3, 2005, which has the objective of more fully compensating victims of oil pollution.

The regime is a model of what can be achieved by intergovernmental bodies by taking a pragmatic and cooperative approach to decision making, with due regard for the contemporary demands of international business, government and the public.

This paper examines the background to challenges the regime currently faces and the manner in which the regime is responding. The paper focuses on three main areas of challenge in that regard: the pressure to refine the scope of spills and damage covered by the regime to include, for example, non-economic environmental damage; the push by some fund members for the regime to discourage substandard shipping; and the concern by some members to ensure that contributions by ship owners and oil receivers are made equitably. The continued success of the regime may be seen to depend on the manner in which it deals with these current challenges.

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Teleworking at Lloyd's of London: a case study
By Michael Collins

Abstract

The subject of this paper is teleworking. It reports on research in the form of a multi-dimensional case study at Lloyd's Policy Signing Office (LPSO). LPSO employs 400 people and provides professional support services to its customers being the Lloyd's syndicates, insurance brokers and managing agencies that make up the market.

The study involves examination of the business case for teleworking from the perspective of all of the principal constituencies involved. The findings of previous research in relation to costs and benefits, staff productivity, staff retention and absenteeism levels are critically examined. Similarly the employee perspective in relation to the demand for teleworking, their job satisfaction and perception of work-life balance are also investigated within the context of existing research. The theory paradigms used to provide the structure to the research are principally the theory of the flexible firm, use of the balanced score card and from the operational research arena, use of six sigma methodology. The financial case for teleworking is also examined.

The investigation found higher levels of productivity for teleworkers, lower levels of unplanned absence and some evidence of a propensity to stay with LPSO because of the availability of teleworking. Teleworkers reported levels of work and life satisfaction that were never lower than office based colleagues and higher in some key respects. This was despite the fact that teleworkers feared that they might be disadvantaged in terms of career development and access to training.

The study found that the financial pay-back for introducing teleworking was near neutral. Therefore, despite the significant increase in the productivity of teleworkers compared to their office based colleagues the resources required to introduce teleworking might better be applied to other means of improving per capita efficiency. This, however, raises issues of a neo-Taylorist way of working in that potentially is disadvantageous to some groups of employees and the paper closes with a discussion of the changing nature of work in the new economy.

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The impact of the Companies (Audit, Investigations and Community Enterprise) Act 2004 on D&O insurance
By Caroline Bouch and Helen Atkins

Abstract

After a prolonged period of consultation, the Companies (Audit, Investigations and Community Enterprise) Act 2004 has made it into the statute books. The Act, in force from April 2005, relaxes rules regarding the indemnities companies are authorised to provide to their directors. This will impact upon directors and officers liability (D&O) insurance, although exactly how is not yet clear.

The Act gives directors some protection against third party liabilities and follows the sharp rise in the frequency of class actions in the US, a particular concern for directors of British companies listed in the US.

Prior to the Act, UK companies were restricted in their ability to indemnify their directors: section 310 of the Companies Act 1985 voided any provision purporting to exempt or indemnify any officer of a company (including directors and auditors) from liability in respect of negligence, default, breach of duty or trust on the part of that officer in relation to that company. The only indemnity a company was authorised to provide was for directors' defence costs if the officer in question was successful in such proceedings.

The Act removes these restrictions in relation to directors (protection of other officers being a matter for individual companies) by allowing companies to make qualifying third party indemnities (QTPIs), subject to various conditions:

• Companies are still prohibited from indemnifying a director where a claim is brought against the director by the company itself. QTPIs also close the “associated company” loophole, which previously allowed cross indemnification of directors between group companies. There is uncertainty relating to the position of indemnities given by overseas parents.
• For public policy reasons, no indemnity can be given for fines or penalties incurred by a director.
• Directors can be indemnified for their legal defence costs. These must be repaid if any adverse judgment is made against the director, but there are issues over the extent to which a company can forego the director's requirement to re-pay.