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40 Cards in this Set
- Front
- Back
- 3rd side (hint)
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Capacity |
The measure of an insurer's ability to issue contracts of insurance. Measured usually buy the largest amount it will accept on a given risk or, in certain situations, by the maximum volume of business that the company is prepared to accept. |
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Run-off |
An article in a reinsurance contract stating that the reinsurers remains liable under the ceding company's policies in force at termination for losses occurring after the date of termination of the reinsurance contract. |
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Imee has been asked to run a seminar for a group of graduating high school students who are considering insurance as a career. She decides to discuss the dynamics of the insurance marketplace. Explain the economics of insurance. |
Economics of insurance: • Traditionally, the results of the P&C insurance industry have not tracked with those of businesses in general • When the economy is faltering, insurers have often done well • When the economy is strong, insurers have often done less well • Buyers of insurance also tend to be more cautious of their assets during economic downturns and, therefore, they tend to rely more on insurance • The level of regulation governing an insurance company’s financial position has contributed to ensuring that the market is relatively conservative and stable • Stability makes the Canadian market an attractive place to do business, - especially for foreign-owned companies looking to expand • This, in turn, has a positive effect on the market’s capacity |
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Imee has been asked to run a seminar for a group of graduating high school students who are considering insurance as a career. She decides to discuss the dynamics of the insurance marketplace.
Describe how the market cycles affect insurers, brokers, risk managers, consumers, and governments. |
Market cycles: • Insurers: Begin to lose profitability when soft markets take hold; when the market is hard, insurers regain profitability but face the animosity of brokers and the insuring public when pricing increases are dramatic or the underwriters that serve those parties are not willing to accept risks
• Brokers: Enjoy soft markets because capacity is abundant, premium rates decline, and underwriters are less demanding; however, a decline in rates means a decline in commission income
• Risk managers: Benefit from lower prices, easier underwriting, and less demanding loss control requirements in soft markets; during a hard market cycle, risk managers have to be more creative in offering options to deal with risk
• Consumers: When hard market conditions strike without warning, insurance consumers become wary, distressed, and often frustrated; conversely, in soft market conditions, consumers are simply more neutral in their reactions to the insurance industry
• Governments: Often react to hard markets by imposing measures they believe will make insurance more affordable; when certain lines of coverage become difficult to buy because, for example, the risk of catastrophic loss is too significant, governments can step in to establish backstops |
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Imee has been asked to run a seminar for a group of graduating high school students who are considering insurance as a career. She decides to discuss the dynamics of the insurance marketplace.
Explain how a hard market cycle follows a soft market cycle. |
Hard market cycle follows a soft market cycle: • Hard markets inevitably follow buoyant soft markets because risks underwritten at artificially low prices must eventually be offset with high enough premiums • When a company’s rate of return on equity drops to threatening levels, shareholders demand corrective measures. • The market hardens when the following strategies are adopted: - Approach each risk very cautiously before offering to insure it - Set more exacting underwriting standards - Give loss control and loss prevention measures significant consideration - Tighten policy terms to limit exposures - Make substantial rate increases - Terminate relationships with brokers with unprofitable results or with only a small volume of business - Withdraw from the jurisdiction, a class of business, or an individual risk when sufficient market share has not been gained or a portfolio or individual risk is notprofitable |
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Explain how market cycles affect risk managers. |
Market cycles’ effects on risk managers:
• Soft market—benefit from lower prices - Underwrite more easily and there are less demanding loss control requirements - Deliver risk protection more easily - Take the time to do serious risk management investigations
• Hard market—more creative in offering options to deal with risks - Deal with stringent guidelines, making decisions more difficult - Explore alternative risk financing propositions (like reciprocal exchanges and other, less conventional means) to deal with risks, which is time consuming |
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Explain how market cycles affect consumers. |
Market cycles’ effects on consumers: • Soft market—consumers are neutral - Experience no change - Find insurance affordable • Hard market—consumers become frustrated when faced with unaffordable premiums and unavailable coverages - Are placed in awkward positions, as when coverage is mandated by law but they cannot afford it - Complain to politicians |
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Explain how market cycles affect government. |
Market cycles’ effects on government: • Soft market—government is neutral - Receives no complaints from consumers • Hard market—imposes measures on insurance - Implements government-backed protection plans that are advantageous to the insurance industry as well as to consumers - by capping losses to ensure that the insurer can survive a catastrophic loss - Participates in recovery initiatives if severe terrorist events were to occur |
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What is capacity defined as?
a. Amount of capital that individual insurers or entire markets make available for insuring risk b. Amount of risk and insurer is allowed to sign c. Maximum amount of money collected in premiums d. Maximum number of customers allowed to appear on a policy
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a. Amount of capital that individual insurers or entire markets make available for insuring risk Rationale: Capacity is the amount of capital that individual insurers or entire markets make available for insuring risk. |
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What analyzes the way pricing is regulated? a. Capacity b. Bear market c. Bull market d. The theory of supply and demand |
d. The theory of supply and demand Rationale: The theory of supply and demand analyzes the way pricing is regulated by balancing the amount of a product made available for purchase with the quantity required by consumers. |
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What term refers to the increase in claims costs from generous jury awards? a. Bear market b. Bull market c. Social inflation d. Capacity
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c. Social inflation
Rationale: Social inflation refers to the increase in claim costs resulting from generous jury awards, legislated benefit increases, and changing legal concepts of tort and negligence that benefit plaintiffs. |
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What term refers to the increase in claims costs from generous jury awards? a. Bear market b. Bull market c. Social inflation d. Capacity
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c. Social inflation
Rationale: Social inflation refers to the increase in claim costs resulting from generous jury awards, legislated benefit increases, and changing legal concepts of tort and negligence that benefit plaintiffs. |
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What type of market performs well during economic downturns? a. Bull market b. Bond market c. Bear market d. Monopolistic market
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b. Bond market Rationale: Bond markets, and particularly government bonds, generally perform well during economic downturns. For those who have them, this results in better investment portfolio returns. |
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When a company ceases to write new business and services only existing policies, this is known as what?
a. Rebranding
b. Market dislocation
c. Shifting prioritise
d. Run-off
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d. Run-off Rationale: Run-off is when a company ceases to write new business and only services existing policies. |
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What happens when consumers are forced to find a new insurer when their current insurer withdraws from the market? a. Shifting priorities b. Market dislocation c. Run-off d. Rebranding
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b. Market dislocation Rationale: Market dislocation occurs when consumers are forced to find a new insurer when their current insurer decides to withdraw from the market after such consumers have come to rely on that insurer for the product. |
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What happens when there is excess financial capacity in the marketplace? a. Soft market b. Hard market c. Run-off d. Market dislocation
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a. Soft market Rationale: Soft market conditions arise when there is excess financial capacity in the marketplace. |
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Which one of the following triggers may cause a hard market? a. Market dislocation b. Shifting priorities c. Limited market competition d. Run-off
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c. Limited market competition
Rationale: Hard markets can arise when there is limited market competition, increased government regulation on premium rates, and increased demand for a product than can be met by the insurers who actually sell it. |
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The Canadian P&C marketplace is influenced by individual companies and groups of companies. Which of the following do these entities control? a. Capacity b. Corporate structure c. Regulatory bodies d. Consumer relations
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a. Capacity
Rationale: These entities control new product offerings, capacity, rates (to some degree), and market consolidation in the form of mergers and acquisitions. |
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What makes up the largest share of the P&C insurance industry? a. Property insurance b. Automobile insurance c. Licensing d. Life insurance
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b. Automobile insurance
Rationale: Automobile insurance forms the largest share of the P&C insurance industry |
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What is capacity in an insurance context? |
Capcity is the amount of capital that indivdual insurers or entire marekt make available for insuring risk |
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What does the theory of supply and demand do? |
Analyzed the way pricing is regulated by balancing the amount of a produc made available for purchase with the quantity required by customers. - economic infulence on the market includes increasing the demand for isnurance and reinsurance that reuslt form a health economy. - an activity increasing the need for insurance and this contributes to organic growth in premium income as opposed to premium growth through mergers and acquistion. (downside causes growth in claims cost) - Insurance is mandated by law so it is not fully governed by the law of supply and damand because of the products must be purchased even if the cost is high. |
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what is bull market? |
When the marekt is on the rise. - this cycle is when there is a strong demand for securities but a weak supply which causes share price to rise- investor are optimistic and ahve faith that th uptur in the marek will continue - strong econmy means hight employment - investor are optimistic and ahve faith that th uptur in the marek will continue - strong econmy means hight employment |
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What is a bear market? |
Market in declien - share price are dropping and investor believe the downward trend will continue - fear perppetrates the downward trend - slow econmy means rise of unemployment |
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What does the law of supply show? |
Shows the quantity of a product a supplier will provide is relative to the anount of payment per unit an individual will received - highter price measn more producer wants to supply |
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What does the law of demand state? |
States that if all other factors remain equal, fewer people will demand the product as its price rises. - the lower the price the mroe damand willb e fore the products |
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What is the effect of mergers and acquistion int he insurnce marekplace? |
Tends to increase the capacity as larger companies with surplus capital expand their gerographic socre and prducts offering. - have geater resoruce thand samller competiton to draw form and put to use to copete for market share. \ |
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When the investment market is peformaing badly on what must insurers rely in order to earn profit? |
Underwriting profits was not review as much due to investement returns for insurance company have been very high where insurer was able to record an overall profit. - insurer has started to tighten their underwriting for more profit increase since the changes in the market in the mid 2000s - to have a healthy profits it is good to have both underwriting profit in the plan. |
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What imprudent underwriting practices emerg inhight competitive environments in soft market cycles? |
- loose sight of guildelines - aggessively looking for new business - relaxing policy terms and conditon - neglecting loss prevention and controle. |
Behavior of an UW during a tyep fo market |
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Strategies emplyed by underwriter that signify a hardening of market |
Soft market conditions arise when there is excess finanical capacity in the marektplace and insurer demonstrate reasonable profitablitliy and strong captial bases. Hard market contions follows poor results because risks underwritten at artificially lwo prices must eventually be offset with high enought premiums. companies tend to react very slowly in a hardening marekt becasue they dont want to be the first to move price up and loose good account 1. approach each risk very cautiosly before offering to insure it 2. set more exacting underwritng standards 3. givenlos control and loss prevention measures significant consideration 4 ighten policy terms to limits exposure 5. marek substanital rate increase. 6. terminate relationship with brokers with unprofitable resutl or with only a small volume of business 7. withdraw from the jurisdiction, a class of business or an individual risk when sufficient market share has not been gained or a portfolio or individual risk is not profitable. 8. withdraw form the marekt altoghter by selling the company to another insuer or placing it into what is know as a run-off (cease to write new business and only services existing policies) |
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what is market dislocation? |
Occurs when an insurer withdraw from the market - forcing the insured to find a new insurer when they come to rely on the purchased product. - impacts the marke capacity |
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what is social inflation ? |
Refers to in crease in clims costs reuslting from generous jury awards,legislated benefit icnreases and changing legal concept of tort and negligency that benefit planitiffs. the reduction of profitability for the insurer as it was not ex. environment related loss Causes the reduction of profitability for the insurer as it was notex. environment related loss - an asbesto and environment claims where higher claim cost was wared from teh class action lawsuit - public agree the long term healt concern form the asbestos. - an asbesto and environment claims where higher claim cost was wared from teh class action lawsuit - public agree the long term healt concern form the asbestos.
- public agree the long term healt concern form the asbestos. |
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What is idenifty a large loss that exhausted a significant amount of captial for the insurance industry in 2001? |
911 events - hundred of millions of shareholder captial were lost as a resut of terrorist attacks on the New York twin towers with scandalously improper accounting practice that occurred in corporate america therafter - insurer and reinsurer in the US marekt were primiarly affected by the severe claim filed, the canadian market also felt it effects because it tends to reaction to the internal market. |
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what effect can an insolvent insruance company have on the marketplace? |
Shrinks the market and the capacity due to few market players. - effects of shrinkage impacts the other healthy companies in the industry sicne canada has created an association to deal with bankrupt P&C insurer. - each insurer taht is a member of teh association is called upon to pay its share of claims which could potentially ahve negative effect on their profit level. |
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HOw are borkers affect by market cycles ? |
Soft market, broker enjoy the abundance of capacity, premiuim rates declien and undewriters are less demanding. but declien in rates measn a decline in commission. Hard market, broker must laboru intensively to find capacity for their clients needs and must negotiate more diligently ot obtain reasonable prices (commission income rise when premiuim increase) |
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How are consumer affected by market cycles? |
Soft market cycle, consumer are simply more neutral in their reacton to the insurance industry hard market cycle, consumer becomes wary, distress and often angry. tey are facing with premium that are suddnely not affordalble, availability that is restrictive and coverage terms that are limited. Consumer are in an awkward situation a they cannot afford to buy nsurance that is mandated by law. |
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What is back lash can be expected when a mandatory insurance produce becomes less accesible to consumers becasue of hight rates? |
Politician get involve by imposing mesaure they believe will make insurance more affordable - government may stop in to estiablish backstop and protection plan such as cap on amount of loss |
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How may regualtory intervention in the automobile insurance industry affect insurers? |
Pricing regualtion is an unnecessary and expensive adminstrative burden when regulatory intervention is for pleasinbg the consumers. - Free market system anticipates a self-regulating market that will ensure prices reflect the true cost of doing business *rating boards and commission only create imbalance in the free marekt pricing system *higer staffing requirement or different software application to rate and report data might be required *increased operation costs and politicially-imposed premium coude reduce the insurer's profitablity and return on equity. |
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What are some disadvantages taht may flow from an insuer exerting excessive internal costcutting? |
May find company's functional competence suffers, questionable risk selection occurs, succession plans cannot be developed and the company's financial results are negatively affected. |
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What action might an insurer take when the effects of governement imposed reforms are unknown? |
- Projects for premium, loss ratio and ROE made before the changes must be redeveloped. - sheveling business strategies toa chieve organice growth or to expand territoritally until the effet of governement action are made clear. - other insurer may consider withdrawing from their jurisdiction, adjusting marketing plans for the affectd area, or reseving any finanical decision until the rgulator's plans are announced. - reduces automobile insurance capcaity in the insurer's juridiction |
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Summary |
The theory of supply and demand says that the price of a product is determined by how much of it is available and how much people want to buy. In the insurance industry, if more people start buying insurance online, then the market will shift in that direction.Insurance is different from other businesses because it doesn't always do well when the economy is doing well. This is because when the economy is good, there are often more insurance claims, which can hurt insurance companies. On the other hand, when the economy is bad, insurance companies tend to do better because people are more cautious about protecting their assets. Catastrophes and other problems like class action lawsuits and cyber risks can also hurt the insurance industry's profitability.The insurance market goes through cycles called hard and soft market cycles. During a soft market cycle, there is a lot of financial capacity in the market, which leads to relaxed guidelines and lower rates. But eventually, this can lead to worse results for insurance companies. A hard market cycle happens when there is a more cautious approach to business, stricter guidelines, and higher rates. The typical insurance cycle lasts about seven years, with four years of falling rates followed by three years of worsening results. The cycle ends when insurance companies make big changes to improve their results and stabilize the market.The ups and downs of the insurance market are usually caused by problems with supply rather than demand. This means that it's more about the capacity or financial strength of insurance companies rather than how much people want to buy insurance. Automobile insurance is the biggest part of the property and casualty insurance industry. It is mandatory and highly regulated. When it becomes unprofitable, rates go up and consumers complain to the government. In some places, the government sets up rate control boards to regulate insurance rates. Insurance companies may also choose to leave the market during a crisis, which reduces the capacity for automobile insurance in that area. |
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