Cpcu 540 Chapter 12

Front 1

Profit cycle

Back 1

A recurring increase and decrease in profits, usually regarding a single organization or industry.

Front 2

Underwriting cycle

Back 2

A cyclical pattern of insurance pricing in which a soft market is eventually followed by a hard market before the pattern again repeats itself.

Commonly used term for describing a recurring rise and fall in profits and prices in the property-casualty insurance industry.

Front 3

Structural change

Back 3

Gradual, long-term and fundamental change involving institutional arrangements, products, services, roles, and regulation.

Front 4

Soft-market phases

Back 4

Insurers decrease premium rates, relax underwriting standards, and expand coverage.

Front 5

Hard-market phases

Back 5

Insurers raise prices, restrict coverage, tighten underwriting criteria, and re-evaluate reserves.

Front 6

Phases of the cycle

Back 6

-The cyclical process is driven by profit expectations, not underwriting execution.

-The relevant profit expectations are for operating profits, which are the sum of underwriting and investment income rather than underwriting profits alone.

Front 7

Three economic conditions for industry cycles

Back 7

-The structure of the industrys markets
-The demand for the industrys products or services
-The supply of the industrys products or services

Front 8

History of structural changes in society and how they affected the market

Back 8

-1970's - Increased litigation caused a increase in supply which caused a soft market.

-1980's - The underreserving in the 1970's caused the hard market in the 1980's.

Front 9

Non-admitted insurer

Back 9

An insurer not authorized by the state insurance department to do business within that state.

Front 10

Reunderwriting

Back 10

The process of analyzing the characteristics of policies within a portfolio and the trends of those characteristics.

Front 11

Financial factors influencing the underwriting cycle

Back 11

-Investment incom
-Capacity
-Return on equity
-Cash flow

Front 12

Capacity

Back 12

The accumulated assets of a business or an owners equity in a business.

Front 13

Cash flow

Back 13

Cash inflow - cash outflow

Front 14

Theory of supply and demand

Back 14

-The higher the price, the smaller the quantity that consumers are willing to purchase.
-Alternatively, the lower the price, the greater the quantity that consumers are willing to purchase.
-The opposite is true for supply; the higher the price of a product, the greater the quantity that sellers are willing to offer and vice versa.

Front 15

Supply

Back 15

In insurance, the aggregate willingness of all insurers to assume risk at a given time.

Front 16

Factors that affect the supply of property-casualty insurance.

Back 16

-Reinsurance
-Ease of entry
-Difficulty of exit
-Regulatory environment
-Dedicated capital
-Underreserving
-Profit expectations

Front 17

Surplus relief

Back 17

A flow of funds into an insurers policyholders surplus when policyholders surplus has been reduced by the insurers rapid growth in written premiums.

Front 18

Regulatory constraints

Back 18

-Minimum financial requirements of an insurer
-Regulation of rate increases and underwriting factors

Front 19

Elastic demand

Back 19

Willingness to purchase a product that varies significantly with price.

Front 20

Inelastic demand

Back 20

Willingness to purchase a product that does not tend to respond to a change in price.

Front 21

Application of Supply and Demand Theory to the Underwriting Cycle

Back 21

Property-casualty insurance is dominated by supply, which is highly variable.