11.6: Insurance Companies

Question 1

Two types of insurance companies

Answer 1

Property and casualty (P&C)
life and health (L&H)

Question 2

soft pricing period

Answer 2

During periods of heightened competition, price cutting to obtain new business leads to slim or negative margins

Question 3

hard pricing period

Answer 3

the resulting reduction in competition leads to a healthier pricing environment

Question 4

combined ratio

Answer 4

is the sum of the underwriting loss ratio and the expense ratio.

Question 5

underwriting loss ratio

Answer 5

Question 6

expense ratio

Answer 6

Question 7

loss reserve

Answer 7

estimated value of unpaid claims (based on estimated losses incurred during the reporting period).

Question 8

loss and loss adjustment expense ratio =

Answer 8

Question 9

dividends to policyholders ratio =

Answer 9

Question 10

Combined ratio after dividends (CRAD)

Answer 10

CRAD = combined ratio + dividends to policyholders ratio

Question 11

Primary considerations in analysis of L&H insurers include:

Answer 11

1 - Revenue diversification. The proportion of income generated from premiums, investments, and fees can vary over time and among insurers.
2 - Earnings characteristics.
3 - Investment returns.
4 - Liquidity.
5 - Capitalization.