930 chap 1 Flashcards
the insurance market and the role of brokers
-broking sector has remained competitive despite changes
-ins market in a global context - uk is top 3rd- generates a quarter of eu premium
- us premiums higher due to litigation
- uk high compliance eg hse
market cycle;
‘trend for rates to fall and rise over time’
- ‘uws will sustain losses for so long as they can rely on the ‘‘float’’ warren buffet- the float is the diff between prems paid and claims made
- diff cycles around the world- eg aviation, space, hurricanes, us energy - direct ins v reinsurance
- swings of cycle more pronounced in anglo saxon economies
- cycle supposed to last 6 - 7 years but isnt the case now
- driving factors - credit crunch, supply and demand, energy prices, population changes, gov expenditure
insurance cycle diagram
after wrc- some rates increased by 500%!
hard market- increased prices- prompting capacity to withdraw, competition eases lowering COR’s (combined operating ratio)
- improved profitability attracts new entrants and capacity and forces a new softening
- soft market- high competition and low profit margins- higher COR’s
insurance cycle - key drivers
- wtc, uk floods - ‘catastrophe losses’
- claims cost inflation, caused by a greater propoensity to claim ‘comp culture’ , advances in medical science, increased cost of medical treatments, legal costs inflation
- asbestos - equity bonds volatility
- the availibility of capital
- rapid capital deployment eg sidecars in bermuda
- OVERSUPPLY of insurance capacity for ORDINARY risks
- western society impacy of oversupply is made worse by limited growth in demand- low economy growth rates
- the way insurance comps manage their risks- strategy etc
- 1975 hard market med mal- overreaction
- 1980s hard market - us legal system on product liab
- 1998 - 2000 reinsurance market was near suicidal because uw losses exceeded investment income
9/11 sent shockwaves through the industry
- warren buffet * reinsurers made a fundamental mistake of focussing on experience rather than exposure
- damage caused to major telecommincations switch- caused desruption beyond manhattan
- insurers had no specific protection to deal with this ‘clash’ event
- virtually every class of insurance HIT
- closure of US airspace for several days- global disruption
- personal disruption - aon and marsh lost a large no. of employees
- insurer credibility damaged as rates increased massively while the risk claim experience of the client had not..
- failure of independent - low prices flooded the market after liquidation
profound changes to insurers following wtc
soft market continued with d&o cover - bernie maddoff
‘book correction’ removing lower quality risks- overreactions and the cylical cycle re-begins
following credit crunch-insurers more prudent
hard markets short lived
- investment strategy
- pricing models
- catastrophe models
- greater uw discipline
- cover withdrawn/ greatly limited. seperately underwritten
aig (america) had to be rescued by the gov as it wrote credit default swaps
key features of a brokers agency r.ship
….1. implied or written
- lawful instructions
- skill and care
- fiduciary obligations
- conflicts of interest
- secret profits
- confidential info
the impact of brokers on the market
….cost of competitive activity falls more on the broker
- costly for broker to engage in a market review ever year. counterargument- brokers normally ofter to save the prospect money
- insurers prefer long r.ships with clients but they forget this when they offer quotes. counterargument- insurers have economic issues and need to defray their costs
- holding insurer will be defensive, will likely delay renewal terms until as late as poss, or refuse to quote until they know what they are competing against- CA; few clients are likely to go that extreme
- contunity- insurers more flexible when they have it- eg on a claim etc- insured may believe insurer must pay all claims and that the broker should use their leveridge to get it paid
