Brehm Ch 5 Flashcards
Define underwriting cycle
Recurring pattern of increases and decreases in insurance prices and profits.
Are underwriting cycle the same for each LOBs?
Typically, each LOB experiences its own cycle.
For example, auto insurance tends to follow a 6y cycle.
However, economic and societal shocks can cause correlations between cycles across LOBs.
Identify the 4 stages of the evolution of a LOB.
- Emergence
- Control
- Breakdown
- Reorganization
Describe the emergence stage of LOB evolution. State its primary driver.
When a new LOB arises, data is thin, demand grows quickly and pricing is erratic.
Price wars set in as competitors enter the market.
Eventually, a sudden price correction occurs and weak competitors leave the market.
A period of profitability follows, which brins in more competitors and restarts the cycle.
Driven by competition.
Describe the control stage of LOB evolution. State its primary driver.
Stabilization of the LOB is eventually gained through collective coercive control:
Restricting entry
Standardizing insurance products
Stabilizing market shares
Rating bureaux and state DOIs regulate price changes.
Driven by statistical data lags (growing lines experience large losses in early years and EP catch up to losses in financials).
Describe the Breakdown stage of LOB evolution. State its primary driver.
Due to technological and societal changes, new types of competitors enter the market and take business away.
This causes a breakdown in the control regime.
Driven by competition and data lags.
Describe the reorganization stage of LOB evolution. State its primary driver,
This is a return to the conditions of the emergence phase, as a new version of the old LOB emerges.
Driven by competition.
Briefly describe 2 theories that drives UW Cycle
- Institutional Factors
Cycle is driven by time lags involved in pricing.
Time lags due to reporting and regulatory delays also contribute to UW cycle. - Competition
The cycle is driven by competition between insurers toward lower rates.
Underwriting strategies fluctuate between growth and price maintenance. - Supply/Demand, Capacity Constraints and Shocks
Shocks to capital (ex: CATs) reduce capacity, causing price increases. - Economic Linkages
Insurance profitability and cost of capital are driven by macroeconomics.
Provide 3 examples of economic drivers
- Insurance profitability is linked to investment income
- Cost of capital is linked to wider economy
- Expected losses in some LOBs are affected by inflation, GNP growth or unemployment
Provide 2 quantities used as DEPENDANT variables in modelling UW Cycle.
- Loss Ratio
- Combined Ratio
Provide 4 quantities used as INDEPENDANT variables in modelling UW Cycle
- Historical values of dependent variable and its components
- Internal financial variables (reserves, investment income, cat losses, capital)
- Regulatory/ratings variables (upgrades and downgrades)
- Reinsurance financials
- Econometric variables (inflation, unemployment, GNP)
- Financial market variables (interest rates, stock market returns)
Provide 4 sources of competitor intelligence
To help predict the turn in UW cycle, competitor analysis techniques are advised.
Sources of information include:
1. Own agents and field staff
2. Customer surveys
3. Trade publications
4. News scanning
5. Rate filings
6. Internet
Identify 3 styles of UW Cycle modelling
- Soft approaches
- Behavioural or econometric modelling
- Technical modelling
Describe the soft approaches to UW Cycle modelling
Focus on gathering data and doing competitor intelligence, which analysts look at to gauge the state go UW cycle.
Data analysis techniques include:
1. Scenarios
2. Delphi method
3. Competitor Anlysis
Describe the technical modelling of UW Cycle
UW Cycle is modelled as a time series such as an autoregressive model.
Model can then create forecasts for the future, which can be used in an ERM model or for strategic planning.