Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

exam 7 > Brehm ch.5 > Flashcards

Brehm ch.5 Flashcards

1
Q

what is the underwriting cycle defined as?

Brehm ch.5

A

the recurring pattern of increases and decreases in insurance prices and profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what are the four stages of the evolution of a LOB?

Brehm ch.5

A
  • emergence
  • control
  • breakdown
  • reorganization
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

what happens in the emergence phase of the evolution of a LOB?

(Brehm ch.5)

A
  • new LOB arises - thin data, demand quickly grows, pricing erratic
  • price wars with new competition entering market
  • sudden price correction occurs, weak competitors leave market
  • profitable period follows -> more competitors and “restart” cycle
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what happens in the control phase of the evolution of a LOB?

Brehm ch.5

A
  • stabilization of LOB via collective coercive control

- rating bureaus and state DOIs regulate price changes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what are three examples of “collective coercive control” that may occur in the control phase?

(Brehm ch.5)

A
  • restricting entry
  • standardizing insurance products
  • stabilizing market shares
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what occurs in the breakdown phase of the evolution of a LOB?

(Brehm ch.5)

A
  • due to technological and societal changes, new types of competitors enter the market and take business away
  • causes a breakdown in the control regime
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what occurs in the reorganization phase of the evolution of a LOB?

(Brehm ch.5)

A

-return to the conditions of the “emergence” phase -> new version of old LOB emerges

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what are the emergence phase dynamics driven by?

Brehm ch.5

A

competition

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what are the control phase dynamics driven by?

Brehm ch.5

A

statistical data lags (growing lines experience large losses in early years and EP “catch up” to losses in financials)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what are the breakdown phase dynamics driven by?

Brehm ch.5

A

competition and data lags

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what are the reorganization phase dynamics driven by?

Brehm ch.5

A

competition

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what does one theory suggest that time lags between compilation of historical data and implementation of new rates results in?

(Brehm ch.5)

A
  • time lags lead to poor extrapolation by actuaries during ratemaking
  • historical data may suggest further rate increases are needed when rates have actually returned to adequate levels
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what does another theory suggest about time lags between historical data analysis and rate implementation?

(Brehm ch.5)

A

reporting and regulatory delays cause the cycle effect EVEN WHEN actuaries behave rationally

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

how does competition contribute to the underwriting cycle?

Brehm ch.5

A
  • not all competitors have same view of future

- inexperienced firms may have poorer loss forecasts than mature firms -> drop prices -> lower market rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

what effect does a shock like a natural catastrophe have on the market?

(Brehm ch.5)

A
  • insurance capital is reduced
  • > supply is constricted and prices increase
  • > profit may decline as better performing firms leave the market first
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what are three examples of how economic drivers affect insurance profitability?

(Brehm ch.5)

A
  • 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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

what is a dependent variable in a model?

Brehm ch.5

A

the variable being modeled

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

what are the independent variables in a model?

Brehm ch.5

A

the predictors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

for the underwriting cycle, what do most models use as the dependent variable?

(Brehm ch.5)

A

loss ratio or combined ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

what are six potential independent variable categories for models for the underwriting cycle?

(Brehm ch.5)

A
  • historical values of the dependent variables and its components
  • internal finance variables
  • regulatory/ratings variables
  • reinsurance financials
  • econometric variables
  • financial market variables
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

what are four examples of historical values of the dependent variables and its components that might be used as independent variables for the underwriting cycle model?

(Brehm ch.5)

A
  • historical combined ratios
  • premiums
  • losses
  • expenses
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

what are four examples of internal finance variables that might be used as independent variables for a u/w cycle model?

(Brehm ch.5)

A
  • reserves
  • investment income
  • catastrophe losses
  • capital
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

what are two examples of regulatory/rating variables that might be used as independent variables for a u/w cycle model?

(Brehm ch.5)

A
  • upgrades

- downgrades

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

what are three examples of econometric variables that might be used as independent variables for a u/w cycle model?

(Brehm ch.5)

A
  • inflation
  • unemployment
  • GNP
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

what are two examples of financial market variables that might be used as independent variables for a u/w cycle model?

(Brehm ch.5)

A
  • interest rates

- stock market returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

what are six sources of competitor intelligence that can help predict the “turn” in the u/w cycle?

(Brehm ch.5)

A
  • firm’s own agents and field staff
  • customer surveys
  • trade publications
  • news scannings
  • rate filings
  • internet
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

what are three styles of modeling the underwriting cycle?

Brehm ch.5

A
  • soft approaches
  • behavioral modeling (econometric)
  • technical modeling
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

what three dimensions do the styles of modeling the u/w cycle vary by?

(Brehm ch.5)

A
  1. data quantity, variety, and complexity
  2. recognition of human factors
  3. mathematical formalism and rigor
29
Q

rank the three styles of modeling the u/w cycle in terms of their data quantity, variety, and complexity

(Brehm ch.5)

A

soft > behavioral (econometric) > technical

30
Q

rank the three styles of modeling the u/w cycle in terms of their recognition of human factors

(Brehm ch.5)

A

soft > behavioral (econometric) > technical

31
Q

rank the three styles of modeling the u/w cycle in terms of their mathematical formalism and rigor

(Brehm ch.5)

A

technical > behavioral (econometric) > soft

32
Q

what are three data analysis techniques used in soft approaches to modeling the u/w cycle?

(Brehm ch.5)

A
  • scenarios
  • Delphi method
  • competitor analysis
33
Q

what is a scenario? (re: soft approaches to modeling the u/w cycle)

(Brehm ch.5)

A
  • detailed written statement describing a possible future state of the world
  • multiple used at once to define a space of possible future outcomes
34
Q

how are scenarios used in u/w modeling?

Brehm ch.5

A

-once space of future possible outcomes is defined -> firms organize thinking about how to respond to these scenarios

35
Q

how do scenarios differ from “simulations”?

Brehm ch.5

A

simulations are more numerous and processed by computers rather than humans

36
Q

what is the Delphi method?

Brehm ch.5

A

method of obtaining expert consensus on an issue

37
Q

how does the Delphi method work?

Brehm ch.5

A
  • experts given background info, asked for opinions in questionnaire
  • answers aggregated -> summaries given back to participants
  • participants change answers or articulate reasons for disagreeing
  • repeat process until consensus
38
Q

how can scenarios and the Delphi method feed off of each other?

(Brehm ch.5)

A
  • Delphi process can create a set of scenarios

- scenarios can form the input to a Delphi assessment about the likelihood of each scenario

39
Q

what does competitor analysis (re: soft approaches to u/w cycle modeling) do?

(Brehm ch.5)

A

attempts to discern the states, motives, and likely behaviors of individual, competing firms

40
Q

what does competitor analysis start with (re: soft approaches to u/w cycle modeling)?

(Brehm ch.5)

A

database of competitor information, key financials, news items, and behavioral metrics

41
Q

what is the goal in predicting turns in the underwriting cycle?

(Brehm ch.5)

A

observing unusually profitable or distressed financial conditions over a large number of firms

42
Q

what is the basic technical method for modeling the underwriting cycle?

(Brehm ch.5)

A

autoregressive time series analysis

43
Q

how does VARMAX generalize an autoregressive time series?

Brehm ch.5

A
  • multiple variables modeled simultaneously
  • interaction and co-movement between these variables is quantified
  • can handle predictive variables external to time series system
44
Q

what is another name for behavioral modeling?

Brehm ch.5

A

econometric modeling

45
Q

what is the general structure of econometric/behavioral modeling?

(Brehm ch.5)

A

components of model have meaningful interpretations motivated by economic and behavioral theory

46
Q

what is the slope of a general supply curve and why?

Brehm ch.5

A
  • slopes up and to the right
    (ex: 2:00)
  • -> price must increase to attract more supply to market
47
Q

where does the competitive limit supply curve line live, in comparison to the general supply curve line?

(Brehm ch.5)

A

shifts down and to the right

48
Q

what scenario does the competitive limit supply curve represent?

(Brehm ch.5)

A

when competition is strong and/or technological advances reduce firms’ expenses

49
Q

where does the post-shock supply curve line move to (from the general supply curve line)?

(Brehm ch.5)

A

up and to the left

50
Q

what scenario does the post-shock supply curve line represent?

(Brehm ch.5)

A

when available capital is restricted (ex: natural catastrophe)

51
Q

what does the slope of a demand curve look like, and why?

Brehm ch.5

A
  • slopes down and to the right
    (e. g. 5:00)
  • -> price must decrease in order to sell more products
52
Q

what scenario does the capital rich demand line represent?

Brehm ch.5

A

when industry capital increases -> general increase in capital “quality”
(more capital means default probability is lower for a firm)

53
Q

where does the general demand curve move to get to the capital rich demand line?

(Brehm ch.5)

A

-shifts up and to the right

54
Q

what scenario does the post-shock demand line represent?

Brehm ch.5

A

when available capital is restricted

55
Q

where does the post-shock demand line live, in comparison to the general demand curve?

(Brehm ch.5)

A

demand reduces -> line shifts down and to the left

56
Q

when capital decreases (post-shock), how does the equilibrium price change?

(Brehm ch.5)

A 
price increases (quantity decreases)
(both curves shift left)
57
Q

what is the theory underlying Gron’s supply curve?

Brehm ch.5

A
  • companies sell products at a “minimum price” up to a certain quantity
  • at some point, capacity threshold is reached and companies must raise prices to take on more business
  • eventually price reaches a point where it can adequately fund the business (asymptotic maximum price)
58
Q

why must companies raise the price at the capacity threshold to take on more business? (via Gron’s supply curve)

(Brehm ch.5)

A

need more risk capital to support more business

59
Q

what happens to Gron’s supply curve when capital is restricted (post-shock)?

(Brehm ch.5)

A

capacity threshold is reached sooner –> price increases at a lower quantity, further to the left on the graph

60
Q

what happens to Gron’s supply curve when competition is strong?

(Brehm ch.5)

A

minimum price decreases

61
Q

what are the three phases of a capital flows model?

Brehm ch.5

A
  • market exits, insolvencies (capital out)
  • normal dividends (capital out)
  • new entries, capital infusion (capital in)
62
Q

what are the axes of a capital flow graph?

Brehm ch.5

A

x-axis: profit

y-axis: capital flow

63
Q

what happens to capital flow when profit is low?

Brehm ch.5

A

-capital flow is OUT, capital is used to pay claims

64
Q

what happens to capital flow when profit is “normal”?

Brehm ch.5

A
  • retained earnings add to capital stock

- firms pay out capital in form of dividends to shareholders

65
Q

what happens to capital flow when profit is high enough?

Brehm ch.5

A

hits a threshold where external capital infusion occurs -> funds existing firms and new entrants into the market

66
Q

when does capital infusion tend to happen?

Brehm ch.5

A

when capacity is limited and profit expectations are high

67
Q

what five questions need to be answered once supply, demand, and capital flows have been modeled?

(Brehm ch.5)

A

1) How do economic factors (ex: interest rates, inflation, cost of capital) influence the supply and demand curves?
2) How does capital influence the supply and demand curves?
3) How do the supply and demand curves jointly determine price and quantity?
4) How do premiums and losses affect capital stock?
5) How does profitability affect external capital flows?

68
Q

what is the final step, once supply, demand, and capital flows have been modeled, and the five questions are answered?

(Brehm ch.5)

A

econometric model is built where changes in each component influences equilibrium price in specific ways

69
Q

what is the final goal of an econometric model?

Brehm ch.5

A

determine the equilibrium price that sets the benchmark against which firms must compete

exam 7 (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions