Chapter 3: External Environment

Question 1

15 Factors to consider in the external environment

Answer 1

C - Commercial issues (competition and u\w cycle)
R - Regulation
E - Environmental issues
A - Accounting standards
T - Tax
E - Economic issues (interest r., inflation, growth, exchange r.)

G - Governance
R - Risk management requirements
E - Experience overseas
A - Adequate capital / solvency
T - Trends in demographics

L - Lifestyle considerations
I - Institutional structure (mutual or proprietary)
S - Social trends
T - Technology
S - State benefits

Question 2

Underwriting cycle

Answer 2

Profitability in the various insurance classes tends to go in cycles driven by market forces of supply and demand.

When business is profitable, more insurers enter the market.
PREMIUMS REDUCE as insurers compete for market share.
This leads to reduced profits or solvency problems.
The position may be accentuated by catastrophes or by the economic climate.

At the bottom of the cycle, insurers leave that market,
or reduce their involvement in the classes concerned.
Eventually PREMIUMS INCREASE to cover the losses incurred.