chapter 4 Flashcards
What is meant by supply and demand?
it is the relationship
between the price of the commodity and the quantity traded.
To a certain extent, it also relies on a mixture of luck, a review of historical information and –
in some cases – the weather.
The ideal balance is that the quantity supplied equals the quantity demanded; known as
equilibrium.
4 tools to manage supply and demand
historic and current information, competitive pricing and exclusivity of the
product.
historic information
Past trading patterns, for example, weather reports which give a clue to the weather patterns throughout the year, or previous patterns of demand
for a particular product.
current information
example is sporting fixtures. By knowing when major sporting fixtures are held, shops can ensure that they have adequate stocks of barbecue items and other essentials.
Competitive pricing
the extent to which this tool can be used is entirely dependent on the size of the organisation and the extent to which it can balance out aggressive pricing in one area with realistic pricing in another (so as not
to end up putting itself out of business)
Exclusivity of product
if a shop is the only supplier in the area, this provides an element of
control; as shoppers will generally only travel a certain distance to buy
basic products
what do shops have no control over?
Competition in the local area this can be partially controlled by the competitive pricing
Data used for forecasting or decision-making being inaccurate
- particularly data such as weather forecasting or changes in fashion.
Necessities versus luxuries
Insurance would not generally be called a
luxury as there are many situations where the buying of insurance is either obligatory or
required as a term of doing business
Price elasticity of demand
if the price of a product or service goes up the demand for it goes down.
The ‘elasticity’ element is working out how much the demand goes down as the price goes up.
achieving equallibrium
- Equilibrium: there is just enough supply to meet demand.
- Under-supply: there is not enough supply to meet demand.
- Over-supply: there is more than enough supply to meet demand
why do new insurers join the market?
New insurers join the insurance marketplace if they think that there is greater demand than
there is current supply
The new insurers think they can make a profit by increasing supply
what is the easiest way to compete for business?
If insurers start to compete for business and try to maintain their market share
(because there is more supply than there is demand) then one of the easiest areas in which
to compete is price.
If aggressive pricing takes place (where insurers are prepared to accept business at a price that is very low in relation to the perceived risk being presented) then pressure is placed
on the rest of the market to accept risks at a lower price to obtain or maintain a share of business
Why do insurers leave the market?
main reason that insurers leave the market is that they suffer large losses, which leads to lower profits
in 2018 a number of Lloyd’s syndicates either left the market completely or
significantly changed their business plans. Lloyd’s was not prepared to give them permission to write the business they wanted to in 2019. Therefore, this was not necessarily a voluntary exit but an enforced one.
insurance cycle
hard & soft markets
A hard market is one where there is an excess of demand over supply and one where insurers have more ability to influence rates due to less capacity.
a soft market is one where there is an excess of supply over demand and it is far more difficult for insurers to push prices up.
