Chapter 4 Flashcards
What are 5 tools to manage supply + demand?
- Historic info
- Current info
- Competitive pricing
- Exclusivity of product
- High order vs low order serve - (low order = low influence on people, e.g. people won’t travel for to purchase milk)
How does pricing impact supply and demand?
•Pricing elasticity of demand - of price of service goes up, then demand decreases
•Necessities vs luxuries - if the item is a necessity, then change in price could have less impact on demand then if it was a luxury
What is equilibrium in supply + demand?
Quantity supplied = quantity demanded
If demand is present for a product, what are the 3 types of status that can be used to describe the marketplace?
- Equilibrium: there’s just enough supply to meet demand
- Under-supply: there’s not enough supply to meet demand
- Over-supply: there’s more than enough supply to meet demand
Why do new insurers join the market?
If they think there is greater demand then currently supply, so they think they can make profit by increasing supply
What is a subscription market?
A number of insurers working in LM can take shares of the same risk depending on their appetite + capacity
What happens when aggressive pricing occurs in the market?
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?
They suffer large losses, which leads to lower profits
Why is the offshore energy insurance market suffer larger losses?
This class of business is more volatile
What is a hard market?
There’s an excess of demand over supply, + insurers have more ability to influence rates due to less capacity
What is a soft market?
There’s an excess is supply over demand, + is more difficult for insurers to push prices up
What is the insurance cycle of the impact on rates of new market entrants + leavers?
High prices + higher profits made > new insurers enter market, increasing capacity > lower prices as there’s more supply > losses made or lower profits, so insurers leave market, hence reducing capacity > then, higher prices
What are the characteristics of a hard market?
•Higher premiums + lower limits
•More stringent underwriting + narrower policy wordings
•Wider exclusions
•Insurance cover difficult to arrange, especially for sub-standard risks
•Clients + brokers compete for available capacity
What are the characteristics of a soft market?
•Low premiums + Higher limits
•Expansive policy wordings + narrow exclusions
•Insurance cover freely available
•UWs willing to take on risks that wouldn’t have otherwise
•Insurers compete for risks
What are reasons why the insurance cycle might vary?
•Legal + political influencers/events
•Impact of major events + catastrophe events (e.g. tsunami)
•Fluctuating level of claims + claims inflation
•Rapidly developing risks
•Level of investment returns
•Fluctuations in UW profit
•Rise/fall in reserves
Why might legal influences impact the insurance cycle?
•Law might change to make more or fewer types of insurance compulsory
•Law might change to extend liabilities for which insureds can be found responsible
•Ability of market to write business in certain parts of the world might increase
How do major world event impact the insurance cycle?
•General impact is to shorten the cycle as they accelerate the reduction in individual players due to large losses, hence supply is less - so, premiums increase
•Covid impacted the world in going more digital - so, there was increase in the use of 2 insurance systems (PPL + Whitespace)
What is 1 of London Markets key challenge?
•Cost of doing business, which has a knock on effect in terms of prices that have to be charged to customers
•By harnessing tech + innovation, these costs can reduce hopefully + market can remain competitive
What are reserves?
Need to put away enough money to be able to pay claims, so insurers need to predict what claims levels will be
How does levels of investment returns affect the market cycle?
If you can get a big investment return through putting your money in a bank, then you wouldn’t invest in insurance
