Chapter 9: The External Environment Flashcards
3 Reasons why medical inflation can be significantly higher than price or wage inflation
- more advanced medical treatments are used, which are more expensive
- better treatment means patients survive for longer, but still require medical care
- in some cases, doctors and consultants salaries can rise in excess of average wage inflation
3 Components of personal injury claims (“Heads of damage”)
- compensation for loss of income
- cost of medical and nursing care
- awards for pain and suffering
Describe the underwriting cycle
- When insurance premiums are high and profitable, more insurers enter the market because they want a share of the profits
- This increases competition which proceeds to drive down premiums
Low, unprofitable premiums lead to insurers struggling to stay afloat
- some insurers become insolvent and leave the market, while others write less business
- this reduces competitive pressures and allows the remaining insurers to increase premiums until business is profitable again
… and the cycle continues …
“Hard market”
A profitable market when premium rates are high
“Soft” market
Unprofitable market with low premiums.
3 Actual mechanisms that reduce the size of the market when it is unprofitable
- companies becoming insolvent
- companies withdrawing as a reaction to unprofitability because of unwillingness to accept continuing loss
- reinsurance being less readily available
7 Factors that encourage the underwriting cycle’s progress
- the ease with which new entrants can join insurance markets
- the delay between writing business and knowing how profitable it is
- simplistic regulatory capital requirements that encourage insurers to write more business when premium rates are falling and less business when they are rising
- reduced insurance capacity (often following large-scale catastrophes)
- deliberate under-pricing by key players to drive out weaker competitors
- pricing strategy being determined by chasing market prices
- economies of scale.
Court award inflation
In some territories, a decision made by a court can set a precedent for future court awards, ie in similar cases.
The effect is very similar to inflation.
3 Differences between court inflation and price inflation
- court inflation historically, has been higher than price inflation
- court inflation tends to remain level for a period, then increase in sharp jumps when new precedents are created
- court inflation is less predictable than price inflation
2 ways in which the increasing compensation for negligence has been observed:
- courts may be more willing to accept that there is liability for a victim’s suffering
- given that they decide there is liability, the courts may award larger amounts for similar losses
4 Reasons for cases that might be successfully litigated, never to be brought
possibly because the victims
- are unaware of their rights
- do not know how to go about the process
- do not want to dwell on past miseries
- are not sufficiently motivated to go through the process
The high cost of weather-related claims in the USA can be attributed to (3)
- the large number of properties in certain areas, particularly in cities along the eastern coast
- the high average value of those properties
- the high proportion of properties that are insured
Reasons for a rising cost of major losses
- Largely due to economic development (in vulnerable areas)
- General trend towards insurance in developed economies
3 Main types of man-made catastrophes
- Terrorist incidents
- industrial accidents
- conflagrations
Conflagration
A large destructive fire, which can be difficult to control.