General revision

Question 1

Describe the underwriting cycle for general insurers (3)

Answer 1

1. In any given class of general insurance over a period of time, companies move from large profits to losses (or very small profits) and back again. This effect is much more pronounced for some classes of business than for others.
2. When profits are large, existing companies seek to expand and new companies are attracted into the market
3. Increased competition drives down premium rates (or weakens underwriting controls), and profits are subsequently reduced, or losses made.
4. Faced with inadequate profits, some insurers contract or withdraw from the market
5. Premium rates can then increase for the remaining companies, who subsequently make good profits again

Question 2

State the reasons why an expense analysis should be carried out (4)

Answer 2

1. Expenses can still account for a large proportion of the premium charged, especially if the business written suffers from low persistency rates. We want to allocate all the insurer’s expenses correctly between the different classes of business it writes and within rating groups for each class
2. If there is any cross-subsidies either between classes or within a class then an expense analysis will help us to understand this.
   This expense allocation will enable more accurate measure of past performance in each class.
   It will also help determine the appropriate level of expense allowance to be included in any future premium rating exercises, after adjusting for inflation
3. An expense analysis might indicate whether all the expenses are expected to be covered by future premiums
4. An expense analysis may help with future planning