Study 3 - Dynamics of the Insurance Marketplace Flashcards
1
Q
Define CAPACITY
A
The measure of an insurer’s ability to issue contracts of insurance.
Measured usually by the LARGEST AMOUNT it will accept on a given risk, or in a certain situation, by the MAXIMUM VOLUME of business that the company is prepared to accept.
2
Q
What are causes of reduced profitability?
A
- Poor underwriting performace
- Could be because rates were set too low
- Or because of unanticipated losses/claims volume
- Poor investment performance
- could be poor investment decisions
- or falling stock prices
- Legal system changes in court awards for product liability
- Changing liability landscape, class action lawsuits.
- Catastrophic events erode capacity and impair the surplus of an insurer (9/11 or Natural Disasters such as floods or hurricanes)
3
Q
Explain the Hard to Soft Market Cycle
A
- The story starts with rate adequacy.
- Company are earning underwriting profit, they start to want to earn even more money
- Companies get greedy. Because they have achieved rate adequacy they feel they can reduce their rates.
- Companies that do this start to write more premium.
- This threatens the general landscape, other insurers follow suit as they start to lose business to the insurers that began to cut rates.
- Claims start to mount, underwriting profits are reduced.
- Reinsurers and retrocessionaires start to pull back and stop insuring certain risks.
- There is now less capacity in the marketplace.
- Insurance companies, realizing they have been losing profit and knowing the situation to be unsustainable begin to be hard in applying their UW guidelines in order to avoid risk.
- They may start to be more stringent in loss prevention
- Or they pull out of the market or territory
- Insureds get upset.
- Rates start to increase
- Rate adequacy is achieved
- The marketplace stabilizes for a period of time and
4
Q
Explain Soft Market from Insurers Perspective
A
- Lose profitability
- Lose sight of guidelines, write classes of business they do not normally write
- Aggressively look for new business and find themselves under attack by competitors
Engage in imprudent practices, undercutting rates, relaxing policy terms, neglecting loss prevention and control methods.
5
Q
Explain Soft Market from Brokers POV
A
- Enjoy soft market because capacity is abundant and there are fewer rules
- Underwrite more easily as premium rates decline
- Place risks more easily on renewal
- Earn lower commissions because of lower premiums
6
Q
Explain Soft Market from Risk Managers POV
A
- Benefit from Lower Prices
- Underwrite more easily and there are less loss control methods
- Deliver risk protection more easilty
- Take the time to do serious risk management investigations
7
Q
Explain Soft Market from Consumers POV
A
- Attitude toward insurance is neutral
- Experience no change
- Find insurance affordable
8
Q
Explain Soft Market from Government POV
A
- is Neutral
- Receives no complains from consumers
9
Q
Explain HARD MARKET from Insurers POV
A
- Regain profitability but face animosity from brokers and the public
- Follow guidelines stringently
- Terminate relationships with brokers that are unprofitable
- Withdraw from jurisdiction or individual risk
- Withdraw from the market altogether but selling the company or placing it into run-off
10
Q
Explain HARD MARKET from the Brokers POV
A
- Earn Higher Commissions
- Work harder in hard market to find capacity
- Negotiate diligently for reasonable prices and packages
- Spend more time finding new insurers for clients who no longer meet guidelines of their previous insurer.
11
Q
Explain HARD MARKET from the Risk Managers POV
A
- Have to be more creative
- Deal with stringent guidelines
- Explore alternative risk financing propositions such as reciprocal exchange)
12
Q
Explain HARD MARKET from the consumers POV
A
- Hate their insurance companies
- Complain to government / politicians
- Find premium unaffordable and coverage unavailable
13
Q
Explain HARD MARKET from governments POV
A
- Impose measures on insurers
- Implements government backed insurance protection plans that are advantageous to insurance industry as well as consumers by capping losses to ensure insurer can survive.
