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.

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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)
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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
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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.
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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
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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
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7
Q

Explain Soft Market from Consumers POV

A
  • Attitude toward insurance is neutral
  • Experience no change
  • Find insurance affordable
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8
Q

Explain Soft Market from Government POV

A
  • is Neutral

- Receives no complains from consumers

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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
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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.
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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)
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12
Q

Explain HARD MARKET from the consumers POV

A
  • Hate their insurance companies
  • Complain to government / politicians
  • Find premium unaffordable and coverage unavailable
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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.
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