4. The Insurance Cycle

Question 1

What are the three types of status that can describe the supply and demand in a given market

Answer 1

1. Equilibrium
2. Over-supply (Too much supply for the demand)
3. Under-supply (Not enough supply to the meet the demand)

Question 2

Tools for managing Supply & Demand

Answer 2

Historic Info
Current Info
Competitive Pricing
Exclusivity of Product

Question 3

What do shops have little / no control

Answer 3

Competition in the local area

Data

Question 4

Explain necessity vs luxury

Answer 4

Necessities = NEEDS. Less susceptible to demand fall when prices go up

Luxury = WANTS. More susceptible to demand fall when prices go up

Question 5

Price elasticity

Answer 5

When price goes up, demand goes down

Elasticity = Working out how much demand will change in proportion to price rise.

Question 6

Why do insurers join the market

Answer 6

Join: They believe there is more demand than the current supply of insurance

Leave: Large losses = Lower profits

Question 7

Subscription Market

Answer 7

Insurers take shares of same risk depending on their appetite and capacity

Question 8

What is the insurance cycle of joiners/leavers

Answer 8

• New insurers come into market
• Prices are forced down as there is more supply for demand
• Losses / Lower profits
• People leave market, capacity reduces
• Prices rise again
• Space for new joiners

Question 9

Hard vs Soft market

Answer 9

Hard: Excess demand, little supply
Soft: Excess supply, little demand

Question 10

External impacts on the Insurance cycle

Answer 10

1. Legal & Political influences
2. Major events

Question 11

How does a change in the law impact the insurance cycle?

Answer 11

Compulsory insurances - The law may make more/less insurances compulsory, therefore changing the demand for a given insurance

Extended liabilities - Makes people more liable and therefore demand for insurance increases

Brexit - UK/ROW & EEA

**Insurance is international so even changes to any nations law can impact

Question 12

How do major events impact the insurance market?

Answer 12

Shorten the insurance cycle by speeding up the process of players leaving a given market due to losses.

Question 13

Supply & Demand (key points)

Answer 13

• S&D are balance that applies in insurance
• Balance impacted by necessity
• Price impacts demand but not necessarily a proportional impact on it