CHAPTER 4: The Insurance Cycle

Question 1

What is meant by Supply and Demand?

Answer 1

The relationship between the price of the commodity and the quantity traded.

Question 2

What is meant by the term ‘Equilibrium’?

Answer 2

The balance where the quantity supplied is equal to the quantity demanded.

Question 3

What are the tools to manage supply and demand?

Answer 3

• Historic Information - past trading patterns/such as weather reports
• Current Information - such as big events
• Competitive Pricing
• Exclusivity of Product - The only provider of a of product for example

Question 4

What are high order services?

Answer 4

Services people use less often, typically located in cities and accessible places. As used less often people will be more willing to travel to access these.

Question 5

What are low order services?

Answer 5

Services people use on a regular basis, people won’t travel very far to access these.

Question 6

What do shops have little or no control over?

Answer 6

• Competition in the local area

- Data used for forecasting or decision-making being inaccurate.

Question 7

What are the differences in price changes between necessities vs luxuries?

Answer 7

If an item is a necessity a change in price will have less impact on demand.

Luxury items changing price will affect the demand.

Question 8

What is the price elasticity of demand?

Answer 8

If the price of a product or service rises/drops the demand decreases/increases respectively.

The elasticity element is working out how much the demand changes with a change in price.

Question 9

What are the 3 status that can describe the supply and demand of a marketplace?

Answer 9

• There is just enough supply to meet demand (equilibrium)
• There is not enough supply to meet demand (under-supply)
• There is more than enough supply to meet demand (over-supply)

Question 10

Why do new insurers join the market?

Answer 10

When there is a greater demand than current supply, so there is a chance to make profit.

Question 11

What is a subscription market?

Answer 11

A market with many insurers where a number of them can take shares of the same risk. There is no price control.

Question 12

Why do insurers leave the market?

Answer 12

• Suffer losses, generally due to low premiums not covering the cost
• They can be forced to leave the market by not being given the permission to write certain business.

Question 13

Describe the insurance cycle.

Answer 13

• Prices are high and profits increase
• New insurers enter the market increasing capacity
• Prices are forced down are there is more supply than demand and aggressive pricing happens
• Losses are made or just reduced profits so insurers leave the market, reducing capacity.
• Go back to the start as reduced capacity results in high prices.

Question 14

What is a hard market?

Answer 14

Where there is more demand than supply

Question 15

What is a soft market?

Answer 15

Where there is more supply than demand.

Question 16

What are some reasons that may affect the insurance cycle?

Answer 16

• Legal and political influences can have an impact both positive and negative. Such as extending liabilities for insureds. Or changes such as Brexit.
• Major events that cause a significant loss, these shorten the cycle by accelerating the reduction in insurers so that there is an increase in premiums.