Chapter 3 Flashcards
(16 cards)
Explain insurance as a commodity
A commodity is a product used for commerce and it has been typically distinguished from a service
Define capacity
Is the amount of capital that individual insurers or entire markets make available for insuring risk
Explain the theory supply and demand
Analyzes the way pricing is regulated by balancing the amount of a product made available for purchase with the quantity required by consumers
Explain law of supply
Represents how much of a product producers are willing to provide at a certain price
The quantity of a product the supplier will provide is relative to the amount of payment per unit he/she will receive
Explain a bull market
Market on the rise
Strong demand for securities but weak supply
Share prices rise
Investors are optimistic
The economy is strong and the employment rate is high
Explain a bear market
Market is on the decline
Share prices drop
Reluctance to invest in securities
Investors are pessimistic
Economy is sluggish and unemployment rises
What are the causes of reduced profitability
Investment portfolio under performs
Interest rates fall
Miscalculated rate levels
State of court awards
Catastrophic events
Insolvency
Social inflation-the increase in claims costs
Hardening of the market
Explain a soft market cycle
-Arise when excess financial capacity in the marketplace
-Drives underwriters to: reduce premium rates, relax policy terms and conditions, and relax loss prevention and control measures
-Companies tend to start writing class business that they don’t normally write
-Strategy to improve market share is to create new products with new demand
Explain a hard market cycle
Approach each risk very cautiously before offering to insure it
Set more exacting underwritten standards
Give loss control and loss prevention measures significant consideration
Tighten policy terms and limit exposure
Make substantial rate increase
Terminate relationships with brokers with unprofitable results
Withdraw from jurisdiction, a class of business, or individual risk
Withdraw from market all together
Explain run off
A company is in run off when it ceases to write new business and only services existing business
Explain market dislocation
Said to occur when consumers are forced to find a new insurer when their current insurer decides withdraw from the market after such consumers have come to reply on that insurer for that product
What are the causes of hard market?
Limited market competition
Fierce competition
Government regulation over rates
Define captive insurance
An insurance company that provides insurance to and is controlled by its owners
Explain reciprocal insurance exchange
A means of insurance whereby each subscriber appoints a central underwriter
Explain parametric insurance
Insurance that is triggered by a pre-defined events and generates a ore-determined payout, regardless of damage
Provide some facts about delivering automobile insurance
-Mandatory insurance must be accessible
-Rate boards cause work and create imbalance
-Automobile insurance accounts for half of the total insurance premium written in Canada so any regulatory intervention will affect the operations and profits of insurers that deal in this division
-If salaries decrease and bonuses are not paid lose quality personnel
