Chapter 9: The external environmnet Flashcards
(5 cards)
1
Q
Economic influences on insurance businesses:
A
- Claims inflation
- The underwriting cycle
- Investment conditions – importance of and allowance for investment income in pricing
- Currency movements
2
Q
The underwriting cycle:
A
The insurance cycle (or underwriting cycle) is a cycle seen in the insurance market where the market cycles between high and low premiums and hence cyclical profitability.
- When premiums are high and profitable, new insurers enter the market to capture a share of these profits. This is said to be a hard market.
- Increased competition drives down premiums, this is known as softening of premium rates.
- This leads to lower, unprofitable premiums which pushes insurers to insolvency or to write less business. This is said to be a soft market.
- As insurers exit the market, competitive pressures are reduced and remaining competitors increase premiums until business is profitable again. This is known as the hardening of premium rates.
- The cycle continues again.
3
Q
Possible reasons why the underwriting cycle exists:
A
- Low barriers to entry in the insurance market
- Delay between writing business and knowing how profitable it is
- Simplistic regulatory capital regimes that encourage insurers to write more business when premium rates are falling and less business when they are rising
- Reduced insurance capacity (often following a large-scale catastrophe)
- Deliberate under-pricing by key players to drive out weaker competitors
- Pricing strategy being determined by chasing market prices
- Economies of scale
4
Q
Legal, political and social factors influencing the insurance markets
A
- Court awards
- Jurisdiction shopping
- Increasing cost of compensation
- Trends in behaviour and awareness
5
Q
Climate and environmental factors influencing the insurance markets
A
- Weather
o Seasonality
o Subsidence and land heave
o Location of property
o Global warming - Catastrophes
- Latent claims
