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| 1. The risk that negative publicity, whether true or not, willdmage a company's reputation and its ability to operate its business. |
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| 2. The study of the social and economic effects of products, services and other market activity on individuals, organizations, and the economy |
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| 3. Gradual, long-term, and fundamental change involving institutional arrangements, products, services, roles and regulation. |
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| 4. The expansions and contractions in general business activity |
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| 5. A recurring increase and decrease in profits, usually regarding a single organization or industry |
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| 6. A recurring increase and decrease in underwriting profits and premiums in the insurance industry |
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| 7. Market conditions in which insurer competition diminishes, buyers have difficulty finding coverage, premiums increase, and insurer profitibility rises. |
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| 8. Market conditions in which insurer competition is intense and is indicated by widely available coverage, lower premiums, and decreased insurer profitability. |
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| 9. A process of reviwing and evaluating an insurers existing policyholders and as necessary, imp0osing surcharges, deductibles, or nonrenewals in cases in which policyholders' claim history or other experience are inconsistent with the insurer's underwriting criteria. |
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| 10. Cash-flow Underwriting |
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Definition
| 10. An underwriting approach that relies considerably on investment income to offset underwriting losses. |
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| 11. The amount of risk that insurers can assume relative to their capital |
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| 12. In insurance, the aggregate willingness of all insurers to assume risk at a given time |
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| 13. Willingness to purchase a product that varies significantly with price |
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| 14. Willingness to purchase a product that does not tend to respond to a change in price |
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| 1. List the components of an insurer's legal and regulatory environment. |
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Definition
| 1. Components of an insurer's legal and regulatory environment include the laws, rules, regulations, prescribed practices, and ethical standards that apply in all of the jurisdictions in which the co operates. |
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| 2. Explain how an insurer's operation might be affected by the legal and regulatory environment. |
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Definition
2. An insurer's operation might be affected by the legal and regulatory environment in the following areas:
(1) ability to implement business plans
(2)Ability to make strategic and operational decisions.
(3) Ability to allocate resources
(4) Ability to adapt to changes in the business environment thatwill affect its competitive position and financial condition
(5) Ability to resolve policy interpretation disputes outside of court. |
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| 3. Id possible sources of reputational risk for an insurer: |
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Definition
3. sources of reputational risk for an insurer include:
(a) negative publicity from court cases or regulatory issues
(b) consumer issues
(c) safety issues
(d) Environmental issues |
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| 4. Explain how cultural and demographic info might affect the economic environment of an insurer. |
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Definition
| 4. The cultural envoronment, which includes the patterns and norms that regulate society's behavior, can affect the types and amts of insurance that individuals are willing to purchase. Demographic info, including population characteristics, can greatly affect the insurance mkts and can be used in teh establishment of mkt segmentations and development of new insurance products |
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| 5. Id population characteristics that are part of the demographic environment. |
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| 5. The demographic environment includes factors such as age distributions, births, deaths, marital status, gender, education, wealth, and geographic location. |
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| 6. List socioeconomic factors that could affect the insurance industry. |
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Definition
6. The following socioeconomic factors could affect the insurance industry:
(a) new technologies
(b) Changes in the physical environment
(c) Ecological changes
(d) Increased use of litigation and variability in the dollar amt of judgments among jurisdictions. |
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| 7. Explain why it is difficult to construct a theory to explain insurance cycles. |
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Definition
| 7. It is difficult to construct a theory to explain insurance cycles because the operating environment of insurers is influenced by many outside factors and because insurers must continually adapt to the pressures from within the insurance business, such as competition and regulation. |
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| 8. Id what structural change within the insurance industry involves. |
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Definition
8. Structural change within the insurance industry involves:
(1) new products and services
(2) New providers taking on new roles
(3) Changes in govt attitude toward business practices
(4) Changes in govt regulation |
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Term
| 9. List three phases of the business cycle |
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Definition
9. The three phases of the business cycle are:
(1) Recessing
(2) Recovery
(3) Explansion |
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Term
| 10. Explain how the terms "profit cycle" and "underwriting cycle" differ |
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Definition
| 10. The underwriting cycle is the recurring increase and decrease in underwriting profits and premiums. The profit cycle is based on the sum of underwriting income and investment income, as opposed to underwriting performance alone. |
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11. Describe actions that insurers typically take to maintain surplus when experiencing the following underwritng cycles:
(a) Underwriting profits
(b) Underwriting losses |
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Definition
11. Insurers maintain surplus in the following economic environments:
(a) Underwriting profits: An insuer may reduce premium rates and offer broader coverage to increase its market share
(b) Underwriting losses: An insurer may neet to increase premium rtes and restrict the availability of coverage to increase underwriting profits. |
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| 12. Explain how underwriting profitability defines the hard and soft markets in the insurance industry |
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Definition
| 12. In a hard market, insurer competition diminishes, buyers have difficulty finding coverage, premiums increase, and insurer profitability rises. When insurers believe they have enough surplus to reduce premiums and write additional insurance to increase market share, the soft mkt begins and competition becomes intense as insurers start to reduce premiums and expland coverages. Insurers eventually experience decreased profitability, which leads again to the beginning of a hard market cycle. |
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Term
13. Describe potential insurer strategies to achieve the following results in response to the underwriting cycle:
(a) price reduction in a soft market
(b) increased profitability in a hard market |
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Definition
13. Potential insurer strategies to achieve the following results in response to the underwriting cycle:
(a) price reduction in a soft market: Reducing rates, increasing the use of rate credits, broadening the terms of coverage, and loosening underwriting standards.
(b) increased profitability in a hard market: Raising rates; reunderwriting; and, as necessary, imposing surcharges, deductibles, or nonrenewals. |
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| 14.Describe how increased capital from new competitors in a hard market affects the underwriting cycle |
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Definition
| 14. Increased capital is often needed to satisfy insurance regulatory restrictions on insurers' written premiums relative to their policyholders surplus. Increased capital obtained from new competitors in a hard mkt satisfies demand, fuels competition, and causes the underwriting cycle to turn. |
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| 15. Explain why regulators are concerned when extreme hard market or soft market patters occur in the underwriting cycle. |
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Definition
| 15. Regulators are concerned when extreme hard market or soft market patterns occur in the underwriting cycle. In a hard market, they must address insurance coverage availability and affordability problems. A prolonged soft market can lead to insurer insolvencies. |
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| 16. Id the factors influencing the underwriting cycle. |
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Definition
16. The following factors influence the underwriting cycle:
(a) investment income
(b) capacity
(c) return on equity |
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| 17. Describe why underwriting mgrs generally dislike using cash flow underwriting. |
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Definition
| 17. Underwriting mgrs generally dislike using cash flow underwriting because it undermines underwriting discipline and because investment income can mask poor underwriting decisions. |
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| 18. Id the traditional measure of insurer capacity. |
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Definition
| 18. The traditional measure of insurer capacity is the ratio of premiums written to policyholders' surplus |
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Term
| 19. Explain what is meant by the point of price equilibrium |
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Definition
| 19. The point of price equilibrium is the point at which buyers and sellers are both satisfied with the product's price. |
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| 20. Describe how decreasing prices and increasing supply affect the point of price equilibrium. |
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Definition
| 20. Pricing related to the supply of and demand for insurance affects the point of price equilibrium. When underlying demand decreases and supply increases, the point of price equilibrium decreases. |
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Term
| 21. Describe the factors affecting the supply of property-casualty insurance |
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Definition
21. The following factors affect the supply of property-casualty insurance:
(a) reinsurance: Expands an insurer's capacity by allowing it to increase gross premium writings.
(b) Difficulty of exit: Increases the insurance supply because once capital is committed to the insurance industry, it tends to stay committed due to regulatory requirements.
(c) Dedicated capital: Increases the insurance supply because an insurer licensed only to write insurance has to dedicate its capital to compete for available business.
(d) underreserving: Artificially inflates surplus and thereby increases capacity. Altho0ugh it can initially increase supply, ultimately the underreserving must be corrected, resulting in a decrease in supply
(e) Profit expectations: Uncertain and shifting, possibly resulting in the use of risk mgmt techniques and alternative risk transfer policies. |
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Term
22. Describe how premium price variations might affect the following:
(a) Consumer demand for insurance
(b) insurer premium rates |
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Definition
22. Price variations might affect the following:
(a) Consumer demand for insurance: when premiums decrease, insureds might purchase higher limits, add coverages, or purchase additional policies. Increasing premiums may cause insureds to reduce coverages, eliminate coverage, or use alternative methods of risk financing.
(b) insurer premium rates: Price will not generally influence demand significantly because it is not necessary to purchase two or more polcies covering the same property. Also the decision to purchase insurance required by statute is not affected by price. |
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Term
| 23. Describe how insurers typically respond to the soft and hard markets of the underwriting cycle |
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Definition
| 23. In soft markets, premium pricing generally decreases and insurers develop specialized products and cultivate niche mkts. As the market hardens, they become more selective about the accounts they are willing to accept and may limit the number of producers who represent them to those with the best accounts. |
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Term
| 24. Describe how agents and brokers adapt to the underwriting cycle |
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Definition
| 24. In a soft market, competition for acounts with other producers is intense. Price reductions occur, and producer commission income is reduced. The potential for insurer insolvencies increases, exposing agents and brokers to professional liability. In hard markets, producers actively market accounts to insurers. Insurance prices increase along with commission income. |
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| 25. Explain how considering profit cycles in other industries might help an insurance professional when underwriting or settling claims |
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Definition
| 25. This information is useful to insurance professionals because profit cycles in these industries can provide insight into an insureds current financial condition and its future prospects. |
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Term
| 26. Describe a problem that might occur if the insurance underwriting cycle is in a hard market and the insured's profit cycle is in an expansion phase |
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Definition
| 26. If the insurance underwriting cycle is in a hard mkt and the insds profit cycle is in an expansion phase, a disruption in the insurance mkt for that industry could occur due to tightening of insurance availability |
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| 27. Id two insights regarding underwriting cycles that are prvided by studying historical trends. |
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Definition
27. The following two insights are provided by studying historical underwriting cycles.
(1) The nature of underwriting cycles has changed as insurance mkts have evolved; as insurance mkts become more competitive, insurers became subject to the laws of supply and demand.
(2) Certain fundamentals of underwriting cycles have remoned the same; insurance buyers tend to deal with crises of availability by creating risk financing alternatives. |
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