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21 Cards in this Set
- Front
- Back
Profit cycle
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A recurring increase and decrease in profits, usually regarding a single organization or industry.
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Underwriting cycle
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A cyclical pattern of insurance pricing in which a soft market is eventually followed by a hard market before the pattern again repeats itself.
Commonly used term for describing a recurring rise and fall in profits and prices in the property-casualty insurance industry. |
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Structural change
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Gradual, long-term and fundamental change involving institutional arrangements, products, services, roles, and regulation.
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Soft-market phases
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Insurers decrease premium rates, relax underwriting standards, and expand coverage.
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Hard-market phases
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Insurers raise prices, restrict coverage, tighten underwriting criteria, and re-evaluate reserves.
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Phases of the cycle
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-The cyclical process is driven by profit expectations, not underwriting execution.
-The relevant profit expectations are for operating profits, which are the sum of underwriting and investment income rather than underwriting profits alone. |
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Three economic conditions for industry cycles
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-The structure of the industrys markets
-The demand for the industrys products or services -The supply of the industrys products or services |
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History of structural changes in society and how they affected the market
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-1970's - Increased litigation caused a increase in supply which caused a soft market.
-1980's - The underreserving in the 1970's caused the hard market in the 1980's. |
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Non-admitted insurer
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An insurer not authorized by the state insurance department to do business within that state.
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Reunderwriting
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The process of analyzing the characteristics of policies within a portfolio and the trends of those characteristics.
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Financial factors influencing the underwriting cycle
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-Investment incom
-Capacity -Return on equity -Cash flow |
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Capacity
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The accumulated assets of a business or an owners equity in a business.
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Cash flow
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Cash inflow - cash outflow
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Theory of supply and demand
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-The higher the price, the smaller the quantity that consumers are willing to purchase.
-Alternatively, the lower the price, the greater the quantity that consumers are willing to purchase. -The opposite is true for supply; the higher the price of a product, the greater the quantity that sellers are willing to offer and vice versa. |
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Supply
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In insurance, the aggregate willingness of all insurers to assume risk at a given time.
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Factors that affect the supply of property-casualty insurance.
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-Reinsurance
-Ease of entry -Difficulty of exit -Regulatory environment -Dedicated capital -Underreserving -Profit expectations |
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Surplus relief
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A flow of funds into an insurers policyholders surplus when policyholders surplus has been reduced by the insurers rapid growth in written premiums.
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Regulatory constraints
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-Minimum financial requirements of an insurer
-Regulation of rate increases and underwriting factors |
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Elastic demand
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Willingness to purchase a product that varies significantly with price.
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Inelastic demand
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Willingness to purchase a product that does not tend to respond to a change in price.
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Application of Supply and Demand Theory to the Underwriting Cycle
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Property-casualty insurance is dominated by supply, which is highly variable.
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