C16 BUSINESS INSURANCE FINAL EXAM WITH
QUESTIONS AND DETAILED ANSWERS |
ALREDY GRADED A+ | GUARANTEED PASS |
LATEST VERSION 2024/2025
When the investment market is performing badly on what must insurers rely in order to earn a profit? - ANSWER--in the past when investment returns for insurance companies have been very high, companies found that they do not have to report on underwriting profit in order to record a profitable bottom line
-stating in about mid-2000, a bear equity market took over that lasted close to three years thus insurers had no choice but to work towards earning underwriting profits
-those that succeeded in doing so were beginning to record very healthy profits by 2003 and this was sustained through the 2006 underwriting year
What THREE imprudent underwriting practices emerge in highly competitive environments in soft market cycles? - ANSWER-1. Undercutting Rates
- Relaxing policy terms and conditions
- Neglecting loss prevention and control measures
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Name THREE strategies employed by underwriters that signify a hardening market. - ANSWER--Soft market conditions arise when there is excess financial capacity in the marketplace and insurers demonstrate reasonable profitability and strong capital bases
-Hard markets follow poor results because risks underwritten at artificially low prices must eventually be offset with high enough premiums. Companies tend to react slowly in a hardening market because they do not want to be the first to up prices an lose good accounts
- Approach each risk very cautiously before offering to insure it.
- Set more exacting underwriting standards.
- Gives loss control and loss prevention measures significant consideration.
- Tighten policy terms to limit exposures.
- Mark substantial rate increases
- Terminate relationship with brokers with unprofitable results or who only have a
small volume of business
- Withdraw from the jurisdiction, a class of business, or an individual risk when
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sufficient market share has not been gained or a portfolio or individual risk is not profitable
- Withdraw from the market altogether by selling the company to another insurer
or placing it into what is known as a run-off (cease to write new business and only service existing policies)
What is market dislocation? - ANSWER-Market dislocation is said to occur when consumers are forces to find a new insurer when their current insurer decides to withdraw from the market after such consumers have come to rely on the insurer for the product
What is social inflation? - ANSWER-Refers to the increase in claims costs resulting from generous jury awards, legislated benefit increases, and changing legal concepts of tort and negligence that benefit plaintiffs
Identify a large loss that exhausted a significant amount of capital for the insurance industry in 2001? - ANSWER--Hundreds of millions in shareholder capital was lost as a result of terrorist attacks on the twin towers in NYC and the scandalously improper accounting practices that occurred in corporate America thereafter
-although insurers and reinsurers in the U.S. market were primarily affected by the severe claims filed, the Canadian market also felt its effects because it tends to illicit reaction in the international market
What effect can an insolvent insurance company have on the marketplace? - ANSWER--Shrinks the market and its capacity due to the fewer market players.
-Canada has created an association to deal with bankrupt P&C insurers, the effects of shrinkage are even more intense for other health companies in the industry
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-When a P&C company goes bankrupt, each insurer that is a member of the association is called upon to pay its share of claims, this could potentially have negative effects on profit levels
How are brokers affected by market cycles? - ANSWER--During a soft market cycle, brokers enjoy the abundance of capacity, premium rates decline and underwriters are less demanding. However, a decline in rates means a decline in commission
-During a hard market cycle, brokers must labour intensively to find capacity for their clients needs and must negotiate more diligently to obtain reasonable prices.Commission income rises when premium increases.
How are consumers affected by market cycles? - ANSWER--During a soft market cycle, consumers are simply more neutral in their reaction to the insurance industry
-During a hard market cycle, consumers become wary, distressed and often angry.They are faced with premiums that are suddenly not affordable, availability that is restrictive and coverage terms are limited. Consumers are in an awkward situation as they cannot afford to buy insurance that is mandated by law
What backlash can be expected when a mandatory insurance product becomes less accessible to consumers because of high rates? - ANSWER--Politicians get involved by imposing measures they believe will make insurance more affordable
-Governments can step in to establish backstops and protection plans such as caps on the amount of loss
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