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Math 479/568 Casualty Actuarial Mathematics

Math 479/568 Casualty Actuarial Mathematics. Fall 2014 University of Illinois at Urbana-Champaign Professor Rick Gorvett Session 3: Economics and Insurance Markets September 2, 2014. Last Time. Insurance contracts Lines of business Insurability Etc…. CAS Exam 5, Spring 2008, #1.

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Math 479/568 Casualty Actuarial Mathematics

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  1. Math 479/568 Casualty Actuarial Mathematics Fall 2014 University of Illinois at Urbana-Champaign Professor Rick Gorvett Session 3: Economics and Insurance Markets September 2, 2014

  2. Last Time • Insurance contracts • Lines of business • Insurability • Etc…

  3. CAS Exam 5, Spring 2008, #1

  4. CAS Exam 5, Spring 2008, #1Sample Answer

  5. CAS Exam 5, Spring 2008, #2

  6. CAS Exam 5, Spring 2008, #2Sample Answer

  7. Today’s Agenda • Underwriting cycle • Macroeconomic approach to the cycle • Impact of the cycle on insurers and industry behavior

  8. TheProperty / CasualtyInsuranceUnderwriting Cycle

  9. P/C Underwriting Cycle Profitability or Written Premium Growth Hard Time Soft

  10. Insurance Information Institute Presentation: “Overview and Outlook for the P/C Insurance Industry: Trends, Challenges and Opportunities in 2014 and Beyond” http://www.iii.org/presentation/overview-and-outlook-for-the-p-c-insurance-industry-trends-challenges-and-opportunities-in-2014-and

  11. AMacroeconomic Approachto theU/W Cycle(Boor, 1998)

  12. Characteristics of theInsurance Market • Relatively fixed demand • Buy out of necessity • Required by law • Required by others • Protect against financial ruin • Thus, a relatively flat demand curve • Supply  price

  13. Characteristics of theInsurance Market (cont.) • Product is largely a “commodity” • Policies are similar (for a given line / type) • Regulation • Policy forms of bureaus • Individual sellers  no control over price •  Seek “brand names” • Differentiate policies • Different values associated with different policies

  14. Characteristics of theInsurance Market (cont.) • Relatively easy entry and exit of firms • Entry • Capitalization and regulatory requirements • Not many expensive facilities needed (as compared with, say, manufacturing) • Exit • Perhaps regulatory issues • Perhaps marketing issues

  15. Characteristics of theInsurance Market (cont.) • Supply curves • Different between companies • Underwriting • Expenses • Reserve management • Profitability may affect reserve levels • Reserves may be used to manage reported profitability

  16. How These CharacteristicsAffect the Insurance Cycle • Commodity  cycle • Suppose low supply (e.g., from low profits) • Raise prices; profits increase; firms enter  excess capacity • Prices lowered; profits fall; firms exit  low supply • Issues affecting length & severity of cycle • Accuracy of claim cost estimates • Reserving practices • Financial conditions

  17. Impact of theInsurance Cycleon Insurers(Boor, 2004)

  18. Soft Markets • Occur when aggregate written premium goal of all insurers is greater than aggregate insurance demanded • To reach volume or growth targets, companies begin dropping their prices • Other companies either follow or fail to meet their premium / growth targets

  19. Soft Markets (cont.) • Price-reducing mechanisms • Rate filing requirements • Theoretically, can slow down falling prices • But: political and institutional realities • Company rating plans • Risk classification systems • Affiliated corporate entities

  20. Hard Markets • Occur when aggregate written premium goal of all insurers is low relative to aggregate insurance demanded • Can result after poor financial condition of insurer(s) • Certain accounts cannot be written at desired terms • Inadequate capacity  prices and profitability rise • Eventually, leads to new entrants

  21. Issues • Leverage • Ratio of premiums to surplus • Increasing prices can lead to a higher ratio, contrary to regulatory guidelines • Degree of reserve adequacy • Can improve during hardening market • Impact on historical loss data used for prospective pricing

  22. Issues (cont.) • Potential “cycle-changers” • Catastrophe loss experience • Financial conditions • Underwriting • Commodity market  company cost structure is critical • Losses are the biggest component

  23. Insurer Strategies with respect tothe Insurance Cycle • Maintaining market share • Keep business • Drop / match prices as needed • Conserving capital • Insisting on profitable business • Maintaining infrastructure during soft markets

  24. CAS Exam 5, Spring 2010, #13

  25. CAS Exam 5, Spring 2010, #13Sample Answer

  26. CAS Exam 5, Spring 2010, #14

  27. CAS Exam 5, Spring 2010, #14Sample Answer

  28. CAS Exam 5, Spring 2009, #14

  29. CAS Exam 5, Spring 2009, #14Sample Answer

  30. CAS Exam 5, Spring 2009, #15

  31. CAS Exam 5, Spring 2009, #15Sample Answer

  32. CAS Exam 5, Spring 2008, #42

  33. CAS Exam 5, Spring 2008, #42Sample Answer

  34. CAS Exam 5, Spring 2007, #25

  35. CAS Exam 5, Spring 2007, #25Sample Answer

  36. CAS Exam 5, Spring 2007, #26

  37. CAS Exam 5, Spring 2007, #26Sample Answer

  38. CAS Exam 5, Spring 2005, #11

  39. CAS Exam 5, Spring 2005, #11Answer A. 1 only.

  40. Next Time • Loss Reserving • A fundamental actuarial process • Chapter 5 of Foundations of Casualty Actuarial Science

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