Ch2: External environment

Question 1

Aims of regulatory requirements relating to capital adequacy and solvency (4)

Answer 1

• Reduce risk of insurers being unable to pay claims
• Reduce lossess suffered by policyholders in the event that inurer is unable to meet claims
• Provide early warning system so that regulators can intervene if capital is not adequate
• Ensure confidence in insurance sector

Question 2

Public proprietaries advantages

Answer 2

• Easier access to capital
• Greater economies of scale
• More dynamic management

Question 3

Underwriting cycle explained

Answer 3

• Profitability in various insurance classes tend to move in cycle, which are riven by market forces of supply and demand combined with actual claims experience and economic climate
• Cycle:
  * Profitable business leads to more insurers in the market
  * Premium rates reduce as insurers compete for market share
  * Ends up with reduced profits or losses
  * Cycle goes into depression enhanced by catastrophes and economic climate
  * Insurers leave market or reduce involvement
  * Eventually premium rates will increase to cover losses that have been incurred
  * Speed of cycle depends on position adopted by leading insurers and continuing demand for market share