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Insurance Marketplace
Refers to the space where consumers and insurers interact to exchange insurance policies for premiums.
Commodity
A standard product used for commerce that is traded based on price.
Supply and Demand Theory
Economic theory determining prices based on the balance between product availability and consumer demand.
Law of Supply
Asserts that producers are willing to supply more of a product at higher prices.
Law of Demand
Indicates that demand decreases as price rises and increases as price falls.
Capacity
The availability of insurance products in the market, influenced by the financial strength of insurers.
Soft Market Cycle
Occurs when there is excess financial capacity in the insurance marketplace leading to low premiums and relaxed underwriting.
Hard Market Cycle
Follows a soft market, characterized by decreased capacity, increased premiums, and stricter underwriting standards.
Underwriting
The process insurers use to assess risk before offering coverage.
Residual Market Mechanisms
Plans created by the insurance industry to provide access to mandatory insurance for high-risk individuals.
Mergers and Acquisitions (M&A)
Business strategies where companies combine or purchase others to expand market share and capabilities.
Reinsurance
Insurance purchased by insurers to manage risk by sharing it with other insurance companies.
Investment Income
Profits generated from the investments made by insurance companies, crucial for financial performance.
Market Dislocation
A situation where insurance becomes unavailable or unaffordable due to drastic market changes.
Social Inflation
The increasing costs of claims that exceed general economic inflation, often driven by legal trends.
Class Action Lawsuits
Legal actions taken by a group of individuals against a company, potentially affecting insurer profitability.
Natural Catastrophe
A severe event like hurricanes or earthquakes that causes significant insurance claims.
Toxic Mould Risk
Emerging liability areas related to health implications of mould, impacting insurance costs.
Cyber Risk
Threats to digital assets and data which insurers must now consider.
Climate Change Risk
Long-term risks associated with changes in climate, influencing insurance underwriting.
Government Regulation
Laws governing how insurance should be sold and operated, often affecting prices and availability.
Mandatory Insurance
Insurance products that must be purchased by law, such as automobile liability insurance.
Privatization in Insurance
The trend towards allowing private companies to provide insurance services rather than through government.
Market Growth Trends
Patterns in the increase or decrease of insurance market activity influenced by economic factors.
Equity Market
The market where shares of publicly held companies are issued and traded.
Economy Health Impact
Refers to how economic conditions influence consumer behavior and claims in insurance.
Claims Costs
The expenses associated with processing and paying insurance claims.
Interest Rates
The cost of borrowing money that can affect investment returns for insurance companies.
Insurer Insolvency
When an insurance company cannot meet its financial obligations, leading to its closure.
Claims Reserves
Funds set aside by insurers to pay for future claims.
Premium Growth
The increase in income generated from the sale of insurance policies over time.
Policy Terms and Conditions
The specific clauses that guide the coverage and limitations of an insurance policy.
Direct Writers
Insurers that sell insurance policies directly to consumers without intermediary brokers.
Managing General Agents (MGAs)
Organizations acting on behalf of insurers to underwrite business and manage risks.
Alternative Risk Financing
Unconventional insurance options like captives or parametric insurance to manage risk.
Volume of Business
The amount of insurance policies an insurer writes within a specific period.
Strict Underwriting Practices
Rigorous guidelines to evaluate and accept insurance risks.
Bear Market
A market characterized by declining prices, often causing financial stress in investments.
Bull Market
A market where prices are rising, generally associated with economic growth.
Stakeholder Relationship Management
Strategies insurers use to maintain relationships with brokers, clients, and regulators.
Insurance Market Fragmentation
The distribution of many different insurers in a market leading to competitive pressures.
Catastrophe Reinsurance
Reinsurance specifically designed to protect insurers against large claims from natural disasters.
Profit Margin
The difference between an insurer's income and its expenses.
Insurable Interest
A requirement that policyholders must have a vested interest in the insured item or individual.
Broker Commission
The fee paid to insurance brokers for their services in facilitating insurance transactions.
Public Utilities Commissions
Government entities that regulate the prices and services in certain economic sectors, including insurance.
Market Demand
The total amount of insurance coverage that consumers are willing to buy at given prices.
Regulatory Sanctions
Actions taken by government agencies to enforce compliance with insurance laws.
Expense Management
Strategies insurers use to control costs and maintain profitability.
Financial Stability
The ability of an organization to sustain adequate financial performance amidst fluctuating markets.
Underwriting Profit
The profit remaining after claims and expenses are deducted from premiums.
Insurance Capacity Shortage
A situation where market resources are insufficient to meet consumer insurance demands.
Risk Exposure
The potential for loss or damage that an insurer covers.
Profitability Trends
Patterns regarding the financial success of insurers based on revenue and expenses.
Legislative Reform
Changes in laws intended to modify how insurance is regulated and sold.
Commercial Risks
Risk exposure related to the operations of businesses, which insurers must underwrite.
Insurance Claims Management
The process of handling the assessment and payment of claims made against insurance policies.
Consumer Awareness
The knowledge and understanding consumers have regarding different insurance products.
Liability Insurance
Coverage that protects individuals and businesses from claims resulting from injuries and damage.
Insurance Limits
The maximum amount an insurer will pay for a covered loss.
Market Saturation
When most or all potential consumers already have insurance, limiting new business opportunities.
Risk Management Practices
Strategies implemented to identify, assess, and mitigate risks in insurance.
Insurance Cycle Analysis
Evaluating the recurring pattern of market conditions and their impacts on pricing and profit.
Fundamental Insurance Principles
The foundational concepts guiding insurance practices, like risk pooling and indemnity.
Insurer Portfolio
A collection of different insurance policies held by an insurer at a given time.
Insurance Technology Innovations
New technologies that improve the efficiency and effectiveness of insurance processes.
Fraud Detection in Insurance
Methods used by insurers to identify and prevent fraudulent claims.
Influences of Economic Trends
Factors in the economy that have direct effects on insurance sales and profitability.
What statement describes capacity?
Capacity is the amount of capital that individual insurers or entire markets make available for insuring risk.
What analyzes the way pricing is determined?
Theory of supply and demand
What term refers to the increase in claims costs from generous jury awards
Social inflation
Bond Market
The type of market generally performs well during economic downturns
Run-off
When an insurer has chosen to stop writing new business and service existing policies only until renewal in a certain market.
Relax risk control requirements
In this cycle, a home and auto insurer is losing market share to its competitors.
What happens when policyholders are forced to find a new insurer when their current insurer withdraws from the market?
Market dislocation
What is typically the result of excess financial capacity in the insurance marketplace?
Soft market conditions
What triggers a hard market?
Limited market competition
What makes up the largest share of the P&C insurance industry?
Automobile insurance
The Canadian P&C marketplace is influenced by individual companies and group of companies. Which of the following do these entities control?
Capacity
What analyzes the way pricing is regulated?
The theory of supply and demand
What happens when consumers are forced to find a new insurer when their current insurer withdraws from the market?
Market dislocation
Which one of the following triggers may cause a hard market?
Limited market competition - Hard markets can arise when there is limited market competition, increased regulation on premium rates, and increased demand for a product than can be met by the insurers who actually sell it.
When a company ceases to write new business and services only existing policies, this is known as what?
Run-off - This occurs when an insurer stops writing new policies and only services existing ones, often due to financial difficulties or regulatory reasons.
Breifly explain how market cycles affect risk managers (5 marks)
Soft Market (easier to offer coverages) insurers can deliver risk protection more easily to insureds because they are less demanding loss control requirements
Hard market (consideration of alternate risk financing measures) Insurers must be more creative and explore alternative risk financing propositions when offering options to deal with risks due to stringent guidelines, which means making decisions is more difficult.
Briefly explain how market cycles affect consumers (5 marks)
Soft Market (neutral): In a soft market, consumers are neutral, they find insurance affordable and more readily available.
Hard market (frustrated): In a hard market, consumers become frustrated when premiums become unaffordable, and when coverage become unattainable, consumers are placed in a awkward position when coverage that is mandated by law is unaffordable and unavailable.
Briefly explain how market cycles affect government (5 marks)
Soft market (compliance of insurers): In a soft market the government is more neutral and may review insurers relaxed underwriter rules and guidelines to ensure that they are still in compliance.
Soft market (few consumer complaints) In a soft market, the government will receive fewer complaints from consumers.
Hard market (survival of insurers) In a hard market, the government implements government-backed protection plans (backstops) by capping losses to ensure that insurers can survive a catastrophic loss.
Hard market (recovery assistance): In a hard market, the government may participate in recovery initiatives if severe catastrophic events occur.
Hard market (ensure availability of insurance): in a hard market, the government imposes measures to make insurance more affordable and available for consumers.
What is a Soft Market Cycle?
Occurs when there is excess financial capacity in the insurance marketplace
Triggered by strong insurer profitability and capital bases
Characterized by intense competition among insurers aiming to grow market share
Common underwriting behaviors include:
Reducing premium rates
Relaxing policy terms and conditions
Easing loss prevention and control measures
Additional strategies may involve:
Launching new products to meet emerging demand
Writing riskier or previously avoided business classes
Expanding into new geographic territories
Prolonged soft market conditions often lead to deteriorating underwriting results
If investment returns also decline, capital depletion occurs, leading to a shift toward a hard market
What is a Hard Market Cycle?
Follows a soft market when low premiums result in poor underwriting results
Insurers are slow to raise prices at first, fearing the loss of good business
Triggered when return on equity drops and investors demand corrective action
Common insurer strategies in hard markets include:
Cautiously evaluating each risk before insuring
Imposing stricter underwriting standards
Emphasizing loss control and prevention measures
Tightening policy terms to reduce exposure
Raising premium rates significantly
Terminating low-performing broker relationships
Withdrawing from unprofitable jurisdictions, business classes, or risks
Entering run-off (stopping new business and servicing only existing policies)
May result in market dislocation, where coverage is unavailable or unaffordable for some insureds
Investors expect at least low double-digit returns; high single-digit returns may suffice in tougher markets
Typical insurance cycles last ~7 years (4 years of falling rates + 3 years of hardening market); recent cycles may last 3–5 years
Market cycles are a natural result of free-market dynamics and overcorrections in insurer behavior
Financial pressure is often intense before a correction, forcing some insurers
What are the causes of Hard Markets?
Hard market cycles can result from several contributing factors, including:
Limited market competition: Few market players may lead to higher premiums
Regulated premium rates: Government-imposed limits can prevent insurers from charging adequate premiums to cover claims and expenses
Restrictive underwriting: In response to rate regulation, insurers may limit the type or amount of coverage offered
High demand for new products: When demand outpaces the number of insurers offering coverage, a hard market can emerge in that specific product line
Inability to exit markets: Insurers may stay in unprofitable markets but reduce expenses and tighten underwriting to manage losses
What are the differences in Market Cycles?
Insurers:
Soft Market: Profitability declines; competition intensifies as they seek new business
Hard Market: Profitability returns; face criticism due to rising prices and stricter underwriting
Brokers:
Soft Market: Easier to place coverage; lower rates reduce commission income
Hard Market: Must work harder to find coverage; higher premiums increase commissions
Risk Managers:
Soft Market: Benefit from low premiums and lenient underwriting
Hard Market: Must explore creative risk financing (e.g., captives, reciprocal exchanges, parametric insurance)
Consumers:
Soft Market: Neutral response due to stable prices and availability
Hard Market: Face high premiums, limited coverage, and frustration; may involve political intervention when mandatory insurance is unaffordable
Governments:
Soft Market: Generally minimal involvement
Hard Market: May impose affordability measures or create backstops for high-risk coverage (e.g., terrorism, earthquakes)
Example – 9/11:
Massive losses from terrorist attacks led to market withdrawal and exclusions
The U.S. government partnered with the industry to create a backstop, helping restore insurance availability and economic stability
What happens in soft market cycles?
Insurers:
Soft Market: Profitability declines; competition intensifies as they seek new business
Brokers:
Soft Market: Easier to place coverage; lower rates reduce commission income
Risk Managers:
Soft Market: Benefit from low premiums and lenient underwriting
Consumers:
Soft Market: Neutral response due to stable prices and availability
Governments:
Soft Market: Generally minimal involvement
Example – 9/11:
Massive losses from terrorist attacks led to market withdrawal and exclusions
The U.S. government partnered with the industry to create a backstop, helping restore insurance availability and economic stability
What happens in hard market cycles?
Insurers:
Hard Market: Profitability returns; face criticism due to rising prices and stricter underwriting
Brokers:
Hard Market: Must work harder to find coverage; higher premiums increase commissions
Risk Managers:
Hard Market: Must explore creative risk financing (e.g., captives, reciprocal exchanges, parametric insurance)
Consumers:
Hard Market: Face high premiums, limited coverage, and frustration; may involve political intervention when mandatory insurance is unaffordable
Governments:
Hard Market: Face high premiums, limited coverage, and frustration; may involve political intervention when mandatory insurance is unaffordable
Example – 9/11:
Massive losses from terrorist attacks led to market withdrawal and exclusions
The U.S. government partnered with the industry to create a backstop, helping restore insurance availability and economic stability
What are the Soft Market Cycles - Party Impacts
Insurers:
Soft Market:
Lose profitability
Loosen underwriting guidelines
Write unusual classes of business
Reduce premiums
Compete aggressively for new and existing business
Brokers:
Soft Market:
Enjoy abundant capacity and easier placement
Experience rate declines and less stringent underwriting
Earn lower commissions due to reduced premiums
Risk Managers:
Soft Market:
Benefit from low prices and easier underwriting
Meet risk protection goals with less resistance
Consumers:
Soft Market:
Neutral attitude
Insurance is affordable and available
Governments:
Soft Market:
Neutral stance, fewer consumer complaints
May monitor underwriting practices for compliance
What are the Hard Market Cycles - Party Impacts
Insurers:
Hard Market:
Regain profitability
Enforce strict underwriting guidelines
Increase premiums
Terminate unprofitable or low-volume broker relationships
Withdraw from unprofitable markets, risks, or jurisdictions
Exit the market via run-off
Brokers:
Hard Market:
Struggle to find capacity
Spend more time sourcing new insurers
Negotiate pricing and coverage more intensely
Earn higher commissions due to rising premiums
Risk Managers:
Hard Market:
Face stricter underwriting and decision challenges
Must innovate with alternative risk financing (e.g., captives, parametric solutions)
Consumers
Hard Market:
Experience frustration and difficulty affording or obtaining required coverage
May trigger political intervention when mandatory insurance is inaccessible
Governments:
Hard Market:
Introduce affordability measures
Create or expand backstops for high-risk coverage (e.g., catastrophic loss)
Participate in recovery efforts during crises (e.g., post-9/11)
Explain delivering Private Automobile Insurance
Significance:
Automobile insurance represents nearly 40% of total P&C premiums in Canada
Any regulatory changes impact insurer operations, expenses, and profitability significantly
Challenges in Accessibility:
High rates or strict underwriting can make mandatory auto insurance less accessible
Leads to public pressure on governments, often resulting in regulatory intervention
Government Actions:
May create automobile rating boards or public utilities commissions to control pricing
While pleasing to consumers, insurers view price regulation as a burden on free market operations
Consequences for Insurers:
Claims cost ratio may rise
Prices may no longer reflect true risk or costs
Risk of market withdrawal if rates are inadequate
Increases in operating costs due to:
Additional staffing
New software/system adjustments
Lower return on equity and reduced profitability
Example – Alberta 2023 Rate Freeze:
Alberta government froze rate increases for all of 2023
Capped future increases for “Good Drivers” at 3.7%
Insurers had to rapidly adapt systems, incurring significant expenses
Cost-Cutting Fallout:
Potential loss of quality staff and customer service decline
Weakening of internal operations, poor risk selection, and stalled succession planning
Impact of Government Takeover:
Insurers must re-evaluate business plans
May delay or abandon growth and expansion strategies
May consider withdrawing from jurisdictions in anticipation of reforms
Leads to reduced capacity in affected provinces
Define Capacity
The measure of an insurerís ability to issue contracts of insurance. Measured usually by the largest amount it will accept on a given risk or, in certain situations, by the maximum volume of business that the company is prepared to accept.
What is an Managing General Agent (MGA)?
An independent business operation given authority by a number of insurance companies to solicit business on behalf of such companies. Responsibilities include recruiting, training, and supervising agents.
What is a run off?
An article in a reinsurance contract stating that the reinsurer remains liable under the ceding company’s policies in force at termination for losses occurring after the date of termination of the reinsurance contract.
What is a captive insurance company?
An insurance company that provides insurance to, and is controlled by, its owners.
What is a reciprocal insurance exchange?
A means of insurance whereby each subscriber appoints a central underwriter as attorney-in-fact to share insurance costs with other insureds in the same group.