LasTargaryen
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Hello I have a total of 3 questions from CMP that I just can't seem to understand even after many reads. Appreciate if anyone can help to clarify!
Chapter 9 - Underwriting Cycle
One of the reasons for existence of underwriting cycle is Economies of scale - economics of writing insurance business and fear of losing market share. But I can't seem to wrap my head around how it exacerbates or enforces the cycle. From what I understand, during a soft market, insurers would rather write businesses at a small loss (as long as variable cost is covered) than not write any businesses at all, the reason for this is to not lose market share/withdraw from the market. Isn't this going to slow down the process, because in order for market to turn, insurers need to leave at the lowest point of the cycle? Or maybe I misunderstood the meaning of 'enforcing the cycle'.
Chapter 20 & 21 - Losses-occurring basis reinsurance
I don't understand what any of the following sentences are saying:
Chapter 20.5.2: The extent to which occurrence-based programmes may overlap with exposure periods that would not otherwise be included in the model. It may therefore be necessary to include allowance for such exposure to ensure the application of the reinsurance on modelled exposures is accurate
Chapter 21.2.6:
Reinsurance of unexpired risk: if a firm has bought reinsurance on a losses-occurring basis rather than on a risks-attaching basis, we should either model the gross cost of risks unexpired at the end of the modelling period, or allow for possible additional costs in renewing cover, especially in a post-loss scenario. In other words, if reinsurance is purchased on a losses-occurring basis, then the insurer will not yet have purchased reinsurance to cover the (future) period that is being modelled.
I don't understand why loss-occurring basis reinsurance will still be unexpired after modelling period, but not the case for risk-attaching basis? I understand we should expect additional reinsurance cost after major loss, but I don't understand the part about 'unexpired'.
Chapter 21 - Diversification between underwriting risk and reserving risk
Finally, we should allow for diversification effects between underwriting risk and reserving risk. For long-tailed lines, any diversification effects between reserving risk for the more recent years and underwriting risk for the year ahead might be limited. For example, under-reserving of more recent years may lead to under-pricing of the year ahead and vice versa.
I get why under-reserving will lead to under-pricing, but I don't understand why it is more severe for longer-tailed classes, isn't this going to affect all type of insurance classes? My hypothesis is that for long-tailed business it might be harder to establish that we are under-reserved, so it takes time to realise it and charge the correct price next year?
Thank you so much!
Chapter 9 - Underwriting Cycle
One of the reasons for existence of underwriting cycle is Economies of scale - economics of writing insurance business and fear of losing market share. But I can't seem to wrap my head around how it exacerbates or enforces the cycle. From what I understand, during a soft market, insurers would rather write businesses at a small loss (as long as variable cost is covered) than not write any businesses at all, the reason for this is to not lose market share/withdraw from the market. Isn't this going to slow down the process, because in order for market to turn, insurers need to leave at the lowest point of the cycle? Or maybe I misunderstood the meaning of 'enforcing the cycle'.
Chapter 20 & 21 - Losses-occurring basis reinsurance
I don't understand what any of the following sentences are saying:
Chapter 20.5.2: The extent to which occurrence-based programmes may overlap with exposure periods that would not otherwise be included in the model. It may therefore be necessary to include allowance for such exposure to ensure the application of the reinsurance on modelled exposures is accurate
Chapter 21.2.6:
Reinsurance of unexpired risk: if a firm has bought reinsurance on a losses-occurring basis rather than on a risks-attaching basis, we should either model the gross cost of risks unexpired at the end of the modelling period, or allow for possible additional costs in renewing cover, especially in a post-loss scenario. In other words, if reinsurance is purchased on a losses-occurring basis, then the insurer will not yet have purchased reinsurance to cover the (future) period that is being modelled.
I don't understand why loss-occurring basis reinsurance will still be unexpired after modelling period, but not the case for risk-attaching basis? I understand we should expect additional reinsurance cost after major loss, but I don't understand the part about 'unexpired'.
Chapter 21 - Diversification between underwriting risk and reserving risk
Finally, we should allow for diversification effects between underwriting risk and reserving risk. For long-tailed lines, any diversification effects between reserving risk for the more recent years and underwriting risk for the year ahead might be limited. For example, under-reserving of more recent years may lead to under-pricing of the year ahead and vice versa.
I get why under-reserving will lead to under-pricing, but I don't understand why it is more severe for longer-tailed classes, isn't this going to affect all type of insurance classes? My hypothesis is that for long-tailed business it might be harder to establish that we are under-reserved, so it takes time to realise it and charge the correct price next year?
Thank you so much!