Chapter 48 question 48.13

[ST6_aspirant]

When analyzing the overall premium, one statement is “The effects of competition on persistency to see if the change in approach five years ago mirrored those made by competitors. If persistency has worsened for the general insurance company, then premiums will be lower overall.”

Not sure what is being said above. Is it saying that if the premium rates were similar to the competition when it revised rates five years ago, AND if persistency has worsened now, premiums will be lower overall – for the general insurance company? I don’t see the connection.


Same answer also says: Analysis of effectiveness of reinsurance arrangements to see if poor experience is due to inappropriate cover. If the reinsurance arrangements are inappropriate then reinsurance recoveries will be low in relation to what the general insurance company expected (for a given reinsurance premium).

Not sure of what is being said here too. Company will expect reinsurance cover on what it has reinsured, however big or small and will pay premium on that cover. The only way it wont be effective is if the reinsurer defaults. Is the above paragraph referring to defaults or did I miss something?

 

[ST6_aspirant]

Same question: Underwriting performance on homogeneous cohorts of business to check for any adverse selection.

Not sure what it means. Does it mean comparing underwriting performance in the same homogenous cell for two years assuming no change in underwriting guidelines (because this has been addressed in the point above the one in question)? If there is no change in the guideline, how can adverse selection happen?

 

[Lindsay Smitherman]

When analyzing the overall premium, one statement is “The effects of competition on persistency to see if the change in approach five years ago mirrored those made by competitors. If persistency has worsened for the general insurance company, then premiums will be lower overall.”

Not sure what is being said above. Is it saying that if the premium rates were similar to the competition when it revised rates five years ago, AND if persistency has worsened now, premiums will be lower overall – for the general insurance company? I don’t see the connection.

This comment is in the section which covers reasons why total premiums received (i.e. sales volumes) may have fallen. The scenario is that five years ago the company increased its premium rates in order to improve its profits. If other companies didn't do the same (i.e. they didn't increase their own premium rates) then renewal rates for this company would likely have fallen as customers go elsewhere to buy their insurance for cheaper premiums. Hence total premiums (and total profits) received would have likewise fallen.

Same answer also says: Analysis of effectiveness of reinsurance arrangements to see if poor experience is due to inappropriate cover. If the reinsurance arrangements are inappropriate then reinsurance recoveries will be low in relation to what the general insurance company expected (for a given reinsurance premium).

Not sure of what is being said here too. Company will expect reinsurance cover on what it has reinsured, however big or small and will pay premium on that cover. The only way it wont be effective is if the reinsurer defaults. Is the above paragraph referring to defaults or did I miss something?

Bear in mind that when the company is setting premium rates and deciding on what reinsurance strategy to use, it doesn't know exactly what its claim profile will be for the business that it sells under those rates. So perhaps it made an assumption that it would have few (or no) very large claims and therefore chose to use quota share reinsurance rather than an excess of loss treaty. But then there may have been a very high number of large claims (e.g. liability) - and so its reinsurance arrangement was ineffective as these large claims would not have been capped. Having made an inappropriate choice of reinsurance arrangement would therefore have contributed to a lower benefit from having reinsurance in place than the company had been hoping for.

Same question: Underwriting performance on homogeneous cohorts of business to check for any adverse selection.

Not sure what it means. Does it mean comparing underwriting performance in the same homogenous cell for two years assuming no change in underwriting guidelines (because this has been addressed in the point above the one in question)? If there is no change in the guideline, how can adverse selection happen?

This means investigating to see whether there has been any change in the level of adverse selection within the business over the past five years (and compared with the level before the premium rate changes), which might have been contributing to the fall in profits. The phrase "underwriting performance" means the extent to which premiums are exceeding claims and expenses. If any of the cells being investigated show a very poor underwriting result (i.e. premiums - claims - expenses), then this could indicate that there is adverse selection within that particular cell - so perhaps the rates have not been set correctly for the specific risk factors that are being represented by that cell. Bear in mind that the company may have changed its risk factors during its previous repricing, and as a result there may have been a change in the extent to which it is suffering from adverse selection: e.g. if it is pricing too cheaply for a particular combination of risk factors, then it is likely to write more of those particular risks and this will contribute to a reduction in profits.

Hope that all helps? [BTW you might want to edit the title of this thread to refer to question 48.14 rather than 48.13, to help other students who might search the forum in future.]