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Chapter 7, Insurance Cycle

T

tatos

Member
Under the reasons for the existence of the cycle, Acted notes:

- economies of scale, which encourage marginal costing

Please explain this..
 
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I guess that pretty much anything that affects general movements in prices, could be argued to affect the control cycle? As companies get bigger, they get more economies of scale, so marginal costing becomes more prevalent (I assume you know what this is), so prices generally don't increase as much as they might have done, so the cycle is not so marked at that stage...
 
I think it's more about the effect that it has at the other end of the cycle, i.e. when rates are soft, they are allowed to get even softer as insurers accept low premiums on the grounds that the policies are still marginally profitable. If insurers insisted on every policy making its proper contribution to fixed costs then rates would never get as soft as they sometimes do.
 
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