Question X2.3

[nyaman]

Am not quite understanding the question and solution. Can someone explain to me. It seems am getting it wrong some where.

 

[Lindsay Smitherman]

Hi - it would be helpful if you could post up what your own answers were and the reasoning behind them, so that we can help you to work out what the confusion might be. Bear in mind that there could well be other valid examples for this question!

 

[ST6_aspirant]

What is the meaning of "extended warranty (due to less consumer expenditure or a lower take-up rate at the point of sale)" under "personal - fall in premiums"?

Does it mean that people buy less goods example a mobile phone for which the manufacturer has bought a cover for warranty from an insurance company?

Also, I don't see the difference between less consumer expenditure and lower take up rate at the point of sale. What am I missing?

 

[Lindsay Smitherman]

When a product is purchased that has the potential to go wrong (e.g. car, cooker, freezer, mobile phone - as you suggest, etc etc) then when you buy that product you are also often offered the chance to purchase extended warranty insurance at the same time. But not everybody who buys that product also chooses to buy the insurance.

So try thinking of it as follows:
Number of purchases of extended warranty insurance = number of purchases of underlying product x take-up rate of insurance.

 

[Ana Chew]

Although I agree with the examples in the solution, wouldn't the premiums charged be higher during recession to reflect the higher possibility of making a claim?

 

[Lindsay Smitherman]

Hi Ana. Bear in mind that the probability of claim would not increase for every type of insurance, and in practice insurers may decide not to increase premiums as they may already be finding it difficult to sell new business in a recession. Even if they did, such an increase is unlikely to offset the reasons for reductions in total premiums as mentioned in the solution.