In the solution for this description, it says it's where premiums are lower than they really should be, because the amount of risk wasnt really known fully when contract was written. When I looked at the description of the underwriting cycle, I presumed a soft market was where premiums are intentially decreased since it's part of the underwriting cycle where competition is high? So in this case, the insurance company would know their premiums were too low for the risk they have taken on. However, if I am incorrect on my thinking in the above paragraph (para.2), is the link between the above paragraph, and the correct interpretation in the April solution (para.1), that it is actually the fact they think they can afford these lower premiums (which they are lowering due to the competition) but only realise just how profitable they are when claim notifications happen. Again, just need confirmation on whether/why my 2nd paragraph is incorrect above. Thanks
The first paragraph is kinda wrong to be honest. In a soft cycle the premium is too low for the amount of risk assumed. This is consistent with the answer in the examiner's report. It also fits in with the second paragraph and competition. It could be right but only where the company can't tell what the real level of risk is. This could be because of poor data, new entrant, little experience or new class, long tail class etc. Your third paragraph is also kinda correct. It takes time to see the effects of a soft cycle on the profit levels due to the delays associated with claims coming in. So, the company may be happy to do this until they see profits decreasing. In previous soft cycles this has been the case exactly. People think they could afford the lower premiums then a cat hits or really poor claims experience and then they realise and get all of the associated problems. Rate monitoring is a bit better now a days, but is under estimated because of new business.
