Assignment 15 - The Insurance Underwriting Cycle

An insurance company has a track record of strong investment returns, has a ratio of premiums written to policyholders' surplus of one-to-one, and return on equity greater than its return-on-equity threshold. In a soft market, the insurance company most likely would Select one: A. Maintain prices and increase underwriting standards. B. Make no changes because ROE doesn't affect profitability. C. Increase prices and increase underwriting standards. D. Make no changes because investment income doesn't affect profitability.

A. Maintain prices and increase underwriting standards.

In a hard insurance market Select one: A. Producers lose some of the insurers they represent. B. Producers have more price competition. C. Producers limit the insurers they will represent. D. Producer success ratios decline.

A. Producers lose some of the insurers they represent.

Which one of the following factors affects the supply of insurance? Select one: A. Reinsurance B. Sarbanes-Oxley Act C. Policy interpretation D. National Association of Insurance Commissioners

A. Reinsurance

Sugartown Insurance has had several highly profitable years recently and accumulated a sizable surplus. Sugartown is now initiating a market plan to increase market share by competing on price. If enough of Sugartown's competition follows this strategy, what will be the likely immediate effect? Select one: A. The market will soften. B. Industry loss ratios will decline. C. The underwriting cycle will stabilize. D. New competition will enter the market.

A. The market will soften.

Models that attempt to describe the current property casualty insurance market based on past cycles rely on Select one: A. A future trend. B. A recurring pattern. C. Structural change. D. Unique aspects.

B. A recurring pattern.

Models that describe the current market in terms of past insurance underwriting cycles Select one: A. Are based on the demand for insurance. B. Are based on operating profitability. C. Must discount current period structural changes. D. Are based on anecdotal reports of repeated patterns.

B. Are based on operating profitability.

Within the underwriting cycle, which one of the following occurs in a hard market? Select one: A. Competition is intense. B. Coverage is hard to find. C. Premiums decline. D. Insurers are less profitable.

B. Coverage is hard to find.

Which one of the following is most likely to be an action taken by insurance companies during soft markets? Select one: A. Limit the number of producers to those with the best accounts for the insurer's ideal book of business B. Develop specialized insurance products that allow them to operate with less price competition C. Strengthen loss reserves as profitability improves D. Increase staff to manage an increased workload

B. Develop specialized insurance products that allow them to operate with less price competition

Which one of the following conditions is characteristic of a hard market? Select one: A. Lower insurance premium B. Diminished insurer competition C. Widely available coverage D. Decreased insurer profit

B. Diminished insurer competition

Which one of the following statements about the underwriting cycle is true? Select one: A. Individual account pricing is not impacted by the underwriting cycle. B. During a soft market, insurance pricing reflects the desire to hold market share. C. When investment returns are not covering underwriting losses, the soft market begins. D. During a hard market, many insurers loosen loss reserves.

B. During a soft market, insurance pricing reflects the desire to hold market share.

Professional liability exposure for agents and brokers increases in a soft market because Select one: A. Commissions are reduced. B. Insurer insolvencies increase. C. Staff is reduced. D. Producer competition is reduced.

B. Insurer insolvencies increase.

Which one of the following is a sign that the insurance market is beginning to harden? Select one: A. Insurer investment income begins to show increased returns B. Insurers begin to start to increase premiums and restrict writing risks C. Underwriting expense ratios begin to decrease with the market D. When there is an expansion in the amount of insurance written

B. Insurers begin to start to increase premiums and restrict writing risks

Which one of the following statements about a hard market is true? Select one: A. During a hard market, insurer competition is intense. B. A hard market involves diminishing insurer profitability. C. Insurance premiums rise during a hard market. D. Insurance coverage is easy to find during a hard market.

C. Insurance premiums rise during a hard market.

Predicting insurance underwriting cycles based on past periods is difficult because Select one: A. Anecdotal evidence suggests limited patterns of repetition within the insurance underwriting cycle. B. Little statistical evidence of cyclical patterns exists within insurance underwriting cycles. C. Insurance underwriting cycles occur in the context of structural change in business and society. D. Insurance underwriting cycles bear little resemblance to general business cycles.

C. Insurance underwriting cycles occur in the context of structural change in business and society.

The underwriting cycle is made up of two phases. Which one of the following best describes the soft market phase? Select one: A. Expansion and contraction of general business activity B. Diminished competition in the market and increased profitability C. Intense competition in the market and decreased profitability D. Gradual and fundamental change in the market involving profits

C. Intense competition in the market and decreased profitability

When profit cycles are assessed over a period of years the cumulative change that has occurred is best referred to as Select one: A. Cycle change. B. Market change. C. Structural change. D. Fundamental change.

C. Structural change.

If a company purchases higher limits on a liability policy because of growth in litigation, it is likely a response to Select one: A. Structural changes in the insurance industry. B. The underwriting cycle entering a soft market. C. Structural changes in society and business. D. The underwriting cycle entering a hard market.

C. Structural changes in society and business.

The profit cycle is usually described in terms of Select one: A. GDP B. The market C. Underwriting D. An industry

D. An industry

Producer staff in a hard market Select one: A. Has a lower success ratio. B. Find coverage more readily. C. Is more likely to be replaced by technology. D. Is likely to increase.

D. Is likely to increase.

Which one of the following is an insurer response to a soft market? Select one: A. Staff increases B. Restrictive underwriting C. Price increases D. Specialized products

D. Specialized products