Can anyone explain me what is underwriting or profitability cycle in Non life insurance companies? The explanations in both CFAI and schweser books are not clear. Thanks.
in non-life insurance typically , there are boom and bust cycles . premiums are low when business is booming and a lot of small insurers enter the market. when a calamity ( a.ka. natural disaster) , hits a large number of these smaller insurers go bust. premiums can then adjust upward so it is sustainable for a few years.
Think of the underwriting cycle as the business cycle of the property insurance industry.
Thanks that makes sense.
The underwriting cycle is when insurance companies having sustained losses tighten their underwriting standards and increase premiums, then when they become more profitable again and have excess capital, they loosen standards and premiums for policies to gain market share and such, then get in trouble again taking bad risk, contract and restart the cycle. It’s the insurance cycle.
To clarify, premiums are the payments made from policyholder to the insurance company right? And are crediting rates the growth rate of the payments that are made to the company? This might sound utterly basic but I just want to clarify (not wanting to take chances)…
Thanks again.
That’s correct.
No. With whole life insurance, the policy has a cash value which grows over the years and against which the policyholder can borrow. The rate at which that cash value grows is the crediting rate. That is independent of the growth rate of the premium.
You’re welcome.
Underwriting means taking on the risk. The premiums are what is paid for that transfer of risk.
In Non-Life, pricing of premiums are driven by “events”. For insurance cover over property, for example, a material event wouljd be a natural catastrophe.
When it has been a long time between Cats insurers get agressive on pricing to steal market share and lose sight of the actuarial calculations which originally guide the pricing. So the premium rates get lower and lower and then a Cat happens and the pricing goes up again as the full effect of the losses are realised