underwriting cycle

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Risk Management & Insurance Presented by Shekh Mohammed Thoufeeq 4PA14MBA46

Transcript of underwriting cycle

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Risk Management & Insurance

Presented byShekh Mohammed Thoufeeq

4PA14MBA46

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Contents • Administrative cost• Profit loading• Capital shocks• Underwriting cycle

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Administrative cost

• Administrative cost is the expenses that an organization incurs not directly tied to a specific function such as production or sales. These expenses are related to the organization as a whole as opposed to an individual department; also referred to as "administrative expense."

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Major components of administrative cost

• Commission to agent• General expenses • Cost associated with claim processing

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Profit loading• The business of general insurance, like any other market

based concern, is required to return adequate compensation on the capital, or surplus, supplied to it. Fundamental to fulfillment of this objective is the achievement of an appropriate price, or premium to cover the cost of providing the product (in the form of losses and expenses) and to provide a profit margin to service the capital required to conduct the business.

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Mathematical Equation

Premium = Claims + Expenses + Profit loading

P = (1+r) X

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Capital shocks Industry supply depends on the amount of insurer capital and

that industry supply is upward sloping in the short run because the stock of capital is costly to increase due to the cost of raising new capital.

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Underwriting CycleUnderwriting: It is a process where experts decide which policy to accept

and which policy to reject. Underwriters accepts those policy which can be profitable for

the business and rejects those policy which can be harmful. Although they accepts these policies but keep the premium very high. the fundamental objective of underwriting is to produce a profitable business.

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The Hard Market• In a hard insurance market rates are up, new exclusions may be imposed, and limits may be

reduced. In addition, certain coverage readily available before the change may no longer be available, and certain types of businesses may find it difficult, or impossible, to find acceptable insurance arrangements. The current hard insurance market is all of this and more.

• Causes of hard market: War Terrorism Natural calamities Economic meltdown(any catastrophic events)

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Soft Market• Soft markets typically are marked by new entrants into the business, dropping prices,

generous underwriting provisions, and aggressive discounting.• Causes of soft market: Competition High growth rate of the economy Optimistic situation

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Thank you . . . .