Question

Parts (a) and (b):

a) In Chapter 6 (Lecture 2), we covered the basis for the factors that may result in more restrictive underwriting decisions by the insurer.

Which of the following factors may result in such decisions?

I. Inadequate rates being set.

II. The unavailability of reinsurance at favorable terms.

III. One-off decline in investment income.

IV. One-off decline in assets values.

V. A sustained decline in investment income.

VI. A sustained decline in assets values.

VII. A catastrophic loss event impacting a large portion of insurer's business.

Briefly explain your answer.

b) Which of the following statements about underwriting standards is (are) true and explain why?

I. One purpose of underwriting standards is to reduce adverse selection against the insurer.

II. Equitable rates should be charged so that each group of policy owners pays its own way in terms of losses and expenses.

III. Insurance company must maintain sufficient investment income flows to cover the risk of negative insurance float.

Answer 1

a) 1,2,5,6,7 : These factors may result in a more restrictive underwritting standard, set by the insurance firm so as to protect the business model and make it sustainable at an aggregate level.

b) 1 - True : As the primary objective of an acturary is to set an equation which minimizes the need for a payout while ensuring higher premium collection. Hence if there are a lot of payouts, the insurance firm would be under high risk

3- True: Insurance companies invest the money collected as premiums into several market instruments so as to earn a return. These excess returns provide a buffer against additional payouts that the company might have to pay policy holders