There costs and investment returns. (CII M-80 Underwriting Practice

There
is no uniform pattern in terms of duration and cycles can be
lengthened or shortened by several factors, affecting the cost of
claims, operating costs and investment returns. (CII
M-80 Underwriting Practice 2017-2018 Study Text P-2/18)
A typical underwriting cycle spans a number of years, as market
conditions for the underwriting business go from boom to bust and
back to boom again. (Source
https://www.investopedia.com/terms/u/underwriting-cycle.asp).
Underwriting cycle is fundamentally driven by
claim costs. As
there are expected large numbers of liability claim would be made
against our policy holder which insurance company will have to meet.
It will increase company’s claim ratio and as such liability claims
are complex in nature and could take time so that will give rise to
management expenses as well for meeting all these claims which will
consequently affects company’s profit and it will reduce company’s
reserved capital and company capacity to meet claims. Our insurance
company might have to face a risk of insolvency. And in order to
manage profit account insurance company will need to charge higher
premiums. But by pricing high there is risk that competitors can
throw our company out of the market by charging low prices. So our
company might have to lose share of business and might have to face
regulators concerns as well.

Such
events can drive lesser-capitalized insurer out of the business. As
the supply of insurance reduce in relation to the demand for cover.
And eventually the decreased competition and lower insurance capacity
of insurers lead to better underwriting conditions for the survivors,
which enable them to charger higher premiums and post solid earnings
growth. This is known as hard market. Hard Market conditions occur
when insurance losses are above expectations and reserves are no
longer able to cover all losses and under these conditions capacity
is lowered and prices escalate. It will also increase re-insurance
costs for this class of business. The supply for both insurance and
reinsurance products is plentiful in profitable times, but scarce
when an abnormally large loss, and more particularly, a series of
large losses, has effected the worldwide insurance and reinsurance
markets. In a hard market a reinsurance underwriter will hold the
advantage when negotiating the premium and policy terms with the
insurer. (CII M-80 Underwriting Practice 2017-2018 Study Text
P-6/14). Large number of increase will reduced insurer’s reserve
which in result decrease insurer’s capacity to underwrite business or
expand their products. And re-insurer will set terms of their own
choice.   

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