FIN 342 Lecture Notes - Lecture 7: Small Business
Document Summary
Controversial public policy issue because everyone wants lower premiums and better coverage. The insurance marketplace is competitive, particularly in commercial lines. Rate regulation can interfere with the efficient pricing. Rates must: be adequate to cover losses and expenses, not be excessive, not be unfairly discriminatory. Rate-making system should: be easy to understand, be stable over short periods, be responsible to changes in exposures and economic conditions, encourage loss control efforts. Fundamental determinants of fair insurance pricing (x/- impact on premium) Admin costs (+: commission, home office expenses, advertising. =1-combined ratio: insurers also make investment returns. Collect premiums at the beginning of the policy period, but pay claims later. Documented evidence that premiums and underwriting profits are cyclical. Hard vs. soft markets: soft: stable or failing prices, lots of available insurance, hard: reduced supply of insurance, sharp increases in prices, more recently, the cycle had lengthened (some had thought it was disappearing)
