C16 BUSINESS OF INSURANCE -PRACTICE

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C16 BUSINESS OF INSURANCE -PRACTICE

EXAM UPDATED ACTUAL EXAM WITH

CORRECT SOLUTIONS.

Explain the economic laws of Supply and Demand, and explain why these laws do not strictly apply to automobile insurance. - correct answer- pages 3-3 and 3-13. the economic theory of supply and demand proposes that more resources will be allocated to a product that increases revenue. The law of supply provides that the higher the price, then more will be supplied. the law of demand provides that, with all other factors equal, less will be demanded as the price rises.For the insurance market, supply is represented by the capacity of the market, or the willingness of insurers to insure risks. The demand is represented by consumers' need for insurance coverage. In most cases consumers have some flexibility about the level of insurance they purchase, but they generally do not have the freedom to choose not to purchase it. this is the case for automobile insurance, which is mandated by law, and as a result demand remains fairly constant.In addition, since auto insurance rate and availability are regulated, supply tends to fluctuate less, even when prices are low. Insurers do not have the flexibility to increase prices to where they want, nor do they have the freedom to choose not to provide insurance.In these ways, both the supply and demand of auto insurance is significantly influenced by regulation, and less by market forces.Rate peaks and valleys are mostly caused by problems with supply rather than a change in demand. This is not so evident 1 / 3

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with automobile insurance, given that its supply and price is regulated in most jurisdictions.

Your employer, Reliable Insurance Brokers, has asked you to prepare a Marketing Plan. Identify and describe two of the key components you will include in your plan. - correct answer-

1.Product or service overview: what will be the features, pricing

structure, distribution strategy, positioning, promotions and advertising that will be used to attract customers. the products need to be responsive to consumer needs. Perhaps the insurer will offer complementary services and products.

• A marketing plan must include tracking and evaluating

results. this can be done in various ways, including a tracking number or code, a promotion code, a survey to evaluate customer satisfaction, evaluation of complaints.

• Budget and resources description. All marketing budgets are

limited, and need someone to be held accountable for it.

Discuss the impact of the stock market on the insurance industry. - correct answer- The investment markets have a significant impact on insurance companies because they hold a significant amount of capital investments, and rely on investment returns to augment underwriting profits. The investment markets generally are in a bull market when there is a soft insurance market. this is because an insurer can afford to compete more on premiums because they know they will make it up on strong investment returns, and when investment returns wane, an insurer takes steps to increase its 2 / 3

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underwriting profit by increasing prices and tightening up policy terms and requirements, such as loss control.Also, in economic downturns, insurance purchasers tend to be more cautious of their assets, and rely more on insurance.

Identify and define the functions of the two board of director committees mandated by law for all Canadian insurers. - correct answer- The Insurance Acts of Canada and the provinces and territories require insurer boards of directors to

include two committees:

• Audit committee, which is responsible to improve the

companies financial reporting process.

• Conduct Review committee, which is mainly responsible to

handle conflict of interest issues, and prevent self-dealing.

List the main factors that influence how an insurance company organizes itself. - correct answer- Ultimately an insurer organizes itself in the way that allows it to operate as efficiently as possible in producing profits, and is dependent on a number

of factors:

• how power and control are distributed
• how well systems are integrated between departments and

others

• how communication works
• how well services are coordinated
• the size of the company
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