930 Coursework

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930 Coursework assignment 2

Advance Insurance/Reinsurance Broking

Students Name

University/College

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930 Coursework assignment 2

Introduction

The insurance context, in this case, is Swiss Re, a reinsurance firm that operates in Europe

and is the largest within the region. The insurance organization deals with general insurance,

reinsurance and other risk transfer products that are insurance based. The provider exposes the

customer to different products and services. In the insurance industry, the company offers services

that are often similar in type and nature in comparison to other insurance companies. It means that the

clients are influenced by many factors when choosing insurance providers. The customers will often

choose an alternative that provides them with the maximum benefit. The insurance company has been

undergoing rapid changes to remain competitive. It will allow the company to be more customer

focused as the clients are becoming increasingly focused on value for money. The insurance company

has to establish a profitable customer base to improve its market share (Study text P97, 2016). It will

rely on several factors that influence the choice of the insurance provider. The most important factors

that affect the selection of insurers include price, profitability and cost efficiency, and service

characteristics.

Factors that influence the selection of insurers

Price

Price is a significant uncertainty that arises with risk. Swiss Re may choose to charge a higher

premium than in cases where they have more precise risk estimates. Additionally, if the capacity of the

company is reduced due to the occurrence of significant losses, then the premium will increase due to

a shortage of supply. This is why it affects the price. Once Swiss Re can estimate the risk, then they

will have to establish a premium rate that is profitable for the company and avoids an unacceptable

level of loss. The price of the premium is also affected by a variety of factors. The first issue is state

regulations. In addition, this provision limits the rate set by the insurer, and competition is a significant

aspect that determines the price established by the company on the market. Moreover, the absence of

these variables does not mean that the price will not be regulated (Pierre, 2009). Other variables still
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exist such as adverse selection, the uncertainty of losses, moral hazard, and highly correlated losses.

The moral hazard and adverse selection are not a common issue when to natural hazard risks but

cater to other risks (Study text P97, 2016). This is why the adverse selection arises when the insurer is

unable to differentiate price between the expected losses from differing categories of risk. In addition,

the moral hazard is applicable in the case of a rise in the expected loss caused by how the

policyholder behaves (Bennett, 2004). For instance, the policyholder can move an unwanted

electronics into the basement in the case of an impending flood. It is done so that the flood destroys it,

and the client will still be paid for the loss. In this regard, the price will affect the selection of insurers.

Service characteristics

The service features are regarding various variables such as service risk, type, cost, and

quality. Swiss Re offers many services with differing characteristics that influence decision-making.

For example, insurance companies such as Swiss Re has established some specialized departments

called actuarial and underwriting (Study text P97, 2016). These agencies are responsible for coming

up and determining the services to be availed by the company. In comparison, the services offered in

banks is often part of a broader marketing strategy. It is created by considering the business units

involved in each service category such as personal banking, corporate banking, and credit card units.

In addition, the costs that arise from the insurance process are a prominent aspect in the process for

establishing a service characteristic (Pierce, Weston, Levy, & McMahon, 2014). Furthermore, the cost

differentials that arise from different countries means that the Swiss Re will have services with wide

price gaps. It is essential in ensuring that the company provides the best service to clients. This is why

private information is vital in the analysis of insurance markets. If an individual has private information

about the risk that they face, then the competition equilibrium is not efficient. Furthermore, the adverse

selection often increases the premiums, and the low-risk individuals are often underinsured. Based on

the law, the insurers can only price their premiums based on gender, age, state of residence and

health status. In this regard, the expenditure is due to other factors such as health status and relevant
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information that can be used for analysis, and making the selection process much easier (Carter,

Ralph, & Lucas, 2013). This information is used to determine the service characteristics. It means that

Swiss Re will formulate its products based on these variables. It influences the service characteristics.

The underwriter department plays a significant role in the selection. The underwriter selects the

person that applies for an insurance and grants it based on the capacity to pay and the most beneficial

service (Cummins & Venard, 2007). This is why the agent is often the primary underwriter and plays a

role in the final selection. In addition, they act on behalf of the firm. They also have the authority to

recommend to the company the cases that are likely to be accepted. The individual is also excited to

sell insurance to all people who want the insurance (Edelman & Burns, 2013). Once the underwriter

has accepted an individual, then a liability is created. Not all the prospects gain the cover

automatically. It is done to improve the awareness of the proposers and improve their lifestyle. This is

why the process of selection by the underwriter ensures that many are selected while some are

rejected. This is often used to ensure that the service characteristics are suitable to a particular client.

Profitability and cost efficiency

Swiss Re considers the cost efficiency and profitability when selecting an insurer. Cost

efficiency is a measure of how the company minimizes costs. It is through a comparison between the

costs that would arise, and those that have been incurred by the organization. The cost efficiency can

depend on both allocative efficiency and technical efficiency (Study text P97, 2016). The allocative

efficiency relies on how the organization utilizes its resources. It determines the efficiency, primarily

based on the costs to output ratio. Technical efficiency relies on how the personnel uses the allocated

resources. These variables involve the relationships among the insurance companies. For instance,

the weakest companies in regards to service could also be the preferable choice based on profitability

and cost efficiency (Jurczynski & Trotter, 2010). Specifically, the selection between insurance often

entails coming up with trade-offs. This means that the insurer will need to consider the trade-offs that

the most beneficial. The company has a trade-off criterion, and this would mean that the organization
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has some form of flexibility in the process. It is often applicable during the selection process.

Additionally, the individual may not be able to obtain adequate reinsurance of the criteria for the price

is strict (Lyde & LLP, 2009). It means that the experience and expertise of the Swiss Re are reflected

based on how the trade-offs are handled. As a result, it is important to attempt to establish the most

beneficial compromises. Intermediaries play a significant role in the selection process. In addition,

their role does not entail choosing a reinsurance provider for the company, but rather to introduce

them based on established criteria. The company often develops this. What this shows us is that the

company is responsible for the choice of reinsurance providers made. Moreover, insurers tend to

reduce the level of their reinsurance exposure with a given reinsurer depending on the size of the

shared surplus held by the firm. It is done to minimize the chance that there will be a retrocede by the

reinsurer on the part of its business (Kenny & Lattal, 2014). In this case, the reinsurer uses a lot of

retrocessionaries, and their profitability and cost efficiency will play a role in the selection of insurers.

Challenges arising from changes in insurers financial security

Swiss Res financial security is of importance. An insurance policy will be applicable based on

the content and wording of the paper. Moreover, the financial strength of the company providing the

policy also determines whether the claim can be paid. The policyholder has to be confident that the

insurer will be able to meet their obligations, and pay the policy upon maturity. Essentially, the ability

of an insurer to pay is often an essential component when selecting an insurer (Kiln & Kiln, 2001).

Many challenges can arise from the changes in an insurers financial security. Any change in the

company could create problems for its financial security. It would mean that the company has to adapt

to new trends. For instance, when the company begins to use a different financial partner, it will be

difficult to make swift financial changes to concur with the needs of the new partner. In this regard,

Swiss Re will spend an extensive time in finalizing an agreement with this new partner. It was the case

with the partnership with Oxfam America, which took a year to conclude. The analysis of the

reinsurers financial security relies on is often part of the partnership agreements. To deal with these
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challenges, the insurer can often establish criteria to standardize the analysis. Some occurrences can

mean that the insurer makes modifications (Mance, Goldrein, & Merkin, 2011). If the process is

structured, then the evaluation will prove beneficial. The most relevant variables when considering the

challenges are rating, ownership, and size. The impact of size on financial security arises from the fact

that insolvency is a frequent occurrence among the smaller reinsurers. It is not the case with larger

reinsurers, such as Swiss Re, which enjoy clients across Europe and has many customers. The

smaller insurance lacks the advantage of profits and contacts within the industry. It is often difficult for

the smaller company to survive after insolvency. Furthermore, the survival of Swiss Re is of

importance to many stakeholders. It would mean that many people are interested in its profitability and

survival in the industry (Schwarcz & Siegelman, 2015).

The challenges arise from changes in financial security have influenced the insurance provider

to limit the net risks. It can either be on a per line business or based on the entire account. The insurer

can come up with limits per risk or event. It arises from an evaluation of the risk profile as well as the

costs resulting from the reinsurance. For instance, the firm will not have sufficient capital to meet the

risks retained. The insurance can also apply the use of a dynamic financial analysis strategy (Study

text P97, 2016)The reinsurance cover is part of the variable used. It is then used in making operating

decisions in regards to financial security. The ceding insurer will often have to determine whether the

proposed insurer is willing to retrocede some of the businesses. If this occurs, then the ceding insurer

must be in a position to be equally satisfied. It arises from the retrocessionaries quality used. It would

create more challenges for the company, especially when the retrocessionaries cannot assume the full

cost of the risks. Swiss Re faces commercial pressures to choose the cheapest quote when offering

premiums. The actual cost of this choice can often be critical to the success of the firm (Reinsurance,

2016). If the Swiss Re becomes insolvent, then they face grave consequences regarding their

personal activities and business capacity. The policyholders will have to find an alternative cover. It

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would mean that the individual would pay a double cover. The new premium may often be pricier, and

the person will have to pay more than what the cheap quote has to offer.

Changes in Swiss Re financial ratings also lead to credit rating downgrades. The credit ratings

by the insurance are important to the success of the business. It is the case with bond insurers, with

the ratings affecting the business outlook and financial products. If the rating of a company is lowered,

this will lead to developments that are more adverse (Riley, 2012). The credit ratings are necessary for

the companys business model, and this would affect the capacity of the company to gain new

business. Other companies or new businesses that have better prospects will often attract any new

clients. In this case, a run-off insurance company can easily become insolvent, and this depends on

the particular nature of the payments. It means that the insurer will not be able to pay the defaulted

security when required. However, they need to honor the payment of principal and interest when the

contractual payments are due. Furthermore, the existing capacity of a company to make claim

payments should be large. It will be beneficial in cases of defaults, even when the company can attract

new business (Carter, Ralph, & Lucas, 2013). The company can also avoid liquidity issues, and this

can ensure that can gain from the outstanding premiums. Moreover, the financial situation of the

company may become worse due to several reasons. For instance, a decrease in rating could

influence Swiss Re to request more money to support their existing contracts. An alternative would

also mean termination of the contracts. In the context of the broader insurance sector, there seems to

be a view of the regulator and management of large insurance companies that they are in a position to

survive the fall-out or any form of adverse developments among the financial guarantors.

Recommendations to improve the selection of insurers

It is recommended to follow various strategies to improve the selection of insurers based on

price, profitability and cost efficiency, and service characteristics. It is through adverse selection. It

involves the use of a portfolio that is characterized by more high-risk people in comparison to the

average population. In many cases, people with the riskiest profiles often select certain insurance
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covers based on advantageous premiums. It is a positive relation between the insurance and risk, and

it makes the diversification of risks a difficult process (Pierre, 2009). Moreover, the pooling of risks will

not be effective and can lead to a situation where the claims being more than the amount that has

been covered by the premiums. It means that Swiss Re can improve the selection of insurers based

on price by screening the various potential organizations. It is a reason many firms are often needed

for particular kinds of insurance, leading to differences in the premiums paid. For instance, Swiss Re

charges a flat rate across the board in regards to life insurance, and will often find itself attracting a

large number of inordinate smokers. The organization will not be in a position to avoid this issues that

arise (Study text P97, 2016). For instance, it would not be in a position to increase the premiums to

cater to the high-risk category.

There has been a growing demand for long-term cover as individuals in many countries are

living longer lives. It is an issue for the insurers, and it would be vital for the company to come up with

products that offer a low price to be attractive to clients, but not too low to affect the operations of the

insurance company. This will improve the selection of insurers based on service characteristics. It is a

complicated process, especially when formulating products intended for people who are old and facing

more risks. In this case, the insurance provider can improve its service through a combination of long-

term insurance and life insurance. In the context of reinsurance, an individual cannot be considered as

a high risk for life insurance and long-term insurance in their cases, employee-sponsored schemes will

lead to a reduction in voluntary nature of long term insurance. It avoids anti-selection and underwriting

issues (Bennett, 2004). This will prove beneficial in improving the selection of insurance based on

profitability and cost efficiency. The insurer will be find it easier to increase its client base, and will

often be a preferable choice among clients.

Recommendations to respond to changes in insurers financial security

A financial rating will enable Swiss Re to respond better to changes in financial security. The

insurer accesses the financial evaluation through an assessment of its financial strength. It occurs as
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an independent process carried out by a rating agency. It indicates the financial strength of the insurer

and makes it easier to respond to the changes. For instance, Standard and Poors is a major rating

agency. Despite this, it does not guarantee that the insurance firm will face a financial insolvency. The

insurer, whether rated or not, is guided by the regulations by the state regulator. Many countries have

differing liquidity requirements. It means that there is also a differing level of oversight and scrutiny

(Lyde & LLP, 2009). In addition, the firm should not rely on the assessment of the regulator, but should

also seek further information that provides an objective, independent indication in regards to the

financial strength. As a result, the use of a reinsurance cover is often the best way to deal with these

changes. Swiss Re can choose to use several reinsurers. It is beneficial as it reduces the effect of

counterparty credit risk. It also prevents the problems that could arise from the withdrawal of capacity

on reinsurance during cases of capacity contraction. This is advantageous for the company, and the

less the number of reinsurance covers, the higher the chance that the security of the company is

essential (Kenny & Lattal, 2014). Risk management is also a strategy to deal with the issues. Risk

managers will have to work together to share information about the financial security of the

organization. Additional losses can face the business, which arises from non-core business activities.

The loss estimates are often uncertain due to the high number of assumptions that appear in the case

of materialization of risk (Carter, Ralph, & Lucas, 2013). It would be important that different

parameters be put in place such as credit default swaps (CDS). The current cost of buying protection

on credit exposure for financial guarantors through the CDS would mean that the company attracts a

significant chance to default by these entities over the short term. Swiss Re should consider that the

process developments are often an exaggeration of the issues and are an underestimation of the

companys financial health (Study text P97, 2016). In this regard, the firm should be at the forefront of

dealing with the challenges of financial security to prevent a disadvantageous perspective arising from

the credit ratings.

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Swiss Re can respond to increased risks by considering insurance sector supervision. The

supervisory authorities can provide vital information in dealing with the challenges. They can monitor

the quality of portfolios offered in the sector, as well as the most beneficial risk management policies.

It can also improve provisioning needs. It is important to simplify the supervisory landscape and

increase the protection mechanisms available to consumers. The law has established the Financial

Markets Authority that is comprised of three agencies that were previously possible for regulation and

supervision (Bennett, 2004). It means that it creates an autonomous insurance service that comprises

of the agencies dealing with mutual and commercial insurers. It has been beneficial in dealing with the

financial security issues that arise in the industry, and make it easier to respond to any changes.

In conclusion, many factors influence the selection of insurers. It price, profitability and cost

efficiency, and service characteristics. These are often considered when selecting an insurance

provider. Additionally, financial security also affects insurers. Many challenges arise due to change in

financial security by an insurer. It includes insolvency and credit rating downgrades. These can

influence the profitability of Swiss Re and negatively impact on its operations. It is imperative that the

firm deals with the challenges swiftly to avoid issues in future. The choice of insurers can be improved

by considering the three factors that influence the selection. It is through screening to ascertain the

needs of the individual will be met (Kenny & Lattal, 2014). Additionally, the company can deal with

challenges arising from financial security by using credit ratings. It can determine the extent of the

issues that affect the business, and the strategies available to deal with the challenges. However, it

should not be over-reliant on the credit ratings as this can sometimes be an exaggeration of the

companys current financial state.

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References

Bennett, C. (2004). Dictionary of insurance (2nd ed.). London: Pearson Education.

Carter, R., Ralph, N., & Lucas, L. (2013). Carter on reinsurance (5th ed.). London: Witherby.

Cummins, D., & Venard, B. (2007). Handbook of international insurance : between global dynamics

and local contingencies. New York: Springer.

Edelman, C., & Burns, A. (2013). The law of reinsurance (2nd ed.). Oxford: OUP.

Jurczynski, D., & Trotter, R. N. (2010). Insurance settlement handbook. Santa Ana, CA : James Pub.

Co.

Kenny, G. J., & Lattal, F. A. (2014). New Jersey Insurance Law. New York: New Jersey Law Journal.

Kiln, R., & Kiln, S. (2001). Reinsurance in practice (4th ed.). London: Witherby.

Lyde, B., & LLP, G. (2009). Reinsurance practice and the law. London: Informa.

Mance, J., Goldrein, I., & Merkin, R. (2011). Reinsurance. Chapter Insurance disputes (3rd ed.).

London: Informa.

Study text P97, (2016). Reinsurance. London: CII. Retrieved from Revisionmate:

https://www.revisionmate.com/

Pierce, J. S., Weston, H., Levy, R. G., & McMahon, D. J. (2014). Insurance practice and coverage in

liability defense. New York: Wolters Kluwer Law & Business.

Pierre, M. (2009). Increase your insurance sales, retention & referrals now!!! Bloomington, IN:

AuthorHouse.

Riley, K. (2012). Reinsurance: the nuts and bolts. London: Witherby.

Schwarcz, D., & Siegelman, P. (2015). Research handbook on the economics of insurance law.

Cheltenham, UK: Edward Elgar Publishing.

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