An insurance company that has only been underwriting cyber liability insurance for two years will face several challenges in estimating the cost of cyber liability claims. BD plc company will have limited historical data to use as a basis for estimating the cost of cyber liability claims. This is because cyber insurance is a new market, and the nature of cyber risk is constantly changing. As a result of these challenges, BD plc may have to make estimates of the cost of cyber liability claims based on limited data and assumptions. This can lead to inaccurate estimates, which can make it difficult to set premiums that are fair to both policyholders and insurers.
(a) Climate change is a gradual and long-term process, which makes it challenging to predict its exact impact on specific line of business. Insurance companies often rely on historical data, but climate change brings uncertain and unpredictable events that.
may not have occurred before in recorded data.
Also, climate change effects may vary from region to another. Some areas might
experience more frequent and severe events, while others may be less impacted.
Its challenging for BD plc to capture and assess this regional variability accurately.
Due to these challenges, BD plc need to continuously update their risk assessment methods, work with climate experts to develop more accurate models and projections. It can help improve the estimation of climate change related claims frequencies.
Question 7 – Learning Outcome 7 (20 marks)
When considering joining a company, financial ratios are the most efficient tool analyse company’s financial position. These ratios reveals if CC plc is sound, efficient, and profitable.
The first ratio is the combined ratio, it gauges CC plc underwriting performance. It is the total of loss ratio, expense ratios and commission ratio divided by earned premium. If a combined ratio is less than 100% it indicates that the company’s underwriting is making loss. While if the company’s ratio is less than 100% shows that they are generating underwriting profit.
In other word, is there a sufficient premium to cover the cost of expenses and claims?
The three ratios that drive the combined ratio are:
The claim ratio = claims incurred net of reinsurance / earned premium net of reinsurance x 100
The expense ratio = administrative expenses / earned premium net of reinsurance x 100
Commission ratio = acquisition cost / warned premium net of reinsurance x 100
Together these three ratios form the combined ratio:
Combined ratio = (claims + expenses + acquisition cost)/earned premium net of reinsurance x 100 = (-1,309)/1,231 x 100 = (-106.3%)
The second ratio is the liquidity ratio, it is used to assess if CC plc can meet its short-term obligation and it measures how quickly the company can convert their assets into cash to cover current liabilities. The most common liquidity ratio used in insurance companies is the quick ratio= current assets / current liabilities.
Current assets are assets that can be converted into cash and used within a year and current liabilities are liabilities that are due one year. Ex: claims, payable, accounts payable.
If the ratio is above 1 it indicates that the company has more current assets than current liabilities. A current ratio is below 1 indicates that insurer may face challenges in meeting its current liabilities.
It is calculated as follows:
quick ratio = current assets / current liabilities