The Insurance Market, Premiums and Loss Experience - Coursework Example

Risk and insurance Student name: Institution affiliation: Risk and insurance Summary In this article, there is the analysis of the factors that an FD needs to know about the insurance market. Insurance pertains to the creation of protection and safe keeping in case of the occurrence of a loss so that a company that has insured is mitigated and compensated for the risk. This helps in saving the company from losses that arise with the occurrence of the risks that had been insured against. This article therefore focuses on the development of techniques to manage the risks. This is through the creation of a general understanding of the most pertinent risks that the businesses face. This can be through such things as the transferring of the risks among other risk management processes. With this, there is the development of knowledge on several aspects around risk management and insurance. They include the general understanding of the market cycle. There is also the creation of knowledge on the premiums and loss experience. The other aspect that has been analyzed in this article is the issue of the change in the cost capacity. Further on, there is the creation of some insight into the basis and benefits of alternative risk transfer as an alternative to insurance. With this, there is the analysis of the expenses that arise with the factors around alternative risk transfer to the company that seeks to transfer its risks to other parties. There is also a discussion on the aspect of the creation of a condition which forces the buyers out of the market. Similarly, there is an analysis of issues termed as the destruction of the market cycle. With this, it seeks to seek at a conclusion on the matters that should be considered by an FD when analyzing the insurance market. They are the points that they should be aware of before engaging into the market. In this also, there is the critical analysis of some of the points that have been raised by the writer. With this, there is the provision of a description of better strategies that can be put into use by the business. Some of the recent techniques when it comes to risk management have also been noted and pointed out. This is in a bid to counter the idea that is being focused on by the writer on the policy of alternative risk transfer. Following this, the practical application to the UAE case has been given. This is on what they can do to insure themselves and the bets policies that they can put in place. In this also, some of the benefits that accrue from the use of insurance as a means of risk management technique are pointed out. Some of them include that it is important in the returning and restoring the business to its previous financial position before the occurrence of the risk which it had insured against. The development of general knowledge on the matters as pertains to risk management and insurance are also emphasized in the piece. This is in a bid to see to it that the appropriate techniques are applied by business people in the selection of an appropriate technique. The relevance of cost benefit analysis has also been pointed out. This is followed by some additional notes on risk management and a conclusion. The references as to the points that have been raised are also provided at the end of this document. Key learning points The market cycle The insurance market is defined by many as possessing the traits of being cyclical in nature. With this, there is the formation of a regular pattern of hardening whereby the rates increase and softening where the rates decrease. With this, the increases that have been made in the rates of insurance have been accompanied by reduction in the limits and the coverage and also an increase in the deductibles. According to many people, the insurance rates will over the years to come continue increasing to very high levels which will be uneconomic for the insurance policy buyers. The rates will however drop at a later date to levels which will not obviously be the lowest in the market. The rates will also face massive and continued increased competition from the new sources of capital. There has over the recent past been a developing trend which according to many is regarded as a move to force the buyers out of the market. The pattern has been for some time regular and increasing with the number of the buyers who are pushed out of the market. This will have the long term effect of resulting to a declining cost of the insurance products. There are however some occasional attempts that are made into the price controls and price correction. They also have the effect of forcing the buyers out of the market and this also adds on to the downward moving trend. There has been another trend that has been on the rise. This is where once the market hardens, the better risks result to taking an increasing amount of self-insurance. One of the reasons behind the destruction of the market cycle is that it can in the short run result to growth and increase in the market sizes of the second and third world economies. Through this also, there will be an increase in the provision of more competition for capacity. In the long term however, there will be different outcomes. There will be decreasing costs of insurance. This will be as a result of the constant sink in the first world markets at the expense of the second and third world countries. This is what is considered as the aspect of cut-ins. This is where a benefit on one side of the balance results to a decline on the other side. This is a see saw form of trend. Premiums and loss experience The insurers have changed their focus to mainly risk exposure. In this, in the case of the loss experience being more appalling, based on the previous operations but the future risk exposure is good, then the premiums that are charged to the buyers of the policies should not increase at the same rate with those who have acquired the dangerous new exposures. There is also the development of the aspect of a declining cost of capacity. This has the effect of making the buyers to have a greater understanding of their own risk exposure and that of their competitors. This has the benefit of in some scenarios resulting to the creation of a competitive advantage over the competitors. This has the benefit of resulting to increased returns for the businesses. They similarly have more accurate and more attractive risk exposure plan as compared to that of their competitors. The difference that exists between two risks with similar exposures is the loss experience. This is because it also goes further ahead to influence the capacity that is currently on offer and also the attachment point. Cost of capacity This is also a factor that has resulted to change in the policies and undertakings of the businesses. In soft markets, scenarios with over capacity for most of the risks experience reduced costs of capacity as the cost of capacity becomes far and away from the expected risk exposure. The effects that are experienced in the hard markets are that there is the reduction in the full asset value and also the revenue protection. This has the effect of resulting to the increase in the focus of the insurers on the lower and the middle layers of the equations as opposed to the upper layer of the coverage. This further translates to reduction in the discounts that are experienced at the higher layers of capacity. This in other terms has a net effect of making the insurance more costly with time and less benefits derived from it. Aspect of alternative risk transfer This is a form of risk management that has gained recognition and status over the recent past. One of the areas that it has garnered support and attention is in the support of captive insurance companies. This is where the buyers of the policies are self-insuring the risks and passing them through their own captives. With this, it has earned the recognition as being the merger between the unacceptable level of self-insurance and the most economical entry point of the insurance market. There are however restriction that have been imposed as to the levels of transparency that have been set for the alternative risk transfer policies. This is in order to alleviate any chance of the occurrence of fraud among the players. The expense is a comparative In most cases, the alternative risk transfer cases and option is more expensive but the expense however in this case has been comparative. In this case for as long as the risk that is involved is substantial, it is attractive to both the large and the small clients. The people should therefore consider the cost benefit analysis of the policies before factoring in other policies or doing away with them. This is where the costs and other expenses are compared to the benefits that accrue from the use of the policies. The benefits might in some situations be more than the costs involved. The finance directors therefore need to understand more about insurance and the most recent risk management trends so as to facilitate the development of the areas of competitive commercial advantage. This is also in order to see to it that the disadvantages that accrue from them are minimized at all costs. With this, the business will be considered to being in line with the development into other better sides and performance will be better. Critical analysis Risk management is one of the most analyzed factors of the modern day economy. This is due to the rise of the branch of insurance to be one of the pillars of the recent day’s economies. This is due to some of the revenues that are derived from the branch and the cases of employments that it creates to the local populations. Risk management is defined as the process with which risks are identified, analyzed, assessed and prioritized based on their possibility of occurrence and the degree of threat or harm that they bring along with them. The classification of the risks can also be on the basis of the amounts of losses that can be made by the businesses once they occur. With this therefore, the development of a clear understanding of the risks that a business is faced with is crucial in order to develop a good basis for their management. Insurance firms therefore have been on the forefront in the education of the policy takers on the risks that have a high degree of probability of occurrence and those that have low probabilities. This is in order for them to be sure of the best policies to buy from them. There are several risk management techniques that are in use in the market today. The policy buyers select them based on the cost and the probable returns that each of them derives. They are namely, risk avoidance, risk reduction, risk transfer and risk retention. They all are different and unique in their own ways. Risk avoidance involves the complete disassociation of the business or entity from an activity that would bring about the risk. For example, if the risk would originate from the storage of highly flammable material and the company can operate without the material, it can stop storing the material from their presence. With this, the probability for the occurrence of the risk has been completely eliminated and at the same time the risk is avoided completely. The second risk management technique is risk reduction. This involves the reduction in the material of risk involved. For example, a business that deals with the storage of money and valuables can reduce the risk of theft through storing lesser amounts of valuables. This can also be done through the putting in place tight security for the valuables so as to reduce the risk even if not completely eliminating it. The aspect of risk transfer has been earlier pointed out earlier in the article. This involves the use of another firm mostly an insurance company, to reduce the losses that would occur in case the risks that had been insured against occur. This reduces the probability of losses that would be made by a given entity once the risks occur. The final aspect of risk management that can also be taken into consideration is the aspect of risk retention. This is where the business owners take chances and assume that the risk will not occur. This is mostly so in cases where there are no reported cases whatsoever of such risks occurring and the cost of insuring would be great despite the low possibility of occurrence. The businesses therefore do not put in place any insurance policies. They can do this for example through the starting up or the modification of their businesses with the adequate risk control measures to manage the risks that are present. For example, to alleviate the risk of fire to a given place, the company can put in place automated sprinkler systems. This will go in handy in the reduction of any possibility of the occurrence of the risk. Based on this, the risk management method that is proposed for use by the article which is alternative risk transfer is not the best option. This is due to the fact that the additional costs that come up with this move are not generally fair and appropriate for the entity. With this therefore, it is advised that the better alternative to this would be the use of risk retention techniques. This is where the firms develop in built risk management techniques that will aid in the process of reduction of the risk and the losses that would accrue from the occurrence of the said risks. Alternative risk transfer involves the payment of additional insurance policy fees. This is an additional expense for the company. There is also the aspect of incomplete payment after the occurrence of the risk. Failure of occurrence of the risk after the end of the insured period means that all the policies that had been paid will all be forgotten as incurred expenses despite the fact that nothing will have been derived from them. With this therefore, it is cheaper and more effective for the business to develop a strategy whereby there are reduced costs and the risk occurrence possibility is also reduced. This better option is the use of risk retention. The amounts that will be used in alternative risk transfer will all be eliminated and will add on to the profits of the given entity. In the case of the United Arab Emirates, there is a lot that they can gain from the above listed aspects. Through the use of adequate risk management techniques, the firms in the country will be able to reap several benefits from this move. The first benefit that they will reap is that they will have several options at their disposal. This is in terms of the risk management technique that they can put to use. With up to four options at their disposal, there is a lot that they can select from. The best option however according to the analysis is the use of the risk retention method. With this, some of the benefits are the reduction in the costs that are incurred in such things as premium payments to the insurance companies. There is also the benefit of a better cost to benefit outcome for the company. The recent growth and development in the industries in the area has given rise to an increase in the demand for insurance services. This therefore calls for the education of the staff and all the related people on the various risk management techniques that can be put in place. In addition to this, it is important that the factors around the risk management be analyzed before randomly selecting them. This is in order to have an idea of the cost to benefit relationship that exists in either one of them. This can be done through such things as the premiums amounts that are payable. There should also be an in depth analysis of the possibility of the occurrence of the risks that have been insured against. This will aid in creating knowledge as to the amount of risks that the business is talking about and hence the development of better means to reduce the risk this however does not oppose the basis for the use of insurance in the undertaking of day to day activities of a given firm. This is because through the aspect of insurance in a given business, it will be able to alleviate the amount of loss that it will make in the case of the occurrence of a given risk which it had insured against. Insurance is vital in that it reduces the collapse of a business after the occurrence of a given risk which it had insured against. It is also crucial in the returning and restoring the business to its previous financial position before the occurrence of the risk which it had insured against for example the risk of fire. Conclusion In conclusion, as analyzed in the above document, it is crucial that all businesses should consider and take into action the appropriate risk management and insurance techniques. This is because they will aid the business in the alleviation of the amounts of risks that they are encountered with in their normal undertakings. Insurance is also an aspect that the businesses should not ignore. This is due to the various benefits that accrue from it. Some of the benefits as earlier stated are that it is crucial in the returning and restoring the business to its previous financial position before the occurrence of the risk which it had insured against for example the risk of theft or burglary in the business premise. References Aven, T2015, Risk analysis, London, Rutledge. Read More