C16 Business of Insurance -Practice Exam
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ExplainitheieconomicilawsiofiSupplyiandiDemand,iandiexplainiwhyithes
eilawsidoinotistrictlyiapplyitoiautomobileiinsurance.i-iCorrectiAnswer-
pagesi3-3iandi3-
13.itheieconomicitheoryiofisupplyiandidemandiproposesithatimoreireso
urcesiwillibeiallocateditoiaiproductithatiincreasesirevenue.iTheilawiofisu
pplyiprovidesithatitheihigheritheiprice,ithenimoreiwillibeisupplied.itheila
wiofidemandiprovidesithat,iwithialliotherifactorsiequal,ilessiwillibeidema
ndediasitheipriceirises.
Foritheiinsuranceimarket,isupplyiisirepresentedibyitheicapacityiofitheim
arket,ioritheiwillingnessiofiinsurersitoiinsureirisks.iTheidemandiisirepres
entedibyiconsumers'ineediforiinsuranceicoverage.iInimosticasesiconsum
ersihaveisomeiflexibilityiaboutitheileveliofiinsuranceitheyipurchase,ibutit
heyigenerallyidoinotihaveitheifreedomitoichooseinotitoipurchaseiit.ithisii
sitheicaseiforiautomobileiinsurance,iwhichiisimandatedibyilaw,iandiasiair
esultidemandiremainsifairlyiconstant.
Iniaddition,isinceiautoiinsuranceirateiandiavailabilityiareiregulated,isupp
lyitendsitoifluctuateiless,ieveniwhenipricesiareilow.iInsurersidoinotihavei
theiflexibilityitoiincreaseipricesitoiwhereitheyiwant,inoridoitheyihaveithe
ifreedomitoichooseinotitoiprovideiinsurance.
Initheseiways,ibothitheisupplyiandidemandiofiautoiinsuranceiisisignifica
ntlyiinfluencedibyiregulation,iandilessibyimarketiforces.
,Rateipeaksiandivalleysiareimostlyicausedibyiproblemsiwithisupplyirathe
rithaniaichangeiinidemand.iThisiisinotisoievidentiwithiautomobileiinsura
nce,igivenithatiitsisupplyiandipriceiisiregulatediinimostijurisdictions.
Youriemployer,iReliableiInsuranceiBrokers,ihasiaskediyouitoiprepareiai
MarketingiPlan.iIdentifyiandidescribeitwoiofitheikeyicomponentsiyouiwi
lliincludeiiniyouriplan.i-iCorrectiAnswer-
1.Productioriserviceioverview:iwhatiwillibeitheifeatures,ipricingistructur
e,idistributionistrategy,ipositioning,ipromotionsiandiadvertisingithatiwil
libeiuseditoiattracticustomers.itheiproductsineeditoibeiresponsiveitoicon
sumerineeds.iPerhapsitheiinsureriwillioffericomplementaryiservicesiandi
products.
2.iAimarketingiplanimustiincludeitrackingiandievaluatingiresults.ithisican
ibeidoneiinivariousiways,iincludingiaitrackinginumberioricode,iaipromoti
onicode,iaisurveyitoievaluateicustomerisatisfaction,ievaluationioficompl
aints.
3.iBudgetiandiresourcesidescription.iAllimarketingibudgetsiareilimited,ia
ndineedisomeoneitoibeiheldiaccountableiforiit.
Discussitheiimpactiofitheistockimarketionitheiinsuranceiindustry.i-
iCorrectiAnswer-
Theiinvestmentimarketsihaveiaisignificantiimpactioniinsuranceicompani
esibecauseitheyiholdiaisignificantiamountioficapitaliinvestments,iandirel
yioniinvestmentireturnsitoiaugmentiunderwritingiprofits.iTheiinvestme
ntimarketsigenerallyiareiiniaibullimarketiwhenithereiisiaisoftiinsuranceim
arket.ithisiisibecauseianiinsurericaniafforditoicompeteimoreionipremium
sibecauseitheyiknowitheyiwillimakeiitiupionistrongiinvestmentireturns,ia
ndiwheniinvestmentireturnsiwane,ianiinsureritakesistepsitoiincreaseiitsi
, underwritingiprofitibyiincreasingipricesianditighteningiupipolicyitermsia
ndirequirements,isuchiasilossicontrol.
Also,iinieconomicidownturns,iinsuranceipurchasersitenditoibeimoreicau
tiousiofitheiriassets,iandirelyimoreioniinsurance.
Identifyiandidefineitheifunctionsiofitheitwoiboardiofidirectoricommittee
simandatedibyilawiforialliCanadianiinsurers.i-iCorrectiAnswer-
TheiInsuranceiActsiofiCanadaianditheiprovincesianditerritoriesirequireiin
sureriboardsiofidirectorsitoiincludeitwoicommittees:
1.iAuditicommittee,iwhichiisiresponsibleitoiimproveitheicompaniesifina
ncialireportingiprocess.
2.iConductiReviewicommittee,iwhichiisimainlyiresponsibleitoihandleicon
flictiofiinterestiissues,iandipreventiself-dealing.
Listitheimainifactorsithatiinfluenceihowianiinsuranceicompanyiorganizes
iitself.i-iCorrectiAnswer-
Ultimatelyianiinsureriorganizesiitselfiinitheiwayithatiallowsiititoioperatei
asiefficientlyiasipossibleiiniproducingiprofits,iandiisidependentioniainum
beriofifactors:
1.ihowipoweriandicontroliareidistributed
2.ihowiwellisystemsiareiintegratedibetweenidepartmentsiandiothers
3.ihowicommunicationiworks
4.ihowiwelliservicesiareicoordinated
5.itheisizeiofitheicompany
