Underwriting cycle

CFA Level III
#1

I don’t get it. Isn’t it the same as the business cycle?

#2

There is a thread on this: http://www.analystforum.com/phorums/read.php?13,959701,960945#msg-960945 Please try to use the search feature, very useful.

#3

here is my understanding: for non-insurance companies, the liability is not paid as it is claimed. there is a time lag between the contingent event (on which the claim is based) occuring and the liability being finally paid. this is in contrast to life insurance where the liability is paid immediately upon the contingent event ocurring (death). the time lag is due to the verification the validity of the claim and determination of the amount of liability (this process is called underwriting and takes 4-5 years average). the key here is that the insurance co’s liability varies. initially the liability will be less as claims are coming in and being processed. as the underwriting process progresses the (earlier) claims will have to be satisfied and the liability increases. this whole process constitutes one cycle. therefore as the insurance company plans to fund for its liabilities (think alm) it should factor in the underwriting cycle. i vaguely remember reading that this cycle coincides with the business cycle but am not certain of this. moreover i think business cycles are 8-10 years in duration?

#4

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#5

yeah mcpass, you big jerk, use the search feature :slight_smile: Here’s my take on the underwriting cycle: T = 0: company suffers big losses due to some major event (hurricane) T = 1 - 2 or 3: company raises premiums on policies and tightens its lending standards, so business is very profitable and financial statements start to heal T = 3 - 4 or 5, profitable industry attracts new capital and competetition, so premiums come down and risk standards decline to gain/hold market share. T = 5: company is in weaker financial position and exposed to threat of major loss and so the cycle continues…

#6

Shite!!! I should know after 1880 posts! Sorry mofo. But thanks Ilvino, I guess it won’t be a big thing on the exam but at least I get the concept. Won’t spend any more time on it, though.

#7

No worries mcpass. I did not intend it the way ilvino put it :slight_smile: I remember the thread because I contributed to it that’s all.