When market conditions are good insurance companies get low of business and their profits increase but in the adverse market conditions the companies start facing losses or their profitability reaches to rock bottom.

1. Finance Assignment Help
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Finance Assignment Help is a kind of risk management tool in which the potential loss which can happen to
an insurer are being transferred to another entity which is called as insurance company who insures the
insurer. Insurance enables individuals, businesses and other entities to save themselves from any
hardships caused due to financial loss, life loss, property loss etc. at a reasonable affordable rate. In this
system the insurer deposits a periodic premium to the insurance company which estimates the potential
loss from the risk involved and accordingly in case the loss actually happens, the insurance company
reimburses the lost money to the insurer. The common example of losses are death of a family person,
damage to the building due to fire, accident on the road, damage to material
during shipment etc. Thus, insurer gets considerable financial aid
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2. for the loss happened. In the present environment there are various types of risks but insurance is used to
cover only few specific types of risks. Hence, it is important to understand the types of risk before
understanding insurance.
Types of Risk:
Speculative Risk: It is a type of risk in which profit and loss both are possible. For e.g. when someone puts a
bet on a horse race then he can win as well as lose. Similarly, decision of new market entry, product failure,
advertising results etc. involves speculative risks.
Pure Risk: It is a type of risk in which there are chances of loss or being neutral, hence there are no chances
of being in profit. Its results are never beneficial. For example, premature death, occupational disability,
damage to property etc. There are three types of risks: Personal risk, Property risk and Liability risk
(Vaughan&Vaugha, 2003).
Insurers only insure the pure risks but all the pure risks are not insured. For example, unemployment is a
type of risk which leads to financial loss to a person as well as his family. But, it is not being insured by the
companies. It is because, the companies can’t figure out the potential loss by this risk. Also, it will depend on
the market conditions and the qualification of the person. There are many variables in this regard and the
insurance company can’t quantify all of them. Hence, there are some conditions which need to be satisfied
before a pure risk in eligible for getting insurance cover, which have been mentioned below:
Requirements of insurable risk (Rejda, 2009):
1) There must be a large number of exposure units: It will help the insurer to estimate the extent of
losses expected for the group of people/ units. These people are not required to have same risk, but they
should have similar risk. The insurance company can then spread the cost of loss over all the insured
people belonging to that group.
2) The loss must be of accidental and unintentional: Insurance is a tool to cover the losses due to risk and
not a profit making tool. Hence, it should not happen that insured person intentionally and deliberately get
into the loss and then ask for the premium although he could have avoided that risk. If the company starts
paying international loss then moral hazards will increase so the insurance company would have enough
money to help the person who naturally faced the loss. Law of large numbers is also based on random
numbers, so chances of that loss should be accidental as well for the application of the formula.
3) The loss must be determinable and measurable: The insurance company should be able to reasonable
estimate the cause, place, time and amount of loss from a given risk. It will also help the company to
calculate the premium in sync with the expected losses.
4) There should not be a catastrophic loss: It would mean that a large number of insured people should
not incur losses at the same time. Then it will be difficult for the insurance company to reimburse
everybody.
5) The chances of loss should be calculable: The insurance company can estimate the premium only
when it has reasonable understanding about the frequency of loss occurrence and the severity of the loss. ItOnlineOnlineOnlineOnlineOnlineOnlineOnlineOnlineOnline

3. will also allow the company to pay for all claims and to handle all expenses.
6) The premium should be economically feasible. A large premium will not attract people and instead they
will try to handle the risk themselves. Also, the premium should be in sync with the severity of loss. The
chances of loss must be low and then premium will also be low.
Hence, the risk which qualifies all the six points mentioned above can come under the category of insurable
risk.
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The general insurance industry is characterised by cyclical market conditions,
alternating between hard and soft market conditions. Explain what is meant by this?
With the advent of globalization all the industries across the world impact each other directly or indirectly.
The business environment has become very dynamic and all the industries face cyclical movements. The
cyclical nature means that an industry finds a boom in its business at one time and a slowdown at other
time. In 2001 IT industry faced a major slowdown and in 2007 finance industry faced the major setback.
Same is the case with insurance industry. When market conditions are good insurance companies get low of
business and their profits increase but in the adverse market conditions the companies start facing losses or
their profitability reaches to rock bottom. Insurance industry has a great dependence on other industries as
people buy insurance only to cover their risks and they need to have considerable disposable income to pay
the premiums. It needs to be noted that insurance is not considered as a necessity by the public and hence
they purchase it when they have enough disposable income. In this way the market conditions of insurance
industry can be classified as:
Hard market conditions: It is a state when insurance company find it difficult to get business and their
target customers consider that insurance is quite expensive and hence they defer their insurance purchase
decisions. It is considered to be the seller’s market as the insurance companies enjoy high premiums on
their policies.
In this market following characteristics may be found:
1) Premium increase may be more than loss experienced by the insured people and thus people will find it
costly to purchase the insurance.
2) There are chances that insurance companies restrict their insurance cover from few certain lines of
coverage like medical malpractice or day care centres etc. They may also start restricting their services
from geography.
3) New coverage restrictions may be applied by the insurance company and hence insurance conditions
will become more stringent.
Soft market conditions: It is a buyer market wherein insurance premiums are less, high availability of
coverage and flexible contract conditions are there. In this market the competition is very high and hence
insurance company has to provide some extra benefits to attract the customers. A new entrant will follow a
flexible policy which will lead to soft market environment for the people. In this market following
characteristics may be found: OnlineOnlineOnlineOnlineOnlineOnlineOnlineOnlineOnline

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1) Insurance is relatively affordable as competition is high and companies reduce the premium amount on
the policies.
2) More coverage for the insured people can be found as insurance agents will try to sell their policy on
more flexible conditions to attract the customers from other competitors. They may design new lines of
coverage or insurance products to meet additional needs of buyers.
3) Companies may launch more innovative products as per the need of the market and to differentiate
themselves from other companies.Order Now
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