How does economies of scale lead to competitive advantage.

Define the terms: (a) claim frequency (b) credibility [1] A general insurance company specialises in insuring fleets of motorcycles. Analysis of past performance of the account gives the following summary: Year Exposure (Policy Years) Number of Claims 2010 55,505 8,420 2011 52,257 7,750 2012 54,928 8,450 2013 56,124 8,400 2014 55,053 8,060 2015 50,000 (estimate) The claim frequency of this portfolio of policies follows a Poisson process. (ii) Calculate, showing all workings: (a) the mean claim frequency for the period 2010 to 2014 (b) the probability of experiencing more than 7,600 claims in 2015, using a Normal approximation (4] A decision has been taken to start using a model based on classical credibility theory when pricing new fleets. The model applies a credibility factor to the past experience of the new fleet and the complement of credibility to the past experience of the existing portfolio. The standard used by the insurance company for full credibility is to be within +5% of the mean with probability 0.95. (iii) Calculate, showing all workings, the number of claims that a new fleet would need to have experienced in order that credibility in excess of 75% would be assigned to its claim frequency. [5] (iv) Suggest influences on the value of the complement of credibility, other than those relating to mathematical calculations of credibility factors. [2]Define the term "policy endorsement". [1] Write down four examples of a policy endorsement. [2] [Total 3] Moral hazard is an important concept in general insurance. Define the term "moral hazard". [1] Write down two distinct examples of how moral hazard might arise in commercial lines insurance contracts. [1] Outline ways in which an insurance company could seek to reduce the risks of moral hazard. (2] [Total 4] A commercial motor insurer has been insuring a large fleet of vehicles for a number of years. Recent experience has been poor and the policy has made significant losses. However, the policyholder does not want its insurance premium to increase. Suggest solutions the insurance company could propose in order to reduce the cost of claims. [6] Describe an Occurrence Exceedance Probability file and an Aggregate Exceedance Probability file as used in reinsurance pricing. [2] (ii) Describe how these files can be used in the process of setting reinsurance