State 6 determinants of supply.

A general insurance company writing product liability cover has been asked to quote for a pharmaceutical company which develops drugs. The following information is available: Table 1: Unprojected historical incurred claims amounts (6000) for the last five accident years Accident Third party Third party Legal Product year death or bodily property expenses recall injury damage Year 1 1,250 15 10 Year 2 1,040 13 Year 3 1,120 11 Year 4 820 8 9 Year 5 760 11 Table 2: The ratios of incurred claims to ultimate projected claims Years of development 2 3 4 5 Third party claims 45% 50% 65% 80% 95% Product recall 85% 92% 98% 105% 100% Legal expenses 60% 70% 85% 95% 100% The exposure measure used is turnover, which was $30m in Year 1. Growth in turnover has been 5% per annum, except in the year following the product recall when there was no growth.Third party death or bodily injury claims and legal expenses have both inflated at 6% per annum for the past five years. Product recall costs have deflated at 2% per annum over Years 4 and 5, with no inflation prior to that. There was a one-off increase in third party property damage costs of 2.5% at the start of Year 4 following new legislation. (i) Estimate the expected claims cost in Year 6 using the data provided, stating any assumptions made and showing all workings. [12] The syndicate prices business to a target combined operating ratio of 95%, where the combined operating ratio is defined as: expected claims cost + expenses net (of tax) premium Administrative expenses are 20% of the net (of tax) premium, and claims handling expenses are 12.5% of the expected claims cost. Commission may be ignored. (ii) Determine the profit the insurance company expects to make on this policy.[3](i) Describe briefly the features of facultative reinsurance. [2] Company A is a large general insurance company that only writes commercial property insurance. (ii) Describe the reinsurance cover that Company A is likely to have in place. [6] The finance director of Company A previously worked for a competitor, Company B. Both companies write approximately $100m of commercial property business each year. The director has reviewed the reinsurance cover in place for the commercial property book in Company A and has found that the structure is not the same as that used by Company B. (iii) Suggest reasons why Company A may not have the same reinsurance needs as Company B