2019 Fall #26
For the positive outcome for ENID, one of the answers given is "Unexpected withdrawal of a big competitor". My question would be, how can we make sure this example result in favorable improvement in loss reserves?
My reasoning is as follows: In the FCT paper, one of the scenario we tested is "premium risk - volume significantly higher than expected" where we assumed the new business is slightly 'worse' than the existing business. Hence, the added new business could be favorable or unfavorable to the insurer, depending on the quality of new business.
Could you clarify on this? Thank you.
Comments
The removal of a competitor could have many different effects so as you said, the effect could be negative if new business is worse. But I think all they mean here is that eliminating a competitor is generally good for companies that remain because there is less competition.
A big competitor may have economies of scale so it can charge lower prices. That puts pressure on smaller competitors. If the big competitor withdraws, then this pressure is removed and the smaller companies can raise their prices without fear of losing business, which is a positive effect.
If I were answering this question on the exam however, I probably would have chosen this answer:
In this case, the positive effect is obvious because it lowers the amount an insurer would have to pay out in claims.