Casualty Actuarial Society (CAS) Practice Exam

What is one effect of insurer exits from the market?

1. Increased competition between remaining insurers

2. Growth of the admitted market

3. Reduced market diversity

4. More stable premium rates

The correct answer is: Increased competition between remaining insurers

The chosen answer, which highlights increased competition between remaining insurers, is accurate in the context of market dynamics following insurer exits. When an insurer leaves a market, it reduces the number of players available to compete for customers. The remaining insurers then may experience a shift in market share and may feel pressure to improve their offerings, adjust pricing strategies, or enhance service levels to attract customers who are now seeking alternatives. This competitive environment can lead to better options for consumers as insurers vie for the available business. In contrast, while it might seem that reduced competition could follow from this scenario, the reality is that the remaining firms may need to step up their competition to fill the gap left by the exiting insurer. Therefore, this dynamic can indeed result in increased efforts to attract customers. Other potential outcomes like growth of the admitted market or reduced market diversity could occur in specific situations but are not direct or guaranteed effects of an insurer exiting unprofitable conditions or markets. Likewise, while more stable premium rates could be a perceived effect due to decreased competition, it is more common to see increased rate volatility as remaining companies adjust their pricing strategies to retain profitability or gain a larger market share.