Academic journal article Review of Business

Teaching Introductory Concepts of Insurance Company Management: A Simulation Game

Academic journal article Review of Business

Teaching Introductory Concepts of Insurance Company Management: A Simulation Game

Article excerpt

The article describes the learning objectives and outcomes of a computer game that simulates an insurance market. Students integrate accounting, finance, risk management and insurance, asset management and investment topics. Students experience competitive interaction in the product and bond markets and the intra-firm stresses of marketing, investment and production activities.


This article describes an application of student-centered learning using software to simulate the operations of a property-liability insurance company. (1) The application is a decision-making game used in Risk Management and Insurance classes. The game simulates the operations of a property-liability insurance company and the competition of firms in the insurance market. Students develop an appreciation for the interaction of the decisions of insurance company managers operating under the simulated uncertainty of market and economic conditions.

Learning Objectives

Students develop an appreciation for the complexity of financial management decisions in the context of the ongoing operations of an insurance company. The game develops a feel for the interaction of management decisions and market stress. While it is not industry-specific, some insurance concepts are developed as part of the game -- and the game is more easily understood by those with an interest in the financial services industry.

Students develop an appreciation for the interaction between management forecasts of economic performance and firm-level investment outcomes. Students predict the stock market's performance in the following week in order to develop their current investment strategy. Bad forecasts may be penalized through the competitive nature of the game.

Students develop an appreciation for the interaction between intra-firm decisions affecting investment risk levels, product (underwriting) risk levels and product pricing. A firm that chooses extreme, but opposite, risk levels may perform well through luck, but a system shock may induce financial distress. However, a firm that "plays it safe" in balancing risk levels may not be able to compete effectively on product price.

Students develop an understanding of how managerial decisions affect a firm's performance in a multi-period setting. For example, firms that do not invest in advertising may achieve short run profit gains but will lose market share in later periods. Similarly, choosing a low price may attract a higher market share, but some of the losses (product expenses) will be paid in later time periods and will undermine future profitability.

The game is based on play by competing firms. Each firm makes strategic decisions that impact the values of the other firms through competition in the market for a homogeneous product, homeowners insurance. (2) The decision variables include product pricing, employee compensation schemes, advertising strategy, investment mix and risk strategy, and underwriting strategy. In each of the five weeks of the game, teams submit their selections (see Exhibit 1) and the rationale for their strategy. Their reasoning should reflect an understanding of interactions among variables and their expectation of the next week's stock market performance. Both firm investment returns and the aggregate level of market demand for homeowner's insurance policies are affected by stock market performance. Game results are a function of the selections made by the teams and the week's stock market performance.

Feedback to students consists of:

* a summary of the simulated annual results for the "industry," and

* program output reporting a simulated balance sheet and income statement for each firm.

Each week, teams also receive a relative ranking of selected performance variables and the team's points earned through that week (see Exhibits 2 and 3). Points earned by a team are a weighted average of selected performance variables from which deductions are made to recognize the firm's opportunity costs. …

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