Insurance Companies Chapter 18 © 2003 South-Western/Thomson Learning Learning Objectives What life insurance, health insurance, and property and casualty companies do How adverse selection and moral hazard create risks for insurance companies and how these are managed
© 2003 South-Western/Thomson Learning
Two fundamental assumptions underlie how financial theorists think about financial risk and its management:
Contractual-type financial intermediaries that offer the public protection against the financial costs associated with the loss of life, health, or property in exchange for premiums.
Insurance coverage creates two additional forms of risk:
Four primary types of insurance professionals:
A Comparison of Term, Whole, Universal, and Variable Life Insurance Products
Annuities: provide a periodic income at regular intervals for a specified amount of time
Disability Insurance: covers a portion of an insured worker’s previous income if worker becomes unable to work due to illness or injury
Long-Term Care Insurance: compensates insured policyholders needing assistance with the daily tasks of bathing, eating, dressing, and moving about.
Offer protection, in exchange for premiums, against the financial costs associated with events such as doctor visits, hospital stays, and prescription drugs
Provide protection against the effects of unexpected occurrences on property
All insurance companies must actively manage their clients to prevent adverse selection and moral hazard problems
Top 10 Ways to Manage Adverse Selection, Moral Hazard, and Other Risks in the Insurance Industry