1 / 10

Chapter Fifteen

Chapter Fifteen. Insurance Companies. Life Insurance. Four basic classes Ordinary life - marketed on an individual basis in units of $1,000 with policyholders making periodic payments

Download Presentation

Chapter Fifteen

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter Fifteen Insurance Companies

  2. Life Insurance • Four basic classes • Ordinary life - marketed on an individual basis in units of $1,000 with policyholders making periodic payments • Term Life - closes to pure life insurance, no savings attached, individual’s beneficiary receives payout at death of policyholder, term of coverage can vary from 1 year to 40 years or more. • Whole Life - protects individual over an entire lifetime in return for periodic premiums, beneficiaries receive face value of the contract. • Endowment Life - combines both term elements with a savings element, guarantees payout to the beneficiaries if death occurs during some endowment period or to the insured person who lives to the endowment date. (continued)

  3. Variable Life - invests fixed premium payments in mutual funds of stocks, bonds, and money market instruments with policyholder determining risk level • Universal Life and Variable Universal life - allows the policyholder to change both the premium amounts and the maturity of the contract • Group Life Insurance • covers a large number of insured persons under a single policy • Credit Life • protects lender against a borrower’s death

  4. Other Life Insurer Activities • Annuities • reverse of life insurance principles, involve different methods of liquidating a fund over a long period of time, a popular mechanism for retirement savings • Private Pension Fund • an alternative pension plan offered by insurance companies to private employers, innovative pension plans based on guaranteed investment contracts • Accident and Health Insurance • protects against morbidity or ill health risk • major activity line is group insurance • Life insurance companies write more than 50% of all policies but HMOs (nonregulated providers) have cut into their business • face loss exposures similar to those of property-casualty insurers

  5. Balance Sheet • Assets • corporate bonds, equities, and government securities • policy loans - loans made by an insurance company to its policyholders using their policies as collateral • Liabilities • policy reserves - reflects their expected payment commitments on existing policy contracts • surrender value of a policy - the cash value of a policy if a policyholder surrenders the policy prior to maturity • separate account - annuity program sponsored by life insurance companies, payoff on policy linked to assets in which policy premiums are invested

  6. Regulation • McCarran-Ferguson Act of 1945 - confirms the primacy of state over federal regulation of insurance companies • Insurance guarantee fund - a fund of required contributions from within-state insurance

  7. Property-Casualty Insurance Companies • Premiums written - the entire amount of premiums on insurance contracts written • Important P&C lines include the following • Fire Insurance and Allied Lines • protects against fire, lightening, and removal of damaged property • Homeowners Multiple Peril insurance • protects against damage to personal dwelling, contents, liability • Commercial Multiple Peril Insurance • protects commercial firms similar to homeowners • Automobile Liability and Physical Damage insurance • Liability Insurance (other than auto) • provides protection to individuals or firms against legal liability

  8. Balance Sheet and Underwriting Risk • Unearned premium - reserves set aside that contain the portion of a premium that has been paid before insurance coverage has been provided • Loss Risk • property versus liability • severity versus frequency • long tail versus short tail • product inflation versus social inflation • Loss Ratio - measures the actual losses incurred on a specific policy line, measures the ratio of losses incurred to premiums earned(continued)

  9. Expense Risk • loss adjustment expenses (LAE) • commissions and other expenses • combined ratio - equal to the loss ratio plus the ratios of LAE to premiums written and commissions and other expenses to premiums written • Investment Yield/Return Risk • operating ratio - measure of the overall profitability of the insurer, equals the combined ratio minus the investment yield • behavior of interest rates and default rates on P&C insurers’ investments is crucial to the P&C insurers’ profitability

  10. Regulation • Chartered at the state level and regulated by state commissions • The National Association of Insurance Commissioners (NAIC) provides various services to the state, such as: • standardized examination system • the Insurance Regulatory Information System (IRIS) to identify insurers with loss, combined, and other ratios operating outside normal ranges • Rate regulation • state commissions set ceilings on the premiums for auto and workers’ compensation insurance

More Related