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Insurance companies

Insurance companies Insurance companies Are in the business of reallocating risk Actuarial liabilities : the PV of obligations to policy holders The Insurance Industry Life Insurance Companies Property and Casualty Insurance Companies Life Insurance Companies: Functions

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Insurance companies

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  1. Insurance companies

  2. Insurance companies • Are in the business of reallocating risk • Actuarial liabilities: the PV of obligations to policy holders

  3. The Insurance Industry • Life Insurance Companies • Property and Casualty Insurance Companies

  4. Life Insurance Companies: Functions • Protection against losses in income due to premature death • Protection against insufficient income due to longer than expected life

  5. Life Insurance Companies: Products • Life Insurance • Annuities • Health Insurance

  6. Life Insurance Individual life insurance Permanent life insurance - Whole life insurance: • over the long run • constant premium • at maturity (65 or older) the insured receives face value • insured can borrow against accumulated cash value • insured entitled to dividends Term insurance: • one to five years • actuaries are needed to calculate policy premiums based on probabilities of death Group life insurance Renewable term insurance • used by employers to cover many people under a single policy

  7. Annuities The reverse of life insurance • Life insurance - accumulation of funds • Annuities - liquidation of funds Annuities come in many shapes and sizes

  8. Annuities Term annuity • payments cease at a specific date • no actuarial calculation are needed • any FI can offer them Life annuity • payments terminate upon the death of the annuitant or later • premiums require actuarial calculations • can be offered only by life insurance companies

  9. Health Insurance Provide for ill-health risk above and beyond the coverage offered by the Canadian government - Insured plans - Uninsured plans Over half of Canadians have private health insurance and the numbers are growing

  10. Life Insurance Companies: Ownership Mutual ownership • similar to credit unions • aimed at fending off takeover attempts from US firms • permanent insurance policyholders - one vote • permanent insurance policyholders -residual claimants, entitled to dividends Joint stock companies • owned by shareholders, like any other corporation • can easily raise capital, compete, and consolidate The trend is toward demutualization

  11. Life Insurance Companies: Regulation OSFI : oversight functions CompCorp: provide liability insurance to policyholders Portfolio investments by life insurance companies must meet the Prudent Person Test Banks can sell insurance through specialized subsidiaries

  12. The Insurance Industry • Life Insurance Companies • Property and Casualty Insurance Companies

  13. Property and Casualty Insurance Companies Covers losses of property and legal liabilities P&C Insurance • Automobile insurance • Personal property insurance • Commercial property insurance • Commercial liability insurance • Marine insurance • Reinsurance Adjustment: arriving at a claim settlement

  14. Ice storm 1998 • The storm left 5 million people without power • Largest number of claims ever: 840,000 • Payout ever: $1.44 b • The population spent $2.2 b as a result • 16,000 new jobs were created • No bankruptcy among insurance firms

  15. Insurance companies: Summary • Main liability: claims by policyholders • Insurance industry: Life and P&C insurance companies • Life insurance companies sell life insurance, health insurance, and annuities • Life insurance industry is demutualizing • P&C insurance companies sell P&C insurance • Life insurance industry is consolidating while P&C is more fragmented • Competition from banks is heating up

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