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Chapter 7

Chapter 7. INSURANCE COMPANIES. Fundamental Characteristics. Insurance Policies and Premiums Risk bearers Sources of Profits Investment income Underwriting income. Types of Insurance. Life Insurance Insures against premature death Health Insurance

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Chapter 7

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  1. Chapter 7 INSURANCE COMPANIES

  2. Fundamental Characteristics • Insurance Policies and Premiums • Risk bearers • Sources of Profits • Investment income • Underwriting income

  3. Types of Insurance • Life Insurance • Insures against premature death • Health Insurance • Insures against high cost of medical treatment • Property and Casualty Insurance • Insures against damage to various types of property

  4. Types of Insurance • Liability Insurance • Insures against litigation • Other Insurance • Disability Insurance • Long-Term Care Insurance • Structured Settlements

  5. Investment Oriented Products • Guaranteed Investment Contracts (GICs) • Annuities • Fixed • Variable • Mutual Funds

  6. Insurance Companies and Types of Products • Life and Health Insurance Company • Life and health • Property and Casualty Insurance Company • Property and casualty • Multi-Line Insurance Company • Life, health, property and casualty

  7. Fundamentals of Insurance • Relationship between revenues and costs • Initial premium income is invested • Payments to the insured are contingent on potential future events • Difficulty in estimating profitability • Timing and magnitude of payments are uncertain • Long lag between receipts and payments

  8. Regulation of Insurance Industry • McCarran Ferguson Act of 1945 • Insurance industry is regulated by individual states, not the federal government • Securities and Exchange Commission (SEC) • National Association of Insurance Commissioners (NAIC)

  9. Types of Monitors Accountants/Auditors Rating Agencies Government Regulators Purpose of Monitors Assess financial stability Promote synchronicity between premiums and payments Assess volatility of payments Monitors of Insurance Companies • Statutory surplus or reserves

  10. Structure of Insurance Companies • “Home Office” or Actual Insurance Company • Investment Company • Sales Force • Agents • Brokers • Commercial Banks • Internet

  11. Types of Insurance Companies • Stock Insurance Company • Owned by independent shareholders and the stock is publicly traded • Constituencies: stockholders and policyholders • Mutual Insurance Company • Owned by policyholders • No stock • Constituencies: policyholders • Mutual Holding Company

  12. Individual vs. Group Insurance • Individual Insurance • Insurance sold to an individual • Group Insurance • Insurance sold to identifiable groups, such as employees of a specific company, through employers, educational, medical, or other professional associations

  13. Life Insurance Policies • Pure Insurance Protection Against Risk of Death • Term Life Insurance • Insurance/Investment Policies • Whole life insurance • Universal life insurance • Variable life insurance • Insurance Against Risk of Long Life • Annuity • Pure Investment-Oriented Policies • Guaranteed investment contract

  14. Insurance Company Investment Strategies • Investment portfolio reflects liabilities of insurance company • Differences in investment strategies • L&H companies and P&C companies • Public and mutual insurance companies • Tax concerns

  15. Changes in the Insurance Industry • Deregulation of the financial system • Internationalization of the insurance industry • Demutualization

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