Chapter 6. Insurance Companies

Transcription

1 Chapter 6 Insurance Companies

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

3 Types of Insurance Life Insurance-pays the beneficiary of the life insurance policy in the event of the death of the insured. Health Insurance-pays the insured all or a portion of the medical treatment of the insured. Property and Casualty Insurance- insure the risk of damage to various types of property. Liability Insurance- Insures in the event of lawsuits against the insured due to actions by the insured or others. Disability Insurance and Long-Term Care- insures against the inability of employed persons to earn an income. Structured Settlements- pays fixed, guaranteed periodic payments over a long period of time, typically resulting from a settlement on a disability policy or other type of policy. 3

4 Investment Oriented Products Guaranteed Investment Contracts (GICs) Annuities Fixed Variable Mutual Funds Monoline insurance 4

5 Major Risks 5

6 Top Life Insurance Companies 6

7 Top P&C Companies 7

8 Fundamentals of Insurance Relationship between revenues and costs Premiums are paid upfront 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

9 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

10 Accounting Issues Statutory versus GAAP Accounting Statutory accounting focuses on liquidity and ability to pay claims State regulators focus on statutory accounting 10

11 Monitors of Insurance Companies 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 11

12 Structure of Insurance Companies Home Office or Actual Insurance Company Investment Company Sales Force Agents Brokers Commercial Banks Internet 12

13 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 13

14 Mutual Holding Company 14

15 Individual vs. Group Insurance Individual Insurance Insurance sold to an individual Group Insurance Insurance sold to groups Companies Organizations Governments 15

16 16 Table 6-4 Life Insurance Policies What is Life Insurance: Pure Insurance Protection Against Risk of Death Term Life Insurance Cash Value or Permanent Life Ins. Whole life insurance Variable life insurance Universal life insurance Guaranteed Dollar Cash Value Policies Variable/Non- Guaranteed Policies Fixed Premium Whole Life Ins. Variable Life Ins. Flexible Premium Universal Life Ins. Variable Universal Life Ins. Insurance Against Risk of Long Life Annuity Pure Investment-Oriented Policies Guaranteed investment contract

17 General and Separate Accounts General Accounts- investment portfolio of the overall company. Insurance companies must support the guaranteed performance of their general account products to the extent of their solvency. Separate Accounts-receive no guarantee from the insurance company s general account, and their performance is not based on the performance of the insurer s general account but solely on the performance of an account separate from the general account of the insurer. 17

18 Insurance Company Investment Strategies Investment portfolio reflects liabilities of insurance company Differences in investment strategies Life Ins. companies and P&C companies Public and mutual insurance companies Tax concerns 18

19 Changes in the Insurance Industry Glass-Steagall Act (1933) separated commercial banking, investment banking, and insurance. Deregulation of the financial system Gramm-Leach-Bliley Act Internationalization of the Insurance Industry Demutualization of Insurance Companies 19

20 Evolution of Products 401(k) & Roth 401(k) IRA & Roth IRA Comparison nt/ira/tradvsroth/ Rollover IRA 20

21 Evolution of Products 21

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