INSURANCE COMPANIES AND PENSION FUNDS - PowerPoint PPT Presentation

Loading...

PPT – INSURANCE COMPANIES AND PENSION FUNDS PowerPoint presentation | free to view - id: 1376a9-MGRhN



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

INSURANCE COMPANIES AND PENSION FUNDS

Description:

Protect against the economic risk of premature death, poor health and superannuation. ... Family personal auto insurance -- A multi-peril policy covering most of the ... – PowerPoint PPT presentation

Number of Views:139
Avg rating:3.0/5.0
Slides: 34
Provided by: David74
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: INSURANCE COMPANIES AND PENSION FUNDS


1
CHAPTER 18
  • INSURANCE COMPANIES AND PENSION FUNDS

2
The Insurance Service --
  • Indemnify another against risk of economic loss.
  • Requires pooling of a large number of similar,
    but independent risks -- law of large numbers.
  • Insurance is the last step after other pure risk
    control and reduction techniques of risk
    management.
  • Pure risk, the chance of loss, differs from
    speculative or investment risk which is related
    to the variability of returns where one can have
    a gain or a loss.
  • Insurance reduces society's cost of bearing risk.

3
The Insurance Mechanism
  • An insurer assumes objective risk which is the
    deviation of actual losses from expected losses.
    It is part of the operating risk of an insurance
    company.

4
Insurable Risks
  • homogeneous or similar.
  • fortuitous, random or occurring by chance.
  • circumstances of loss can be identifiable.
  • a probability of loss can be estimated.
  • the losses occur independent of each other--not
    all at once, such as a flood, wiping out the
    insurer.
  • premiums must be economically feasible for the
    insured
  • considers Adverse Selection.

5
Objective risk control methods include
  • Use the Law of Large Numbers
  • As the number of insured risks increases, the
    deviation between actual and insured risks
    decline
  • Underwriting
  • Selection and classification of insurable risks
  • Accept "average" risks as customers.
  • Use of loss prevention techniques such a "safety"
    programs and sprinkler systems.
  • Require deductibles and/or shared losses with the
    insured.
  • Use reinsurance

6
Insurance premiums represent the sum of
  • expected losses, plus
  • operating costs, plus
  • target profit, less
  • premium investment income

7
Interest rate risk affects insurance companies.
  • Insurance contracts are long-term contracts
    interest rates vary providing incentives for
    cancellations and revision of intentions.
  • Underwriting Cycle
  • A cyclical pattern
  • High interest rates encourage "cash flow
    underwriting" and policy loans

8
Organizational Forms in the Insurance Industry
  • Stock Companies
  • Mutual Companies
  • Demutualization
  • Reciprocals
  • Lloyds Associations
  • Supervised by National Association of Insurance
    Commissioners (NAIC).

9
Life/Health Insurance Companies
  • Oldest financial intermediary in U.S. (1759)
  • Life/Health insurers sell a wide variety of
    financial services products including
  • Life insurance
  • Annuities
  • Health insurance
  • Long-term care insurance
  • IRAs and mutual funds
  • Protect against the economic risk of premature
    death, poor health and superannuation.

10
Term Insurance
  • General
  • Payment for death only
  • Lower premium
  • Large amount of protection per premium dollar

11
Term Insurance (concluded)
  • Term policy variables
  • Straight -- coverage for specific time period
    with premiums increasing with age.
  • Renewable -- option to continue after expiration
    date, independent of health changes.
  • Decreasing -- pay level premiums over a period of
    years while level of coverage declines.
  • Convertible -- policyholder may convert to a
    whole life policy for an added premium fee.

12
Whole Life Insurance General Characteristics
  • Level premiums for constant level of protection.
  • Premium includes cost of insurance and savings
    contribution.
  • Policy holders overpay the cost of mortality in
    the early years, and underpay in the later
    years.
  • Cash values (savings accumulated by insured)
    increase with time.
  • Death benefit includes "return" of savings.

13
Whole Life Insurance General Characteristics
(concluded)
  • Provides "living" benefits in form of accumulated
    savings.
  • Combines life insurance and savings (at a
    relatively low but contractual rate).
  • The cash value serves as a savings account for
    the policyholder
  • Protects against premature death during the
    income-earning years and against the risk of
    superannuation after retirement.

14
Universal life
  • The most popular interest-sensitive permanent
    policies.
  • Flexible premium, nonparticipating policy with
    varying death benefit and premium amounts.
  • Pays market rate on savings.

15
Variable Life
  • Popular in the 1990s with rapid growth in equity
    values.
  • Fixed-premium
  • Insured direct investment of cash values
  • Guaranteed minimum death benefit
  • No guaranteed cash value
  • Offers a number of mutual fund alternatives for
    the cash value

16
Annuities
  • Superannuation- risk of living too long after
    retirement
  • A life annuity, for a given payment, pays a life
    long stream of payments.
  • The period of time and survivorship terms vary.
  • The longer the "certainty," the less the
    payments.
  • 168.4 billion in 2002

17
Health Insurance
  • Covers medical, disability, long-term care, and
    dental expenses.
  • Health insurance can be purchased individually or
    made available through a group insurance plan.

18
Balance Sheet of Life Insurance Companies
  • Liabilities and net worth
  • Life insurance reserves -- funds owed for life
    insurance policies, including cash values and
    losses owed, not yet paid.
  • Pension fund reserves -- accumulated commitments
    to pay future pensions.
  • Surplus and net worth

19
Balance Sheet of Life Insurance Companies
(concluded)
  • Assets -- long-term matching liabilities
  • Corporate bonds-largest financial investment
  • Corporate equities-Variable life
  • Mortgages
  • Policy loans
  • Cash short-term investments
  • 3.369 trillion in 2002

20
Property/Liability Insurance Companies
  • Property insurance -- protection from financial
    loss of property from perils such as fire and
    theft.
  • Casualty insurance -- liability, worker's
    compensation, auto, aircraft, marine

21
Property Insurance
  • Purchased to protect against direct or indirect
    loss to property they own
  • Named-perils coverage
  • All-risks coverage
  • Open perils coverage

22
Types of Property/Casualty/ Liability Policies
  • Property -- insurance against losses associated
    with physical damage.
  • Liability -- insurance against loss arising from
    the damage to the property or personal injury to
    others.

23
Types of Property/Casualty/ Liability Policies
(continued)
  • Surety and fidelity bonds
  • Bond -- agreement by one party (surety) to be
    accountable to a third person (the obligee) for
    the debt or default of another party (principal).
  • Surety bond -- provides financial protection
    against failure to perform an agreement such as
    construction.
  • Fidelity bond -- provides financial protection
    from the infidelity or dishonesty of employees,
    such as embezzlement.

24
Types of Property/Casualty/ Liability Policies
(continued)
  • Marine insurance -- covers financial losses
    related to transportation.
  • Ocean marine -- ocean transportation
  • Inland marine -- inland transportation and some
    personal property such as furs and jewelry
  • Homeowner's insurance -- Multi-peril or
    multi-line policy covering most risks of home
    ownership and renting. Includes property and
    liability insurance.

25
Types of Property/Casualty/ Liability Policies
(concluded)
  • Family personal auto insurance -- A multi-peril
    policy covering most of the risks of owning and
    driving an auto
  • liability.
  • physical damage (collision).
  • medical.
  • uninsured motorist.

26
Life vs. P/L operations and practices
  • P/L policies shorter term than life
  • P/L loss payments more erratic
  • P/L loss payments increase with inflation
  • P/L premiums net of losses and expenses is taxed
  • Both life and P/L firms generate revenue from
    premiums and investment income.

27
Balance Sheet of P/L Insurance Companies
  • Assets -- selected for income, inflation hedge,
    liquidity, and tax sheltering
  • State and municipal bonds (tax free) and
    corporate bonds
  • Corporate stock (inflation hedge and income)
  • Government securities (liquidity and income)
  • Trade credit ( owed by customers and agents)

28
Balance Sheet of P/L Insurance Companies
(concluded)
  • Liabilities and net worth
  • Policy reserves include
  • unearned premium reserve.
  • losses incurred, not paid.
  • Surplus and net worth
  • Total of 1,042.9 billion in 2002

29
Types of Pension Plans
  • Private Pension Plans
  • Insured -- assured by contracting with life
    insurance firms
  • Noninsured
  • Trustee managed by a third party
  • Non-trusteed -- managed by firm or labor union
  • Government-sponsored Pension Plans
  • Federal Social Security
  • Old Age, Survivors, and Disability Insurance
  • Social insurance Security Net
  • Federal employees
  • State and municipality

30
Pension Plan Terms
  • Fully funded -- contributing a pool of funds
    sufficient to cover future obligations versus
    paying retirement benefits from sales or tax
    revenues.
  • Contributory -- employee contribution deducted
    from pay.
  • Noncontributory -- employer makes all funding
    payments.
  • Defined benefit plan -- contributions are made to
    meet "defined" retirement benefits for pensioners.

31
Pension Plan Terms (concluded)
  • Defined contribution plan -- benefits are
    variable, but contributions are defined in plan.
    401ks--most popular today.
  • Cash Balance Plantype of defined contribution
    plan oriented to younger workers
  • Vesting -- employee assured of retirement
    benefits after a set period of time.
  • Portability -- ability to transfer vested
    benefits on to other pension fund as a single
    plan
  • Pension Benefit Guaranty Corporation and ERISA.

32
Pension Fund Portfolio Management Factors
  • Little need for liquidity
  • Pension fund income exempt from federal income
    taxes
  • The higher the earnings rate, the lower the
    contribution for a defined benefit plan
  • Pension funds face risk/return trade-off
    decisions for their beneficiaries
  • Over 7 trillion in 2002.

33
Conclusion
  • Pure Risk
  • Life Insurance
  • Term
  • Whole life
  • Universal
  • Variable
  • Annuity
  • Property and Liability Insurance
  • Pension Plans
  • Defined Benefit
  • Defined Contribution
  • Cash Balance
About PowerShow.com