Value Creation in Insurance, Information and Asset Management Services

1
Value Creation in Insurance, Information and
Asset Management Services

• Week 8 - October 12, 2006

2
Life Insurance

• Life and annuity contract
• Probabilities determined
• Cash flows from coverage are predictable
• Principal-agent problems with moral hazard
  limited, adverse selection tolerable
  
• Cancellations, lapses, policy loans
• Inflation, taxes, and product innovation
• Universal life insurance
• Annuities

3
Life Insurance Contracts
Whole Life Contract
Limited Pay Life
Premiums, Benefits
Premiums, Benefits
Retirement
Retirement
Death
Death
Age
Age
4
Life Insurance Contracts (contd)
Endowment Policy
Life and Annuity
Premiums, Benefits
Premiums, Benefits
Retirement
Retirement
Death
Death
Age
Age
5
Casualty Insurance

• Casualty contract
• Period
• Incidence and severity of claims
• Catastrophic losses
• Principal-agent problems
• Insured and adverse selection
• Insured and moral hazard
• Correlation of incidence and severity with
  systematic risk

6
Reinsurance Example
Paid by Reinsurers B C
Claims Payments
Paid by Reinsurer A
Retained by Underwriter
0
Loss
7
Insurance Pricing in Equilibrium

• Premiums compensate insurers for insurance costs
  and losses and systematic riskwhere
  
• and P, X and L are premiums, expenses and
  losses and k is a time to claim payment measure

8
Inefficiencies in Insurance

• Pricing and term setting
• Marketing and information
• Monitoring and controlling
• Production and delivery
• Funding and investing
• Risk bearing and sharing

9
Asset Management

• Economics of the industry
• Performance measurement
• Principal-agent problems
• A temporary disequilibrium
• Historical perspective
• Basic problem luck versus skill
• The value chain in asset management
• Strategic challenges

10
Information and Advice

• Markets
• Retail customer specific information
• Credit information
• Loan application and transaction sources
• Advice based on scoring, marketing, etc.
• Wholesale information and analytical services
• Dun and Bradstreet
• Rating agencies
• Current issues in bundling, pricing

11
Next Week...

• Prepare DFA and Bloomberg cases for discussion on
  October 19 (or 14)
  
• Review ISE and Hambrecht case if you plan to come
  on October 14 (Saturday) (see Week 6 Objectives
  for case questions)
  
• Part 2 of project due on October 19
• Take-home distributed today is due in class on
  October 19