Outline 2999

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Outline 2/9/99

• Current events
• Financial services -- Insurance Companies
• Insurance Company - regulation

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Life Insurance -- Classes

• Ordinary life
• Group life
• Industrial life
• Credit life

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Assets of Life Insurers
Discussion Recent trends
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Liabilities of Life Insurers
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Regulation - Insurance

• McCarran Ferguson Act
• recent rulings
• NAIC

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Trends life insurance

• 1,563 firms in 1997 compared to 1,748 in 1980
• 10.5 drop
• 2.3 trillion in 1997 vs. 0.48 in 1980
• Conversion of mutually organized companies into
  stock controlled companies
  
• Prudential
• Traditional life insurance in decline

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Mutual Insurers
Policy Holders
Policy dividends
Ownership rights
Policy Rights
Mutual InsuranceCompany
Reserves
Accumulated Profits
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Stock Conversion
Dissolved Mutual Company
Policies transferred to new company
Reserves
Policy Holders
Stock
Policy Rights
Stock InsuranceCompany
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Top Life Insurance Cos.
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Property-Casualty Insurance

• Important lines
• fire and allied
• homeowners multiple peril
• commercial multiple peril
• automobile
• liability

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Property-Casualty Insurance

• Highly concentrated industry
• 90 of companies compete for 10 of business
• Top 10 companies have 40 of business
• Trends
• decrease in fire and allied lines
• increase in commercial and homeowners multiple
  peril
  
• increase in workers compensation
• Causes
• increased litigation
• increased jury awards
• increased health care costs
• increased life expectancy
• upgrading benefit levels

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Balance Sheet composition

• Assets
• Liabilities - Reserves for
• Losses
• Loss adjustment expense

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Underwriting Risks

• Unexpected increases in losses
• Unexpected increases in expenses
• Unexpected decreases in investments

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Loss Risk

• Property vs. liability
• Severity vs. frequency
• Long tail vs short tail
• product inflation vs. social inflation

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Underwriting Ratio Calcs

• A. loss ratio
• B. expense ratio
• C. investment yield
• A B - C

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Example

• loss ratio 73
• loss adjustment expense 12.5
• commissions an other 18
• Is it profitable?
• What if yields are 9?

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Example

• Loss ratio 72.5
• Loss adjustment 12.9
• Commissions and dividends 20
• What is minimum investment yield to maintain
  profits?

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Book questions problems