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Life Insurance


Ordinary life - marketed on an individual basis in units of $1,000 with ... Term Life - closes to pure life insurance, no savings attached, individual's ... – PowerPoint PPT presentation

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Title: Life Insurance

Life Insurance
  • Basic classes
  • Ordinary life - marketed on an individual basis
    in units of 1,000 with policyholders making
    periodic payments
  • Term Life - closes to pure life insurance, no
    savings attached, individuals beneficiary
    receives payout at death of policyholder, term of
    coverage can vary from 1 year to 40 years or
  • Whole Life - protects individual over an entire
    lifetime in return for periodic premiums,
    beneficiaries receive face value of the contract.
  • Variable life - invests fixed premium payments in
    mutual funds of stocks, bonds, and money market
    instruments with policyholder determining risk
  • Universal life and Variable universal life -
    allows the policyholder to change both the
    premium amounts and the maturity of the contract

  • Group Life Insurance
  • covers a large number of insured persons under a
    single policy
  • Credit Life
  • protects lender against a borrowers death

Other Life Insurer Activities
  • Annuities
  • reverse of life insurance principles, involve
    different methods of liquidating a fund over a
    long period of time, a popular mechanism for
    retirement savings
  • Private Pension Fund
  • an alternative pension plan offered by insurance
    companies to private employers, innovative
    pension plans based on guaranteed investment
  • Accident and Health Insurance
  • protects against morbidity or ill health risk
  • major activity line is group insurance
  • Life insurance companies write more than 50 of
    all policies but HMOs (nonregulated providers)
    have cut into their business
  • face loss exposures similar to those of
    property-casualty insurers

Balance Sheet
  • Assets
  • corporate bonds, equities, and government
  • policy loans - loans made by an insurance company
    to its policyholders using their policies as
  • Liabilities
  • policy reserves - reflects their expected payment
    commitments on existing policy contracts
  • surrender value of a policy - the cash value of a
    policy if a policyholder surrenders the policy
    prior to maturity
  • separate account - annuity program sponsored by
    life insurance companies, payoff on policy linked
    to assets in which policy premiums are invested

Life Insurance Company Assets, 1999
Property-Casualty Insurance Companies
  • Important PC lines include the following
  • Fire Insurance and Allied Lines
  • protects against fire, lightening, and removal of
    damaged property
  • Homeowners Multiple Peril insurance
  • protects against damage to personal dwelling,
    contents, liability
  • Commercial Multiple Peril Insurance
  • protects commercial firms similar to homeowners
  • Automobile Liability and Physical Damage
  • Liability Insurance (other than auto)
  • provides protection to individuals or firms
    against legal liability

Balance Sheet and Underwriting Risk
  • Loss Risk
  • property versus liability
  • severity versus frequency
  • long tail versus short tail
  • product inflation versus social inflation
  • Loss Ratio - measures the actual losses incurred
    on a specific policy line, measures the ratio of
    losses incurred to premiums earned

  • Expense Risk
  • loss adjustment expenses (LAE)
  • commissions and other expenses
  • combined ratio - equal to the loss ratio plus the
    ratios of LAE to premiums written and commissions
    and other expenses to premiums written
  • Investment Yield/Return Risk
  • operating ratio - measure of the overall
    profitability of the insurer, equals the combined
    ratio minus the investment yield
  • behavior of interest rates and default rates on
    PC insurers investments is crucial to the PC
    insurers overall profitability

  • McCarran-Ferguson Act of 1945 - confirms the
    primacy of state over federal regulation of
    insurance companies
  • Insurance guarantee fund - a fund of required
    contributions from within-state insurance

  • Chartered at the state level and regulated by
    state commissions
  • The National Association of Insurance
    Commissioners (NAIC) provides various services to
    the state, such as
  • standardized examination system
  • the Insurance Regulatory Information System
    (IRIS) to identify insurers with loss, combined,
    and other ratios operating outside normal ranges
  • Rate regulation
  • state commissions set ceilings on the premiums
    for auto and workers compensation insurance