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Insurance Companies Chapter 2


Policy loans. Irwin/McGraw-Hill. 6. Regulation of Life Insurance Companies ... Loss rates are more predictable on low-severity, high-frequency lines (such as ... – PowerPoint PPT presentation

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Title: Insurance Companies Chapter 2

Insurance Companies Chapter 2
  • Financial Institutions Management, 3/e
  • By Anthony Saunders

Insurance Companies
  • Differences in services provided by
  • Life Insurance Companies
  • Property and Casualty Insurance
  • Life Insurance Companies
  • Size, Structure and Composition of the Industry.
  • Trends in terms of size and number of firms.
  • Demutualization
  • Consolidation and competition from other FIs.

Life Insurance Companies
  • Life Insurance Products
  • Ordinary life
  • Term life, Whole life, Endowment life.
  • Variable life, Universal life, Variable universal
  • Group life
  • Industrial life
  • Credit life

Other Life Insurer Activities
  • Annuities
  • Reverse of life insurance activities.
  • Private pension funds
  • Compete with other financial service companies.
  • Accident and health insurance
  • Morbidity insurance

Balance Sheet
  • Long-term liabilities
  • Net policy reserves to meet policyholders
  • Long-term assets
  • Need to generate competitive returns on savings
    components of life insurance policies.
  • Bonds, equities, government securities
  • Policy loans

Regulation of Life Insurance Companies
  • McCarran-Ferguson Act of 1945
  • Confirms primacy of state over federal
  • State insurance commissions
  • Coordinated examination system developed by the
    National Association of Insurance Commissioners
  • States promote life insurance guaranty funds
  • Not permanent funds (like FDIC)
  • Required contributions from surviving
    within-state firms.

Property and Casualty Insurance
  • Size and Structure
  • Currently about 2,300 companies.
  • Highly concentrated. Top 10 firms have 42 of
    market in terms of premiums written.
  • Balance sheet
  • Similar to life insurance companies.
  • Major liabilities loss reserves, loss adjustment
    expense and unearned premiums.

Loss Risk
  • Underwriting risk may result from
  • Unexpected increases in loss rates
  • Unexpected increases in expenses
  • Unexpected decreases in investment yields or
  • Property versus liability
  • Losses from liability insurance less predictable.
    Example claims due to asbestos damage to
    workers health.

Loss Rates
  • Severity versus frequency
  • Loss rates are more predictable on low-severity,
    high-frequency lines (such as fire, auto, and
    homeowners peril) than on high-severity,
    low-frequency lines (such as earthquake,
    hurricane, financial guaranty).
  • Claims in high-severity, low-frequency lines may
    not be independent.
  • Higher uncertainty forces PC firms to invest in
    more short-term assets and hold larger capital
    and reserves than life insurance firms.

Long Tail Versus Short Tail
  • Long-tail risk exposure
  • Arises where peril occurs during coverage period
    but claim is made many years later.
  • Examples Asbestos cases and Dalkon shield case.
  • Product inflation versus social inflation
  • Unexpected inflation may be systematic or
  • Social inflation unexpected changes in awards by

  • Loss ratios have generally increased.
  • Expense ratios have generally decreased.
  • Trend toward selling directly through their own
    brokers rather than independent brokers.
  • Combined ratio
  • Includes both loss and expense experience.
  • If greater than 100, then premiums are
    insufficient to cover losses and expenses.

Investment Yield / Return Risk
  • Operating ratio Combined ratio after dividends
    minus investment yield.
  • Importance of investment income
  • Causes PC managers to place importance on
    measuring and managing credit risk and interest
    rate risk.

Recent Trends
  • PC industry was not very profitable during 1987 -
  • Reasons
  • Succession of catastrophes (Hurricane Hugo 1989,
    San Francisco Earthquake 1991, Oakland fires
    1991, Hurricane Andrew 1991) -- trough of
    underwriting cycle.

  • PC insurers are chartered and regulated by state
  • State guaranty funds
  • National Association of Insurance Commissioners
    (NAIC) provides various services to state
    regulatory commissions.
  • Includes Insurance Regulatory Information System
  • Some lines face rate regulation.