Chapter 7

INSURANCE COMPANIES

Fundamental Characteristics

Insurance Policies and Premiums Risk bearers

Sources of Profits Investment income Underwriting income

Types of Insurance

Life Insurance Insures against premature death

Health Insurance Insures against high cost of medical

treatmentProperty and Casualty Insurance

Insures against damage to various types of property

Types of Insurance

Liability Insurance Insures against litigation

Other Insurance Disability Insurance Long-Term Care Insurance

Structured Settlements

Investment Oriented Products

Guaranteed Investment Contracts (GICs)

Annuities Fixed Variable Mutual Funds

Insurance Companies and Types of Products

Life and Health Insurance Company Life and health

Property and Casualty Insurance Company Property and casualty

Multi-Line Insurance Company Life, health, property and casualty

Fundamentals of Insurance

Relationship between revenues and costs Initial premium income is invested Payments to the insured are contingent on

potential future eventsDifficulty in estimating profitability

Timing and magnitude of payments are uncertain

Long lag between receipts and payments

Regulation of Insurance Industry

McCarran Ferguson Act of 1945 Insurance industry is regulated by

individual states, not the federal government

Securities and Exchange Commission (SEC)

National Association of Insurance Commissioners (NAIC)

Monitors of Insurance Companies

Types of Monitors Accountants/

Auditors Rating Agencies Government

Regulators

Purpose of Monitors Assess financial

stability Promote synchronicity

between premiums and payments

Assess volatility of payments

Statutory surplus or reserves

Structure of Insurance Companies

“Home Office” or Actual Insurance Company

Investment CompanySales Force

Agents Brokers Commercial Banks Internet

Types of Insurance Companies

Stock Insurance Company Owned by independent shareholders and the

stock is publicly traded Constituencies: stockholders and policyholders

Mutual Insurance Company Owned by policyholders No stock Constituencies: policyholders

Mutual Holding Company

Individual vs. Group Insurance

Individual Insurance Insurance sold to an individual

Group Insurance Insurance sold to identifiable groups,

such as employees of a specific company, through employers, educational, medical, or other professional associations

Life Insurance Policies

Pure Insurance Protection Against Risk of Death Term Life Insurance

Insurance/Investment Policies Whole life insurance Universal life insurance Variable life insurance

Insurance Against Risk of Long Life Annuity

Pure Investment-Oriented Policies Guaranteed investment contract

Insurance Company Investment Strategies

Investment portfolio reflects liabilities of insurance company

Differences in investment strategies L&H companies and P&C companies Public and mutual insurance companies

Tax concerns

Changes in the Insurance Industry

Deregulation of the financial systemInternationalization of the insurance

industryDemutualization