Chapter 7 Insurance Companies.ppt

Chapter 7 Insurance Companies Types of Insurance Regulation Structure Background insurers bear risk that others pay to avoid underwrite risk receive premiums invest premiums face contingent liabilities profit/loss premiums + investment income - claims - overhead II. Types of insurance Life Insurance term life insurance cash value life insurance term life insurance policy period death benefit if occurs w/in policy period no cash value cash value life insurance whole life insurance death benefit cash value builds over life of policy premiums cover -- cost of insurance -- investment capital Universal life insurance similar to whole life buildup of cash value may be used to finance future premiums variable life insurance policy holders chooses how to invest premiums benefits/value depend on investment returns other issues timing amounts are predictable life insurance companies also offer pure investment products annuities GICs over 50% of their liabilities Health Insurance pay all/some costs of medical treatments fee-for-service managed care a separate industry Property Casualty auto, home insurance timing/size of claims unpredictable separate industry Big losses for PC 1992 Hurricane Andrew $15.5 billion today $30 billion 9/11 WTC attack $35 billion Liability insurance risk of litigation timing/size of claims unpredictable Long-term care pays all/some costs of nursing care fairly new industry GICs firms pays a single premium insurer guarantees annual interest rate (10%) certain period (5 years) interest premium paid at end of period example $10 million x (1+.10)5 = $16.1 million large premiums used by pension funds insurer bears investment risk but insurer might default Annuities premiums paid and invested in stock/bond portfolio premiums over time or lump sum investor receives payments fixed, variable life contingent income gains not taxed until withdrawn some guarantees on return like a mutual fund but preferential tax treatment higher expenses Comp