Life Insurance

1
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
  more.
• 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
  level
• Universal life and Variable universal life -
  allows the policyholder to change both the
  premium amounts and the maturity of the contract

(continued)
2

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

3
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
  contracts
• 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

4
Balance Sheet

• Assets
• corporate bonds, equities, and government
  securities
• policy loans - loans made by an insurance company
  to its policyholders using their policies as
  collateral
• 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

5
Life Insurance Company Assets, 1999
6
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
  insurance
• Liability Insurance (other than auto)
• provides protection to individuals or firms
  against legal liability

7
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
  (continued)

8

• 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

9
Regulation

• 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

10
Regulation

• 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