Essays /

15 F 378 Pp10 Essay

Essay preview

Financial Services Industry
Insurance Companies

Overview
• Insurance Companies:
– Two major groups:
• (1) Life and (2) Property & Casualty

– Size, structure and composition
– Balance sheets and recent trends
– Regulation of insurance companies
– Global competition and trends

Fundamentals of Insurance
• (1) There must be a relationship between the insured and the beneficiary
• (2) The insured must provide full and accurate information to the insurance company
• (3) The insured is not to profit as a result of insurance coverage • (4) If a third party compensates the insured for the loss, the insurance company’s obligation is reduced by the amount of the compensation

• (5) The insurance company must have a large number of insured so that the risk can be spread out among many different policies • (6) The loss must be quantifiable
• (7) The insurance company must be able to compute the probability of the loss’s occurring

Insurance Management Tools







(1) Information collection and screening
(2) Risk-based premium
(3) Restrictive provisions
(4) Prevention of fraud by investigations
(5) Cancellations of insurance
(6) Deductibles
(7) Co-insurance
(8) Limits on the insurance coverage

Selling Insurance
• Sales forces: marketing of insurance products
• (1) Independent agents: sell insurance for a numbers of different companies. No loyalty to any one firm and find the best offer from the underwriters for customers. (Insurance Brokers)
• (2) Exclusive agents: sell insurance products for only one insurance company (Insurance agent)
• Since most agents are paid by commissions, they do not care the level of risk involved with policies sold

• Underwriters: keep control of the risk that sales agents are incurring on behalf of the company. They assume the obligations under the insurance contract and have authority to turn down policies

• A final decision to accept the policy may depend on the inspector’s report

Insurance: Major Issues
• Adverse selection: occurs when the persons most
likely to benefit from a transaction are the ones who
most actively seek out the transaction and are thus
most likely to be selected
– Insured have higher risk than general population
– Loss probability statistics gathered for the entire population may not truly reflect the loss potential for the persons who actually want to buy policies
– Alleviated by grouping of policyholders into risk pools
(group insurance) or requiring extra information or charging higher premium

Insurance: Major Issues
• Moral hazard refers to the fact that an insurance policy

changes the behavior of the insured person
• Concern arises when we cannot observe people’s actions and so cannot judge whether a poor outcome is intentional or just a result of bad luck
• Examples: A fire insurance policy written for more than the value of the property may induce the owner to arson. A
generous automobile insurance policy may encourage
reckless driving. Employment arrangements suffer too.
• Solutions to the moral hazard problem are hard to come by. Restrictive covenant, monitoring, and deductibles can reduce the problem.

Life Insurance Companies
• Size, Structure and Composition of the Industry:
– In 1990: 163 companies
– In 2000: 120 companies
– In 2008: 94 companies
– In 2014: 76 companies (42 Canadian + 34 Foreign)

• Experience solid growth recently
• More concentrated as a result of consolidation
– Great-West Life acquired London Life and Canada Life (2003) – SunLife acquired Clarica Life (2002)
– Manulife Financial merged with John Hancock (2004)

Top 10 Life Insurance Companies
• Manulife Financial is the largest life insurance company in Canada with total assets of C$538.873 billion (03/31/2014)
Company

A.M. Best Rating

BMO Life Assurance Company

A (excellent)

Co-operator Life Insurance Company

A

Empire Life Insurance Company

A

Great-West Life Assurance Company

A+ (superior)

Industrial Alliance Life Insurance

A+

Manulife Financial

A+

Primerica Life Insurance Company of Canada

A+

RBC Life Insurance

A

Reliance Life Insurance Company

A+

Sun Life Assurance Company

A+

Wawanesa Life Insurance Company

A

Changes in Organizational Structures

Life Insurance Companies:
Organizational Structures
• Prior to 1999, half of life insurance companies were
mutuals. In 1999, five large mutuals (Sun Life,
Manulife Financial, Industrial-Alliance, Clarica, and
Canada Life), started the demutualization process
and converted to stock companies
• Benefits of reverting to stock companies:
– Gain better access to capital market by issuing stocks
– Increase flexibility for mergers
– Attract top-class personnel

Life Insurer: Product Lines
• Ordinary Life Insurance:
– A legal contract between an insured (insurance policy holder) and an insurance company, where the insurer promises to pay a designed beneficiary a sum of money (i.e. benefits) in exchange for a premium, upon the death of the insured

– Sold on an individual basis taking up the largest segment of the life insurance market.
– Contracts fall into two categories: (1) protecti...

Read more

Keywords

+1 -20 /0.08 /0.70 0.08 0.1 0.25 0.7 0.70 0.75 000 000/250 013 022 03/31/2014 046 077 1 1.08 10 10.3 100 104 106.4 11 12.7 12.9 12/31/2012 120 13 13.3 131 134 14 14.1 14.3 147 147.55 15 153 16 16.1 163 165 170 18.0 19.6 190 192 1990 1999 2 2.0 2.3 20 20.5 20.8 200 2000 2001 2002 2003 2004 2006 2008 2012 2013 2014 21.5 217 22 246.3 25 250 266.67 267 27 28 286 3 3.3 3.8 3.9 30 30.6 300 305.6 308.0 32 33 34 36 37.3 375 378 39 4 40 40.4 41 42 420 429 43 43.7 44 448.66 45 45.4 461 47.4 479 48 5 5.2 50 500 53.0 538.873 54.0 54.4 55 563 57.8 59.3 59.4 6 6.3 6.4 60 61 615 65 65.6 66 67.3 678 7 7.14 70 710 72 72.3 731 75 76 76.8 768 77 77.5 786 8 80 80.0 80.7 810 817 84 86 88 9 9.4 910 916 94 95 95.3 961 975 981 a.m abc abl acceler accept access accid accident account accumul accur achiev acquir act action activ actual add addit address adjust administr advanc advers age agenc agent agre agreement aia aig aliv allevi allianc allianz allow allstat also american among amount amt annual annuit annuiti annum appeal appli appropri aris arrang arson asbesto asset associ assum assur assuri attempt attract author auto automobil avail averag avers award axa bad balanc bank bankruptci base basi basic becom begin behalf behavior beneficiari benefit berkshir best better beyond billion bmo bodi bodili bond brand breakdown broker buffet build built built-up busi buy c calcul call canada canadian cancel cannot capit care career case cash casualti catastroph categori caus certif chang charg chequ child china choos claim clarica class clhio co co-insur co-oper collect combin come commerci commiss commit common compani compens compet competit compon composit compound comput concentr concern consolid consum contain conting continu contract control convert corpor cost could counterpart countri coven cover coverag creat credit crime cross cross-countri current custody/asset custom dalkon damag death debtor decis declin decreas deduct defer demutu dental depend deposit design determin dictat die differ difficult direct disabl distribut divid dividend dollar domest downsid drive drug due e.g earli earn earthquak easi economi either element empir employ employe empti encourag end entir equal estat estim even event exampl exceed excel except exchang exclud exclus exempt exist expect expens experi expir explos exposur extra f fact failur fall farm featur feder file final financi find fire firm first fit five fix flexibl float flood focus follow forc foreign form franc fraud frequenc frequent full fulli fund fundament futur fvifa gain gather general generat generous germani get gic give given global good govern grade gradual great great-west greater green gross group grow growth guarante guaranti half hancock hard harm hathaway hazard health heir held high high-sever higher highfrequ hold holder home homeown hong hospit hurrican i.e identifi ii iii illiquid impact impli import includ incom income-produc incorpor increas incur independ individu induc industri industrial-alli industry-fund inflat inform ing initi injuri inspector instal instead institut insur intact intent interest intern introduct invest investig investor involv issu iv ivic john judg jurisdict keep known kong lag larg larger largest last later law leav legal lend lender less level levi liabil licens life like limit limitedpay line line-specif live lloyd load loan london long long-tail long-term loss loss/reimbursement lossadjust lost low low-frequ low-sever loyalti ltd luck lump lump-sum m made main maintain major make male malpractic manag mani manulif market matur may mccsr measur medic meet merg merger method metlif million minimum minus money monitor month moral morbid mortgag much municip must mutual name named-peril nation natur necessari need neglig nester net netherland next nonsmok note number oblig observ occur offer offic often old ombudservic one ontario open open-peril oper order ordinari organ organiz osfi other outcom outlay outstand overview own owner p pace pacicc paid parti partial particip particular pay payabl payment payout pc pension peopl per percentag peril period perman person personnel perspect ping place plan polici policyhold pool poor popul portion posit potenti pp10 predict prefer premium prevent primari primerica prior privat probabl problem proceed process produc product profit project promis prompt properti property-casualti proport protect provid provinci provis prudenti purchas pure put pvifa q1 quantifi question rate rather ratio rbc real receiv recent reckless reduc refer reflect reform refund regul regulatori reinsur relat relationship reli relianc repay replac report repres requir reserv resid residenti respons restrict result retir return revenu revers revert right rise risk risk-avers risk-bas rrif rrsps safeti sale save screen secur seek segment segreg select sell sens separ servic set settlement sever share sharehold sheet shield short short-term show sick similar sinc singl size small smaller social societi sold solid solut solvenc someth sound sourc special specif specifi spent spread stage standard start state statist stay stock storm straight structur substanti suffer suffici suicid sum sun sunlif superintend superior support surplus surround switzerland systemat tail take tax tax-def td temporari term term-lif theft third thus time togeth tool top top-class total toward transact treatment trend truli turn two type typic uncertain uncertainti under underwrit unearn unexpect uninsur uniqu unit univers unlik upon usa usd use usual valu variabl various vehicl versus view vs want warren wawanesa way weather well west whenev whether whole whose within worker world written x xyz year yield zurich