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15 F 378 Pp10 Essay

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Financial Services Industry
Insurance Companies

• 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)

A.M. Best Rating

BMO Life Assurance Company

A (excellent)

Co-operator Life Insurance Company


Empire Life Insurance Company


Great-West Life Assurance Company

A+ (superior)

Industrial Alliance Life Insurance


Manulife Financial


Primerica Life Insurance Company of Canada


RBC Life Insurance


Reliance Life Insurance Company


Sun Life Assurance Company


Wawanesa Life Insurance Company


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...

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