Chapter Nineteen Insurance Companies and Pension Funds.

20
Chapter Nineteen Insurance Companies and Pension Funds

Transcript of Chapter Nineteen Insurance Companies and Pension Funds.

Chapter Nineteen

Insurance Companies and Pension Funds

Copyright © 2004 Pearson Education Canada Inc. Slide 19–2

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

Copyright © 2004 Pearson Education Canada Inc. Slide 19–3

Fundamentals of Insurance (cont.)

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 occurring

Copyright © 2004 Pearson Education Canada Inc. Slide 19–4

Adverse Selection in Insurance

• Those most likely to suffer loss are most likely to apply for insurance.

• Insurance companies give lower rates to group plans because they help control this problem

Copyright © 2004 Pearson Education Canada Inc. Slide 19–5

Moral Hazard in Insurance

• The insured person is not as likely to protect property as the uninsured person.

• Insurance companies prefer to use a deductible to help control this problem.

Copyright © 2004 Pearson Education Canada Inc. Slide 19–6

Types of Insurance

• Life Insurance • Health Insurance• Property and Casualty Insurance

Copyright © 2004 Pearson Education Canada Inc. Slide 19–7

Life Insurance

• Term Life• Whole Life• Universal Life• Annuities• Assets and Liabilities of Life Insurance Companies

Copyright © 2004 Pearson Education Canada Inc. Slide 19–8

Life Expectancy at Various Ages in Canada

Copyright © 2004 Pearson Education Canada Inc. Slide 19–9

Sample Annual Premiums

Copyright © 2004 Pearson Education Canada Inc. Slide 19–10

Distribution of Life Insurance Company Assets

Copyright © 2004 Pearson Education Canada Inc. Slide 19–11

Percentage of Life Insurance Company Assets Invested in Mortgages

Copyright © 2004 Pearson Education Canada Inc. Slide 19–12

Property and Casualty Insurance

• Property Insurance – Named-peril policies

– All-risk policies

• Casualty Insurance

• Reinsurance

Copyright © 2004 Pearson Education Canada Inc. Slide 19–13

Distribution of Assets of Property and Casualty Insurance Companies in Canada

Copyright © 2004 Pearson Education Canada Inc. Slide 19–14

Insurance Management (avoidance of moral hazard and adverse selection)

• Screening• Risk-Based Premium• Restrictive Provisions• Prevention of Fraud• Cancellations of Insurance• Deductibles• Coinsurance• Limits on the Amount of Insurance

Copyright © 2004 Pearson Education Canada Inc. Slide 19–15

Pension Plan

• Definition: An asset pool that accumulates over an individual’s working years and is paid out during the nonworking years.

Copyright © 2004 Pearson Education Canada Inc. Slide 19–16

Types of Pensions

• Defined-Benefit Pension Plans

• Annual Payment =

2% average of final 3 years’ income years of service

Copyright © 2004 Pearson Education Canada Inc. Slide 19–17

Types of Pensions (cont.)

• Defined-Contribution Pension Plan

• Private Pension Plans

• Public Pension Plan

• Social Security

Copyright © 2004 Pearson Education Canada Inc. Slide 19–18

CPP and QPP Total Financial Assets

Copyright © 2004 Pearson Education Canada Inc. Slide 19–19

Private Pension Plan Assets in the U.S., 1999

Copyright © 2004 Pearson Education Canada Inc. Slide 19–20

Social Security

• Pay as you go system

• Projected number of workers is falling while projected number of retirees is increasing