Chapter 7
INSURANCE
COMPANIES
Fundamental
Characteristics
Insurance Policies and Premiums
Risk bearers
Sources of Profits
Investment income
Underwriting income
Types of Insurance
Life Insurance
Insures against premature death
Health Insurance
Insures against high cost of medical
treatment
Property and Casualty Insurance
Insures against damage to various types of
property
Types of Insurance
Liability Insurance
Insures against litigation
Other Insurance
Disability Insurance
Long-Term Care Insurance
Structured Settlements
Investment Oriented
Products
Guaranteed Investment Contracts (GICs)
Annuities
Fixed
Variable
Mutual Funds
Insurance Companies and
Types of Products
Life and Health Insurance Company
Life and health
Property and Casualty Insurance Company
Property and casualty
Multi-Line Insurance Company
Life, health, property and casualty
Fundamentals of
Insurance
Relationship between revenues and costs
Initial premium income is invested
Payments to the insured are contingent on
potential future events
Difficulty in estimating profitability
Timing and magnitude of payments are
uncertain
Long lag between receipts and payments
Regulation of Insurance
Industry
McCarran Ferguson Act of 1945
Insurance industry is regulated by individual
states, not the federal government
Securities and Exchange Commission
(SEC)
National Association of Insurance
Commissioners (NAIC)
Monitors of Insurance
Companies
Types of Monitors
Accountants/Auditors
Rating Agencies
Government
Regulators
 Purpose of Monitors
Assess financial stability
Promote synchronicity
between premiums and
payments
Assess volatility of
payments
 Statutory surplus or reserves
Structure of Insurance
Companies
“Home Office” or Actual Insurance
Company
Investment Company
Sales Force
Agents
Brokers
Commercial Banks
Internet
Types of Insurance
Companies
Stock Insurance Company
Owned by independent shareholders and the stock is
publicly traded
Constituencies: stockholders and policyholders
Mutual Insurance Company
Owned by policyholders
No stock
Constituencies: policyholders
Mutual Holding Company
Individual vs. Group
Insurance
Individual Insurance
Insurance sold to an individual
Group Insurance
Insurance sold to identifiable groups, such as
employees of a specific company, through
employers, educational, medical, or other
professional associations
Life Insurance Policies
Pure Insurance Protection Against Risk of Death
Term Life Insurance
Insurance/Investment Policies
Whole life insurance
Universal life insurance
Variable life insurance
Insurance Against Risk of Long Life
Annuity
Pure Investment-Oriented Policies
Guaranteed investment contract
Insurance Company
Investment Strategies
Investment portfolio reflects liabilities of
insurance company
Differences in investment strategies
L&H companies and P&C companies
Public and mutual insurance companies
Tax concerns
Changes in the Insurance
Industry
Deregulation of the financial system
Internationalization of the insurance
industry
Demutualization