Chapter Fifteen

Insurance Companies

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Life Insurance
Four 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. Endowment Life - combines both term elements with a savings element, guarantees payout to the beneficiaries if death occurs during some endowment period or to the insured person who lives to the endowment date.
(continued)
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 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

Group Life Insurance

covers a large number of insured persons under a single policy

Industrial Life
involves weekly payments collected directly by representatives

Credit Life
protects lender against a borrowers death

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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
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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
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Life Insurance Company Assets, 1999

9% 3% 8% 10%

Government Securities Bonds Stocks Mortgages

41%

Policy Loans Misc. Assets

29%

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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

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Property-Casualty Insurance Companies

Net premiums written - the entire amount of premiums on insurance contracts written Important P&C 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
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Balance Sheet and Underwriting Risk

Unearned premium - reserves set aside that contain the portion of a premium that has been paid before insurance coverage has been provided 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)
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 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 P&C insurers investments is crucial to the P&C insurers overall profitability

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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
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Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.