Chapter 15 Final Flashcards by Isabella Perea

An insurance provider acts as which two roles

Insurance underwriter and Insurance broker

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Insurance underwriter

assess risk of an applicant for coverage

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Insurance brokers

Sells insurance contracts

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Insurance is classified into which two groups

Life insurance- protection against untimely death, illness, retirement
Property/casualty insurance- protects against injury or liability due to accidents, theft, fire

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Insurance companies charge premiums based on what

The probability of them having to pay your claim in the future ( also consider PV)

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How many insurance companies were there in 1988 compared to 2021 and why

In 1988- 2300
In 2021- 740
Several mergers to become bigger and more efficient

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How much do insurance companies have in assets in 1988 compared to 2021

In 1988- 1.12 trillion
In 2021- 8.7 trillion
The largest insurers are 43.7% of it

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Why do life insurers pool together individuals

so they can spread out the risk (not everyone will need a payout at the same time)

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What are other activities of life insurance companies

Annuity contracts, pension plans, provide accident and health insurance

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stock owned insurance companies are owned by

Their shareholders (ex; MetLife, AIG)

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What percentage of life insurance companies are classified as having stock ownership

80%

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Insurance companies take on risk in exchange for

The premiums people pay

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What is underwriting

When insurance companies decide which risks to accept or reject
-if they accept the risk they decide how much to charge(smoker pays more than non smoker)

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Adverse selection means that

people who need insurance the most are more likely to buy it (someone with health problems)

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Moral Hazard

When people take more risks after getting insurance because they know they’re protected

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Ordinary life

Sold individually, regular periodic premium payments in exchange for life insurance coverage

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Term Life Insurance

Closest to pure life insurance, pays out only if you die during the coverage period, no savings element

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Whole life insurance

Covers you for your entire lifetime, builds cash value over time that you can borrow from while your alive

Endowment Life Insurance

combines term life insurance with a savings element, pays a lump sum to your beneficiaries when you die or when policy end(whichever is first) , can be used as a savings or investment plan

Variable life insurance

invests fixed premium payments into mutual funds of stocks, bonds and money market instruments. Beneficiaries receive investment value when you die

Universal Life Insurance

offers flexibility in premium payments and contract maturity, can change how much and how often you pay

What is group life insurance and how many types are there

Covers many people under one policy usually provided by employers. Two types contributory and noncontributory

Contributory

Cost is shared by employer and employee

Noncontributory

Employer pays the entire cost

Credit Life Insurance

Protects lenders, pays off borrowers debt if they die before paying it

What are other activities of life insurers

sell annuities, manage private pension plans, offer accident and health insurance

Annuities

different methods of liquidating a fund over a long period of time. often during retirement

Balance Sheet Assets(life insurance)

Life insurance concentrate their asset investments mostly in long term assets ex; corporate bonds, equities, gov securities

Balance Sheet Liabilities( life insurance)

Net policy reserves make up 74% of total liabilities and capital( this is funds set aside to pay for future claims on current policies) , They also keep a capital and surplus reserve fund( a backup fund for unexpected future losses)

Insurers earn profits by

taking in more premium and interest income than they pay out in policy payments

How can firms increase their speed between premium income and policy payouts

lower future pays while keeping premiums the same, reduce risk in the group of people they insure, earn more on their investments from policy reserves, take on more investment risk(for potential high return)

Financial Crisis Impact to Life insurers

Life insurers were hit hard, the u.s treasury provided bailouts to companies like AIG,Allstate, Lincoln National

Covid 19 impact on life insurers

Life insurers paid out a record 90.4 billion in death benefits

How was the recovery of covid 19 impact

industry bounced back and net income rose to 54.1 billion

What do states regulate in insurance

-Insurance premiums -licensicing -sales practices -commission charges -Insurer investments

Wall Street Reform and Consumer Protection Act of 2010

Created the federal Insurance office (FIO) and gave the fed a bigger role in supervising large insurance firms

FIO has the authority to

watch over the insurance industry, find regulatory gaps that could affect system, handle international insurance issues, check if underserved communities have access to affordable insurance

Property Insurance

Provides coverages related to the loss of real and personal property

Casualty Insurance

Offers protection against legal liability exposures

Underwriting Risk

Happens when an insurance company income premiums and investments arent enough to cover claims and admin costs

Reinsurance

Essentially is insurance for insurance companies its an alternative to manage risk on a p&c balance sheet

Loss ratio

measures actual losses incurred on a specific policy line

If loss ratio is less than 100%

the premiums were able to cover the losses incurred on that line