Chapter 6 Flashcards
Who are the policy holders in for insurance companies?
The customers, the ones who premiums
Premiums are assets or liabilities for the insurance companies?
Assets for the insurance comoanies
Benefits are assets or liabilities for the insurance companies?
They are liabilities since it is money paid back to the customer
What are the two types of insurance companies?
1) life insurance companies
2) Property and casualty insurance
Describe life insurance companies
Deals with mortality of the HUMAN life
Describe property and casualty insurance companies
Deal with everything else besides human life
-Ex: Car, home, pet, etc
Describe the terms “frequency” and “severity” in insurance
Frequency deals with how often the event occurs (how many times the benefit is paid) and severity deals with how harsh or bad the damages are of this event (how much benefit is paid out)
What is a cooperative or a mutual? Describe in it in bank terms and in insurance terms? What happens to profits of these cooperatives or mutuals?
Bank terms: The customers who choose to bank at this FI are the ones who are the owners of this bank
Insurance: The policyholders who insure themselves at that insurance firm are the owners of that firms
-all profits generated from both these cooperatives go back to their customers
Describe the process of demutualization
It is where a company was a mutual or cooperative and turns themselves into a public company
What is the big difference between National Bank and Desjardins in terms of raising capital
Since National Bank is a public company, they can raise capital through equity, bonds, debt. Desjardins can’t raise money through equity because they are not public. Therefore, if you are a mutual, it is much harder for you to raise capital
Name 6 reasons why demutualization may be attractive
1) Easier access to capital
2) Easier flexibility and Agility
3) Incentives for Management and Employees through stock option
4) Market valuation and M&A possibilities
5) Policyholder benefits
6) Regulatory or legislative pressure
Describe policyholder benefits
Distribution of shares of the new stock company to the mutual company’s policyholders with immediate financial benefit which can involve receiving a cheque in the mail
What is moral hazard in insurance
It is the idea that says people who are insured will take additional risk since there exist this feeling of protection
Ex: People may text and drive once they are insured because they have that comfort or protection from the insurance
What is adverse selection issues in insurance
It is the tendency for those who have the highest risk to be the once who want to be insured
Ex: Someone who is sick of a disease will likely want insurance compared to someone who doesn’t have one
How do insurance companies prevent adverse selection?
If the policy holder is diagnosed with a disease or illness before buying the policy, the insurance company will often insure the person for everything BESIDES that disease or illness
If given two balance sheets, how could you realize which is a life insurance company?
By looking at the duration (how long) the assets sit on that balance sheet
What does the insurance company do with the premiums that a policyholder pays?
They invest them which is called the investment yield
What are actuarial liabilities?
Calculations based on probability which tells the insurance company how much benefit will need to paid out to policyholders. Those benefits need to be highly liquid to allow for payment to policyholders
What is a term policy insurance
You pay a certain amount of money for a certain time whereby you are covered for that time
Ex: you pay $100 a month from the age of 40 to 60, then you are ONLY insured between 40 and 60
What is whole life insurance
Accumulation of insurance whereby you keep contributing and last until you die
What is a surrender value insurance?
It is done in a whole life insurance whereby a customer might want to opt-out of their life insurance policy. Since the person has been paying for their life insurance over years and years, there is an accumulated balance. However when the policyholders decides to surrender their insurance, they only get a certain percentage of the accumulated value they have invested into their insurance, usually 70-80% of the value.
