Chapter 6 Flashcards
what protects everything else (including injury) besides human life
property and casualty insurance
what protects only human life
Life insurance
what is frequency?
how often it happens (happens often but smaller claims)
what is severity?
how bad the damages are (doesnt happen often but huge claims)
what is the primary function of an insurance company
to protect policyholders from unexpected harmful events
what are premiums (expense or revenue?)
payments from policyholders which is a revenue for the insurance comp
what are benefits (expense or revenue?)
compensation given to policyholder which is an expense
what is a mutual corporation
the company was owned by their policyholders (would get dividend)
what is demutualization
switched to public, insurance company owned by policyholders switched to a stockholder controlled insurance firm
what is the difference in terms of financing abilities between national bank and desjardins? (how do they raise capital)
national bank (public): issue more stocks, issue bonds
desjardins (mutual): have to ask members to deposit checks, not publicly traded cannot raise money by issuing stocks (equity)
why demutualize?
-policyholder benefits: paid a benefit to the mutual companies policyholder
-regulatory: more transparency, government auditing
What are issues in insurance?
-Moral hazard
-Adverse Selection
-Actuarially priced insurance premiums
what is moral hazard
since you know you are covered, you engage in more risk activities
what is adverse selection
the ones who are most expensive will take the most insurance; ex: someone with terminal cancer will take life insurance opposed to someone who does not
what is actuarially priced insurance premiums
premiums based on risk of insured (men under 30 trying to get insurance)
What is the difference between term life and whole life insurance
term life: covered until term is done
whole life: you contribute all the time but grows with interest and ends when you die
what is an annuity
policyholder gives money to the company and asks the company to pay them income with interest
How can you tell the difference between life insurance and property casualty balance sheet
Through the duration (decades), life insurance premiums (assets) sit longest on balance sheet
what are actuarial liabilities on balance sheet
% of premiums we have to keep aside to pay out benefits, how much benefit we have to pay out
what is surrender value
insurance company will buy back the policy from you, this is for whole life policy ONLY.
ex: all the money accumulating, they will pay it out
if you had 3 balance sheets and all had their durations how would you place them (longest to shortest)
1) life insurance
2) universal banks
3) property and casaulty
what is property and casaulty
property: cover loss of personal property and injury
casualty: your liability, damages caused to third parties
what are unearned premiums with property casualty
deferrals, they have to give protection even if not paid for the whole year. (ex: paid 2 months of your 12 month contract)
what is the difference between primary insurers and reinsurance
primary insurers: originators of insurance policies
reinsurance: transfers part of the claim to another insurer, which is initiated by the primary insurer (they do this when the risk is really big)
what is the loss ratio
not necessarily a loss, its how much youve collected in benefits to how much youve paid out in benefits
what is the expense ratio
related to operations and cost of running the business
what happens if combined ratio is greater than 100
premiums are insufficient to cover losses and expenses
what is pure loss
premiums minus benefits (EXPRESSED IN $)
what is the combined ratio
= (loss ratio+loss adjustment expense ratio)/ premiums earner
what is the investment yield
amount of money they have made from your premiums on investments
How can an insurance company make a loss
1) increase in the loss rates (more claims)
2) increase in expenses (new company decides to increase broker commission)
3) decrease in investment returns
when it comes to probability is property or liability more predictable
property is more predictable than liability
what is the difference between severity vs frequency
frequency: how often a benefit is paid
severity: size of loss
what is the difference between fat tails and middle of curve
fat tails = severity (happens less often)
middle of curve = frequency
what is a long tail loss
claim that is made after the policy came into effect
when it comes to severity loss vs frequency loss which is more predictable
low severity, high frequency ( car theft ) is ore predictable than high severity, low frequency (earthquake)
