ENVIRONMENT

Question 2

How do mutual companies work?

Answer 2

• owned entirely by PH not by external SH
• once you buy a policy you automatically become a SH
• creates nice alignment in interests unlike proprietary companies (SH maximise profits, PH make sure pay benefits)
• profits returned to policyholders
• PH elect the board of directors (voting rights can follow different designs - one member, one vote vs. premium-size-based)
• demutualisation is addressed in the Insurance Act and must be approved by the courts and an independent actuary hired by the PA
• capital needs to be managed differently as cannot raise capital through shares

Question 3

How do insurance companies raise capital?

Answer 3

• Retained Earnings: Profits that are reinvested rather than distributed
• Debt Instruments: Bonds and other debt securities when needed
• Contingent Capital: Arrangements like financial reinsurance or contingent loans/subordinate debt
• Securitisation: selling future expected profits
• Equity: Selling shares (not applicable to mutual companies)

Question 4

How does securitisation work?

Answer 4

• insurer identifies a specific block of in-force business (existing policies) expected to generate profits over time
• future profit streams are packaged into securities with defined payment terms
• securities are sold to investors, providing the insurer with immediate capital
• investors receive returns only if sufficient profits emerge from the specified block of business
• investors may include: pension funds, hedge funds
• this is bought by them: to provide diversification, provide higher return