Insurance investment Flashcards
Why do insurers invest?
To ensure funds received are available to pay claims, insurers can a. re-insure the risk b. invest funds during time lag (between receiving premium and paying a claim)
Sources for investment
Examples include:
- Premiums
- Outstanding claims
- Shareholders’ capital
- Retained earnings
Outstanding claims
Claims which have been made, or which are expected to be made, but not yet been paid
Sources for retained earnings
- Premium over claims
2. Investment returns
Basic structure of an insurer
Assets: Investments, Fixed Assets, Receivables
Liability: Outstanding Claims, Unearned Premiums
Equity: Share Capital and Retained Earnings
Investment vs. liability
Match investments to the size and type of liabilities
Investment vs. premium
Timing of premiums influences investments
Roles of stakeholders in insurance investment
- Provide funds for investment
- Decide how funds will be invested
- Account for funds invested and accrued
- Depend upon investment earnings
Stakeholders in insurance investment
Shareholders, Policyholders, Regulators, Staff, Creditors, Fund manager
Example of investors
- General insurance companies
- Life insurance companies
- Investment Trusts (e.g. equity trusts, bond trusts, cash management trusts etc.)
- Overseas institutions
- Individuals and other organizations
How are objectives determined?
- How much to invest
- Terms for which investment funds are available
- Need to liquidate investments
- Need for a secure investment
- Opportunity for a high return on investments
investment in GI and LI
GI: does not invest in higher risk ventures where it risks losing premiums
LI: Invest funds over relatively long period of time
Three most distinguishing characteristics of investment
Return, Risk, Liquidity
Why do insurers always need some proportion of very liquid assets?
- Normal day-to-day running expenses
- Commissions
- Claims
Types of investments
- Money market investments
- Fixed interest investments
- Equity investments
- Property investments
Nature and types of Money Market investment
short-term (with tenure of 6 months or less)
Deposits, Discounted Security
Discounted Security (DS)
a piece of paper on which the borrower (or issuer) undertakes to pay an amount (the face value ) to whoever owns the piece of paper (the lender) on a given date in the future
11am
The time of day by which the intermediary must be informed if the loan is to be repaid that same day
Types of DS
- Bank Accepted Bills
- Negotiable Certificates of Deposit
- Promissory Notes
- Treasury Notes
Bank Accepted Bills
Bank guarantees to pay the face value on maturity regardless of whether the issuer is able to pay the Bank (90, 120 or 180 days, highly liquid)
Negotiable Certificate of Deposit
Special form of Bank Accepted Bills - Bank itself is the borrower
Promissory Notes
No bank involved, buyer is relying on the creditworthiness and good faith of the issuer
Treasury Notes
Special form of Promissory Notes - Commonwealth Government is the borrower
Years of maturity of Fixed Interest Securities (FIS)
3, 5, 10 Yrs are most popular, Less than 15 Years
(Fixed Income Securities) FIS vs. (Money Market Securities) MMS
Like DS: fixed face value and maturity date, traded in $5 or $10 mil face value
Unlike DS: Regular payment of coupon (paid half-yearly)
How many dates between transacting and settling Fixed Interest Securities
3
Forms of equity returns
Capital appreciation, dividends
cum-dividend
When a company has declared the amount of its dividend but has not yet distributed it, the share is known as “cum-dividend”. Else it is called “ex-dividend”
How many days between transaction and settlement of the equity
5
Dividend Imputation
Introduced in 1987 by Federal Government. Benefit of the income tax paid by companies was passed through to their shareholders. These tax-advantaged dividends are called “franked dividends”
Costs involved in equity transaction
- State Government Stamp Duty of 0.15% of the share’s value levied on both buyer and seller
- Brokerage or commission paid to the stockbroker
Two main ways insurers invest in property
- Property Trusts
2. Physical Property
Other types of investments
- Indexed bonds 2. Floating Rate Notes 3. Convertible notes 4. Mortgages 5. Overseas investments
AASB1023
Asset backing GI liabilities shall be measured on a basis that is consistent with the measurement of the GI liabilities
Fair Value defined in AASB 139
The amount of which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction
Fair value on stock exchange market
Closing bid price, not the closing last sale price
Does fair value take into account selling costs?
No
AOI
All Ordinaries Index, a price index which share market returns are often compared to.
Calculated by taking the prices of several hundred of the major companies listed on the ASE, weighted according to the size of each company
Shortcoming of AOI
Presume that any dividends paid will be used to buy more shares in the same company, which overlook impact dividends have on the total return achieved from shares
