Lecture 17 - Insurance Flashcards
Insurance
Protection - reimbursement from the impact of a possible event
Needs to work
Event must be possible
PPI payment protection insurance
Credit default swaps
Insurance companies can have a slippery reputation, but some people lie..
Why don’t you get your money back if the event doesn’t happen
History
Started as mutual
So,e might suggest one house in 10,000 will burn down each year
Hence 10,000 people could set aside 1/10,000th of the cost of repair after a fire
Small print
Will the insurance actually pay out
Some policies seem very difficult to claim on PPI
Not just a problem for individuals
Types of insurance
Life insurance Assurance is insurance for an eventual certainty - death I buy 10 year life cover - insurance I buy open ended cover - assurance Critical illness cover Private medical insurance Income protection insurance Home insurance
Pure Siri
Accidental and unintentional
Always results in a loss
Can be personal, property or liability risk
Such risk can be insured against
Speculative risk
Investment risk where losses and gains are possible
Investing in financial markets
Tend to talk about hedging these markets
History of insurance companies
Insurers pool the risk of their policy holders when issuing policies
Insurance customers pay a premium based on the probability that they will file a claim and the probable size of the expected claim
And a profit for the company - building serves
Insurers have good years and bad years
Oftener dependent on major catastrophes
Life assurance
Life insurance companies started out as mutual organisations where members contributed amounts to cover their funeral expenses
As the industry grew this allowed for calculation of more talk than rates
Allows for premiums to be calculates for the full life term policy
Becomes more expensive as the person grew older
Premiums are calculated for those in good health
Improved medical knowledge allowed for realistic extra premiums being calculated for those with impaired health
Similar pension annuity issue
Bundled investment products
Improving mortality and higher than expected invest return created surpluses in these mutual firms that led to the payout of bonuses
Led to development of separate policies with profits and without profits
Polices prices to ensure that surpluses would arise and be added to policies
Opportunities to earn profits from the industry led to joint stock companies competing with mutuals for insurance business
Life insurance companies are also known as life offices
Term assurance
Agree to pay value of the policy if the life insured dies within the given time
No benefit is due if surviving until end of term
Can be written on single or joint lives
Level term assurance
Decreasing term assurance
Convertible term assurance - option to convert before the end of its term
Renewable term assurance - provides for the policy to be continued nat the end of its term
Whole life insurance
Guarantees to pay the sum assured on the death of the life assured provided the premiums are maintained according to the policy conditions
Provide a surrender value that can be claimed by stopping the policy and discharging cover
Many whole life policies see unit-linked policies where premiums are invested in an investment fund
Cost of cover is based on the age of life assured and increases over time
Premiums can be paid on a regular basis or as a one-off payment
Annual bonus- whole life policies
Only becomes payable on the same event that causes the sum assured to be payable e.g death or maturity of the policy
Once declared by the life office this is added to the policy and cannot be removed
Terminal bonus whole life policies
Added to the policy on the day it becomes a claim and depends on investment conditions at the time
Can be removed but rare in practice
Reserves are created in the fund specifically to fund terminal bonuses
