Lecture Flashcards
What does insurance add to society?
- companies to can expand, add to society, etc. if they know their covered
- spreading losses so you don’t have a major loss in one area
- avoid having an entire area economically ruined from catastrophe
- home owners insurance (for a co. they take bonds)
how do we decide coupon rate?
their ability to pay it back; more risk, higher rate
what makes a risk insurable
- economically feasible premium
- accidental and unintentional
- calculable frequency and severity
why do co.s/ people buy insurance?
- helps economic profit in the long-run
- so they look prepared when something happens, don’t want to seem unprepared
- contractual obligations with other co.s
- regulatory requirements or can’t partake in certain events
- decrease variability by requiring insurance on their side
goals of insurance regulation
- protect insurance consumers
- maintain insurer solvency
- preventing destructive competitive
why not leave the market completely open to competition?
natural disasters- huge correlated effect in one region that wipes out its economy
stress testing
- run scenarios
- can you handle less likely but plausible events?
destructive competition
- can force prices of premiums down to a point where its underpriced (more risk of insolvency)
- can’t survive a crash; only big co.s survive
- eventually leads to monopoly or oligopoly (high barriers to entry and high industry exits)
who writes insurance laws?
the state legislature (the commissioner just enforces them)
NAIC
- a collection of all the insurance commissioners in all the states
- gives some direction or suggestions that states look to when writing insurance laws
- helps create some consistency btw states
insurer accreditation
- you need a license (helps protect consumers)
- minimum capital requirements (solvency)
- dif. based on domestic v. foreign v. alien
why are there different categories of accreditation?
- where the money comes from (state should get some tax $)
- you want to look out for your domestic insurers
- foreign/alien have higher thresholds b/c you’re protecting your states residents
surplus lines
none admitted insurers
- deal with higher variability consumers
- not readily available in current insurance mkt in the state of admitted insurers
- you have to apply for this too
- generally has less regulation b/c it makes co.s want to do this which makes coverage available for high risk consumers
must insurers still follow federal employment law?
YESSS
solvency core principles
- total written premiums
- reserves
- net income
rating agencies
- rate co.s based on their risk profile
- riskier you are higher interest rate
- to get capital: put shares on the mkt
- based on ability to pay out policies
premium:surplus ratio
3: 1
- for every expected $ of profit we write $3 of premiums (risk taken on)
insurance
a pooling of fortuitous losses by a transfer of risk to an insurer who indemnifies insured for losses
bankruptcy
can’t pay current liabilities - discharge the debt in order of priority (Shareholders last)
is the state guarantee fund guaranteed?
nope- you could just be liquidated
black swan
unknown, unknown (shit happens)
perfect market
- many buyers/sellers
- selling same product
- perfect info
adverse selection
info asymmetry causes this
adequate policyholders’ surplus
- ability to pay claims
- maintain insurer credit rating
- ability to expand business
