Mildenhall Ch 2: The Insurance Market Flashcards
Define Policyholder Liabilities and provide 2 examples
Any amounts owed to policyholders.
Ex:
1. Loss reserves
2. Unearned Premiums Reserves
Define Assets
Total financial resources owned by insurer that can be used to meet policyholder liabilities in exchange for premiums.
Define Required Assets
Minimum amount of assets that insurer must hold.
Define Intermediaries
Refers to insurance company who acts as intermediary between policyholder and investors.
Never means agent or broker in this textbook.
Define Units
Portfolio components
Ex:
1. policy
2. groups of policies
3. LOB
Define Aggregate Loss
Sum of losses from insurer’s portfolio over single period.
Premium excludes UW expenses but includes margin for risk.
Define contingency provision
The contingency provision is separate from margin and is intended to cover biases in ratemaking.
Define Shared Liability
Assets - Expected Loss = Capital + Margin
Liability of financing assets other than expected losses is shared between policyholders and investors.
Define Loss Ratio
Loss/Premium
Ratio of Loss to Premium
Define Premium Markup
1 / ELR
Inverse of expected loss ratios.
Cat bonds often quote premium markup instead of LR.
Define Premium Leverage
Premium / Capital
Ratio of premium to capital
Provide 4 characteristics of Thick-tailed LOBs
Losses in thick-tailed portfolio unit have:
1. High coefficient of variation
2. Right-skewed
3. High kurtosis
4. Significant probability of assuming substantial value
Define catastrophe model
Computer simulation tool used to estimate potential cat losses from insurance portfolio.
Calculate coefficient of variation (CV)
CV = SD / Mean
Define Capital
Funds over & above reserves needed to ensure insurers pay for policyholder obligations.
Aka net assets or surplus.
Complete the sentence:
Capital is regulated by …
Statute
Define Equity
Value of owner’s residual interest.
Briefly explain why accounting equity is often lower than capital.
Because debt can be included in capital but not in equity.
Briefly explain why accounting equity can be negative but market value is always positive.
Because of limited liabilities in market value.
Complete the sentence:
Equity is regulated by …
Equity is NOT regulated
Define skewness
Measures asymmetry of loss distribution.
Positive means right tail is longer.
Define kurtosis
Describes the tailness of loss distribution.
Higher value means thicker tail.
List the 5 monetary variables that control Ins. Co. operations.
- Expected Loss
- Premium
- Assets
- Margin
- Capital
List the 3 unitless ratios that control Ins. Co. operations
- Loss Ratio
- Cost of Capital
- Leverage
Calculate Premium
P = Loss + Margin
Calculate Assets
A = P + Q = Premium + Capital = E(X) + M + Q
Calculate Cost of Capital
CoC = M/Q = Margin / Capital
Calculate Asset Leverage
Assets / Premium = A / P
Fully describe the Cfs in a one-period Ins. Co.
Insurers are one-period, limited liability entities with no existing liabilities that come into existence at time t=0.
At t=0, it writes single-period(s) insurance contract(s) & collect premium from insureds. Premiums is fully earned by time t=1 (no UPR).
It raises capital from investors at time t=0 by selling them all or part of its uncertain t=1 residual value.
It pays all claims at time t=1 & gives residual value to investors. If assets are insufficient, it defaults and investors lose original investment.
Calculate grown assets at time t=1
a’ = (1+r)a = min(X, a’) - max(0, a’-X)
r is return on assets
