Topic 11 - Insurance, Super, Investment Companies Flashcards
Risk Transfer
shifting risk from one party to another
Pure Risks
situations with only two outcomes; loss or no loss
Objective Risk
deviation between actual losses and expected losses
Law of Large Numbers
The higher the amount of people insured, the less deviation between actual and expected losses (like diversification)
Underwriting
Classification and selection of insurable risks
Co-insurance
Loss-sharing provisions (e.g. paying an excess)
Reinsurance
An insurance company insures themself
Insurance pricing must be..
Must be:
- able to cover cost of claims
- competitive
Life Insurance - Term Life
Over specified time frame
Life Insurance - Whole Life
Over whole time frame of life
Life Insurance - Business Overhead
Covers business expenses while a key person in running the business is incapacitated
General Insurance
Car/home/legal liability
Types of Insurance
- Life
- General
- Health
Public Unit Trust Fund: Cash Management Trusts
At-call deposits invested in short term government securities
Public Unit Trust Fund: Equity Trust
Funds invested in shares with high franking credits
Investors can reduce tax payments
Public Unit Trust Fund: Property Trust
Investors can sell their units, but the fund manager does not have to sell any assets
Public Unit Trust Fund: Fixed Interest Trust
Usually commonwealth and state government bonds
Public Unit Trust Fund: Ethical Funds
exclude investments that may harm the environment
Public Unit Trust Fund: Capital Guaranteed Trusts
investors guaranteed to receive initial investment back
Accumulation Super Funds/Defined Contribution
Members contribute portion of income
Benefits pay based on fund’s investment performance
Defined Benefit Fund
Employer promises a pre-determined final payout for when the employee retires
Super Fund: Retail Super
Anyone can join, mid-high costs
Super Fund: Industry Super
Low-mid costs
Super Fund: Public Sector Super Funds
Usually for government employees, low cost
Super Fund: Corporate Super Funds
Arranged by employer for its employees, low-mid costs
Super Fund: SMSF
Self managed super fund, highly regulated by ATO
Hedge Fund Strategy: Fixed Income Arbitrage
Take short/long bond positions
Profit if yield spreads return to historical levels
Hedge Fund Strategy: Index Arbitrage
Buy or sell basket of stocks
Take counter position in an index future
Capture difference due to market ineffiencies
Hedge Fund Strategy: Closed-End Fund Arbitrage
Buy/sell basket of stocks that replicates holding of a closed-end mutual fund
Hedge Fund Strategy: Convertible Arbitrage
Go long in convertible securities
Simultaneously go short on underlying equities
Work spread between two
Hedge Fund Strategy: Risk Arbitrage
Fund managers take long position in stock of company being acquired
Short the stock of the company acquiring
