Economics
Life Insurance Companies
Life insurance companies are financial institutions that provide protection to individuals and their families by offering insurance policies that pay out a sum of money upon the insured person's death. These companies collect premiums from policyholders and invest the funds to generate returns, which are used to pay out claims and cover operating expenses. Life insurance plays a crucial role in risk management and financial planning for individuals.
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10 Key excerpts on "Life Insurance Companies"
eBook - ePub- Robin Pearson(Author)
- 2015(Publication Date)
- Routledge(Publisher)
15 Trust in the solvency of an insurance company is important for broader social reasons. Life Insurance Companies invest premiums paid by policyholders in remunerative assets, thus essentially operating as financial intermediaries between savers (or policyholders) and borrowers (entrepreneurs, households and governments). As such life insurance hasaugmented economic growth by increasing society’s total savings. Those increased savings, reduce the cost of borrowing…by increasing the supply of investment funds, thereby establishing a complex web of mutually beneficial relationships among insurers, policyholders, direct beneficiaries, and what we call ‘social beneficiaries’. As increased financial intermediation has been a major cause of economic progress, Life Insurance Companies have made significant contributions to the general weal.16As life insurance depended heavily on the principle of trust and confidence some suspicion existed against such business, which explains the relatively late application of limited liability to insurance corporations.17 The general condition was for insurance companies to be mutual in principle and thus command greater confidence. Mutuality in fire, marine and life insurance offered a mechanism of obtaining capital without exposing a small group of individuals to heavy concentrated risk. Mutualization enabled companies to begin with relatively small initial capital guarantees and had the marketing advantage of hiring commercially minded policyholders with the prospects of sharing the dividend rewards of ownership.18 Governments often regulated the insurance industry to protect policyholders and prevent insurance companies from abusing their investment power.19
eBook - PDF- Philip Booth, Robert Chadburn, Steven Haberman, Dewi James, Zaki Khorasanee, Robert H Plumb, Ben Rickayzen, Robert H. Plumb(Authors)
- 2020(Publication Date)
- Chapman and Hall/CRC(Publisher)
In this regard, nonlife (or general) insurance and sickness and disability insurance contingencies are equally important; see Part V. 6.7.2 Insurance Company Risk The business of a life insurer is to manage the collective risks passed to it by its policyholders. At this point it is useful to define what is meant by risk from the point of view of a life insurance company: a future event will constitute a risk to the company if the event can have an adverse financial effect on the company, and where the occurrence of the event and/or the intensity of its financial effect are uncertain at the present time. The primary risks that are managed by Life Insurance Companies are those due to the uncertainties caused by the demographic determinants of life insurance policy claims; that is, due to the incidence of death and survival among its policyholders. These risks will be referred to collectively as the company’s insurance risk . 209 Fundamental Features of Life Insurance 6.7.3 Managing Insurance Risk: Risk Pooling The following description of risk pooling applies equally to general insurance; see Section 12.1. Let us assume that an insurer issues n identical insurance contracts at time t 0 , which terminate at time t 1 , to n independent risks (lives). Premium income of p n will be received, assumed payable at time t 0 . Shareholders will also provide capital of u 0 ¼ wp n ; i.e., capital provision is assumed to be a proportion w of the premium income p n . We will ignore investment income and expenses throughout. Now, the capital remaining at the expiry of the insurance contract, at time t 1 , will be U 1 ¼ ð 1 þ w Þ p n -C n where C n is the total amount of claims incurred over the period from the n policies. The insurer can be described as technically solvent at time t 1 if it has nonnegative assets at that time, i.e., if U 1 > 0.
- Maureen Burton, Reynold F. Nesiba, Bruce Brown(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
Risk-averse behavior can be observed in the way most people make insurance-buying decisions. When given a choice between living uninsured in a $100,000 house or paying $400 per year to insure against its loss, most of us choose to buy the insurance. It is likely that one could live in a house for an entire lifetime and never experience a major catastrophe. However, most of us also know that the loss of a house—regardless of its unlikely destruction—would be unbearable financially. Rather than taking the wager that our house will not burn down, we instead do the opposite of gambling—we purchase coverage from an insurance company. This coverage ensures that in the unlikely event of our house being burned to the ground, we will be reimbursed financially for the loss.Chapter 4 introduced financial institutions and financial conglomerates. This chapter examines insurance companies more closely. The first section explains risk pooling and two special kinds of risk created by insurance—adverse selection and moral hazard—and examines professional employment in the insurance industry. Later sections discuss various aspects of the life, health, and property and casualty insurance businesses, how insurance companies manage adverse selection and moral hazard, and insurance industry regulation.Insurance Companies
Overview
Insurance companies are a form of contractual-type financial intermediary that offer the public protection against the financial costs associated with the loss of life, health, or property. For a fee, called a premium, insurance companies agree to make a payment contingent upon the occurrence of a certain event. Premiums are used to purchase financial assets until policyholders present their claims. As long as a company’s combined premium revenue and investment earnings are greater than the insurance claims made against it, the company will earn a profit.Insurance CompanyA contractual-type financial intermediary that offers the public protection against the financial costs associated with the loss of life, health, or property in exchange for a premium.The essential principle underlying insurance is that through the pooling of risks, a loss that would be unbearable if borne by one person becomes bearable if shared with enough other people. Imagine a situation in which we can compute actuarially that, on average, three ships out of 100 leaving a particular port will sink or be captured by pirates each year. We do not know which three ships will be lost. Without insurance, the owners of the sunken and captured ships will face potential financial ruin. They may not be able to afford to stay in business. However, if the 100 ship owners band together and each pays a small premium whose sum equals the cost of replacing three ships each year, the actual loss becomes bearable. Those losing insured ships are not financially submerged but are instead able to continue their nautical pursuits. It is this basic concept that medieval merchants understood when they created the property and casualty insurance agreements to insure each other’s ships. This practice continued for centuries. In the 1690s, a London coffeehouse owned by Edward Lloyd became a regular meeting place for ship owners and merchants. Before a ship set sail, its cargo was listed on a statement and read to those in the coffeehouse. Those willing to guarantee or underwrite the risk of insuring the cargo wrote their name and the share of risk they were willing to bear on the statement. Over time, Lloyd’s of London grew into one of the most famous names in insurance, introducing insurance coverage for a wide variety of misfortunate occurrences.
eBook - PDFThe Life Insurance Industry in India
Current State and Efficiency
- Tapas Kumar Parida, Debashis Acharya(Authors)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
It provides individuals and the economy with several important financial solutions. First, life insurance products encourage long-term saving and reinvestment of substantial sum in public and private sector projects. By leveraging their role as financial intermediaries, life insurers have become a key source of long-term finance, encouraging development of capital markets. Second, in the phase of growing urbanization, population mobi- lity and formalization of economic relationships between individuals, families and communities, life insurance has taken on increasing impor- tance as a way for individuals and families to manage risk. Third, by pooling risks and smoothing incomes, insurance helps avoid excessive and costly bankruptcies and facilitates lending to businesses. Finally, the availability of insurance enables individuals and entrepreneurs to under- take activities with higher risk and higher return than they would other- wise consider, thus promoting higher productivity and growth (Beck and Webb 2003). In macroeconomic context, the link between high growth rates and savings is well known from the classical growth theory. In the context of India, a number of studies indicate that a growth rate of 8% is possible, only with a savings rate of 30%. The Table 1.1 specifies the trend of savings starting from 1950–1951 to 2014–2015. It clearly indicates that there is a strong correlation between gross domestic savings (GDS) and gross domestic product (GDP), which stands at 0.99 during the period 1950– 1951 and 2014–2015. In literature, it is well argued that a positive relationship exists between saving and insurance premium (Parida and Acharya 2014). So, any study on insurance business needs to look into the other saving activities of the households. The household sector savings include physical and financial saving and account for around 57.8% of the 1 LIFE INSURANCE IN INDIA: ORIGIN, EVOLUTION AND THE PRESENT STATE 3
- Colin Dodds(Author)
- 2017(Publication Date)
- Taylor & Francis(Publisher)
Various attempts have been made in both the USA and the UK to model the demand for life insurance. A.M. El-Mokadem (56), as part of his econometric study of personal sector saving in the UK, did attempt some specification of a possible demand function. But the main attempts have been in the USA and these have been more theoretical in their orientation and in particular we can cite the work of M.E. Yaari (170) (171), R.S. Headen and J.F. Lee (77) and to a lesser extent J.D. Cummins (39) and W.E. Nicholson (112). Clearly a knowledge of what factors are likely to be present in the demand for life assurance is important to life offices, both in terms of their marketing policies and their anticipated future new premium receipts. The wide-ranging nature of the business militates against any general or easy prediction although the growth in the group pension business (apart from new entrants) will be directly related to personal income. But having said that we need to derive estimates of national income which places us in the position of requiring macro-economic forecasts. This should be possible as there are a number of such models available, but as we have indicated, there has been no published systematic attempt to relate these macro model forecasts to the demand for insurance in the UK, though J.D. Cummins (39) in his econometric study of the life insurance sector in the USA used a forecast of this anticipated premium income that was derived from the Wharton Quarterly Model. The limits of this present study militate against exploring this particular avenue for the UK. However, we must make the obvious point that this is an important area for further work and certainly life investment officers have stressed to us that they continually attempt to predict cash flows. Indeed some go so far as to say that it is future cash flow that is important and that current market values and their fluctuations are irrelevant.1.3 Outline of the Study
We have discussed the three functions which life companies perform in terms of indemnification, accumulation and liquidation and the type of policies that they issue which can combine these three elements. We have also indicated the significance life companies have in holding the savings of the personal sector and more particularly in their potentially influential role in capital markets, given the magnitude and rate of growth of funds to invest. Given their ability to lend in a wide variety of markets, the investment policy of life offices would appear to pose numerous and intricate problems for the administering of the investment process and for the economic, social and political impact this may have on financial markets. In this latter respect the Wilson Committee (168) was set up to examine the role of financial institutions in the City and their efficiency and effectiveness in providing funds for industry. Life companies are clearly a significant institution in this regard.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- White Word Publications(Publisher)
The majority of the money that insurance companies make comes directly from premiums paid, as money gained through investment of premiums can never, in even the most ideal market conditions, vest enough money per year to pay out claims. Rates charged for life insurance increase with the insurer's age because, statistically, people are more likely to die as they get older. Given that adverse selection can have a negative impact on the insurer's financial situation, the insurer investigates each proposed insured individual unless the policy is below a company-established minimum amount, beginning with the application process. Group Insurance policies are an exception. ________________________ WORLD TECHNOLOGIES ________________________ This investigation and resulting evaluation of the risk is termed underwriting. Health and lifestyle questions are asked. Certain responses or information received may merit further investigation. Life Insurance Companies in the United States support the Medical Information Bureau (MIB), which is a clearinghouse of information on persons who have applied for life insurance with participating companies in the last seven years. As part of the application, the insurer receives permission to obtain information from the proposed insured's physicians. Underwriters will determine the purpose of insurance. The most common is to protect the owner's family or financial interests in the event of the insured's demise. Other purposes include estate planning or, in the case of cash-value contracts, investment for retirement planning. Bank loans or buy-sell provisions of business agreements are another acceptable purpose. Life Insurance Companies are never required by law to underwrite or to provide coverage to anyone, with the exception of Civil Rights Act compliance requirements. Insurance companies alone determine insurability, and some people, for their own health or lifestyle reasons, are deemed uninsurable.
eBook - PDF- Davis W. Gregg, Dan M. McGill(Authors)
- 2016(Publication Date)
The basic kinds of services that we can provide are primarily those arising out of the contingencies of death, disability, sickness, and accident. Out of the mathematics of these life contingencies, combined with the interest rate, the life insurance business has evolved a tremendous variety of cover-ages and methods of payment for such coverages. It is remarkable how much change is still possible after a period of almost two hundred years since modern life insurance started with the Old Equitable of London. In our free society the existence and continued acceptance of the services offered by Ufe insurance companies is a vital force in the nation's economy, but that force is far from dominant. For example, practically everything the Life Insurance Companies now do is anti-inflationary. Yet this by itself will never hold inflation in check, and the development of our services is much affected by the forces that * Senior Vice President and Actuary, The Equitable Life Assurance Society of the United States. 271 272 World Insurance Trends result in inflation or deflation. Again, w e may believe that the insuring public would be better off if we developed our services along certain lines, but if the impact of our tax laws creates inducements for development along other lines, the forms which these services take are bound to be affected. As I proceed to comment briefly on a number of changes that are now taking place, it will be apparent that they stem from the many influences that shape our economy, and are less the result of spontaneous invention than of evolutionary adaptation. PREMIUMS GRADED BY SIZE OF POLICY The laws of our different states do not directly regulate the premium rates that may be charged for individually issued life insurance and annuity contracts, and on the whole this is true for the other types of contracts issued by our Life Insurance Companies.
eBook - PDFWiley Pathways Personal Finance
Managing Your Money and Building Wealth
- Vickie L. Bajtelsmit, Linda G. Rastelli(Authors)
- 2012(Publication Date)
- Wiley(Publisher)
That means life insurers are receiving extra premium dollars today that will have to be available to pay death claims many years in the future. Because of the long- term nature of their liability, these insurers can invest in long-term securities without worrying about having access to sufficient funds to pay claims. The life insurer’s investment experience is therefore very important to its long-term financial performance: Insurers with better investment experience can charge lower premiums and capture larger market shares. The Benefits of Life Insurance Life insurance is uniquely suited to meeting certain personal financial goals and to providing a sizable amount of protection at a relatively low cost because the proceeds are free from the claims of creditors and tax authorities. It also offers the following benefits: ▲ Large amount of coverage: Life insurance allows you to buy a fairly large amount of protection for a relatively small annual cost. Your greatest need for protection is likely to be at the time in your life when you’re still in the wealth accumulation phase. For a young family, household resources are unlikely to be sufficient to meet the financial costs of an untimely death. But for a few dollars a month, the family can buy insurance to cover these costs. ▲ Protection from creditors: If you die, the proceeds of your life insurance policy are not subject to the claims of your creditors, whereas your other financial assets are. Thus, with life insurance, you can be sure that the funds will be there to meet the needs of your survivors. ▲ Tax savings: The proceeds of a life insurance policy are not taxed. If your policy includes an investment component, the increase in the value of that investment is also free of income tax. And as discussed in Chapter 15, with some minimal planning, you can ensure that your estate will pay no gift and estate taxation on the benefits. 250 FINANCIAL PLANNING WITH LIFE INSURANCE
eBook - PDFEmbracing Risk
The Changing Culture of Insurance and Responsibility
- Tom Baker, Jonathan Simon, Tom Baker, Jonathan Simon(Authors)
- 2010(Publication Date)
- University of Chicago Press(Publisher)
A substantial degree of control over Life Insurance Companies was therefore vested in the policyholders themselves. Although they ceded direct over-sight to an elected board and quotidian management of the office to the “register” (usually the projector himself), they collectively controlled their respective societies. Within the boundaries of these little common-wealths, policyholders gathered in an egalitarian fashion to protect one another from outrageous fortune. Inside this social shelter, the risks of 90 geoffrey clark falling into a demeaning social dependence on relations, neighbors, or the parish could be reduced, and the continued respectability of people of middling fortunes thereby assured. Life insurance seemed therefore to provide a means to preserve the independency of commercial families in the face of mortal disaster, and consequently to contribute to the conti-nuity and autonomy of commercial society and, by extension, of the na-tion as a whole. Of course, indemnification against loss was only one side of the allure of these early insurance schemes. As one insurance office acknowledged, the “[t]hings generally desired by the people . . . in undertakings of this na-ture, are security and advantage” (Perpetual Assurance Office 1709[?]). Accordingly, many societies spiced their offerings of insurance against mortal misfortune with plans for low-risk avenues to positive wealth. Some offices promised for instance to abate their fees as interest income from the joint-stock accumulated, until such time as the society became financially self-sufficient and could do away with members’ contribu-tions altogether. Members would then hold heritable title to stated death benefits free of charge. Other offices intended to invest their joint-stocks in real estate or in fisheries, the revenue from which would provide sup-plemental income to members or their heirs.
eBook - PDFNegro Employment in Finance
A Study of Racial Policies in Banking and Insurance
- Armand J. Thieblot, Jr., Linda Pickthorne Fletcher(Authors)
- 2016(Publication Date)
CHAPTER II. The Structure of the Insurance Industry Insurance as a technique is defined by academicians and prac-titioners in numerous ways. A definition of insurance is relevant to this study for two reasons. First, it is necessary to delineate between insurance provided by private as opposed to govern-mental mechanisms. Second, it is essential to eliminate from the scope of this study insurance-like devices such as service or parts replacement contracts sold by retailers along with a given product. For the purpose of this study, therefore, insurance shall be de-fined as the transfer of pure risk through a two-party contract. Accordingly, the following data are relevant only for those entities that meet this definition. CATEGORIES OF INSURERS Currently accepted usage categorizes an insurance company according to the type of product (referred to as coverage) it sells. The four broad types of coverages and, therefore, categories of insurers are (1) life, (2) health, (3) property, and (4) liabil-ity (historically termed casualty). Each of these classifications usually is referred to as a line of insurance. For all practical purposes, however, there are only two rather than four lines of insurance: life and property-liability. This narrowing of cate-goies is permissible because most insurers of tangible property write both property and liability insurance; similarly, there are few insurance companies that are organized to write only health insurance since both life and liability insurers may be licensed to market the health product. Most state insurance laws prohibit a single corporate entity from writing both life and property-liability coverages. An insurer may be chartered, therefore, as a life or a property-liabil-ity insurer, but not as both a life and property-liability company. As a result, an organization—for example, a life company—that wishes to extend its marketing efforts to all four lines must form 5
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