1. Chapter Nineteen Insurance Companies and Pension Funds

2. Copyright © 2004 Pearson Education Canada Inc. Slide 19–2 Fundamentals of Insurance 1.There must be a relationship between the insured and the beneficiary 2.The insured must provide full and accurate information to the insurance company 3.The insured is not to profit as a result of insurance coverage 4.If a third party compensates the insured for the loss, the insurance company’s obligation is reduced by the amount of the compensation

3. Copyright © 2004 Pearson Education Canada Inc. Slide 19–3 Fundamentals of Insurance (cont.) 5.The insurance company must have a large number of insured so that the risk can be spread out among many different policies 6.The loss must be quantifiable 7.The insurance company must be able to compute the probability of the loss occurring

4. Copyright © 2004 Pearson Education Canada Inc. Slide 19–4 Adverse Selection in Insurance Those most likely to suffer loss are most likely to apply for insurance. Insurance companies give lower rates to group plans because they help control this problem

5. Copyright © 2004 Pearson Education Canada Inc. Slide 19–5 Moral Hazard in Insurance The insured person is not as likely to protect property as the uninsured person. Insurance companies prefer to use a deductible to help control this problem.

6. Copyright © 2004 Pearson Education Canada Inc. Slide 19–6 Types of Insurance Life Insurance Health Insurance Property and Casualty Insurance

7. Copyright © 2004 Pearson Education Canada Inc. Slide 19–7 Life Insurance Term Life Whole Life Universal Life Annuities Assets and Liabilities of Life Insurance Companies

8. Copyright © 2004 Pearson Education Canada Inc. Slide 19–8 Life Expectancy at Various Ages in Canada

9. Copyright © 2004 Pearson Education Canada Inc. Slide 19–9 Sample Annual Premiums

10. Copyright © 2004 Pearson Education Canada Inc. Slide 19–10 Distribution of Life Insurance Company Assets

11. Copyright © 2004 Pearson Education Canada Inc. Slide 19–11 Percentage of Life Insurance Company Assets Invested in Mortgages

12. Copyright © 2004 Pearson Education Canada Inc. Slide 19–12 Property and Casualty Insurance Property Insurance –Named-peril policies –All-risk policies Casualty Insurance Reinsurance

13. Copyright © 2004 Pearson Education Canada Inc. Slide 19–13 Distribution of Assets of Property and Casualty Insurance Companies in Canada

14. Copyright © 2004 Pearson Education Canada Inc. Slide 19–14 Insurance Management (avoidance of moral hazard and adverse selection) Screening Risk-Based Premium Restrictive Provisions Prevention of Fraud Cancellations of Insurance Deductibles Coinsurance Limits on the Amount of Insurance

15. Copyright © 2004 Pearson Education Canada Inc. Slide 19–15 Pension Plan Definition: An asset pool that accumulates over an individual’s working years and is paid out during the nonworking years.

16. Copyright © 2004 Pearson Education Canada Inc. Slide 19–16 Types of Pensions Defined-Benefit Pension Plans Annual Payment = 2%  average of final 3 years’ income  years of service

17. Copyright © 2004 Pearson Education Canada Inc. Slide 19–17 Types of Pensions (cont.) Defined-Contribution Pension Plan Private Pension Plans Public Pension Plan Social Security

18. Copyright © 2004 Pearson Education Canada Inc. Slide 19–18 CPP and QPP Total Financial Assets

19. Copyright © 2004 Pearson Education Canada Inc. Slide 19–19 Private Pension Plan Assets in the U.S., 1999

20. Copyright © 2004 Pearson Education Canada Inc. Slide 19–20 Social Security Pay as you go system Projected number of workers is falling while projected number of retirees is increasing