1. J. K. Dietrich - FBE 525 - Fall, 2006 Value Creation in Insurance, Information and Asset Management Services Week 8 - October 12, 2006

2. J. K. Dietrich - FBE 525 - Fall, 2006 Life Insurance u Life and annuity contract –Probabilities determined –Cash flows from coverage are predictable –Principal-agent problems with moral hazard limited, adverse selection tolerable u Cancellations, lapses, policy loans u Inflation, taxes, and product innovation –Universal life insurance –Annuities

3. J. K. Dietrich - FBE 525 - Fall, 2006 Life Insurance Contracts Age Retirement Death Whole Life ContractLimited Pay Life Premiums, Benefits

4. J. K. Dietrich - FBE 525 - Fall, 2006 Life Insurance Contracts (cont’d) Age Retirement Death Endowment PolicyLife and Annuity Premiums, Benefits

5. J. K. Dietrich - FBE 525 - Fall, 2006 Casualty Insurance u Casualty contract –Period –Incidence and severity of claims –Catastrophic losses u Principal-agent problems –Insured and adverse selection –Insured and moral hazard –Correlation of incidence and severity with systematic risk

6. J. K. Dietrich - FBE 525 - Fall, 2006 Reinsurance Example Loss Claims Payments 0 Retained by Underwriter Paid by Reinsurer A Paid by Reinsurers B & C

7. J. K. Dietrich - FBE 525 - Fall, 2006 Insurance Pricing in Equilibrium u Premiums compensate insurers for insurance costs and losses and systematic risk: where and P, X and L are premiums, expenses and losses and k is a time to claim payment measure

8. J. K. Dietrich - FBE 525 - Fall, 2006 Inefficiencies in Insurance u Pricing and term setting u Marketing and information u Monitoring and controlling u Production and delivery u Funding and investing u Risk bearing and sharing

9. J. K. Dietrich - FBE 525 - Fall, 2006 Asset Management u Economics of the industry –Performance measurement –Principal-agent problems u A “temporary” disequilibrium –Historical perspective u Basic problem: luck versus skill u The value chain in asset management u Strategic challenges

10. J. K. Dietrich - FBE 525 - Fall, 2006 Information and Advice u Markets –Retail customer specific information »Credit information »Loan application and transaction sources »Advice based on scoring, marketing, etc. –Wholesale information and analytical services »Dun and Bradstreet »Rating agencies u Current issues in bundling, pricing

11. J. K. Dietrich - FBE 525 - Fall, 2006 Next Week... u Prepare DFA and Bloomberg cases for discussion on October 19 (or 14) u Review ISE and Hambrecht case if you plan to come on October 14 (Saturday) (see Week 6 Objectives for case questions) u Part 2 of project due on October 19 u Take-home distributed today is due in class on October 19