1. Chapters 7-- Insurance Chapter 7 – Insurance Companies Types of Insurance Products Life  Term, Whole Life, Universal Health  Medical, Dental, Disability and Long-term Care Property and Casualty  Auto, House. Boat, Business, etc. Investment Products Annuities and GICs

2. Insurance – Risk Transfer Define Risk… Uncertainty of outcomes Potential for “bad” outcome Potential bad outcome is “harmful” Why Transfer… Some one else willing to take on the risk for a fee (premium) Fee is really a put contract Buyer of risk has advantage…law of large numbers

3. Life Insurance Insurance Products – Risk Transfer Life Insurance What is the down side? Why buy life insurance? Who benefits? Insurance Company’s Risk Term Life Insurance Whole Life Insurance Universal Life Insurance Company’s outflow predictable? Premiums (paid up front…prior to payout)

4. Health Insurance Health – transfer of risk? Types Medical Dental Disability Long-Term Care Insurance Company Benefit Premiums Other – Negotiations (Big Player) False Promises (Deny claims) Insurance Company Costs – Predictable?

5. Property & Casualty Insurance Property House, Car, Boat, etc. Business Casualty Liability Insurance Harm done by you Harm done on your property Insurance Company – Predictable Outflow?

6. Insurance Products & Investments Products Guaranteed Investment Contracts Promise to pay lump sum for “portfolio” at maturity date (zero-coupon bond) Purchaser bears risk of repayment by Insurance Company Annuities Promise to pay steady stream of payments over life of the contract Purchaser bears risk of repayment by Insurance Company

7. Types of Companies Grouped by Products Life and Health Companies (L&H) Property and Casualty Companies (P&C) Multiline if both L&H and P&C Stock or Mutual Mutual of Omaha – owned by policy holders Components Home Office – manufactures products Investment Company – manages portfolio Sales Company – sells products

8. Business Model Actuarial Fair Premiums The expected costs of the policy are the premium of the policy Profit from the time value of money – premiums invested in market and insurance company makes money for portfolio gains States legislate some types of insurance Guaranteed market Sets minimum insurance coverage

9. Regulation / Deregulation McCarran Ferguson Act 1945 States regulate insurance companies – most states have insurance boards Rules National Association of Insurance Commissioners (NAIC) – voluntary organization that “propose rules” Gramm-Leach-Bliley Act Removed separation of investment banks and insurance industry

10. International Insurance Companies International companies have expanded into U.S. markets by “buying” domestic insurance companies AXA (French) bought Equitable ING (Dutch) bought Aetna and Reliastar Allianz (German) bought Life USA Zurich (Swiss) bought Kemper Most International Companies are multiline companies