Week 12 Lecture - Week 12. Insurance, Investment Companies...

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Week 12. Insurance, Investment Companies and Superannuation 1203AFE Money, Banking and Finance Chapter 16 Monday 20 October 2008
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The purpose of this lecture is to help you to: Explain how the insurance mechanism works Outline the operation of insurers Describe the different types of insurance products Explain the functions of investment companies. Explain the various types of managed funds and the investment strategies they use Discuss the superannuation industry in Australia Describe cash management trusts and public unit trusts Define hedge funds and discuss the investment strategies they use. Objectives
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What is insurance??. . Why do we need insurance??. . Insurance is a product that reduces loss Insurance is necessity for everyone Some risks can be avoided, some cannot. . Methods of dealing with risk: Retention Loss control Transfer
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Insurance Insurance is the transfer of a pure risk to an entity that pools the risk of loss and provides payment if a loss occurs. Pure risks have two outcomes: loss or no loss. Insurance policies = contracts between the insurer and the insured. The insurer receives a fee - the premium. Insurance is beneficial because: Reduces fear Incentive for loss control Facilitates credit Capital formation
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Objective Risk The risk that insurers face once they have accepted the risk from the insurance purchasers is called objective risk . This is the deviation between actual losses and expected losses. Insurance is priced to cover expected losses and expenses. If loss levels are as predicted, the insurance mechanism works well.
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Reducing Objective Risk Insurance companies reduce objective risk in a number of ways: Using the law of large numbers Careful underwriting Co-insurance Loss sharing Restrictive covenants Reinsurance
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Privately Insurable Risks Certain conditions must be met before a private company can insure risk: There must be many similar exposure units so that risk can be predicted using the law of large numbers. Losses that occur should be accidental and unintentional. Losses must not be catastrophic. Losses should be determinable and measurable. Chance of loss should be calculable. The premium for insurance must be affordable.
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Regulation In Australia, insurance companies are regulated by APRA.
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This note was uploaded on 06/09/2009 for the course ACCOUNTING 1203AFE taught by Professor Ms.mirellamalin during the Three '08 term at Griffith.

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Week 12 Lecture - Week 12. Insurance, Investment Companies...

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