Lec4303_CH22-23 - Financial Markets and Institutions...

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Financial Markets and Institutions Chapter 22 Insurance Companies and Pension Funds
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Lecture Objectives Topics include: Insurance Companies Fundamentals of Insurance Growth and Organization of Insurance Companies Types of Insurance Pensions Types of Pensions Regulation of Pension Plans The Future of Pension Funds
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Insurance Companies Insurance companies assume the risk of their clients in return for a fee, called the premium . Most people purchase insurance because they are risk-averse—they would rather pay a certainty equivalent (the premium) than accept a gamble
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Quick Quiz Research indicates that the 1,000,000 cars in your city experience unrecoverable losses of $250,000,000 per year from theft, collisions, etc. If 30% of premiums are used to cover expenses, what premium must be charged to car owners?
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Fundamentals of Insurance 1. There must be a relationship between the insured and the beneficiary. 2. The insured must provide full and accurate information. 3. The insured is not to profit as a result of insurance coverage. 4. The insurance company must have a large number of insured. 5. The loss must be quantifiable. 6. The insurance company must be able to compute the
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Adverse Selection and Moral Hazard in Insurance Adverse selection problem: Those most likely to suffer loss are most likely to apply for insurance. Moral hazard: Insured may fail to take proper precautions to avoid losses because losses are covered by the insurance policy.
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Growth and Organization of Insurance Companies
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Types of Insurance Insurance is classified by which type of undesirable event is covered: Life Health Insurance Property and Casualty Insurance
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Life Insurance Term Life: the insured is covered while the policy is in effect. Whole Life: similar to term life, but when the term of policy expires, the insured can get the cash value of the policy. Universal Life: includes both a term life portion and a savings portion. Annuities: pays a benefit to the insured until death, to cover retirement years.
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Expected Life of Persons at Various Ages
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Sample Annual Premiums
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Health Insurance Health insurance policies are highly vulnerable to the adverse selection problem. Health insurance is offered through group policies. Health insurance is a hot topic in the political environment, focusing on increased costs and availability of coverage. Insurance programs are attempting to shift costs to the employers. Health Maintenance Organizations are another attempt to keep costs down.
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Property and Casualty Insurance Property Insurance: protects businesses and owners from the risk associated with ownership. Named-peril policies: insures against any losses
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Lec4303_CH22-23 - Financial Markets and Institutions...

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