Chapter18 - Chapter 18 Insurance Companies and Pension...

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Chapter 18 Insurance Companies and Pension Funds
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PRINCIPLES OF RISK MANAGEMENT Risk – uncertainty concerning occurrence of loss Pure risk vs. Speculative Risk Two possible three possible outcomes - Outcomes – loss, no loss, gain Loss, no loss Pure Risk – can be transferred to insurance co. Objective risk – occurs when actual losses exceed expected losses
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How do insurance companies manage expected objective risk? “LAW OF LARGE NUMBERS” As number of insured risks increase, the deviation between actual and expected results decreases and the more predictable average losses become Underwriting standards – only agree to insure acceptable risks; higher premiums paid by higher risk customers; actuarially determined Deductibles and coinsurance Reinsurance – share risk with another insurer
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LIFE AND HEALTH INSURANCE Sell policies that give money to a beneficiary upon death of policyholder Also provide investment services Types of policies sold 1. Term Insurance – benefits payable to a beneficiary only when policyholder dies within a specified time period; no savings element; “pure insurance”; low cost for a high dollar benefit; premiums lower at younger ages
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1. Whole Life Insurance – periodic payment of premiums; protection for as long as insured lives; builds cash values; policyholder can borrow against this amount at below market rates; good product for insurance companies as it has long term, stable cash flows 2. Universal Life Insurance – combines features of term and whole life; premium divided into two parts – first, used to pay death benefit and cover administrative expenses – second, used for investments; minimum guaranteed return; overall return tied to market rates
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1. Variable Life Insurance – like universal life
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Chapter18 - Chapter 18 Insurance Companies and Pension...

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