Actual premium charge pure premium administrative

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Actual premium charge= pure premium + administrative expensive o Administrative expensive are higher for insurance than any other financial product Reserves and Premium Smoothing- o Insurers pay claims after the receive premiums, so they have an amount of investible funds o Insurance reserves- policyholders’ funds that insurance companies are holding in anticipation of paying claims o Premium smoothing- charging a fixed premium over time when the pure premium is changing (rises with age as payer gets older) Marketing Involves selling insurance, screening risks, and writing policies Worthwhile to for insurance company, not bank, to hire a lot salesmen because the payoff is high Incentive problems Owners provide capital and bear risk for exchange in income (paying premiums) Managers- set rates and do the marketing and administration and investment Policyholders pay a premium in exchange for coverage o The Insurance Contract: o The Organizational Form of the Insurer: Mutual association- owned by customers rather than providers of equity- this aids in solving incentive issues o Incentive Problems in Marketing: Agent will want to sign as many customers no matter how bad the business it Has little incentive to vary premiums because it could lose business Direct writing is a solution to this because the seller works for the company Life Insurance: Basic products- life insurance proper, disability insurance, annuities (addresses problem of living to long), and health insurance The Evolution of Life Insurance in the US: The Mutual-
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Lifes and the Early Securities Market- Lifes Since the Depression- Life Insurance Policies: Term and Whole Life policies- o Term insurance- pure life insurance that pays a fixed sum in the event of death. Short-term usually for one year o Hard to market because people don’t like talking about their death, premiums are expensive when you’re old, and if you don’t die during the policies life you lose out o Whole life insurance is a solution to this- a policy with level premiums that combines saving with term insurance o Policy loan- a loan from a life insurance company secured by the cash value of a policy The Dangers of Policy Loans- New Life Insurance products- o Universal life- a policy that pays if you die or, if not, at age 65. It allows flexible premiums and pays a market sensitive return The Declining Importance of Life insurance- o Relatively low return that life insurance policies can offer Retirement-Related Products Alternative Savings Vehicles- Savings vehicles for pension funds- o Separate account- life insurance assets dedicated to specific liabilities, they could invest in stocks Annuities- o Savings that turn into secure income after retirement o Susceptible to the problem of adverse selection o Group annuities reduce adverse selection problem- typically employees at company. Since purchase is not voluntary there is no problem of adverse selection
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  • Fall '19
  • catastrophe insurance

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