Overview
• Insurance Companies:
– Two major groups:
• (1) Life and (2) Property & Casualty
– Size, structure and composition
– Balance sheets and recent trends
– Regulation of insurance companies
– Global competition and trends
Fundamentals of Insurance
• (1) There must be a relationship between the insured and the beneficiary • (2) The insured must provide full and accurate information to the insurance company
• (3) The insured is not to profit as a result of insurance coverage
• (4) If a third party compensates the insured for the loss, the insurance company’s obligation is reduced by the amount of the compensation • (5) The insurance company must have a large number of insured so that the risk can be spread out among many different policies
• (6) The loss must be quantifiable
• (7) The insurance company must be able to compute the probability of the loss’s occurring
Insurance Management Tools
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(1) Information collection and screening
(2) Risk-based premium
(3) Restrictive provisions
(4) Prevention of fraud by investigations
(5) Cancellations of insurance
(6) Deductibles
(7) Co-insurance
(8) Limits on the insurance coverage
Selling Insurance
• Sales forces: marketing of insurance products
• (1) Independent agents: sell insurance for a numbers of different companies. No loyalty to any one firm and find the best offer from the underwriters for customers. (Insurance Brokers)
• (2) Exclusive agents: sell insurance products for only one insurance company (Insurance agent)
• Since most agents are paid by commissions, they do not care the level of risk involved with policies sold
• Underwriters: keep control of the risk that sales agents are incurring on behalf of the company. They assume the obligations under the insurance contract and have authority to turn down policies • A final decision to accept the policy may depend on the inspector’s report
Insurance: Major Issues
• Adverse selection: occurs when the persons most likely to benefit from a transaction are the ones who most actively seek out the transaction and are thus most likely to be selected
– Insured have higher risk than general population
– Loss probability statistics gathered for the entire population may not truly reflect the loss potential for the persons who actually want to buy policies
– Alleviated by grouping of policyholders into risk pools
(group insurance) or requiring extra information or charging higher premium
Insurance: Major Issues
• Moral hazard refers to the fact that an insurance policy
changes the behavior of the insured person
• Concern arises when we cannot observe people’s actions and so cannot judge whether a poor outcome is intentional or just a result of bad luck
• Examples: A fire insurance policy written for more than the value of the property may induce the owner to arson. A generous automobile insurance policy may encourage reckless driving. Employment arrangements suffer too.
• Solutions to the moral hazard problem are hard to come by.
Restrictive covenant, monitoring, and deductibles can reduce the problem.
Life Insurance Companies
• Size, Structure and Composition of the Industry:
– In 1990: 163 companies
– In 2000: 120 companies
– In 2008: 94 companies
– In 2014: 76 companies (42 Canadian + 34 Foreign)
• Experience solid growth recently
• More concentrated as a result of consolidation
– Great-West Life acquired London Life and Canada Life (2003)
– SunLife acquired Clarica Life (2002)
– Manulife Financial merged with John Hancock (2004)
Top 10 Life Insurance Companies
• Manulife Financial is the largest life insurance company in
Canada with total assets of C$538.873 billion (03/31/2014)
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