Insurance Institutions

I. Introduction

A. Type of Insurance

1. Social Insurance

2. Private Insurance• American System

– Life Insurance

– Property/Casualty Insurance

• European System

B. Risk

1. Outcome• Pure Risk

The outcome can only be a loss or no loss with no possibility for gain.

• Speculative Risk

Uncertainty about an event could result in either a gain or a loss.

2. Insurability• Statistical Concepts

– Law of Large Numbers– Measurable Objective Risk

Objective risk is the deviation of actual losses from expected losses and can be measured statistically.

• Commercial Insurability– Homogeneous exposure units

There is a large number of homogeneous exposure units so that losses can be predicted on the law of large numbers.

– Accidental and unintentional occurrence

The law of large numbers is based on randomness.

– Identifiable circumstances of loss

The time, location, cause, and amount should be identifiable.

– Calculable probability of loss

The is required for the purpose of calculating premium.

– Non-catastrophic loss

A large portion of the exposure units should not experience a loss at the same time.

– Affordable premium

This is to ensure a sizable market.

II. Life Insurance Companies

A. Industry Structure1. Insurers• By Organizational Form

– Stock Life Insurance Companies– Mutual Life Insurance Companies– Fraternal Life Insurance Companies– Government Agencies– Mutual Savings Banks

• By Reserve Requirement– Legal Reserve Companies– Assessment Insurance Companies

• By Reinsurance– Primary Companies (Ceding Companies)– Reinsurance Companies

2. Distribution Network• Branch Offices• General Agencies• Direct Mail

B. Financial Operations

1. Life Insurance Policies• By Purpose

– Risk

– Term Insurance• Duration

1-year, 3-year, 5-year, 10-year• Face Amount

Constant term, decreasing term, increasing term

• Expiration Protection

Renewable term, convertible term

– Risk/Investment• Endowment Life• Whole Life (Straight Life)• Variable Life• Universal Life• Variable Universal Life (Universal

Life II)• Single Premium Life

PremiumDeathBenefit

CashValue

WholeLife

Fixedpremium

Fixed deathbenefit

Fixed cashvalue

VariableLife

Fixedpremium

Variablewithguaranteedminimum

Variablewithguaranteedminimum

PremiumDeathBenefit

CashValue

UniversalLife

Variableexcept initialperiod

Variablewithguaranteedminimum

Variablewithguaranteedminimum

VariableUniversalLife

Variablepremium

Variablewithoutguaranteedminimum

Variablewithoutguaranteedminimum

• By Market Segment– Individual Life (Ordinary Life)– Business Life– Group Life– Credit Life– Industrial Life (Home Service Life)

• By Dividend Received– Participating Contract (rec. dividends)– Non-Participating Contract (no dividend)

2. Annuity

3. Health Insurance

4. Investments• Corporate Bonds

• Mortgages

• Government Securities

C. Regulations• National Association of Insurance

Commissioners (NAIC)

• Insurance Regulatory Information System

III. Property/Casualty Insurance Companies

A. Industry Structure

1. Insurers• By Ownership

– Stock Companies– Mutual Companies– Reciprocals (Interinsurance Exchanges) – Domestic Lloyd

• By Corporate Control– Independent Companies– Captive Companies

• By Premium Assessment– Assessment Companies– Non-Assessment Companies

• By Reinsurance– Primary Companies (Ceding Companies)– Reinsurance Companies

2. Distribution Network• Branch Offices

• General Agencies

• Direct Mail

B. Financial Operations

1. Property/Liability Policies• By Parties Covered

– First Person Insurance– Third Party Liability Insurance

• By Pattern of Loss Payments– Short-Tailed Insurance Lines

– Long-Tailed Insurance Lines

• By Risk Category– Property Insurance

• Named Peril Policies

A named peril policy cover perils that are specifically named, such as lightning, flood, theft, etc.

• All-Risk Policies (Open Perils)

An all risk policy protect the insured against loss from all perils except those specifically excluded.

– Liability Insurance– Marine Insurance

• Ocean Marine Insurance• Inland Marine Insurance

– Multiline Policies

A multiline policy contain both property and liability insurance coverages. Examples include homeowner’s policies and personal auto policies.

– Surety Insurance– Fidelity Insurance

2. Health Insurance

3. Investments• Corporate stocks• Revenue bonds• Corporate bonds• U. S. government securities

C. Regulations

IV. Trends

A. Bancassurance• Cross-Sectoral Investing (i.e., crossing

industry lines)

• Interpenetration of Markets (i.e., merges and acquisitions)

• Cooperative Arrangement (i.e., cooperating between independent banks and insurance companies)

B. Cross-Border Activities• Mergers and Acquisitions

• Branching

V. Social Insurance

A. Institutions• Social Security Administration, Department

of Health and Human Services• Bureau of Employment Security,

Department of Labor• Bureau of Employees’ Compensation,

Department of Labor

B. Financial Operations• Old-Age, Survivor, Disability, and

Health Insurance (OASDHI)

• Unemployment Insurance

• Worker’s Compensation