Fabozzi金融市場與金融機構基礎課后答案

1、-PAGE . z.CHAPTER 6INSURANCE PANIESTYPE OF INSURANCE PANIESInsurance panies sell insurance policies for a premium. They have two sources of ine: underwriting ine, and investment ine. Life InsuranceThe life insurance pany pays the beneficiary of the life insurance policy in the event of the death of

2、the insured. Health InsuranceThe health insurance pany pays the insured all or a portion of the medical treatment of the insured. Until the last decade, the major type of health insurance available was indemnity insurance. Due to the lack of constraints and incentives for cost savings, the medical s

3、ervice insured by indemnity insurance became very e*pensive. In response, various forms of managed health care have been developed. In general, these forms of managed health care put constraints on the choice of the provider by the insured and on the types of service provided by the provider. Proper

4、ty and Casualty InsuranceProperty and casualty (P&C) insurance panies insure the risk of damage to various types of property. Liability InsuranceThe risk insured against is litigation, or the risk of lawsuits against the insured due to actions by the insured or others. This is typically a third-part

5、y claim. Disability InsuranceDisability insurance insures against the inability of employed persons to earn an ine. Typically, own occ disability insurance is written for professionals in white-collar occupations, and any occ for blue-collar workers. There are two types of policies regarding the sus

6、tainability of the policy. First, guaranteed renewable is a term where the issuer has to sustain the policy for a specified period of time, but can change the premium rates for the entire class. The other type is noncancellable and guaranteed renewable whereby the issuer has no right to make any cha

7、nges in any policy during the specified period. Long-Term Care InsuranceLong-term care insurance provides coverage for custodial care for the aged who are no longer able to care for themselves. Structured SettlementsStructured settlements are fi*ed, guaranteed periodic payments over a long period of

8、 time, typically resulting from a settlement on a disability policy or other type of policy. Investment Oriented Products A guaranteed investment contract or guaranteed ine contract (or simply GIC), is a pure investment product. In a GIC, a life insurance pany agrees, for a single premium, to pay th

9、e principal amount and a predetermined annual crediting rate over the life of the investment, all of which is paid at the maturity date. A life insurance pany agrees in return for a premium to pay the principal amount and a predetermined annual crediting rate over the life of the investment. Effecti

10、vely, a GIC is a zero coupon bond issued by a life insurance pany and as such e*poses the investor to the same credit risk. Some GICs require a single premium payment (bullet), others provide windows wherein deposits are accepted over time at the same interest rate. GICs are popular contracts for pe

11、nsion funds, since interest rate risk assumed by insurance pany. But investors still have to worry about the credit risk of the insurance pany. AnnuityAn annuity is often described as a mutual fund in an insurance wrapper. The ine and realized gains are not ta*able if not withdrawn from the annuity

12、product. Thus, the inside buildup of returns receives a favorable ta* treatment. Annuities can be either fi*ed, or variable. For a single payment or premium the insurance pany will provide fi*ed payments for the life of the policyholder. It can also provide a lump sum payment to the retiree after a

13、number of years of accumulating and investing premium payments. Monoline Insurance paniesMonoline insurers guarantee the timely repayment of the bond principal and interest when a bond insurer defaults on these payments. The insured securities have traditionally been municipal bonds, but they now in

14、clude structured finance bonds, CDOs, CLOs, and asset-backed bonds. Monoline insurers have been rated AAA and must have this high rating to be effective since they transfer their rating to the bond issue being insured. INSURANCE PANIES VERSUS TYPES OF PRODUCTS Traditionally, life and health products

15、 were coupled by an insurance pany because of some of the similarities of the products. Property and casualty products were also provided by P&C panies. panies that provide both types of insurances (life, health, property, casualty) are called multiline insurance panies. Investment products tend to

16、be sold by life insurance panies. Recently, health insurance panies have separated from life insurance. This change has been due to mainly federal regulation of the health industry. Life insurance panies have focused on investment products. Also, disability insurance is now sold primarily by pure di

17、sability panies. FUNDAMENTALS OF INSURANCE INDUSTRYA fundamental aspect of the insurance industry results from the relationship between the revenues and costs. A pany collects its premium ine initially and invests these receipts in its portfolio. The payments on the insurance policy occur later and,

18、 depending on the type of insurance, in a perhaps very unpredictable manner. The payments are contingent on potential future events. An insurance policy is a binding contract for which the policyholder pays premium in e*change for the insurance panys promise to pay specified amounts contingent on fu

19、ture events. The accepted policy is an asset for the owner and a liability for the insurance pany. Life insurance and property and casualty insurance panies are financial intermediaries that, for a price, will make a payment if a certain event occurs. They function as risk bearers.The principal even

20、t that the life insurance pany insures against is death: a life insurance pany agrees to make either a lump sum payment to the beneficiary of the policy or make a series of payments. However, life insurance protection is not the only financial product sold by these panies. A major portion of the bus

21、iness of life insurance panies is now in the area of providing retirement benefits. The key distinction between life insurance and property and casualty insurance (P&C) panies is the difficulty of projecting whether a policyholder will be paid off and how much the payment will be.REGULATIONS OF INSU

22、RANCE INDUSTRYRegulation is primarily at the state level as a result of 1945 federal statute (McCarran-Ferguson Act). Model laws and regulations are developed by National Association of Insurance missioners (NAIC). Insurance panies are also rated by the rating agencies. To assure financial stability

23、, insurance panies must maintain reserves or surplus, which are the e*cess of assets over liabilities. State statutory surplus requirements are called statutory surplus, which is distinguished from generally accepted accounting principles (GAAP) surplus. STRUCTURE OF INSURANCE PANIESInsurance panies

24、 are really a posite of three panies. First there is the home office or actual insurance pany. Second, there is the investment ponent, which invests the premium collected in the investment portfolio. This is the investment pany. The third is the distribution ponent of the sales force. There are diff

25、erent typed of distribution forces. Finally there are also brokers who sell insurance products of many panies. Insurance panies are attracted by mercial bank customer contacts. As a result, mercial bank distribution of insurance pany products has grown. This relationship is called bankassurance. FOR

26、MS OF INSURANCE PANIESThere are two forms of insurance panies: stock and mutual. A stock insurance pany is similar in structure to any corporation or public pany. Shares (of ownership) are owned by independent shareholders and are traded publicly. The shareholders care only about the performance of

27、their shares that is the stock appreciation and the dividends. The insurance policies are simply the products or business of the pany. In contrast, mutual insurance panies have no stock and no e*ternal owners. Their policyholders are also their owners. The owners, that is the policyholders, care pri

28、marily or even solely about the performance on their insurance policies, notably the panys ability to pay on the policy. Since theses payments may occur considerably into the future, the policyholders view may be long term. Finally a new form of insurance pany, which is a hybrid between a pure mutua

29、l and a pure stock pany has been approved by some states and implemented by some insurance panies in these states since their introduction in 1996. This form is called a mutual holding pany (MHC). INDIVIDUAL VERSUS GROUP INSURANCE Insurance products can be sold on individual and group bases. Also, i

30、n the P&C business, insurers can sell personal lines and mercial lines of insurance products. TYPES OF LIFE INSURANCEThere are two fundamentally different types of life insurance: term (life) insurance and cash value life insurance. Term InsuranceTerm policies pay off only on death. Three are no inv

31、estment benefits and so the premiums are substantially lower than those on whole life policies. Most group policies are term policies. Term implies that coverage is available only during the premium-paying term of the contract.Cash Value or Permanent Life InsuranceThere is a broad classification of

32、life insurance, which is cash value, or permanent or investment type life insurance. A mon type of cash value life insurance iswhole life insurance. This cash value can be withdrawn and can also be borrowed against by the owner of the policy. If the owner wishes to let the policy lapse, he or she ca

33、n withdraw the cash value. A major advantage of this type of policy is that the inside buildup is not subject to ta*, i.e., is ta*ed as either ine or capital gains. Neither is the beneficiary subject to ine ta*. Guaranteed cash value life insurance:This insurance provides a cash value based on a min

34、imum dividend paid on the policy. Additionally, the policy can be either participating or nonparticipating. For a nonparticipating policy, the minimum dividend and the minimum cash value on the policy are the guaranteed amounts. For the participating policy, the dividend paid on the policy is based

35、on the realized actuarial e*perience of the pany and its investment portfolio. Variable life insurance: Contrary to the guaranteed or fi*ed cash value policies based on the general account portfolio of the insurance pany, variable life insurance policies allow the policy owner to, within limits, all

36、ocate their premium payments to and among separate investment accounts maintained by the insurance pany. Variable life insurance, which typically has mon stock investment options, has grown quickly with the stock market rally of the 1990s. Fle*ible premium policiesuniversal life insurance: The key e

37、lement of universal life is the fle*ibility of the premium. The policy cash value is set up as the cash value fund to which the investment ine is credited and from which the cost of term insurance for the insured is debited. This separation of the cash value from the pure insurance is called the unb

38、undling of the traditional life insurance policy. Variable universal life insurance: Variable universal life insurance bines the features of variable life and universal life policies, i.e., the choice of separate account investment products and fle*ible premiums. Survivorship (Second to Die) Insuran

39、ceAn added dimension of the whole life policies is that two people are jointly insured and the policy pays the death benefit not when the first person dies, but when the second person dies. This is called survivorship insurance or second-to-die insurance. GENERAL ACCOUNT AND SEPARATE ACCOUNT PRODUCT

40、S The general account of an insurance pany refers to the investment portfolio of the overall pany. Insurance panies must support the guaranteed performance of their general account products to the e*tent of their solvency. These are called general account products. Other types of insurance products

41、receive no guarantee from the insurance panys general account, and their performance is not based on the performance of the insurers general account but solely on the performance of an account separate from the general account of the insurer. These products are called separate account products. PART

42、ICIPATING POLICIES The performance of some general account products is not affected by the performance of the general account portfolio. The policy performance may not participate in the investment performance of the insurers general account investment portfolio. Such a policy is nonparticipating po

43、licy. Other general insurance products participate in the performance of the panys general account performance. Such a policy is called a participating policy. Both stock and mutual insurance panies write both general and separate account products, but most participating general account products are

44、 written in mutual panies. INSURANCE PANIES INVESTMENT STRATEGIESIn general the characteristics of insurance pany investment portfolio should reflect their liabilities - the insurance products they underwrite. There are many differences among the various types of insurance policies. Among them are:T

45、he e*pected time at which the average payment will be made by the insurance pany (Technically, the duration of the payments)The statistical or actuarial accuracy of estimates Other factors The key distinction between life insurance, property and casualty insurance panies lies in the difficulty of pr

46、ojecting whether or not a policyholder will be paid off and how much the payment will be. There are also differences in investment strategy between public (or stock) and mutual insurance panies of the same type. The major difference is that stock panies tend to have less mon stock than mutual panies

47、. Most insurance pany assets consist of debt, both public and private. In fact, life insurers as a group are the largest holders of bonds. Since life insurers are effectively ta*ed at very low rates, there are no advantages to holding municipals. The reason for bond holdings are (1) to match maturit

48、ies, since liabilities are often long-term and at a fi*ed rate, and (2) regulations require that bonds be booked at cost, while stocks must be written at market value.CHANGES IN THE INSURANCE INDUSTRYThere have been three major types of changes in the insurance industry in the last two decades: (1)

49、deregulation of the financial system; (2) internationalization of the insurance industry; (3) demutulization. Deregulation of the Financial SystemIn 1933, Congress passed the Glass-Steagall Act, which separated mercial banking, investment banking, and insurance. This act resulted in the breakup of t

50、he House of Morgan into separate investment banking and mercial banking entities. . On November 12, 1999 the Gramm-Leach-Bliley Act (GLB), called the Financial Modernization Act of 1999, was signed into law. This act removed the 50 year old anti-affiliation restrictions among mercial banks, investme

51、nts banks and insurance panies. The passage of this act has eliminated the barriers between insurance panies, mercial banks, and investment banks and various binations of these types of panies will continue to evolve. Since then, however, Citigroup sold its insurance business (Travelers) to MetLife,

52、 and no other major binations between banking and insurance have taken place. Internationalization of the Insurance IndustryGlobalization has occurred in many industries, including insurance industry. With respect to the U.S. globalization operates in two directions. First, U.S. insurance panies hav

53、e both acquired and entered into agreements with international insurance panies and begun operations in other countries. Second, international insurance panies, mainly European, have bee even more active in acquiring U.S. insurance and investment panies. The reasons are: (1) more rapid growth of the

54、 US financial business, (2) attractive demographics and ine potential of the US market, and (3) less regulations. DemutualizationSince the mid-1990s, several insurance panies have changed from mutual to stock panies. Many industry observers believe that the recent demutualized insurance panies will

55、either acquire other financial panies or will be acquired by other financial panies. EVOLUTION OF INSURANCE INVESTMENT AND RETIREMENT PRODUCTSEven prior to the Financial Modernization Act of 1999, there was an increasing overlap of insurance, investment and pension products and the distribution of t

56、hose products. The passage of this Act has accelerated this convergence. Three decades ago there were three distinct types of products for individuals: insurance, savings/investment, and retirement. Retirement products include individual retirement accounts. During the last two decades, many product

57、s have been developed that fit into two or even three of these categories. Products that are hybrid of retirement and investment products are 401k and Roth 401k. 401(k) Plans and Roth 401(k) Plans401(k) plans are plans provided by an employer whereby an employee may elect to contribute preta* dollar

58、s to a qualified ta*-deferred retirement plan. IRAs and Roth IRAsWhile a 401(k) is an employer-sponsored retirement program, the most mon types of IRAs are personal ta*-deferred retirement plans. Individually sponsored IRAs include traditional IRA, Roth IRA, and rollover IRA. Employer-sponsored IRA

59、included Simplified Employee Pension (SEP) plans, and Savings Incentives Matching Plan for Employees (SIMPLE). ANSWERS TO QUESTIONS FOR CHAPTER 6(Questions are in bold print followed by answers.)1.What are the major sources of revenue for an insurance panyHow are its profits determinedAn insurance p

60、anys revenue is generated from two sources: (1) premium ine for policies written during the year; (2) investment ine resulting from the investment of both the reserves established to pay off future claims and the P&Cs surplus (asset less liabilities).Profit is determined by subtracting from the reve