Chapter 4

INSURANCE COMPANIES

Prepared by Aminul Haque Russel

Definition of Insurance Company

Insurance company provides insurance

policies, which legally binding contracts
which the policyholder (on owner) pays
insurance premium.
Types of Insurance

Life insurance: When the insurance

company sales different policies for covering
risk against death of an individual by
providing compensation benefit to the
beneficiary of the expired individuals, then
this is known as life insurance.
 Health insurance: When insurance policy
is sold by insurance company for
protection against the risk of physical
illness for medical treatment, then this is
called health insurance.
 Liability Insurance: Under this insurance, the
risk of future uncertainty is insured against
litigation and lawsuits due to actions taken by
the insured on others.
Example- product liability insurance and
employers liability insurance.
 Property & Casualty insurance:
Insurance policies offered by an insurance
company to different individuals and
institutions for covering the damage for
various types of property are known as
Property & Casualty insurance. It includes
fire insurance and marine insurance.
 Disability Insurance: This insurance
issuers the risk of unexpected future event
against the inability of employed persons
to earn an income in either his own
occupation or any other occupation.
Income of insurance
company
The insurance companies have two sources of income:
Underwriting income: The initial underwriting income
means the insurance premium. The premium is a
fairly stable type of revenue.
Investment income: The investment income, which
occurs over time. Investment returns may vary
considerably with the performance of the financial
markets.
 Fundamental
Characteristics

Insurance Policies and Premiums

Risk bearers
Sources of Profits
Investment income
Underwriting income
 Types of Insurance

Life Insurance
Insures against premature death
Health Insurance
Insures against high cost of medical
treatment
Property and Casualty Insurance
Insures against damage to various types of
property
 Types of Insurance

Liability Insurance
Insures against litigation
Other Insurance
Disability Insurance
Long-Term Care Insurance
Structured Settlements
 Investment Oriented
Products

Guaranteed Investment Contracts (GICs)

Annuities
Fixed
Variable
Mutual Funds
 Insurance Companies and
Types of Products

Life and Health Insurance Company

Life and health
Property and Casualty Insurance Company
Property and casualty
Multi-Line Insurance Company
Life, health, property and casualty
 Fundamentals of
Insurance

Relationship between revenues and costs

Initial premium income is invested
Payments to the insured are contingent on
potential future events
Difficulty in estimating profitability
Timing and magnitude of payments are
uncertain
Long lag between receipts and payments
 Regulation of Insurance
Industry

McCarran Ferguson Act of 1945

Insurance industry is regulated by individual
states, not the federal government
Securities and Exchange Commission
(SEC)
National Association of Insurance
Commissioners (NAIC)
 Monitors of Insurance
Companies

Types of Monitors Purpose of Monitors

Accountants/Auditors Assess financial stability
Promote synchronicity
Rating Agencies between premiums and
Government payments
Regulators Assess volatility of
payments

Statutory surplus or reserves

 Structure of Insurance
Companies

Home Office or Actual Insurance

Company
Investment Company
Sales Force
Agents
Brokers
Commercial Banks
Internet
 Types of Insurance
Companies

Stock Insurance Company

Owned by independent shareholders and the stock is
publicly traded
Constituencies: stockholders and policyholders
Mutual Insurance Company
Owned by policyholders
No stock
Constituencies: policyholders
Mutual Holding Company
 Individual vs. Group
Insurance

Individual Insurance
Insurance sold to an individual
Group Insurance
Insurance sold to identifiable groups, such as
employees of a specific company, through
employers, educational, medical, or other
professional associations
 Life Insurance Policies

Pure Insurance Protection Against Risk of Death

Term Life Insurance
Insurance/Investment Policies
Whole life insurance
Universal life insurance
Variable life insurance
Insurance Against Risk of Long Life
Annuity
Pure Investment-Oriented Policies
Guaranteed investment contract
 Insurance Company
Investment Strategies

Investment portfolio reflects liabilities of

insurance company
Differences in investment strategies
L&H companies and P&C companies
Public and mutual insurance companies
Tax concerns
 Changes in the Insurance
Industry

Deregulation of the financial system

Internationalization of the insurance
industry
Demutualization