Overview - University of Nevada, Reno



Overview of Insurance Companies

Size, Structure and Composition of the Industry

← Insurance Industry’s Structure

✓ Life Insurance

✓ Property/Casualty Insurance

✓ Other Types of Nonlife Insurance Firms and Products

← Financial guarantee insurance

← Credit insurance (for short-term trade receivables)

← Private mortgage guaranty insurance (PMI)

← Reinsurance

← Catastrophe bonds

← Weather-related derivatives and insurance

Life Insurance Companies

✓ In 1988: 2,300 life insurance companies with aggregate assets of $1.12 trillion. Mid 2000s: 1,300 companies / $4.7 trillion (2009). 3 largest wrote 25% of new premium business (2008)

✓ Demutualization

✓ Adverse selection

← Insured have higher risk than general population

← Alleviated by grouping of policyholders into risk pools

✓ Life Insurance Products:

← Ordinary life

Term life, Whole life, Endowment life.

Variable life, Universal life, Variable universal life.

Group life

Others

Annuities

Private pension funds

Accident and health insurance

Property and casualty (liability) insurance companies

✓ Currently about 2,700 companies.

✓ Highly concentrated. Top 10 firms have 48% of market in terms of premiums written. Top 100: 87%

Balance Sheets of Insurance Companies

← Insurance Company Operations

✓ Source of revenues

← Premiums received on insurance policies

← Investment earnings on reserves

✓ Major expenses

← Benefit (loss) payments

← Additions to reserves

← Operating expenses

← Investment expenses

1 Balance sheets of Life Insurance companies

Long-term liabilities: Net policy reserves to meet policyholders’ claims

Long-term assets

Need to generate competitive returns on savings components of life insurance policies

Bonds, equities, government securities

Policy loans

4 Balance sheets of P/C Insurance companies

5 Similar to life insurance cos.

✓ But,

← P/C hold shorter-term securities since claims are unexpected (greater liquidity risk)

← Hold less reserves. Have much more equity relative to assets

← Performance evaluation of P/C companies

6 Performance ratios

Loss Ratio = Loss Expenses / Total Premiums Earned

Expense Ratio = Operating Expenses / Total Premiums Earned

Combined Ratio = Loss Ratio + Expense Ratio

Operating Ratio = Combined Ration (after dividends) – Investment Yield

Overall Profitability = 100% - Operating ratio

← Loss ratio has changed over time: 60% in 1951; 80% in 1996; 73% in2009

← Expense ratio has fallen over time: 34% in 1951; 26.2% in 1996; 27.5% in 2009

← Combined ratio has increased over time: 94.3% in 1951; Since 1981, over 100%; 100.4% in 2009.

← Overall Profitability: 1980s – 1990s

• Higher yields on stocks, higher interest rates increased investment yield to cover costs + losses

• Lower yields recently have led to low profitability and even losses in some years

Regulation of Insurance Companies

← Insurance Company Regulation

✓ Regulated at state not federal level

✓ Licensing & solvency requirements

✓ Mutual insurance funds by state

✓ Rate regulation

✓ Product regulation

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