Insurance company protects policy holders from specific loss events in exchange for the payments of periodic premiums.
Categories of insurance companies:
(A) Term Life Insurance: Covers property losses.
(B) Whole Life insurance: Coverage for the life of the policy holders.
Mortality tables can be used to compute life insurance premiums. Mortality tables include information related to the probability of an individual dying within next year, the probability of an individual surviving to a specific age, and the remaining life expectancy of an individual of a specific age.
MORTALITY RISK: Risk of policyholders lying earlier than expected due to illness or disease. (earlier than expected life insurance pay out)
LONGEVITY RISK: risk of policyholders living longer than expected.( longer than expected annuity pay out period)
HEDGING MORTALITY & LONGETIVITY RISK:
Usually between 60%-80% & increase over time.
Usually between 25%-30% & decrease over time.
Moral hazard is the risk to the insurance company that having insurance will lead the policyholder to act more recklessly than if the policyholder did not have insurance.
Methods to mitigate: deductibles, coinsurance & policy limits.
Adverse selection is a situation where an insurer is unable to differentiate between a good risk & a bad risk & charges the same premium to all policy holders.
Methods to mitigate: Initial due diligence & on going due diligence.
No global requirements exist for insurance companies, however Solvency II is a set of regulations that is applicable in the European Union. Under Solvency II, there is a minimum capital requirements (MCR) and solvency capital requirements (SCR).
Insurance companies are regulated at the state level in US. Every insurer must be a member of the guaranty associates in the state(s) in which it operates. If an insurance co. becomes insolvent in a state, then each of the other insurance co. must contribute an amount to the state guaranty fund based on the amount of premium income it earns in that state.
Contribution in the fund is made by both employer & employee. Upon retirement the employee will receive periodic pension payments for the remaining life.
Involve both employer & employee contribution being invested in one or more investment options selected by the employee.
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