0
Presentation on Life Insurance Fund & Solvency Management AKM Elias Hussain President, Actuarial Society of Bangladesh
Insurance Companies <ul><li>Provide contractual risk management for: </li></ul><ul><ul><li>Risks of insurable asset losses...
Insurance Companies, cont. <ul><li>Major capital market intermediary </li></ul><ul><ul><li>Major investor in corporate (li...
Insurance Concepts <ul><li>Pure vs. financial risk </li></ul><ul><li>Insure fortuitous, independent risk occurrence </li><...
Background <ul><li>Life insurance companies </li></ul><ul><li>Provide risk management contracts for individuals and busine...
Types of Life Insurance Policies Group  Whole Life Variable Life Universal Life Term  Group Cash Value Insurance Term Insu...
Types of Life Insurance Policies <ul><li>Whole life insurance  includes both a death benefit (term insurance) and a saving...
Types of Life Insurance Policies <ul><li>Term life insurance  characteristics </li></ul><ul><ul><li>Temporary, providing d...
Types of Life Insurance Policies <ul><li>Variable life insurance </li></ul><ul><ul><li>Whole life with variable cash value...
Types of Life Insurance Policies <ul><li>Group plans </li></ul><ul><ul><li>Employees of a corporation offered life insuran...
Health Care Insurance <ul><li>Health maintenance organizations or HMOs </li></ul><ul><ul><li>Intermediaries between purcha...
Sources of Life Insurance Company Funds <ul><li>Cash value reserves—accumulated cash values owed insureds (liability) </li...
Uses of Life Insurance Company Funds <ul><li>Major investor in corporate bonds </li></ul><ul><li>Government securities </l...
Uses of Funds—Policy Loans <ul><li>Policy loans are loans to policyholders </li></ul><ul><ul><li>Whole life policies </li>...
Insurance Company Capital <ul><li>Capital </li></ul><ul><ul><li>Build capital by issuing new stock (stock companies) or re...
Risks of Life Insurance Companies Pure Risk of Life Insurance Policies Pension Commitments and Annuities Contracts Financi...
Exposure to Financial Risks <ul><li>Interest rate risk </li></ul><ul><ul><li>Fixed rate assets in company portfolios have ...
Exposure to Financial Risks <ul><li>Market risk  </li></ul><ul><ul><li>Exists because events like significant market value...
Exposure to Financial Risks <ul><li>Liquidity risk occurs because a high frequency of claims may require the life company ...
Threats to Solvency <ul><li>Poor mortality experience </li></ul><ul><li>Poor expense experience </li></ul><ul><li>Expense ...
How to handle threats to solvency <ul><li>Management actions </li></ul><ul><li>Role of the Appointed Actuary </li></ul><ul...
Assets Liability Management <ul><li>It is a dynamic process of Planning, Organizing & Controlling of Assets & Liabilities-...
Asset Management <ul><li>Performance is significantly affected by the performance of the assets </li></ul><ul><ul><li>Comp...
Property and Casualty Insurance <ul><li>Property insurance (fire insurance) </li></ul><ul><li>Casualty insurance (liabilit...
PC Versus Life Insurance Companies <ul><li>PC have shorter contracts </li></ul><ul><li>PC have more varied risk areas </li...
Property Casualty Investment Needs <ul><li>Tax sheltering--major municipal/state bond investor </li></ul><ul><li>Liquid, m...
Components of a Balance sheet   Contingent Liabilities <ul><li>Liabilities </li></ul><ul><li>Capital </li></ul><ul><li>Res...
Components of Liabilities <ul><li>Capital </li></ul><ul><li>Reserves & Surplus </li></ul><ul><li>Deposits </li></ul><ul><l...
Components of Assets <ul><li>Cash & Bank Balances with RBI </li></ul><ul><li>Balances with Banks & money at Call & short n...
Valuation of an Insurance Company <ul><li>Value of an insurance company depends on its expected cash flows and required ra...
Valuation of an Insurance Company <ul><li>Factors that affect cash flows </li></ul>E(CF)   = Expected cash flow R f  = Ris...
Valuation of an Insurance Company <ul><li>Investors required rate of return </li></ul> k   =  f (  R f  ,   RP) + + R f...
Performance Evaluation <ul><li>Common indicators of company performance are available  </li></ul><ul><ul><li>Statistical a...
Performance Evaluation <ul><li>The higher the liquidity ratio, the more liquid the company </li></ul>Liquidity Ratio  = In...
Performance Evaluation <ul><li>Return on net worth or policyholders’ surplus is a profitability measure </li></ul>Return o...
Performance Evaluation <ul><li>Underwriting gains and losses or underwriting profitability measured by the net underwritin...
Other Issues <ul><li>Insurance companies interact in a variety of ways with other financial institutions </li></ul><ul><li...
Thank you very much ASB
Upcoming SlideShare
Loading in...5
×

Presentation on Life Insurance Fund & Solvency Management

4,716

Published on

Presentation on Life Insurance Fund & Solvency Management

Published in: Economy & Finance
1 Comment
3 Likes
Statistics
Notes
No Downloads
Views
Total Views
4,716
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
155
Comments
1
Likes
3
Embeds 0
No embeds

No notes for slide

Transcript of "Presentation on Life Insurance Fund & Solvency Management"

  1. 1. Presentation on Life Insurance Fund & Solvency Management AKM Elias Hussain President, Actuarial Society of Bangladesh
  2. 2. Insurance Companies <ul><li>Provide contractual risk management for: </li></ul><ul><ul><li>Risks of insurable asset losses (auto insurance) </li></ul></ul><ul><ul><li>Risks of liability claims (product liability) </li></ul></ul><ul><ul><li>Risk of large medical costs (health insurance) </li></ul></ul><ul><ul><li>Risk of disability (disability insurance) </li></ul></ul><ul><ul><li>Risk of premature death (life insurance) </li></ul></ul><ul><ul><li>Risk of longevity (annuities) </li></ul></ul>
  3. 3. Insurance Companies, cont. <ul><li>Major capital market intermediary </li></ul><ul><ul><li>Major investor in corporate (life) and state and municipal bonds (property/casualty) </li></ul></ul><ul><ul><li>Major long-term commercial mortgage lender (life) </li></ul></ul><ul><li>Mutual or stock form of ownership </li></ul><ul><li>Premium and investment revenue </li></ul><ul><li>Losses and loss adjustment expenses </li></ul>
  4. 4. Insurance Concepts <ul><li>Pure vs. financial risk </li></ul><ul><li>Insure fortuitous, independent risk occurrence </li></ul><ul><li>Premium covers losses, administrative expenses and profits </li></ul><ul><li>Insured contracts for known loss (premium) in return for protection </li></ul><ul><li>Moral hazard and adverse selection </li></ul>
  5. 5. Background <ul><li>Life insurance companies </li></ul><ul><li>Provide risk management contracts for individuals and businesses </li></ul><ul><ul><li>Risk areas include premature death, health maintenance costs, and disability </li></ul></ul><ul><ul><li>Life insurance provides cash benefits to the beneficiary of a policy on the policyholder’s death </li></ul></ul><ul><ul><li>Life insurance premiums reflect </li></ul></ul><ul><ul><ul><li>Probability of making payment to the beneficiary </li></ul></ul></ul><ul><ul><ul><li>Size and timing of the payment </li></ul></ul></ul><ul><ul><li>Have portfolios of policies and use mortality figures and actuarial tables to forecast claims </li></ul></ul>
  6. 6. Types of Life Insurance Policies Group Whole Life Variable Life Universal Life Term Group Cash Value Insurance Term Insurance
  7. 7. Types of Life Insurance Policies <ul><li>Whole life insurance includes both a death benefit (term insurance) and a savings component that </li></ul><ul><ul><li>Builds a tax sheltered cash value amount for the future for the owner of the policy </li></ul></ul><ul><ul><li>Generates periodic cash flow payments over the life of the policy for the insurance company to reinvest </li></ul></ul><ul><ul><li>Pays fixed death benefit at death </li></ul></ul>
  8. 8. Types of Life Insurance Policies <ul><li>Term life insurance characteristics </li></ul><ul><ul><li>Temporary, providing death benefits only over a specified term </li></ul></ul><ul><ul><li>Premiums paid represent insurance only with no saving component </li></ul></ul><ul><ul><li>Considerably lower cost for the insured than whole life—able to buy more insurance protection for any amount of premium </li></ul></ul><ul><ul><li>Term is for those who would rather invest their savings in other contracts or securities </li></ul></ul>
  9. 9. Types of Life Insurance Policies <ul><li>Variable life insurance </li></ul><ul><ul><li>Whole life with variable cash value amounts </li></ul></ul><ul><ul><li>Cash values invested in equities and will vary with the investment performance </li></ul></ul><ul><ul><li>Flexible premium option since 1984 </li></ul></ul><ul><li>Universal life insurance </li></ul><ul><ul><li>Combines the features of term and whole life </li></ul></ul><ul><ul><li>Variable premiums over time—buys terms and invests difference in a variety of investments </li></ul></ul><ul><ul><li>Builds a varying cash value based on contributions and investment performance </li></ul></ul>
  10. 10. Types of Life Insurance Policies <ul><li>Group plans </li></ul><ul><ul><li>Employees of a corporation offered life insurance or life insurance purchased on life of employee </li></ul></ul><ul><ul><li>Cash value or term insurance </li></ul></ul><ul><ul><li>Low cost (term) because of its high volume </li></ul></ul><ul><ul><li>Can cover group members and dependents </li></ul></ul>
  11. 11. Health Care Insurance <ul><li>Health maintenance organizations or HMOs </li></ul><ul><ul><li>Intermediaries between purchasers and providers of health care </li></ul></ul><ul><ul><li>Annual fee or premium </li></ul></ul><ul><ul><ul><li>Covers all medical expenses </li></ul></ul></ul><ul><ul><ul><li>Medical staff is designated by the HMO </li></ul></ul></ul><ul><ul><li>Losses in recent years for HMOs </li></ul></ul>
  12. 12. Sources of Life Insurance Company Funds <ul><li>Cash value reserves—accumulated cash values owed insureds (liability) </li></ul><ul><li>Pension reserves—accumulated “insured” pension commitments (liability) </li></ul><ul><li>Annuity reserves—accumulated annuity commitments (liability) </li></ul><ul><li>Unearned premium income—premiums received; not yet earned (liability) </li></ul><ul><li>Loss reserves--losses incurred, not yet paid </li></ul><ul><li>Capital funds </li></ul>
  13. 13. Uses of Life Insurance Company Funds <ul><li>Major investor in corporate bonds </li></ul><ul><li>Government securities </li></ul><ul><li>Common stock </li></ul><ul><li>Commercial mortgage </li></ul><ul><li>Real Estate </li></ul><ul><li>Policy loans to insured </li></ul>
  14. 14. Uses of Funds—Policy Loans <ul><li>Policy loans are loans to policyholders </li></ul><ul><ul><li>Whole life policies </li></ul></ul><ul><ul><li>Borrow up to the cash value of the policy </li></ul></ul><ul><ul><li>Guaranteed interest rate is stated in the policy </li></ul></ul><ul><ul><li>Usually used by borrowers during periods of rising rates to lock in the lower rate associated with their policy </li></ul></ul>
  15. 15. Insurance Company Capital <ul><li>Capital </li></ul><ul><ul><li>Build capital by issuing new stock (stock companies) or retaining earnings </li></ul></ul><ul><ul><li>Used to finance investments in fixed assets </li></ul></ul><ul><ul><li>Cushion against operating losses </li></ul></ul><ul><ul><li>Capital requirements vary depending on asset risk </li></ul></ul><ul><ul><li>Credibility with customers is also enhanced by adequate capital </li></ul></ul><ul><ul><li>Mutual companies owned by policyholders—includes earnings retained over time </li></ul></ul>
  16. 16. Risks of Life Insurance Companies Pure Risk of Life Insurance Policies Pension Commitments and Annuities Contracts Financial Risk includes Interest Rate Risk Credit Risk Market Risk Liquidity Risk
  17. 17. Exposure to Financial Risks <ul><li>Interest rate risk </li></ul><ul><ul><li>Fixed rate assets in company portfolios have market values sensitive to interest rate changes </li></ul></ul><ul><ul><li>Firm measures and manages risks </li></ul></ul><ul><li>Credit risk </li></ul><ul><ul><li>Mortgages, corporate bonds and real estate holdings can involve default </li></ul></ul><ul><ul><li>Investment-grade securities </li></ul></ul><ul><ul><li>Diversify portfolio among debt issuers </li></ul></ul>
  18. 18. Exposure to Financial Risks <ul><li>Market risk </li></ul><ul><ul><li>Exists because events like significant market value decreases reduce capital </li></ul></ul><ul><ul><li>Economic downturn affects real estate investments </li></ul></ul>
  19. 19. Exposure to Financial Risks <ul><li>Liquidity risk occurs because a high frequency of claims may require the life company to liquidate assets </li></ul><ul><ul><li>Life insurance companies have high cash flow from premiums to offset normal cash needs </li></ul></ul><ul><ul><li>In case of large disaster (9/11) may be forced to sell assets to generate cash even if market value is low </li></ul></ul><ul><ul><li>Companies try to balance the age distribution of their customer base </li></ul></ul><ul><ul><li>As interest rates rise, voluntary terminations of policies occur </li></ul></ul>
  20. 20. Threats to Solvency <ul><li>Poor mortality experience </li></ul><ul><li>Poor expense experience </li></ul><ul><li>Expense inflation </li></ul><ul><li>Inadequate investment returns </li></ul><ul><li>Poor lapse and surrender experience </li></ul><ul><li>Asset default and depreciation </li></ul><ul><li>Mismatched investments </li></ul><ul><li>Guaranteed surrender values/investments returns </li></ul><ul><li>Liquidity </li></ul><ul><li>Options </li></ul><ul><li>Change in business mix </li></ul><ul><li>Inadequate reinsurance </li></ul><ul><li>Operational risks </li></ul>
  21. 21. How to handle threats to solvency <ul><li>Management actions </li></ul><ul><li>Role of the Appointed Actuary </li></ul><ul><li>Regulations </li></ul><ul><li>Timely intervention by regulator </li></ul><ul><li>Conservative asset and liability valuations </li></ul><ul><li>Risk based capital/solvency margin </li></ul><ul><li>Holistic and integrated approach to risk management </li></ul><ul><li>Incentives to encourage prudent risk management </li></ul>
  22. 22. Assets Liability Management <ul><li>It is a dynamic process of Planning, Organizing & Controlling of Assets & Liabilities- their volumes, mixes, maturities, yields and costs in order to maintain liquidity and NII. </li></ul>
  23. 23. Asset Management <ul><li>Performance is significantly affected by the performance of the assets </li></ul><ul><ul><li>Companies get premiums for several years before paying out benefits </li></ul></ul><ul><ul><li>Companies try to manage the risk of losses with offsetting investment gains or diversity of assets they hold </li></ul></ul><ul><ul><li>Diversify into other businesses to offer a wide variety of financial products </li></ul></ul>
  24. 24. Property and Casualty Insurance <ul><li>Property insurance (fire insurance) </li></ul><ul><li>Casualty insurance (liability) </li></ul><ul><li>Performance and financial bonding </li></ul>
  25. 25. PC Versus Life Insurance Companies <ul><li>PC have shorter contracts </li></ul><ul><li>PC have more varied risk areas </li></ul><ul><li>Life companies larger due to long-term savings and pension contracts </li></ul><ul><li>PC has wider distribution of Occurrences </li></ul><ul><ul><li>PC’s need liquid, marketable assets </li></ul></ul><ul><ul><li>PC’s earnings more volatile </li></ul></ul>
  26. 26. Property Casualty Investment Needs <ul><li>Tax sheltering--major municipal/state bond investor </li></ul><ul><li>Liquid, marketable assets </li></ul><ul><ul><li>Marketable corporate and government bonds </li></ul></ul><ul><ul><li>Listed common stock </li></ul></ul><ul><li>Inflation hedge--common stock </li></ul><ul><li>Reinsurance contracts--manage pure risks </li></ul>
  27. 27. Components of a Balance sheet Contingent Liabilities <ul><li>Liabilities </li></ul><ul><li>Capital </li></ul><ul><li>Reserve & Surplus </li></ul><ul><li>Deposits </li></ul><ul><li>Borrowings </li></ul><ul><li>Other Liabilities </li></ul><ul><li>Assets </li></ul><ul><li>Cash & Balances with RBI </li></ul><ul><li>Bal. With Banks & Money at Call and Short Notices </li></ul><ul><li>Investments </li></ul><ul><li>Advances </li></ul><ul><li>Fixed Assets </li></ul><ul><li>6. Other Assets </li></ul>
  28. 28. Components of Liabilities <ul><li>Capital </li></ul><ul><li>Reserves & Surplus </li></ul><ul><li>Deposits </li></ul><ul><li>Borrowings </li></ul><ul><li>Other Liabilities & Provisions </li></ul>
  29. 29. Components of Assets <ul><li>Cash & Bank Balances with RBI </li></ul><ul><li>Balances with Banks & money at Call & short notice </li></ul><ul><li>Investments </li></ul><ul><li>Advances </li></ul><ul><li>Fixed Asset & Other Assets </li></ul>
  30. 30. Valuation of an Insurance Company <ul><li>Value of an insurance company depends on its expected cash flows and required rate of return </li></ul> V = f [  E(CF),  k]  V = Change in value of the insurance company  k = Change in required rate or return Where:  E(CF) = Change in expected cash flows +
  31. 31. Valuation of an Insurance Company <ul><li>Factors that affect cash flows </li></ul>E(CF) = Expected cash flow R f = Risk free interest rate INDUS = Prevailing industry conditions for the company Where:  E(CF)= f (  ECON,  R f ,  INDUS,  MANAB) ECON = Economic growth MANAB = Management ability of company + + ?
  32. 32. Valuation of an Insurance Company <ul><li>Investors required rate of return </li></ul> k = f (  R f ,  RP) + + R f = Risk free interest rate Where: RP = Risk premium
  33. 33. Performance Evaluation <ul><li>Common indicators of company performance are available </li></ul><ul><ul><li>Statistical analysis of performance </li></ul></ul><ul><ul><li>Ratio analysis </li></ul></ul><ul><ul><ul><li>Trends over time </li></ul></ul></ul><ul><ul><ul><li>Compare to industry average </li></ul></ul></ul>
  34. 34. Performance Evaluation <ul><li>The higher the liquidity ratio, the more liquid the company </li></ul>Liquidity Ratio = Invested Assets Loss Reserves and Unearned Premium Reserves
  35. 35. Performance Evaluation <ul><li>Return on net worth or policyholders’ surplus is a profitability measure </li></ul>Return on Equity = Net Profits Policyholders’ Surplus
  36. 36. Performance Evaluation <ul><li>Underwriting gains and losses or underwriting profitability measured by the net underwriting margin </li></ul><ul><ul><li>Profits include investment income, underwriting profits and realized capital gains </li></ul></ul><ul><ul><li>Ratios can be calculated to focus on various sources of profits </li></ul></ul>Net Underwriting = Premium Income - Policy Expenses Total Assets Margin
  37. 37. Other Issues <ul><li>Insurance companies interact in a variety of ways with other financial institutions </li></ul><ul><li>Insurance companies participate in a full range of financial markets </li></ul><ul><li>Multinational insurance companies </li></ul><ul><ul><li>Insurance companies operate in many countries </li></ul></ul><ul><ul><li>Some countries lack developed markets for insurance </li></ul></ul><ul><li>Multinational investments </li></ul>
  38. 38. Thank you very much ASB
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×