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Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
Presentation on Life Insurance Fund & Solvency Management
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Presentation on Life Insurance Fund & Solvency Management

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Presentation on Life Insurance Fund & Solvency Management

Presentation on Life Insurance Fund & Solvency Management

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

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