This document summarizes a lecture on the general business environment for life assurance companies. It discusses how the economic, legal, regulatory, and professional environments can impact insurer expenses, risk levels, and opportunities. Specifically, it notes that inflation can influence expenses, developing or volatile economies present higher risks, and legal/regulatory changes may constrain product design or contract terms over long time periods.
The document discusses various aspects of insurance companies, including their key operations. It begins by describing how insurance companies handled claims from the 2005 Mumbai floods. It then discusses the main operations of insurance companies, including rate making, underwriting, production (sales), claims settlement, reinsurance, and investments. Insurance companies collect premiums, pay claims, and invest premiums to earn income. They distribute policies through agents or direct selling. Reinsurance allows risks to be shared between insurers.
The document is a letter from the American Council of Life Insurers (ACLI) responding to an IASB discussion paper on accounting for dynamic risk management. The ACLI appreciates IASB's recognition of the importance of dynamic hedging but has concerns about uncertainties in the discussion paper, such as issues related to hedge effectiveness. The ACLI is also concerned that the discussion paper focuses on interest rate risk management and a balance sheet approach, which does not address other risks or the business model of life insurers where a significant portion of assets are measured at fair value through other comprehensive income. The ACLI encourages IASB to continue its work to resolve these issues and recognize that an entity's business model should be
This document discusses international insurance regulation, specifically regarding the differences between property/casualty and life insurance contracts and their accounting implications. Key points include:
- Property/casualty contracts are usually short-term while life/annuity contracts are long-term, spanning decades.
- Claims outcomes for property/casualty insurance vary widely each year depending on events, while life insurance claims are more predictable.
- Statutory accounting principles (SAP) and generally accepted accounting principles (GAAP) have some differences in how they value assets and recognize revenues and expenses.
This document discusses price optimization in insurance pricing and the controversy surrounding its use. It begins by explaining that several states have banned or limited price optimization, which considers non-risk factors like willingness to pay higher prices. The document then discusses what price optimization is, how it builds on traditional risk-based rating, and how it models demand and optimal pricing. While it can allow companies to increase profits, some see it as unfairly discriminating against equally risky policyholders. The future of price optimization and the role of CPCUs in understanding its impact are also examined.
The document defines key terms related to insurance pricing such as rate, exposure unit, pure premium, and loading. It describes the objectives of insurance pricing from both regulatory and business perspectives. The types of rating discussed include judgment rating, class rating, merit rating, schedule rating, experience rating, and retrospective rating. Class rating and two methods for determining class rates, pure premium and loss ratio, are explained in detail with examples. Merit rating adjusts class rates based on individual risk characteristics and loss experience.
The document discusses captives, which are special purpose insurance companies that insure the risks of their owners. It provides an overview of what captives are, their history and growth, types of captives, benefits of using a captive compared to commercial insurance, considerations for utilizing a captive such as ownership structure and domicile selection, and functions related to managing a captive.
In this risk retention piece, we provide updates to how the final rule under Dodd-Frank applies to CLOs. We cover the permissible forms of risk retention and financing options for the risk retention obligation among other things.
Diminishing limit policies, which count defense costs against the policy's liability limit, create challenges for insurers, defense counsel, and policyholders. They require insurers to carefully handle claims to avoid exhausting limits and expose them to bad faith claims. Defense counsel may face conflicts of interest as their duty is to the policyholder but costs hurt limits. Policyholders need frequent updates on remaining limits as multiple claims could exhaust aggregate coverage. Insurance agents must ensure clients understand these risks when purchasing diminishing limit policies.
The document discusses various aspects of insurance companies, including their key operations. It begins by describing how insurance companies handled claims from the 2005 Mumbai floods. It then discusses the main operations of insurance companies, including rate making, underwriting, production (sales), claims settlement, reinsurance, and investments. Insurance companies collect premiums, pay claims, and invest premiums to earn income. They distribute policies through agents or direct selling. Reinsurance allows risks to be shared between insurers.
The document is a letter from the American Council of Life Insurers (ACLI) responding to an IASB discussion paper on accounting for dynamic risk management. The ACLI appreciates IASB's recognition of the importance of dynamic hedging but has concerns about uncertainties in the discussion paper, such as issues related to hedge effectiveness. The ACLI is also concerned that the discussion paper focuses on interest rate risk management and a balance sheet approach, which does not address other risks or the business model of life insurers where a significant portion of assets are measured at fair value through other comprehensive income. The ACLI encourages IASB to continue its work to resolve these issues and recognize that an entity's business model should be
This document discusses international insurance regulation, specifically regarding the differences between property/casualty and life insurance contracts and their accounting implications. Key points include:
- Property/casualty contracts are usually short-term while life/annuity contracts are long-term, spanning decades.
- Claims outcomes for property/casualty insurance vary widely each year depending on events, while life insurance claims are more predictable.
- Statutory accounting principles (SAP) and generally accepted accounting principles (GAAP) have some differences in how they value assets and recognize revenues and expenses.
This document discusses price optimization in insurance pricing and the controversy surrounding its use. It begins by explaining that several states have banned or limited price optimization, which considers non-risk factors like willingness to pay higher prices. The document then discusses what price optimization is, how it builds on traditional risk-based rating, and how it models demand and optimal pricing. While it can allow companies to increase profits, some see it as unfairly discriminating against equally risky policyholders. The future of price optimization and the role of CPCUs in understanding its impact are also examined.
The document defines key terms related to insurance pricing such as rate, exposure unit, pure premium, and loading. It describes the objectives of insurance pricing from both regulatory and business perspectives. The types of rating discussed include judgment rating, class rating, merit rating, schedule rating, experience rating, and retrospective rating. Class rating and two methods for determining class rates, pure premium and loss ratio, are explained in detail with examples. Merit rating adjusts class rates based on individual risk characteristics and loss experience.
The document discusses captives, which are special purpose insurance companies that insure the risks of their owners. It provides an overview of what captives are, their history and growth, types of captives, benefits of using a captive compared to commercial insurance, considerations for utilizing a captive such as ownership structure and domicile selection, and functions related to managing a captive.
In this risk retention piece, we provide updates to how the final rule under Dodd-Frank applies to CLOs. We cover the permissible forms of risk retention and financing options for the risk retention obligation among other things.
Diminishing limit policies, which count defense costs against the policy's liability limit, create challenges for insurers, defense counsel, and policyholders. They require insurers to carefully handle claims to avoid exhausting limits and expose them to bad faith claims. Defense counsel may face conflicts of interest as their duty is to the policyholder but costs hurt limits. Policyholders need frequent updates on remaining limits as multiple claims could exhaust aggregate coverage. Insurance agents must ensure clients understand these risks when purchasing diminishing limit policies.
The use of EU onshore Protected Cells as a capital efficient, cost-effective, flexible and secure alternative to owning a standalone insurer or captive. Presentation by Ian-Edward Stafrace to the UK IRM Global Risk Management Professional Development Forum 2011
Controlling Workers’ Compensation Costs by as Much as 20% - 50%Richard Swartzbaugh
What is Workers’ Compensation?
Who Benefits from Workers’ Compensation Cost Control? Everyone!!!
Worker’s Comp costs can be one of your Company’s greatest “out of control” costs, or, YOU can but in a proven 19-step system to reduce Workers’ Comp costs by as much as 20% - 50%, and utilize critical metrics to address:
- Why workers’ compensation metrics are important
- The formulas for how to calculate 5 critical metrics
- How to leverage these metrics to make an impact at your organization
Following the step-by-step instructions in 19-Step system for the calculation and application of critical metrics will address:
- Workers’ comp viewed as a cost of doing business
- Getting management to understand value of return to work
- Convincing policy holders to embrace a worker recovery program
- Lack of informed and effective employer involvement in WC claims issues
- Stakeholder apathy
- Managers and supervisors not taking seriously their duty to protect workers
Avoiding Workers’ Comp mistakes & loopholes will help drive three major points:
- Drivers of human behavior
- Disincentives to “Return to Work”
- Most common employer mistakes
Finally:
- Evidence-based medicine will create better Workers’ Comp claim outcomes.
- In organized environments, executing successful return to work programs with Unions (and members) is essential.
- As part of a comprehensive workers compensation program, employers should maintain close communications with injured employees to ensure they recover quickly, do not drop out of the workforce and return to work rapidly. Get Well Cards are part of a positive, proactive communication strategy.
The document summarizes key information about timely claim reporting and includes the following points:
1) Claims reported more than 24 hours after occurrence are 33% more costly. Timely reporting is important for a company's risk performance scorecard.
2) Timely reporting allows for early relationships with injured parties to ensure claims are handled properly, and allows adjusters to investigate claims when events are freshest in minds of injured employees and witnesses.
3) Faster reporting means better care for injured parties, faster claim resolution and payments, and ultimately lower costs for employers.
Captives are insurance companies owned by their insureds that provide tailored coverage and help stabilize insurance costs. Forming a captive can reduce operating costs through eliminating normal insurer overhead and realizing investment income. The key advantages are reduced costs, investment income, broader coverage, pricing stability, and increased control over the risk management process. However, captives also require capitalization and ongoing administrative costs to operate successfully.
The document discusses how risk management information systems (RMIS) can help captive insurance companies overcome data challenges. It explains that captives face increasing regulatory requirements, financial reporting needs, and strategic goals that require efficient handling of large and diverse data. An RMIS can automate operations like underwriting, claims management, finance, and reporting. Selecting an RMIS requires considering the captive's unique needs, operations, and information flows. The system should integrate internal and external systems and be flexible enough to change with business needs.
An endowment policy is a life insurance agreement that pays a lump sum after a set time period (maturity) or upon death. Maturity periods are usually 10, 15, or 20 years up to a certain age limit. Policies can be traditional with-profits or unit-linked. With-profits policies guarantee a sum and may pay additional bonuses depending on investment performance. Unit-linked policies value depends on underlying fund performance. Endowments can be used for savings and allow policyholders to choose payment amounts and duration. Modified endowments in the US were created in 1988 in response to some endowments being used as tax shelters, with new tax rules applying to those that fail certain premium tests.
The document discusses various alternative risk financing strategies such as captive insurance, outlining key factors to consider when selecting a strategy, how captives are formed and structured, regulatory requirements for different captive types, and the multi-step process for establishing a captive insurance company.
1. Rated age is a mechanism used by structured settlement providers to determine annuity pricing based on health factors, but it does not determine life expectancy.
2. Different underwriters may assess rated age differently and provide varying annuity costs, so it is important to shop the market.
3. Submitting medical records for rated age assessment can provide savings on annuity costs, even for medical conditions unrelated to the injury in question.
Fiduciary liability insurance covers plan sponsors and fiduciaries for liability arising from managing employee benefit plans, such as 401(k) plans. While premiums have historically been low, several factors are increasing risks for plan sponsors of smaller defined contribution plans, including conservative investment choices by participants, low returns, and investment fees. As a result, more lawsuits are being brought against smaller plans claiming excessive fees reduced returns. Plan sponsors should review their fiduciary liability coverage and ensure proper oversight of retirement plans.
The document provides an introduction to captive insurance, outlining who should form a captive based on risk profile and financial resources, the types of companies that typically benefit from captives, and the benefits such as custom policies, tax advantages, and negotiating leverage. It also describes the key steps to forming a captive including performing a feasibility study, applying to the jurisdiction, and requirements around capital and surplus as well as ongoing requirements like using a domicile manager.
A Road Map to Major Changes Coming to Multi-Employer Pension Plans: What Part...Polsinelli PC
To address the severe underfunding of multi-employer pension plans and the teetering finances of the Pension Benefit Guaranty Corporation ("PBGC"), the Multi-Employer Pension Reform Act of 2014 ("MPRA") was enacted last December in the most significant legislation affecting these plans since 1980. Among other changes, the MPRA gives troubled funds the ability to reduce the pension benefits of participants, including benefits for some retirees already in pay-status. It also gives additional flexibility to the PBGC to help underfunded plans by providing its financial assistance and facilitating fund mergers and partitions. There are also special rules under MPRA that may impact an employer's withdrawal liability.
This webinar, presented by Employee Benefits and Executive Compensation chair Andrew Douglass and Labor and Employment vice-chair Brad Kafka, discussed how the MPRA changes affect multi-employer pension plans, and specific actions that employers should consider in light of MPRA changes taking effect this year.
How to Form and Operate a Network of Competing ProvidersPolsinelli PC
The Health Law Section of the Colorado Bar Association, together with the American Health Lawyers Association, hosted the 2nd Annual Colorado Health Law Symposium, a regional event co-sponsored by the nation's largest educational organization devoted to legal issues in the health industry. Mitchell Raup, Polsinelli Antitrust Shareholder presented How to Form and Operate a Network of Competing Providers at the symposium.
Fiduciary liability insurance covers plan sponsors and fiduciaries for liability arising from managing employee benefit plans, such as 401(k) plans. While premiums have historically been low, several factors are increasing risks for plan sponsors of defined contribution plans and lawsuits alleging excessive fees are being brought against smaller plans. As legal strategies evolve, plan sponsors should review their fiduciary liability coverage and ensure prudent management of retirement plans.
This document provides information about group captive insurance programs. A group captive is a reinsurance company owned by policyholders that allows them to manage risk and control insurance costs. Key benefits include transparency of costs, reduced premiums over time, and the ability to build equity from unused premiums. The structure involves paying annual premiums to cover operating costs and claims through "A" and "B" funds. Unused premiums can be returned as dividends or kept as equity. The Owen-Dunn agency specializes in alternative risk programs like captives, with over a decade of experience placing over 100 clients.
HUSC 3366 Chapter 4 Savings and Payment ServicesRita Conley
This document discusses various types of banking and financial services including savings plans, payment accounts, and electronic banking services. It compares savings options like savings accounts, certificates of deposit, money market accounts, and U.S. savings bonds. It also evaluates factors to consider when choosing savings plans such as rates of return, taxes, liquidity, and safety. The document also covers checking accounts, debit cards, online payments, and other payment methods.
Ratemaking involves determining insurance premiums based on statistical analysis of past losses and variables that predict future risk. Actuaries set rates for classes of risk while underwriters apply the appropriate rates to applicants based on their characteristics. The goal is to charge lower rates to lower risk groups to attract more policyholders in a profitable way while complying with regulations. Premiums cover expected losses, expenses, and profit, with the "loading" portion covering costs and allowing for profit. Both accurate ratemaking and proper risk classification through underwriting are needed for an insurance company to earn a profit.
This document discusses the risks associated with derivative transactions and the impact of regulation in limiting these risks. It analyzes price risk, default risk, and systemic risk in derivatives markets. The document argues that default risk has been exaggerated and misunderstood. It claims that systemic risk simply aggregates individual default risks, which are lower than assumed due to the nature of derivatives. The document also discusses "agency risk" arising from compensation structures that can encourage excessive risk taking.
The document describes key topics related to thrift operations and savings institutions, including sources and uses of funds, types of risk exposure, valuation methods, and the savings and loan crisis of the 1980s. It discusses the sources of funds for savings institutions including deposits, borrowed funds, capital, and mortgage-backed securities. It also outlines the uses of funds such as cash, mortgages, securities, loans, and other investments. The document then evaluates the exposure of savings institutions to liquidity, credit, and interest rate risk and describes methods to manage interest rate risk. It concludes with an overview of the savings and loan crisis in the 1980s and the regulatory response and resolution through the Financial Institutions Reform, Recovery, and Enforcement
This document analyzes the implications of lengthened workers' compensation liability tails for self-insurers in three sentences:
Lengthened liability tails increase the financial risks and rewards of self-insurance by extending the period over which cash outflows are deferred. Longer tails also increase profit and loss volatility for self-insurers and affect how expenses are reported in financial statements. The document models costs of self-insurance under shorter and longer tail scenarios to explore these implications.
This document discusses contractual obligations that companies take on to notify customers and pay costs associated with a data breach when working with third party vendors. There are two common types of obligations: 1) To make the client company whole for any costs associated with a breach, including notification and credit monitoring. However, insurance policies may not cover all costs and the vendor loses negotiating power. 2) To directly notify customers on behalf of the client company. But most policies only cover notification required by law, not contracts. Not all policies cover costs associated with contractual notification obligations. Insureds need to carefully review policies and obligations to ensure coverage aligns with contractual responsibilities in the event of a breach.
The use of EU onshore Protected Cells as a capital efficient, cost-effective, flexible and secure alternative to owning a standalone insurer or captive. Presentation by Ian-Edward Stafrace to the UK IRM Global Risk Management Professional Development Forum 2011
Controlling Workers’ Compensation Costs by as Much as 20% - 50%Richard Swartzbaugh
What is Workers’ Compensation?
Who Benefits from Workers’ Compensation Cost Control? Everyone!!!
Worker’s Comp costs can be one of your Company’s greatest “out of control” costs, or, YOU can but in a proven 19-step system to reduce Workers’ Comp costs by as much as 20% - 50%, and utilize critical metrics to address:
- Why workers’ compensation metrics are important
- The formulas for how to calculate 5 critical metrics
- How to leverage these metrics to make an impact at your organization
Following the step-by-step instructions in 19-Step system for the calculation and application of critical metrics will address:
- Workers’ comp viewed as a cost of doing business
- Getting management to understand value of return to work
- Convincing policy holders to embrace a worker recovery program
- Lack of informed and effective employer involvement in WC claims issues
- Stakeholder apathy
- Managers and supervisors not taking seriously their duty to protect workers
Avoiding Workers’ Comp mistakes & loopholes will help drive three major points:
- Drivers of human behavior
- Disincentives to “Return to Work”
- Most common employer mistakes
Finally:
- Evidence-based medicine will create better Workers’ Comp claim outcomes.
- In organized environments, executing successful return to work programs with Unions (and members) is essential.
- As part of a comprehensive workers compensation program, employers should maintain close communications with injured employees to ensure they recover quickly, do not drop out of the workforce and return to work rapidly. Get Well Cards are part of a positive, proactive communication strategy.
The document summarizes key information about timely claim reporting and includes the following points:
1) Claims reported more than 24 hours after occurrence are 33% more costly. Timely reporting is important for a company's risk performance scorecard.
2) Timely reporting allows for early relationships with injured parties to ensure claims are handled properly, and allows adjusters to investigate claims when events are freshest in minds of injured employees and witnesses.
3) Faster reporting means better care for injured parties, faster claim resolution and payments, and ultimately lower costs for employers.
Captives are insurance companies owned by their insureds that provide tailored coverage and help stabilize insurance costs. Forming a captive can reduce operating costs through eliminating normal insurer overhead and realizing investment income. The key advantages are reduced costs, investment income, broader coverage, pricing stability, and increased control over the risk management process. However, captives also require capitalization and ongoing administrative costs to operate successfully.
The document discusses how risk management information systems (RMIS) can help captive insurance companies overcome data challenges. It explains that captives face increasing regulatory requirements, financial reporting needs, and strategic goals that require efficient handling of large and diverse data. An RMIS can automate operations like underwriting, claims management, finance, and reporting. Selecting an RMIS requires considering the captive's unique needs, operations, and information flows. The system should integrate internal and external systems and be flexible enough to change with business needs.
An endowment policy is a life insurance agreement that pays a lump sum after a set time period (maturity) or upon death. Maturity periods are usually 10, 15, or 20 years up to a certain age limit. Policies can be traditional with-profits or unit-linked. With-profits policies guarantee a sum and may pay additional bonuses depending on investment performance. Unit-linked policies value depends on underlying fund performance. Endowments can be used for savings and allow policyholders to choose payment amounts and duration. Modified endowments in the US were created in 1988 in response to some endowments being used as tax shelters, with new tax rules applying to those that fail certain premium tests.
The document discusses various alternative risk financing strategies such as captive insurance, outlining key factors to consider when selecting a strategy, how captives are formed and structured, regulatory requirements for different captive types, and the multi-step process for establishing a captive insurance company.
1. Rated age is a mechanism used by structured settlement providers to determine annuity pricing based on health factors, but it does not determine life expectancy.
2. Different underwriters may assess rated age differently and provide varying annuity costs, so it is important to shop the market.
3. Submitting medical records for rated age assessment can provide savings on annuity costs, even for medical conditions unrelated to the injury in question.
Fiduciary liability insurance covers plan sponsors and fiduciaries for liability arising from managing employee benefit plans, such as 401(k) plans. While premiums have historically been low, several factors are increasing risks for plan sponsors of smaller defined contribution plans, including conservative investment choices by participants, low returns, and investment fees. As a result, more lawsuits are being brought against smaller plans claiming excessive fees reduced returns. Plan sponsors should review their fiduciary liability coverage and ensure proper oversight of retirement plans.
The document provides an introduction to captive insurance, outlining who should form a captive based on risk profile and financial resources, the types of companies that typically benefit from captives, and the benefits such as custom policies, tax advantages, and negotiating leverage. It also describes the key steps to forming a captive including performing a feasibility study, applying to the jurisdiction, and requirements around capital and surplus as well as ongoing requirements like using a domicile manager.
A Road Map to Major Changes Coming to Multi-Employer Pension Plans: What Part...Polsinelli PC
To address the severe underfunding of multi-employer pension plans and the teetering finances of the Pension Benefit Guaranty Corporation ("PBGC"), the Multi-Employer Pension Reform Act of 2014 ("MPRA") was enacted last December in the most significant legislation affecting these plans since 1980. Among other changes, the MPRA gives troubled funds the ability to reduce the pension benefits of participants, including benefits for some retirees already in pay-status. It also gives additional flexibility to the PBGC to help underfunded plans by providing its financial assistance and facilitating fund mergers and partitions. There are also special rules under MPRA that may impact an employer's withdrawal liability.
This webinar, presented by Employee Benefits and Executive Compensation chair Andrew Douglass and Labor and Employment vice-chair Brad Kafka, discussed how the MPRA changes affect multi-employer pension plans, and specific actions that employers should consider in light of MPRA changes taking effect this year.
How to Form and Operate a Network of Competing ProvidersPolsinelli PC
The Health Law Section of the Colorado Bar Association, together with the American Health Lawyers Association, hosted the 2nd Annual Colorado Health Law Symposium, a regional event co-sponsored by the nation's largest educational organization devoted to legal issues in the health industry. Mitchell Raup, Polsinelli Antitrust Shareholder presented How to Form and Operate a Network of Competing Providers at the symposium.
Fiduciary liability insurance covers plan sponsors and fiduciaries for liability arising from managing employee benefit plans, such as 401(k) plans. While premiums have historically been low, several factors are increasing risks for plan sponsors of defined contribution plans and lawsuits alleging excessive fees are being brought against smaller plans. As legal strategies evolve, plan sponsors should review their fiduciary liability coverage and ensure prudent management of retirement plans.
This document provides information about group captive insurance programs. A group captive is a reinsurance company owned by policyholders that allows them to manage risk and control insurance costs. Key benefits include transparency of costs, reduced premiums over time, and the ability to build equity from unused premiums. The structure involves paying annual premiums to cover operating costs and claims through "A" and "B" funds. Unused premiums can be returned as dividends or kept as equity. The Owen-Dunn agency specializes in alternative risk programs like captives, with over a decade of experience placing over 100 clients.
HUSC 3366 Chapter 4 Savings and Payment ServicesRita Conley
This document discusses various types of banking and financial services including savings plans, payment accounts, and electronic banking services. It compares savings options like savings accounts, certificates of deposit, money market accounts, and U.S. savings bonds. It also evaluates factors to consider when choosing savings plans such as rates of return, taxes, liquidity, and safety. The document also covers checking accounts, debit cards, online payments, and other payment methods.
Ratemaking involves determining insurance premiums based on statistical analysis of past losses and variables that predict future risk. Actuaries set rates for classes of risk while underwriters apply the appropriate rates to applicants based on their characteristics. The goal is to charge lower rates to lower risk groups to attract more policyholders in a profitable way while complying with regulations. Premiums cover expected losses, expenses, and profit, with the "loading" portion covering costs and allowing for profit. Both accurate ratemaking and proper risk classification through underwriting are needed for an insurance company to earn a profit.
This document discusses the risks associated with derivative transactions and the impact of regulation in limiting these risks. It analyzes price risk, default risk, and systemic risk in derivatives markets. The document argues that default risk has been exaggerated and misunderstood. It claims that systemic risk simply aggregates individual default risks, which are lower than assumed due to the nature of derivatives. The document also discusses "agency risk" arising from compensation structures that can encourage excessive risk taking.
The document describes key topics related to thrift operations and savings institutions, including sources and uses of funds, types of risk exposure, valuation methods, and the savings and loan crisis of the 1980s. It discusses the sources of funds for savings institutions including deposits, borrowed funds, capital, and mortgage-backed securities. It also outlines the uses of funds such as cash, mortgages, securities, loans, and other investments. The document then evaluates the exposure of savings institutions to liquidity, credit, and interest rate risk and describes methods to manage interest rate risk. It concludes with an overview of the savings and loan crisis in the 1980s and the regulatory response and resolution through the Financial Institutions Reform, Recovery, and Enforcement
This document analyzes the implications of lengthened workers' compensation liability tails for self-insurers in three sentences:
Lengthened liability tails increase the financial risks and rewards of self-insurance by extending the period over which cash outflows are deferred. Longer tails also increase profit and loss volatility for self-insurers and affect how expenses are reported in financial statements. The document models costs of self-insurance under shorter and longer tail scenarios to explore these implications.
This document discusses contractual obligations that companies take on to notify customers and pay costs associated with a data breach when working with third party vendors. There are two common types of obligations: 1) To make the client company whole for any costs associated with a breach, including notification and credit monitoring. However, insurance policies may not cover all costs and the vendor loses negotiating power. 2) To directly notify customers on behalf of the client company. But most policies only cover notification required by law, not contracts. Not all policies cover costs associated with contractual notification obligations. Insureds need to carefully review policies and obligations to ensure coverage aligns with contractual responsibilities in the event of a breach.
Numerous financial instruments and products are used in financial planning. Life insurance is an example of both because it assists individuals accomplish financial goals via a financial mechanism that is legally structured differently from other financial planning products such as 401(k)s and individual retirement accounts.
Taking a closer look at what your company needs to know about moving from a fully-insured to a self-funded health benefits environment. Originally presented by Greg Bass, Senior Consultant/Benefits Division Manager for The Starr Group, this presentation shares the "secret formula" for health insurance programs that successfully work WITH ObamaCare!
The Insurance Act 2015 has introduced the most significant reform to insurance law in over 100 years. The Act impacts all those involved in the insurance sector. In this report we review key markets' response to the Act and outline the practical steps you should have addressed ahead of the Act coming into force.
Visit our hub to access information and resources tailored to brokers: www.brownejacobson.com/brokers
The document discusses the differences between occurrence-based and claims-made medical malpractice insurance. Occurrence-based insurance provides unlimited coverage for any claims that occur during the policy period, even if reported later. Claims-made insurance only covers claims that both occur and are reported during the active policy period, unless tail coverage is purchased. Tail coverage extends reporting timelines but is expensive, with costs increasing each year. Over time, premiums for claims-made insurance typically exceed those of occurrence-based policies due to increasing liability exposure. Proper due diligence is important when evaluating and switching between these policy types.
The document discusses unfair terms in consumer insurance policies. It defines unfair terms as clauses that create an unjust relationship between the insurer and policyholder by being hidden, unclear, or not properly explained. Unfair terms are prohibited by consumer protection laws in many countries. The document outlines examples of unfair terms, consequences of unfair terms like legal disputes and loss of trust, and liabilities for insurance companies that use unfair terms like regulatory fines and reputation damage. It concludes with best practices for insurance companies to promote fairness, such as avoiding discrimination, using clear policy language, and educating consumers.
Enterprise Act 2016 and its impact on the insurance sectorBrowne Jacobson LLP
The document summarizes the findings of a survey conducted by Browne Jacobson law firm on the expected impact of the Enterprise Act 2016 in the UK. The Act allows policyholders to claim unlimited damages from insurers for losses caused by unreasonable delays in claims payments. Key findings include: 1) Insurers may investigate fewer claims to avoid delays; 2) Insurers will likely pursue claims administrators responsible for payment delays; 3) Most respondents do not expect higher premiums to offset costs of the Act.
This document discusses commercial umbrella liability insurance. It provides the following key points in 3 sentences:
Umbrella policies provide liability coverage over primary policies like general liability and auto liability, sitting above underlying policy limits to provide additional coverage. They offer higher coverage limits at a more affordable cost than buying those limits separately. True umbrella policies may also cover claims not covered by primary policies, but many policies labeled as "umbrellas" are actually excess policies that only provide coverage if the underlying policy also covers it.
- Small and large businesses are increasingly forming "profit center captives" as a way to profit from risk by selling insurance products like warranties to their customers.
- Large companies like Verizon and Walmart have been successfully selling insurance products to customers for years, realizing new profits. These small insurance programs within larger companies are called "profit center captives".
- Profit center captives allow companies to take on third-party risks from customers or other external parties, converting those premiums paid into new revenue streams and profits for the company. They provide benefits like strengthening customer relationships and diversifying revenue.
This document summarizes commercial umbrella liability insurance policies. Umbrella policies provide additional liability insurance coverage over primary policies for costs from large jury awards. They have large deductibles equal to primary policy limits, making premiums relatively inexpensive. True umbrella policies may cover exposures not covered by primary policies, with their own terms and deductible. Excess liability policies similarly provide additional coverage but follow primary policy terms. Factors like separate deductibles and page length can distinguish umbrella from excess policies.
The document discusses various concepts related to insurance including:
1. It defines a utility function and explains how it is used to represent consumer preferences and welfare for different consumption levels and probabilities of states occurring in insurance.
2. It discusses key features of the individual risk model including how consumption levels and probabilities are incorporated into the utility function.
3. It explains how the central limit theorem can be applied in insurance problems by allowing inferences about event probabilities to use normal approximations even if the underlying data is not normally distributed, which is useful for factors like determining claim probabilities and identifying changes over time.
The document provides an overview of the extended warranty industry in the United States. It discusses the structure of the industry, with extended warranties being offered by either the retailer, manufacturer, or a third party warranty administrator. It estimates the size of the US extended warranty market was $39.5 billion in 2014, with automobiles making up the largest segment. The industry has experienced average annual growth of over 8% while overall US economic growth has been around 2.2% annually. Common products covered by extended warranties include automobiles, mobile phones, consumer electronics, appliances, and home systems.
This document discusses pension buy-in arrangements, which are similar to annuities but do not transfer responsibility for pension obligations from the employer to an insurer. Under a buy-in, the pension plan purchases a contract from an insurer to generate returns to cover future benefit payments, but the plan remains responsible for payments. The document explores accounting implications, noting buy-ins do not qualify for settlement accounting and should be recorded as a plan asset at fair value.
Legal Newsletter for the construction industry highlighting Collateral Warranties, New JCT 2016 Edition of contracts, apprenticeships and the health & safety revolution
This M Intelligence piece will explore the product mechanics and design considerations of Whole Life (WL) insurance. There are two general categories of WL...
Business interruption insurance provides coverage for financial losses businesses incur due to indirect or consequential losses from events that cause business interruptions, even if there is only minor direct property damage. It has become especially important with modern automated businesses that are vulnerable to interruptions. Coverage includes lost business income and extra expenses to avoid downtime, such as temporary locations. Claims made policies require claims be reported during the policy period, so renewals require caution to avoid lapses in coverage. Workers' compensation generally does not cover independent contractors, but their injuries may be covered under the client's policy if the contractor has no insurance. The terrorism risk insurance program provides federal backing for terrorism coverage purchased by policyholders.
Business income insurance, also called business interruption insurance or extra expense insurance, is typically purchased as part of a commercial property insurance policy for an additional premium. It covers the loss of business income that occurs when direct physical damage to a business's property causes the business to be unable to operate. The policy will pay for ongoing operating expenses and lost profits during the recovery period, which is usually a set number of weeks or months. The insurance contract lays out the risks covered, effective dates, amounts of coverage, and other important policy details in legal language.
Business interruption insurance provides coverage for financial losses businesses incur due to indirect or consequential losses from events that cause operational disruptions, even if there is no direct physical damage to property. It has two main components - business income coverage, which covers lost profits and operating expenses, and extra expense coverage, which covers additional costs like temporary locations that allow businesses to continue operating. Claims made policies, unlike occurrence policies, only provide coverage if a claim is first made and reported during the active policy period. Renewing claims made policies requires caution to avoid coverage gaps. Workers compensation rules aim to universally cover employee injuries but challenges arise with independent contractors who are not legally considered employees.
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Rethinking Kållered │ From Big Box to a Reuse Hub: A Transformation Journey ...SirmaDuztepeliler
"Rethinking Kållered │ From Big Box to a Reuse Hub: A Transformation Journey Toward Sustainability"
The booklet of my master’s thesis at the Department of Architecture and Civil Engineering at Chalmers University of Technology. (Gothenburg, Sweden)
This thesis explores the transformation of the vacated (2023) IKEA store in Kållered, Sweden, into a "Reuse Hub" addressing various user types. The project aims to create a model for circular and sustainable economic practices that promote resource efficiency, waste reduction, and a shift in societal overconsumption patterns.
Reuse, though crucial in the circular economy, is one of the least studied areas. Most materials with reuse potential, especially in the construction sector, are recycled (downcycled), causing a greater loss of resources and energy. My project addresses barriers to reuse, such as difficult access to materials, storage, and logistics issues.
Aims:
• Enhancing Access to Reclaimed Materials: Creating a hub for reclaimed construction materials for both institutional and individual needs.
• Promoting Circular Economy: Showcasing the potential and variety of reusable materials and how they can drive a circular economy.
• Fostering Community Engagement: Developing spaces for social interaction around reuse-focused stores and workshops.
• Raising Awareness: Transforming a former consumerist symbol into a center for circular practices.
Highlights:
• The project emphasizes cross-sector collaboration with producers and wholesalers to repurpose surplus materials before they enter the recycling phase.
• This project can serve as a prototype for reusing many idle commercial buildings in different scales and sizes.
• The findings indicate that transforming large vacant properties can support sustainable practices and present an economically attractive business model with high social returns at the same time.
• It highlights the potential of how sustainable practices in the construction sector can drive societal change.
1. Lecture Notes: Life Assurance
Lecture 8: The general business environment (2)
By Omari C.O
1 The general business environment
Objective: Describe the effect of the general business environment including the impact on
level of risk to the insurer, in terms of:
• Types of expenses and commissions including influence of inflation
• Economic environment (including developing/ volatile economies and risky markets)
• legal environment
• regulatory constraints and opportunities
• fiscal constraints and opportunities
• professional guidance constraints and opportunities
1.1 Introduction
In this lecture, we describe the main kinds of expenses, and we study the economic, legal, regu-
latory, fiscal and professional influences that may affect the way that life insurance companies
operate.
1.2 Types of expenses and commissions including influence of in-
flation
A life insurance company will incur costs in running its business, being commission payable
to salespeople, and management expenses.
Usually, initial commission is payable on the acquisition of a new policy, and renewal com-
mission is payable each time a renewal premium is paid. If a policy lapses, part of the initial
commission may be recoverable and there will be a risk of non-recovery.
Management expenses consist of expenses that are incurred directly when new policies are
written (new business) or maintained (in-force business), and overhead expenses that a com-
pany has to incur regardless of the amount of new business it writes and the business it has in
force. Thee overheads would include, for example, the costs of general management, at least
part of the costs of a company’s service departments (such as IT and HR), and the cost of
accommodation.
2. Life Assurance
There may also be expenses associated with terminating a policy, for example the cost in-
volved in making a death claim payment on a whole life insurance.
These expenses would be split in various ways in order to determine, for example, the ex-
pense loadings to be built into premium rates.
The term “overheads” can be used to mean a number of different things. Here it is firstly
used to refer to any type of expenses that is not specifically associated with policy activity
(ie with its set up, maintenance or termination). An example might be the cost of electricity
used to run the company’s offices and computer systems.
There is a profitability risk that these loadings will prove insufficient to meet the actual
expenses incurred.
At a simpler level, risks can arise if a company finds it cannot contain costs, including the
rate at which they increase due to inflation.
Inflation affects underlying costs which in turn influence the level of expenses allocated to
policies.
Many underlying costs are directly or indirectly linked to wage and salary levels. Others
are influenced by the general level of prices or by the prices of particular commodities. Pub-
licly available data, eg retail price index, national average earnings index, and similar data
internal to the life insurance company, can be used to decide what assumptions to make about
general price, future wage or specific price inflation.
A particular difficult aspect of managing a life insurer’s costs arises from the fact that new
business may well be cyclical compared with the more predictable base of ongoing renewal
and in-force business. A significant part of operating expenses arises from the need to employ
experienced staff and if any of these are laid off in response to a downturn in new business,
re-employing similar quality of staff may prove difficult when the new business improves again.
The company would therefore like to have much more flexibility with regard to the num-
ber of new business staff that it employs from time to time, whereas this is much less of an
issue with regard to staff employed on renewals.
1.3 Economic environment
The state of the economy in which an insurer operates will carry risks for the insurer. The
availability of asset types, and their short- and long-term expected yields, will determine how
well an insurer can choose investments and the probability of securing the return assumed
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3. Life Assurance
when setting premium rates.
From the consumers’ point of view, insurance products may be seen as more or less attractive
compared with other available investments (or not investing at all).
Economies in which the investment markets are more volatile will tend (other thing being
equal) to have more expensive insurance products and possibly less take up of them. The
insurers will tend to have relatively higher capital requirements as a result of increased un-
certainty of investment return. This will increase the cost of capital and so increase product
charges and premiums.
An insurer investing in more risky/speculative markets is likely to seek a greater expected
rate of return on capital, and hence there is a relatively greater risk of the required return not
being achieved.
This is an additional reason for increasing the cost of capital, as it will mean a higher risk
discount rate will be used for discounting profits.
1.4 Legal environment
Assuming a politically stable operating environment in which the legal processes of contract
law operate efficiently, the written contract between insurer and policyholder should normally
avoid any significant legal risk.
Particular cae, however, is needed with regard to those areas of the contract where the insurer
has discretion. In this event, the insurer is at risk of:
• some principle related to PRE acting unfavourably to the office – for example, the flex-
ibility it would like to adopt in declaring differing levels of bonus across with profits
policies may be constrained.
A company may well be legally required to distribute profits in a way that is “con-
sistent with PRE” However, PRE is very difficult t pin down in a legal sense, and
interpretation might only be settled by court rulings in particular cases. (nevertheless,
such things can and do happen, so they can have as much effect in constraining insur-
ance company behavior as a more precise requirement.) In any case, companies would
no wish to be taken to court in the first place, and they will always have a desire to keep
their policyholders happy so as to improve their company image and increase sales. In
this way, a rather loosely defined PRE requirement might even have greater constraining
influence than might a more rigidly defined rule.
• Unfair contract terms voiding clause of the contract – for example, if a contract confers
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4. Life Assurance
a right for the charges on unit-linked contracts to be increased by a fixed annual rate
which is considered unfair in the country concerned, the legal process may act to void
the clause. A particular risk is that the ability to review charges at all is removed
completely, rather than the clause being replaced with a percentage increase which is
acceptably lower than before.
In most cases it would be hoped that these kinds of issues would be sorted out during the de-
velopment of any product. So if legal requirements prevented certain kinds of charge increases
from being made, then the product design would not incorporate such features. naturally
this puts a constraint on product design; which could ultimately mean that whole classes of
business might not be offered if insurers felt they were too risky.
A compounding difficulty here is that insurance contracts span many years and are hence
open to developing legal cultures, interpretations, and court judgements.
So one of the biggest risks here is that new legislation could be introduced that could change
the legal contract between the insurer and its existing policyholders. For example, it might
prevent a company from making further increases in charges on existing policies under which
increases could hitherto have been made.
Beyond the written contract, legal risks may arise from inconsistencies between the policy
document and any other relevant representations made by the company or its agents.
For example, an intermediary may have told a client that a policy had a certain feature
that, in reality, it did not possess. The client, having taken out (and maybe even claimed
under) the policy, later finds out the discrepancy and makes a complaint to the regulator.
The insurer may well lose money (and face) if the complaint were to be upheld.
(Naturally we will assume that the intermediary did not tell the falsehood deliberately!)
1.5 Regulatory constraints and opportunities
Governments may impose restrictions on the way that life insurance companies
operate. The aim of such restrictions is usually stated to be the protection of the
policyholder.
Historical experience has shown that insurance companies could not always be trusted to
manage their affairs appropriately without legislative control. People who take out long-term
insurance contracts are giving large sums of money to insurance companies, often over very
long periods of time, in return for a “promise” by the company to pay the contractual sum
assured at some (often distant) future date. The public needs to have well-founded confidence
that insurance companies will still be in business and able to honour their obligations when
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5. Life Assurance
policyholders claim. Without this confidence people will be reluctant to buy insurance, and
will therefore be denied this essential financial service as a result (in other words, taken to the
extreme, the industry will fail). Countries have therefore found it necessary ro regulate their
insurance industries in order to ensure the security of the policyholders’ interest (ie that the
companies should not become insolvent), thereby achieving the necessary public confidence
in the industry to the benefit of both parties (the public receives service and the insurance
companies do business).
Although the restrictions will usually meet this aim, they may also have the effect of either
restricting innovation or reducing the benefits that could otherwise be given to policyholders.
The following are the more common of such regulatory restrictions.
1. A restriction on the type of contract that a life insurance company can offer.
For example, in Italy, there are six classes of life insurance product, based on contract
type. For example, unit-linked business is one class. Companies have to be authorized
separately for each class. Some companies may be authorized to write only one or two
of the six classes.
In South Africa, life insurance contracts have to be of term at least five years. This
was introduced to prevent competition with banks for short-term contracts.
2. Restrictions on the premium rates or charges, that can be used for some
types of contract.
Such restrictions have been common in many European countries and in some States in
the United States. The rates themselves might be restricted, or certain elements of the
premium rate basis, such as mortality and interest, might be controlled.
3. Requirements relating to the terms and conditions of the contracts offered,
for example with regard to how paid-up policy and surrender values are to
be calculated.
Customers and regulators in a number of countries have been concerned about poor
value for money on early withdrawal from life insurance contracts. High initial ex-
penses, including up-front commission, are responsible for this problem. One possible
solution is for regulators to impose minimum values (for example specified percentages
of premiums paid). Alternatively, where policy values are calculated on a prospective
basis, the basis for the calculation could be specified or restricted.
4. Restrictions on the channels through which life insurance may be sold or re-
quirements as to the procedures to be followed or the information required
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6. Life Assurance
to be given as part of the selling process.
For example this might involve:
• minimum training requirements for insurance salespeople,
• the right of cancelation of contract by the policyholder
• he illustration of possible maturity values and surrender values, perhaps on specified
or restricted bases.
Where bases, for illustrative values are not restricted, experience shows that (wildly)
over optimistic projections can result.
5. Restrictions on the ability to underwrite, for example a prohibition on the
use of the results of genetic testing, or to differentiate between different
classes of policyholder, eg males and females.
In New Zealand, anti discrimination law prevents life insurers refusing to insure anyone,
whatever their state of health. However, insurers are allowed to charge an appropriate
premium for the risk.
6. An indirect constraint on the amount of business that may be written.
In most countries there are regulations regarding the minimum level of mathemati-
cal reserves that must be held, often combined with minimum requirements regarding
the solvency margin of the company.
These regulations have the effect of firstly limiting the capital available within a com-
pany to write new business and, secondly effectively placing a minimum requirement on
the finance required to write a contract.
The capital that a company has available to write new business is, broadly speaking,
the supervisory value of its assets minus the supervisory value of its liabilities (including
any required solvency margin (RSM)). This difference is sometimes referred to as the
“free assets”, “free capital”, or “free reserves” of the company.
If the company uses up more than the amount of its free assets in writing new business
(or any other way) it will be insolvent in the supervisors’ eyes. Quite simply, the larger
the value of supervisory reserves plus RSM that the insurance company has to hold to
satisfy the regulators on the existing in-force business, the smaller the free assets and
hence the capital available for writing new business.
What is more, the bigger the reserves plus RSM that have to be set up for for any
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7. Life Assurance
new contract, the greater the amount of the limited capital available that will be used
up when the new contracts are written.
7. The regulatory framework within a country may limit what a company would
like to do in terms of investment. There may be restrictions on:
• the types of assets that a life insurance company can invest in
• the amount of any particular type of asset that can be taken into account
for the purpose of demonstrating solvency
• the extent to which mismatching is allowed at all.
For example, in some countries there is a requirement to hold minimum proportions of total
assets in certain types of investment, such as government stock or bank deposits. Investment
in assets perceived to be risky, such as equities, property and derivatives, might be restricted
(eg to x% of total funds or liabilities) or even forbidden.
An alternative is to allow largely unrestricted investment, but to permit only a certain per-
centage of some asset classes to count when demonstrating statutory solvency. For example,
equities might only be allowed to count for 25% of assets in demonstrating solvency. So a
company with, say, 40m in equities and 60 in gilts would only be able to show assets of 80m
in its statutory balance sheet.
Another approach adopted in some countries focuses on preventing over-concentrations in
individual assets (eg the shares of one particular company), rather than in particular asset
classes. For example, a restriction that shares in any one company may amount to no more
than 1% of the assets used to demonstrate solvency.
The regulatory environment can also affect the choice of assets through their
relationship with the investment assumptions used to value the liabilities. A
particular asset distribution may allow a company to use a higher investment
assumption and thereby reduce the value of the liabilities and increase the free
assets. Typically, however, such distributions will not enable the company to
maximize the expected investment return.
Finally there may be a regulatory requirement to allow for mismatching. This
could involve the possible setting up of an investment mismatching reserve. The
more a company decides to invest in risker assets with a higher expected return,
the higher could be any such resulting reserve. This would increase the value of
the liabilities and reduce the available free assets.
There may be regulations specifying what changes in conditions should be considered for
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8. Life Assurance
the purpose of determining a mismatching reserve, or such guidance might come from a pro-
fessional actuarial association or the regulatory authorities. Alternatively the decision might
be left to the individual actuary’s professional judgement.
Another regulatory constraint which might be important is the method required to value
the assets. For instance, in countries where assets are valued at book value, there is a disin-
centive to invest in property because any increase in value in the properties could only be seen
after sale, and having to sell frequently would be expensive and inconvenient. Even simple
equity investment is less attractive in such a country, since gains can only be seen on sale and
there will be times when the company might not want to sell.
The wider regulatory environment
The wider regulatory environment in terms of which institutions are allowed to
transact life insurance type business is also important. In practice, life insurance
companies are likely to have the monopoly of providing pure protection benefits,
but not of providing savings benefits.
Other pooled savings vehicles are likely to exist, for example unit trusts and investment
trusts in the UK, or their approximate equivalents in the US, mutual funds and investment
companies. Direct investment in shares or other assets will also be an option for some indi-
viduals.
The other institutions offering savings contracts, for example banks, will usually
be subject to different regulatory controls from life insurance companies, leading
to a non-level playing field with regard to the terms on which such contracts can
be offered.
The differences may be to the benefit or detriment of insurance companies. Possible examples
of a sloping playing field include:
• different for demonstrating capital adequacy,
• different rules on advertising of products,
• different rules for benefit illustrations
The regulatory environment is likely to have a significant effect on the design of the contracts
sold by life insurance companies, as the companies will want to make the best use of any
regulatory opportunities available to them. Conversely, contract design will have to take into
account any constraints imposed.
Question 1.1. The regulatory authorities in a particular country have just introduced a re-
quirement for life insurers to illustrate, to prospective policyholders, withdrawal values for each
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9. Life Assurance
of the first ten years of contracts. Comment briefly on how this change may affect contract
design and benefits paid to policyholders on unit-linked endowment assurances.
1.6 The fiscal regime
1.6.1 Approaches to taxation
Life insurance business may be taxed in a number of different ways. The most common
methods are:
• A tax on the annual profits of the business, where broadly profits means the excess of
the change in the value of the assets over the change in the value of the liabilities.
• Tax payable on investment income less some or all of the operating expenses of the
company.
In addition, there may be a tax on premium income.
One way of looking at the two above approaches is that they recognize different aspects
of the nature of a life insurer. The “profits” approach recognizes that a life insurer, at least if
it has shareholders, is a company trying to make a profit like any other.
The “investment income” approach could be though of as treating the insurer as a group
of individuals pooling their resources for investment. If the investment return of individuals
is taxed then it is logical that this return should be taxed if it is earned within a life insurance
company.
1.6.2 The profits approach
The profits calculation described above essentially measures taxable profit as the increase in
the free assets of the company over the year, where free assets is defined as the value of assets
minus the value of liabilities. (Any required solvency margin may or may not be added to the
value of liabilities in this calculation). Let us define:
A0 = Assets at start of year
A1 = Assets at end of year
V0 = Liabilities at start of year
V1 = Liabilities at end of year
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10. Life Assurance
Then profit would be stated as:
1. (A1 − A0) − (V1 − V0)
2. (A1 − V1) − (A0 − V0) ie increase in free assets over the year
Generally the reserves used will be the supervisory reserves, because this limits the life in-
surer’s freedom to manipulate the amount of the reserves and hence the taxable profit. It
would also be unfair on insurance companies to use reserves in the tax computation which
are calculated any less prudently than the supervisory reserving basis. This is because the
company is only allowed to distribute profits which are earned in excess of the supervisory
reserves, so a tax assessment on profits bases on smaller reserves would be asking the company
to pay tax on profits before they have actually been earned.
With an approach based on profit the focus is usually on shareholders’ profit. Profit dis-
tributed to policyholders on with-profits policies may well be automatically excluded from the
profit calculation. For example, where policyholder bonus increase the liabilities at the end of
the year (V1) the value of those bonuses would be excluded from the profit figure. Similarly,
if cash bonuses are paid out to policyholders these reduce the end of year asset figure (A1).
1.6.3 The investment income approach
First it is worth pointing out that “investment income” is not always the precisely correct
term, although it may frequently be used colloquially. The taxable amount may include some
or all capital gains, as well as investment income.
Allowing a deduction for expenses is reasonable because such expenses must reduce any re-
turns actually available to policyholders or shareholders.
To get a full picture of the impact of taxation on investment return one must consider the
total effect of taxation within the life insurance company and on the benefits received by the
policyholders.
1.6.4 The effect of the fiscal regime
Within a particular country, different types of life insurance business may be taxed on different
methods.
“Different types” here could refer to various possible classifications of business. For example,
business classed as “pensions” might be taxed differently from other business. Other possibil-
ities could include different treatment of with-profits and unit-linked business, or of “savings”
and “protection” polices.
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11. Life Assurance
This can means that it is lower cost for the consumer if certain forms of benefit can be
offered as one type of business rather than another.
The taxation treatment of life insurance business may make life insurance more or less at-
tractive as a savings medium than contracts offered by other savings institutions, subject to
a different fiscal regime.
Tax concessions available to individuals may make the sale of certain types of contract easier.
The tax treatment in the hands of policyholders of policy proceeds can distort buying habits.
The last three paragraphs illustrate the point that the overall attractiveness of a life in-
surance product compared with other products (be they from life insurers or other savings
institutions) depends on a combination of:
1. the taxation treatment of premium paid, in particular whether the premiums are de-
ductable from the individual’s taxable income in full, in part or not at all.
2. the taxation of the life insurer’s funds during the life of the contract, and
3. the taxation treatment of the eventual policy benefits.
As with the regulatory environment, product design will want to make the best use of any
opportunities provided by the fiscal environment. On the other hand, the ability to avail of
favourable taxation treatment may force constraints on product design.
For example, tax authorities may be keen that pure savings business should not be “dressed
up” as life insurance in order to secure favourable tax treatment where this exists. If so, they
might therefore specify minimum levels of life cover necessary to secure tax concessions.
This would then represent both an opportunity and a constraint. The tax concessions might
allow a competitive product to be produced, but the design would have to include at least the
minimum level of life cover.
It should be noted that both the fiscal and regulatory environments are very significant drivers
of product design in the insurance industry.
Taxation risk
Taxation can change over time so it is important to bear this in mind when
benefits are guaranteed over the long term.
Existing policies are usually not immune from the effects of changes in taxation (methods
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12. Life Assurance
or rates), so the company has a risk of making less (net) profit than anticipated from any
policy as a result of future taxation changes.
1.7 Professional guidance
We look at the professional guidance constraints and opportunities that may exist.
Actuarial associations will often issue professional guidance for actuaries advising
life insurance companies. These will typically give such actuaries a framework of
points that they need to consider in carrying out their responsibilities in order to
maintain professional standards.
The extent to which this is considered necessary will depend on the extent to which actu-
aries’ scope for judgement is limited by legislation, which will vary from country to country.
As such, professional guidance should not restrict the actions of actuaries and may even
provide protection against pressure from proprietors to agree to courses of action that may
not be in he best interests of policyholders.
Actuarial associations may also issue professional guidance on the interpretation of govern-
ment regulations. This may typically arise where the government does not want to overly
prescriptive in its requirements so as not unduly to restrict the actions of life insurance com-
panies. The government will then look to the actuarial profession to set limits as it were, on
what would be acceptable behavior.
To the extent that professional guidance adds safeguards as to the proper running of life
insurers, it effectively provides an opportunity for insurers to encourage consumers to invest
in life insurance products. Such products should then be lower cost and more flexible on
account of enjoying an appropriate, but not undue and over costly, regulatory regime.
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