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					   CHAPTER 25


Insurance and Pension Fund Operations



                                        1
CHAPTER 25 OVERVIEW
This chapter will:
A. Describe the main uses of insurance company funds
B. Explain the exposure of insurance companies to
   various forms of risk
C. Identify the factors that affect the value of insurance
   companies
D. Describe the common types of private pension plans
E. Explain how pension funds are managed




                                                         2
Insurance Company
 Provide various insurance and investment services to
  individuals and charge a fee called premium.
 Life insurance, property and casualty insurance,
  health insurance, and business insurance.
 Adverse selection problem-those who are most likely
  to need insurance are most likely to purchase it.
 Moral hazard problem-insurance can cause the
  insured to take more risks because they are
  protected.



                                                        3
Premium Determination
 Premium is based on the probability of the
  condition under which the company will have
  to provide a payment to the insured (or
  beneficiary) and the potential size of the
  payment.
 Competition
 Adverse selection problem
 Moral hazard problem


                                                4
Main Sources of Funds
1. Insurance premium
2. Provision of annuity plans, which offer a
   predetermined amount of retirement income to
   individuals.
3. Investment
4. Equity




                                                  5
Exhibit 25.1 Distribution of U.S. Life Insurance
Company Income




            Source: 2007 Life Insurance Fact Book
Uses of Funds

 a. Government Securities
 b. Corporate Securities
 c. Mortgages
 d. Real Estate
 e. Policy Loans




                            7
Exhibit 25.2 Assets of U.S. Life Insurance
Companies




           Source: 2007 Life Insurance Fact Book
Exhibit 25.4 Assets of Property and Casualty
Insurance Companies




                Source: Federal Reserve
Risk Exposure
1. Interest Rate Risk

2. Credit Risk

3. Market Risk

4. Liquidity Risk


                        10
Exhibit 25.6 Participation of Insurance Companies
in Financial markets
Property and Casualty Reinsurance
 Property and casualty insurance commonly
 obtain reinsurance, which the insurance
 company allocates a portion of their return
 and risk to other insurance companies.




                                               12
Regulation of Insurance Companies


 a. Regulated by state agencies
 b. Insurance company agents must be
     licensed
 c. National Association of Insurance
     Commissioners (NAIC)
 d. Regulation of Capital



                                        13
D. Common Types of Pension Funds
1. Background
   a. Public Pension Funds

  b. Private Pension Plans
     1.) Defined-Benefit Plan
     2.) Defined-Contribution Plan


  c. Underfunded Pensions

                                     14
Pension and Pension Funds
 Pension plans provide a savings plan for
 employees that can be used for retirement,
 e.g. 401K. They receive premium from the
 employer and/or the employee.




                                              15
Common Types of Pension Funds
  1. Public pension funds
  for example, Social Security

  2. Private pension funds




                                 16
Pension Fund Management
1. Management of Insured plans
   pension funds are managed by life insurance
   companies. Contributions are often used to
   purchase annuity policies. The investment
   concentrates on bonds and mortgages.


2. Management of Trust Portfolios
   pension funds are managed by the trust department
   of financial institutions such as commercial banks.
   The investment concentrates on stocks.
                                                     17
Exhibit 25.10 Participation of Pension Funds in
Financial Markets
Homework Assignment 15
Questions:
1 2 5 8 9 10 14 21 24




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