Post on 31-Dec-2015
J. K. Dietrich - FBE 525 - Fall, 2006
Value Creation in Insurance, Information and Asset Management Services
Week 8 - October 12, 2006
J. K. Dietrich - FBE 525 - Fall, 2006
Life Insurance
Life and annuity contract– Probabilities determined – Cash flows from coverage are predictable– Principal-agent problems with moral hazard limited,
adverse selection tolerable Cancellations, lapses, policy loans Inflation, taxes, and product innovation
– Universal life insurance– Annuities
J. K. Dietrich - FBE 525 - Fall, 2006
Life Insurance Contracts
AgeAgeRetirement RetirementDeath Death
Whole Life Contract Limited Pay Life
Pre
miu
ms,
Ben
efit
s
Pre
miu
ms,
Ben
efit
s
J. K. Dietrich - FBE 525 - Fall, 2006
Life Insurance Contracts (cont’d)
AgeAgeRetirement RetirementDeath Death
Endowment Policy Life and Annuity
Pre
miu
ms,
Ben
efit
s
Pre
miu
ms,
Ben
efit
s
J. K. Dietrich - FBE 525 - Fall, 2006
Casualty Insurance
Casualty contract– Period– Incidence and severity of claims– Catastrophic losses
Principal-agent problems– Insured and adverse selection– Insured and moral hazard– Correlation of incidence and severity with systematic
risk
J. K. Dietrich - FBE 525 - Fall, 2006
Reinsurance Example
Loss
Cla
ims
Pay
men
ts
0
Retained by Underwriter
Paid by Reinsurer A
Paid by Reinsurers B & C
J. K. Dietrich - FBE 525 - Fall, 2006
Insurance Pricing in Equilibrium Premiums compensate insurers for insurance costs
and losses and systematic risk:
where
and P, X and L are premiums, expenses and losses and k is a time to claim payment measure
])([)1()( fmufu rrErxkrE
P
XLPru
J. K. Dietrich - FBE 525 - Fall, 2006
Inefficiencies in Insurance
Pricing and term setting Marketing and information Monitoring and controlling Production and delivery Funding and investing Risk bearing and sharing
J. K. Dietrich - FBE 525 - Fall, 2006
Asset Management
Economics of the industry– Performance measurement– Principal-agent problems
A “temporary” disequilibrium– Historical perspective
Basic problem: luck versus skill The value chain in asset management Strategic challenges
J. K. Dietrich - FBE 525 - Fall, 2006
Information and Advice Markets
– Retail customer specific information» Credit information
» Loan application and transaction sources
» Advice based on scoring, marketing, etc.
– Wholesale information and analytical services» Dun and Bradstreet
» Rating agencies
Current issues in bundling, pricing
J. K. Dietrich - FBE 525 - Fall, 2006
Next Week... Prepare DFA and Bloomberg cases for
discussion on October 19 (or 14) Review ISE and Hambrecht case if you plan
to come on October 14 (Saturday) (see Week 6 Objectives for case questions)
Part 2 of project due on October 19 Take-home distributed today is due in class
on October 19