All Rights Reserved Dr David P Echevarria 1 INSURANCE AND PENSION FUND OPERATIONS CHAPTER 25.

Dr David P Echevarria 1All Rights Reserved

INSURANCE AND PENSION FUND OPERATIONS

CHAPTER 25


TYPES OF LIFE INSURANCE POLICIES

A. Term Life

B. Whole-Life

C. Group Plans

D. Annuities


SOURCES AND USES OF INSURANCE COMPANY FUNDS

A. Principal Source: Premiums1. Secondary Sources: Sale of Bonds, Equity

B. Uses of Funds (Invest, lend)1. Government Securities (Treasuries)

2. Corporate Securities (legal list)

3. Mortgages (Residential Loans)

4. Commercial Real Estate Loans

5. Policy Loans


REINSURANCE,REGULATION& PERFORMANCE

A. ReinsuranceTop 50 Reinsurers.xlsx

B. State regulation predominates

C. A.M. Best ratingshttp://www.ambest.com/

http://www.ambest.com/

http://www.ambest.com/


PENSION FUNDS

A. Federal Legislation;1. Employment Retirement Security Act (1974);

ERISAa. Regulation of pension plans

b. Eligibility, vesting, funding

c. Fiduciary responsibilities

d. Reporting and disclosure

e. Plan termination insurance; Pension Benefit Guaranty Corp


PENSION FUNDS

B. Determining the required level of Funding:1. Determining the Earnings rate of the Fund2. Present Value of Benefits = Market Value of Fund3. Over-funded = PV of Benefit liabilities < MV of Fund

Under-funded = PV of Benefit liabilities > MV of Fund unfunded deficits are liabilities of the firm

4. Defining Benefits:a. ACCRUED: based on years of service for all employeesb. PV of Benefits for past service regardless of vestedc. VESTED: based on employees that reach vested status. Benefits

to be paid if all employees who are vested retired when expected to do so.


PENSION FUNDS

C. Types of Plans:1. Defined Contribution Plans:

a. Benefit levels determined by the investment experience of the fundb. Both employer and employee contribute to plan (typ. pre-tax dollars)

2. Defined Benefit Plans: A contractual benefit (an annuity) payouts based on actuarial tables and length of service. Under ERISA, these are corporate liabilities enforceable by law

3. Vesting Schedules (1989 revision)a. 100% after 5 years of serviceb. Graded vesting: 20% after 3 years, then 20% each additional year until

100% vestedc. Pension formulas vary; (base % + add-ons * years) * MAX salary


PENSION FUND MANAGEMENT

A. Insured Vs. Trust Portfolios1. Insured; insurance annuity plans with guaranteed returns2. Trust; the atypical stock investment plan via mutual fund

portfoliosB. Insured funds sensitive to interest rate risk, trust

portfolios to acumen of fund managers and the vagaries of the market

1. Risk management is essential2. Stock funds manage risk by selecting sectors or

particular stocks3. May also use derivatives to hedge rate-sensitive

investments


PENSION PORTFOLIO EVALUATION & REGULATION

A. Expense ratios versus performanceB. Academic Measures

1. Sharpe Index: excess return to risk2. Jensen's Alpha: the ability to earn return independent of

the market

C. Pension Benefit Guarantee Corporation (PBGC)1. The FDIC of pension plans

D. Pension Funds Must be Prudently Managed; role of Fiduciaries


HOMEWORK QUESTIONS

A. What is the importance of determining the under- or over-funding of a pension fund?

B. How do accrued benefits differ from vested benefits?C. Why might corporations prefer defined contribution plans?D. Why might employees prefer defined benefit plans?E. In your estimation, which plan is better and why?F. Why are insured plans easier (or harder) to manage?G. What role does the PBGC play with regard to pension

plans?H. How is the PBGC funded?

All Rights Reserved Dr David P Echevarria 1 INSURANCE AND PENSION FUND OPERATIONS CHAPTER 25.

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