J. K. Dietrich - FBE 525 - Fall, 2006 Value Creation in Insurance, Information and Asset Management...

J. K. Dietrich - FBE 525 - Fall, 2006

Value Creation in Insurance, Information and Asset Management Services

Week 8 - October 12, 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


Life Insurance Contracts

AgeAgeRetirement RetirementDeath Death

Whole Life Contract Limited Pay Life

Pre

miu

ms,

Ben

efit

s

Pre

miu

ms,

Ben

efit

s


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


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


Reinsurance Example

Loss

Cla

ims

Pay

men

ts

0

Retained by Underwriter

Paid by Reinsurer A

Paid by Reinsurers B & C


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


Inefficiencies in Insurance

Pricing and term setting Marketing and information Monitoring and controlling Production and delivery Funding and investing Risk bearing and sharing


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


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


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

J. K. Dietrich - FBE 525 - Fall, 2006 Value Creation in Insurance, Information and Asset Management...

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