Please enable JavaScript.
Coggle requires JavaScript to display documents.
Marketing and Financial Services (INSURANCE INDUSTRY (FUNDAMENTAL OF…
Marketing and Financial Services
ASYMMETRIC INFORMATION
Adverse Selection
(before transaction)
The Lemon Problem
Tools to help solve problem
Government regulation to increase information.
Financial intermediation.
Private production and sale of information.
Collateral and net worth.
Moral Hazard
(after the transaction)
How - Affect Debt or Equity Contract?
Separation of Ownership and Control of the Firm
Manager pursue personal benefits and power rather than the profitability of the firm.
Called the Principal-Agent Problem
How to Solve?
Government regulation to increase information
Financial Intermediation
Monitoring
Debt Contract
Principal: less information (stockholder). Agent: more information (manager).
How - Influences Financial Structure in Debt Markets?
Borrower have
incentives
to take on projects that have riskier than the lenders would like.
How to Solve? - Debt Contract
Monitoring and Enforcement of Restrictive covenants
Financial Intermediation
Collateral and Net Worth
In Transition and Developing Countries
Financial Repression
Poor legal system.
Weak accounting standards.
Poor system of property rights.
Government intervention through directed credit programs and state owned banks.
FINANCIAL SYSTEM
FUNCTIONS
Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds.
Direct Finance
Borrowers borrow funds directly from lenders in financial markets by selling them securities.
Promotes economic efficiency by producing an efficient allocation of capital, which increases production.
Directly improve the well-being of consumers by allowing them to time purchases better.
STRUCTURE
Primary and Secondary Markets
Investment banks underwrite securities in primary markets.
Brokers and dealers work in secondary markets.
Exchange and Over-the-Counter (OTC) Markets
Exchange: NYSE, Chicago Board of Trade
OTC Markets: Foreign exchange, Federal funds.
Debt and Equity Markets
Debt instruments (maturity)
Equities (dividends)
Money and Capital Markets
Money markets deal in short-term debt instruments.
Capital markets deal in longer-term debts and equity instruments.
INTERNATIONALIZATION OF FINANCIAL MARKET
Eurobond
Bond dominated in a currency other than that of the country in which is is sold.
Eurocurrencies
Foreign currencies deposited in banks outside the home country.
Foreign Bonds
Sold in foreign country and denominated in that country's currency.
World Stock Markets
Also help finance the federal government.
FUNCTION OF FINANCIAL INTERMEDIARIES
Indirect Finance
Reduce the exposure of investors to risk.
Risk sharing
Diversification
Deal with asymmetric information problems.
Adverse Selection
Moral Hazard
Lower transaction costs.
Economies of scale
Liquidity service
Allows "small" savers and borrowers to benefit from the existence of financial markets.
REGULATION
To increase the information available to investors.
Reduce adverse selection and moral hazard problems.
Reduce insider trading (SEC)
To ensure the soundness of financial systems.
Restriction on entry.
Disclosure of information.
Restriction on assets and activities.
Deposit insurance.
Limits on competition.
PENSION FUNDS
definition
A pension plan is an asset pool that accumulates over an individual's working years and is paid out during the nonworking years.
Protect
individuals and families against loss of income in their retirement years by allowing workers to set aside and invest a portion of their current income.
Types of Plan
Defined-Contribution Pension Plan
Private Pension Plan
Defined-Benefit Pension Plan
Promise a specific monthly/annually payment to workers
WHEN THEY RETIRE
based upon the size of their salary and length of employment.
Public Pension Plan
INSURANCE INDUSTRY
RISK
Importance
Makes you decide whether or not you need insurance.
Insurance companies measure when determining whether to effer you insurance and how much it will cost.
How to Handle Risk?
Aviodance
choosing not to participate in an activity because of the risk involved.
Retention
Saving money in case of future losses.
Transfer
Passing risk on to an insurance company
Types of Risk does Insurance Cover
Stocks Lose Value
insurance
NONE
coverage
NONE
Car Crash
insurance
AUTO
coverage
Will pay for damage to your car and other damaged vehicles and property. Will pay for medical expenses for you and other parties.
Lose Job
insurance
Mortage and Credit
coverage
Will cover your debts for fixed period while you are unemployed.
A legal contract that transfer risk from a policyholder to an insurance provider.
FUNDAMENTAL OF INSURANCE
The insured is not to profit as a result of insurance coverage.
If a third party compensates the insured for the loss, the insurance company's obligation is reduced by the amount of the compensation.
The insured must provide full and accurate information to insurance company.
The insurance company must have a large number of insured so the risk can be spread out among many different policies.
Relationship between the insured and the beneficiary.
The loss must be quantifiable.
the insurance company must be able to compute the profitability of the loss's occuring.
ASYMMETRIC INFORMATION
Adverse Selection
Those most likely to suffer loss are most likely to apply for insurance.
Insurance company should turn anyone who applies for an insurance policy.
Moral Hazard
Occurs when the insured fails to take proper precautions to avoid losses because losses are covered by the insurance company.
SELLING INSURANCE
Exclusive Agents
An Underwriter
Independent Agents
TYPES OF INSURANCE
Health Insurance
Property and Casualty Insurance
Life Insurance