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CHAPTER 3
INSURER OWNERSHIP,…
CHAPTER 3
INSURER OWNERSHIP, FINANCINCIAL AND OPERATIONAL STRUCTURE
INSURANCE
The pooling of fortuitous losses by transfer of such risks to inssurers, who agree to indemnify insured for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with risk.
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BENEFITS OF CAPITAL
higher premium revenue
customer of insurance are willing to pay higher premiums to insurers that have a lower probability of insolvency
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COSTS OF INSURER CAPITAL
If investment in insurer has disadvantages compared with otther alternatives then investor require addtional compensation
- insurer has liabilities
- correlation of insurer liabilities with investors' other assets
- double taxation of investment returns
- agency costs
- inssuance underpricing costs
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INSURANCE POLICY
The policyholdet pays a fixed premium to the insurer and the insurer promises to pay losses or benefits as provided under the terms of the policy
INSURER CAPITAL
ECONOMIC CAPITAL - the difference between the market value
of assets and the market value of liablities
THE MARKET VALUE OF ASSETS - reflects the market value of the insurer's stocks, bonds, real estate, cash and the like
THE MARKET VALUE OF LIABILITIES - equals to the present value of the payments the insurer has promised to make in the future for policies already sold
TYPE OF REINSURANCE
- Proportional (pro-rata reinsurance)
- excess (non-proportional)
- treaty
- facultative