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Insurer Ownership, Financial and Operational Structure (Costs of insurer…
Insurer Ownership, Financial and Operational Structure
Insurer Capital
The Market Value of Assets - reflects the market value of 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.
Economic Capital - the difference between the market value of asset and the market value of liabilities
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Benefits of capital
Higher Premium Revenue
customers of insurance are willing to pay higher premiums
insurers that have a lower probability of insolvency
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Costs of insurer capital
double taxation of investment return - insurer has to pay taxed twice on return compare to mutual fund; corporate income tax and tax on investment return
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correlation of insurer liabilities with investor's other assets - insurer claim cost high unexpected return compared to mutual fund if claim cost are negative correlated with value of investors' other assets
issuance and underpricing costs - issue new stock, price received less than true value of shares.
insurer has liabilities - mutual fund does not face problem, investment can be used to pay unexpected high insurance claim costs, can lead to lower or higher returns