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CHAPTER 3: INSURER OWNERSHIP, FINANCIAL AND OPERATIONAL STRUCTURE…
CHAPTER 3: INSURER OWNERSHIP, FINANCIAL AND OPERATIONAL STRUCTURE
INSURANCE
PARTY INVOLVED 
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INSURED :pen: (The person, group or property for which an insurance policy is issued)
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SOURCES OF CAPITAL
MUTUAL INSURER
:pencil2: The most common form of policyholder-owned Insurer
:pencil2: Liability for the Insurer's claim costs is limited to what they originally paid in premiums
:pencil2: Policyholder dividends are low in property-liability insurance compare to the life insurance
STOCK INSURER
:pencil2: Capital is accumulated through retained earnings and through additional bonds or stocks
:pencil2: Maximum loss is limited to the amount of money they invested in the stock
EXAMPLE :red_flag:
Lloyd's of London :book:
:check: Not an insurance company but instead, it is an organization that provides location and more importantly a set of rules and procedures regarding insurance business transactions
INSURER CAPITAL
ECONOMIC CAPITAL :money_with_wings:
The difference between market value of Assets and market value of Liabilities
MARKET VALUE OF ASSETS :car: Insurers stocks, bonds, real estate, cash
MARKET VALUE OF LIABILITIES :bank: = to present value of payments the Insurer promised to make in the future for sold policies
INSURANCE POLICY
Policyholder pays a fixed premium to the insurer and the insurer promises to pay losses or benefits as provided under the terms of policy
Correlation of Insurer liabilities with Investor's other assets
NEGATIVE :warning: CORRELATION : Profits tend to be low
POSITIVE :bulb: CORRELATION : Profits tend to be high
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Insurer has Liabilities
:fountain_pen:Mutual fund doesn't face problem
:fountain_pen: Can lead to lower high returns
Double Taxation of Investment Returns
:moneybag: Insurer must earn a higher before-tax rate return on its capital
:moneybag: Must be generated from selling insurance policies at price that exceeds expected claim costs and administrative costs
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REINSURANCE :!:
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:green_cross: Proportional (Pro-rata insurance)
The ceding company pays a proportion of premium on a pool of policies to a reinsurer
:green_cross: Non Proportional (Excess)
The reinsurer pays part of the ceding insurer's claim only if a particular threshold (attachment point) is reached.
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