1. ©Christoffersen 2000 1 3. Insurance and Pension Funds Three types of Insurance »Life/health Insurance »Property/casualty »Reinsurance Insurance companies can be either mutual or stock companies. Why is there a trend to demutualize? Property insurance companies can sometimes have a reciprocal exchange where each subscriber is liable for a portion of each policy.

2. ©Christoffersen 2000 2 3.1 Life Insurance Companies Two lines of insurance. Each line of insurance differs by the way in which it is sold or marketed. »Individual--marketed to individuals in units of $1000. Policymakers make periodic payments. »Group--covers a large number of insured persons with one single policy.

3. ©Christoffersen 2000 3 3.2 Types of Ordinary Life Insurance Two types of ordinary life insurance »Term life--Beneficiary receives a specified payout if the insured dies within the coverage time. Coverage ranges from 1-5 years. A renewable insurance guarantees the insured the right to renew up to the age of 60 yrs without proof of insurability. Premiums tend to be higher than because of the embedded option to renew. A convertible insurance provides the insured with a right to convert term insurance into whole or universal life insurance. Premiums increase once the policy is converted.

4. ©Christoffersen 2000 4 3.2 Types of Ordinary Life Insurance »Whole Life--Protects the individual over their entire lifetime. The beneficiary of the individual will receive the face value of the insurance once the insured dies or reaches a specified age. Reserves need to be set aside by the insurance company to cover the face value. Policy loan. Nonparticipating contracts guarantee premiums and annual cash surrender values. Participating contracts provide policy dividends at the end of each year. Dividends are the investment performance less mortality experience and overhead expenses.

5. ©Christoffersen 2000 5 3.2 An Example of Term Insurance

6. ©Christoffersen 2000 6 3.2 An Example of Endowment Insurance What is the equivalent annuity payment promising with a future value of $1000 at the end of 6 years with payments made at the beginning of the year?

7. ©Christoffersen 2000 7 3.3 Additional Life Insurance Businesses Three additional businesses of a life insurance company: Annuities--Opposite of life insurance »Movement from RRSPs to RRIFs »Movement from administered to individual Annuities »Term versus Life Annuity: Why can term annuities be sold by banks while only life annuities are sold by insurance companies? Pension Plans: »sell RRSPs »compete to run trusteed pension plans Health Insurance

8. 3.4 Balance Sheet of a Life Insurer Liabilities Assets Policy Reserves73% Policy Claims1.7% Policy Dividend Accumulation.8% Other16.8% Total Capital/Surplus7.7% Separate Account Business22% Bonds34% Commercial Loans8.1% Common Stock5.5% Mortgage loans35% Real estate6% Policy Loans3.5% Cash1% Other Invt2.5% Life, annuity, accident premiums due.5% Other3.9% Separate Account Assets 22%

9. ©Christoffersen 2000 9 3.5 CompCorp Protects Life and Health Insurance companies An industry association and started 1990 During the MacKay Report, there was some discussion to joining CDIC and CompCorp to even the playing fields Claims against the failed institution are transferred to CompCorp Life OSFI regulates insurers

10. ©Christoffersen 2000 10 3.5 CompCorp Protection »$200,000 if life insurance policy protection »$2,000/ month in life or term annuities »$60,000/ person in health benefits »$60,000 on RRSPs/RRIFs »$60,000 on surrender value of life insurance policies and annuities in accumulation stage Stacking covered up to $120,000

11. ©Christoffersen 2000 11 3.6 Questions »Why has group insurance become less important over the last decade? »Does concentration in life insurance business restrict competition?

12. ©Christoffersen 2000 12 3.7 Property and Casualty (Liability) Insurance Two major product groups: »Personal Lines: Automobile, home, renter’s insurance »Commercial Lines: Cover fixed costs in the event of a strike, Crime such as steeling by employees, Liability from a legal suit Errors and omissions Worker’s Compensation PACIC insures Property and Casualty insurance upto $200,000 for 45 days after bankruptcy

13. 3.8 Balance Sheet of Property-Casualty Insurer Liabilities Assets Unpaid Claims46.2% Loss expenses4.8% Reinsurance payable on losses.3% Unearned premiums22.2% Reinsurance Funds1.1% OSFIs Reserve3.3% Policy Holder Surplus10.9% Capital Stock11.4% Bonds47% Preferred Stock7.5% Common Stock9.7% Mortgage loans2.4% Real estate2.5% Cash/CP/Deposits6.8% Other Invt1.5% Premium Balance8.3% Reinsurance recoverable 3.7% Other10.6%

14. ©Christoffersen 2000 14 3.9 Questions on P&Cs »Why do P&C insurers hold more capital than life insurers? »Why are there no reserves for P&Cs but there are for life insurers? »Why do P&Cs have assets with shorter maturity than life insurers? »Why might a P&C reinsure a substantial portion of its earthquake portfolio and not its automobile portion? »Who regulates the capital adequacy of P&Cs and life insurers?

15. ©Christoffersen 2000 15 3.10 Pension Funds Two major product groups: »Defined Benefit Plan: Retirement benefit is fixed (usually as a % of average salary) but the contributions vary. »Defined Contribution Plan: Contribution fixed but the retirement benefit is variable. Observe a decrease in the number of funds offering Defined Benefit Plans compared to Defined Contribution Plans. Contributory versus Non-Contributory

16. ©Christoffersen 2000 16 3.11 Questions on Pension Funds »Why should the employer of a contributory, defined benefit plan be allowed to withdraw surpluses? »Who regulates pension funds in Canada?

17. ©Christoffersen 2000 17 3.12 Summary »The lines between Insurance companies and pension funds are becoming more blurred. »Insurance companies are becoming demutualized. »Insurance of insurers is provided by companies not by government