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MTHEL 131 Class Note Lecture 1

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Mathematics Electives
David Kohler

[Sept. 14, Lecture 1] 1 - First life insurance petition founded in London, England in 1757 - Made so that families can continue to have money if the bread winner dies prematurely - The 3 main financial concerns for Canadians are:  Dying too soon,  Living too long, and  Becoming disabled/ill - Most families in Canada have 2 incomes: mom and dad - Families spend 100% of their income to support their lifestyle - The ultimate being out of work is dying - People don’t want to live to see their investment account run out of money before they die 1583 London, England: Richard Martin of London takes out 1st life insurance policy, on William Gibbons, premium was £ 383 - Richard Martin had a really hard working employee Williams Gibbons - Williams pretty much ran the company - Richard came to realize that Williams may die someday - Discovered he would lose £ 383 if Williams died - Made a wager with some friends in country club that if Williams died in 12 month, the friends would give Richard £ 383 - Williams died just at the end of 12 months - The friends say they won’t pay him and that they’ll see him in court - They really meant 12 lunar months, not calendar months - Judge says they don’t have to pay him - First case of life insurance What happened between 1583 and 1757? - They lacked knowledge of reliable mortality tables, which is a key in actuary life - The reason the tables were unreliable is when plague/diseases broke out, pretty much every one died and no one counted all the deaths - General confusion between gambling and life insurance - The church said that gambling is bad, and that life insurance is gambling on your loved ones death - Lots of hard work went into getting the petition passed Old Equitable -An identical petition passed in 1762, Old Equitable became first life insurance company - Old Equitable decided they wanted 3 fundamental concepts in every life insurance sold:  Policies enforced for entire life (whole life insurance) [insurance guarantee pay back] [Sept. 14, Lecture 1] 2  Level annual premiums for life  Annual premiums would be based on the age of entry: the older you are when you apply, the more money it will cost you - Old Equitable’s (a life insurance company) most valuable asset: -Alevel of trust - Company keeps promise to pay What if can’t pay in time: worried about disease outbreak? - If disease outbreaks, they’ll get more deaths than they expected - Even 2 or 3 more deaths than expected could cause an offset in the system - They had to think of ways to deal with disease outbreaks -Add 50% to the cost of premiums in case disease outbreaks - Exclude deaths that were a result of the plague - Only insure healthy people - Offer annuities, smaller payments over a period of time - They raised the onset premiums a bit just to be safe - These measures proved unnecessary Modern Day timeish - The promise to pay will last 100 years in general - Companies structured so that there’s no question in quality/trust - We now have 149 years of morality tables and experience - Companies have to get all their premiums right the first time - Face value=amount payable Definitions Insurance: From an economic perspective, a financial intermediation function by which individuals exposed to a specified contingency each contribute to a pool from which covered losses suffered by participating individuals are paid. From a legal perspective, an agreement under which the policyowner pays a stipulated premium to insurer in return for which the insurer agrees to pay a defined amount of money or provided service if a crossed loss occurs during the policy term OR Into agreement, arrangement, by upon happening certain events which would result in financial loss, loss suffered is covered/coverage by contract in which one party agrees to
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