Class Notes (839,113)
Canada (511,191)
MTHEL 131 (111)
David Kohler (106)

MTHEL 131 Class Note Lecture 4

5 Pages

Mathematics Electives
Course Code
David Kohler

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[Oct. 5, lecture 4] 1 Acapital structure of insurance company - 2 forms an insurance company can take:  Stock Company  Shares exist  Owned by share holders (individuals who purchase the stokes/shares of the company)  Owners of stock company=share holders  Advantage: Ability to issue shares to raise capital ($$)  Disadvantage: run the risk that company of being taken over Ex. If one person owns more than 50%, he could win vote; has power to elect board member that he wants  Mutual Company (ex. Old Equitable: had no capital, shares/stocks)  Doesn’t have any stock, no share holders  Owned by policy holders (by participating policy holders) → the individuals who bought the policy Mirror image of Advantage: no worry of being taken over  Disadvantage: Difficult to raise capital/money quickly Stock Company 3 key factors that insurers must take into when setting the prices (of policy/premiums)  Investment returns  Mortality rates  Cost of doing business → Expenses -All three of them are estimated, they are projections - Favorable/Unfavorable - Reserve: in what the fund in reserve will pay for the future claim  Premium goes into reserve - Ex. Having a new policy XYZ, in the end of the year,  if the project investment returns is 4, but actually is 5 → favorable;  if fewer people died → favorable;  expenses higher than we thought → unfavorable. Thus sum up, the experience is favorable. - In order to make it save, conservatively, need to add up a little bit onto the premium -At the end of the year, if we have a favorable experience, net favorable experience, the reserve is higher than what we need to be - More money sitting in reserve more than we expected, because lots of premium goes into reserve [Oct. 5, lecture 4] 2 - In a simplistic explanation: charged premium is little too high for what it need to be 2 types of insurance policy  Non-participating Policy  Fixed premiums  Fixed benefits  Participating Policy  Flexible/Changeable premiums  Flexible benefits  If at the end of ever year, and turns out the experience is favorable, those people who over charged, they would participate in an experience dividend, because the premium they are charged was (little bit) more than insurers need to charge  If you are in participating policy, you may be legible to receive experience dividend each year (if it has experience favorable) - Probably 60%-70% of all life insurance policy enforce in Canada are participating variety - Experience dividend is paid out by an insurance company to participating policy holders - The amount of experience dividend of any policy holder would receive would be different as a function of how big the policy is, how much premium they been paying, etc. - Every policy holder gets different amount experience dividend - If the advisor recommends a participating policy, then the purchaser of the policy would get to choose in 1 of 4 ways that they can get their experience dividend  Payment of cash  PRO-option → premium reduction option  PUA→ pay up addition: buy you another addition coverage the will be completely paid for (not separate policy; add the new coverage into the old policy)  On credit:A. Deposit the experience dividend within an envelope attach to your policy (with interest) B. Investment in stock and bond [Oct. 5, lecture 4] 3 - Ex.At the Old Equitable, everyone is participating policy holder. They had big experience dividend that they were going to pay out to all policy holders. They chose  to distribute experience dividend to their participating policy holder - LAW: If the insurance company operating in the U.K., and you have participating policy, the experience dividend you use have to be PUA - In Canada, we have the choice
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