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MTHEL131 lecture 1.docx

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Mathematics Electives
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David Kohler

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MTHEL131 Lecture 1 Sept. 11, 2013 1583, London, England Richard Martin • Successful business, successful among the people (politically popular) • Owner of successful manufacturing company • Enjoyed spending time at his country club and got along well with the members • Most members came from money, but Richard Martin was a self-made man • “How can you run such a successful business, yet spend so much time away from the business?” o Organization, built up business, time management William Gibbons–assistant manager (partner) • Has the authority to make decisions in the absence of Richard Martin • Paid very well, owns a stock percentage of the firm (employment stability, employer security) • Negative effect of his death: o Responsible for sales: sales might drop or plummet o Customers will get worried if sales drop o Profits would have a corresponding drop o Stock prices might drop o Cost of replacing and training a new employee o Total: L383 ($0.5M-1M in today’s money) Country club guys (16 partcipants) • place a bet (wager) on whether or not William Gibbons will survive the year (12 months) o dies within the next 12 months: the country club members pay him to offset the loss o lives passed the next 12 months: Richard Martin will owe 8% of the L383 paid up front • Risk for Martin: Lack of documentation, expiry date on the policy th • 11 month: William Gibbons died, Richard Martin was devastated • Refuse to pay Richard Martin, so he sued them o Judge upheld the terms of the contract, ensured Martin was paid First example of a life insurance policy • INSURER: Country club guys • INSURED: Richard Martin • LIFE INSURED: William Gibbons • FACEAMOUNT: L383 • PREMIUM: 8% (These are the terms and players in the life insurance contract) MTHEL131 Lecture 1 Sept. 11, 2013 1757, London, England Petition was put before the house of parliament Petition: “Great numbers of subjects that depend on income payable to them are very desirous for ensuring the lives of each other in order to procure this income after their death to their family and benefices that otherwise would be reduced poverty.” DENIED, could not secure enough votes in parliament Asking for the opportunity to form a life insurance company so that individuals who wanted to protect their dependents could buy a policy. No other strategies to protect their families in case of their death. Life insurance goals are no different in 2013: protect the surviving spouse and children People are still living pay check to pay check 1762 Legislation was passed and first insurance company was formed The Old Equitable Philosophies: 1. No insurance policies will ever expire, they are enforced for a person’s entire life (as long as they continue to pay the premiums) 2. Prices will stay level. Policy will be based on level (always stays the same as initial premium, regardless of inflation, the same for new and current customers), annual premium. (However all prices goes up eventually) 3. Prices vary based on age of entry. (Life insurance policy sold to a 30 year old will be a higher premium than a 25 year old.) Most Valuable Assets: (for the company) • Human resources • Ability to predict (knowledgeable, forward thinking - actuaries) • The ability to compete effectively (originally only team in town) • MONEY Motivation for consumers: • To secure the financial stability of their loved ones if they should perish • Fair, level premium • Promise that they will uphold their part of the bargain and pay when that day should come that the policy will become active MTHEL131 Lecture 1 Sept. 11, 2013 Mutual company: • Type of cooperative company where the policy holders are the owners. • Goal: Guide the company to a future where the financial responsibility can be met • Goal was met in the year 1800, in premiums and reserves (access the funds if they needed it) Why did it take so long to launch life insurance that was available to the consumers? 1. The average person in that time could not get clear in their mind the difference between life insurance and gambling (legitimacy) back then they gambled on everything. “wager high and drink deep”, run down to the bookie and place bets, meanwhile gambling is a sin, although preacher was betting too. 2. Lack of knowledge of death rates. An actuary needs a mort
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