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Mathematics Electives
David Kohler

MTHEL131 Lecture 2 Sept. 18, 2013 Contract: binding agreement between two parties (Beneficiary is not part of the contract because they have no rights and they can be changed at any time.) Third party contracts: When the insured and the life insured are two different people (inured, life insured, insurer) Insured: person who takes out the policy (policy owner) Life insured: person whose life will be compensated for Life insurance contract is a unilateral contract, which means one party can back out of the contract at any time (not the insurer, only the policy owner). 3 features of a life insurance policy: 1. Enforced for the whole of life (can never expire) 2. Level annual premiums for life 3. Premiums vary based on the age of entry Precautions taken: (by the old equitable) • In the case of some public epidemic or calamity, some substantial increases to the amount payable may be made temporarily • Ensure its reputation, keep its ability to keep its promise (most valuable asset) • Reserve the right to raise premiums for a certain class of people (ex: all males between 30 and 35) Life and Health Insurance Industry in Canada Today Insurance products include a wide range of financial products such as: • Life insurance • Disability insurance • Health (ie. Dental, prescription medication, long-term care, critical illness, etc.) • Investment products (Mortgages, RESPs, annuities, segregated funds, etc.) • Living benefit products (benefits where the life insured can be reimbursed without dying) 57% of the Canadian market is controlled by 3 firms 1. Great-West Group (Great West Life, Canada Life, London Life) 2. Manulife Financial 3. Sunlife Financial CLHIA (Canadian life and health insurance association) did a study in 1997 of Canadians who died that year: • What does the average policy holder (life insured) look like? (What characteristics?) o 70% were male o 70% were over 65 o 88% were over 50 • Who were the beneficiaries? o Wives MTHEL131 Lecture 2 Sept. 18, 2013 o Children • How big were these policies? o 83% of these policies were less than $25, 000 • How long had these policies been enforced? o 72% had been enforced for more than 20 years • What types of policies? o 74% were permanent Many other cases with insurers had policies for less than a year and high payouts Ex: In 1997, 36 year old had $100, 000 policy who had a 9 month policy, paid $245 in premium who died of heart attack. Many claims to young widowers of a few hundred thousand dollars The Importance of Life Insurance: 1. Reliable The industry pays out over $ 1.1 billion every week 2. Improve the quality of life of Canadians 90% of this is paid to the living. 3. The life and health insurance plays an important role in meeting the financing needs of all levels of government. When a person makes an expensive purchase, they take out a loan. The federal government borrows money from the insurance companies using bonds (like a promise), then sells the bonds. Institutional investors are the ones that buy government bonds (Ex: pension funds, banks, and life and health insurance companies) • 20 years to maturity • Insurance does a background check to minimise the risk • Interest rate is 1.8% (relatively low, compare to Greece – 24%) Life and health insurance companies make very safe investments: ie. Government of Canada bonds. Nearly 20% of all industry assets held by Canadian insurance companies are government of Canada bonds. 4. Financially strong industry Other industry assets: • Corporate bonds and stock – 40% • Mutual funds – 20% • Mortgages – 15% • Other – 5% These reserves are for the payment of future claims. 5. Internationally successful MTHEL131 Lecture 2 Sept. 18, 2013 One of the most secure capital industries in the country, Canadian insurance companies are well known around the world. (Sunlife, Manulife) About 50% of insurance company’s revenue come from international clients. 6. Highly competitive domestic industry Over a hundred different companies in Canada, not many other industries centered in Canada successful in Canada. The percentage of health insurance policies taken from Canadian companies is 87% of the market s
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