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MTHEL 131 (12)

Midterm Review - all lecture notes before midterm.pdf

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University of Waterloo
Mathematics Electives
David Kohler

Lecture 1 Public petition for the first insurance company. 1757 London People’s desire to form a firm to reduce poverty. Protection of income in case of disease of breadwinner. Form life insurance companies for families to buy policies. 2013: motivation to buy life insurance hasn’t changed much (financially protect spouse/children) Three main concerns of Canadians 1. Living too long (depletion of savings): pension 2. Dying too soon (sudden loss of income): permanent life insurance 3. Illness, accident and disease (temporary loss of productivity): health insurance First life insurance policy 1583 London Richard Martin estimated the cost of the loss of his company’s manager ($383). (cost of death: train new person, business drop down, loyal customers turn to competitors) Friends in country club waged against the manager’s death (Richard Martin pays 8% upfront) (if the manager dies in 12 months, the country club guys pay 383.)(manager dies, Martin gets paid.) Insurer: country club guys Insured: Richard Martin (policy holder) Life insured: the manager (usu. Life insured = policy holder) Premium: 8% of 383 1583-1757 long time no development of insurance Reasons: 1. people were not clear between gambling and insurance, and superstition and fear. 2. Lack of knowledge on death rate (age increase, death rate increase), mortality tables/rates were not accurate (price of premium could not be set) 3. Epidemics/plague increased death rate, wiped out 2/3 European. 1757 death rate stabilized and petition to establish insurance company arouse but not enough votes. First life insurance company 1762 The Old Equitable legislation formed Principles: 1. policy never expires, enforced whole of life (vs 12 months for Richard Martin) 2. based on level(annual) premiums (same price throughout life) 3. premiums vary based on age of entry (lower age means lower premium) Most important assets of insurance company 1. reputation (promises) 2. cash reserve (investment): flexibility in times of calamity when sth. goes wrong(plague/calamity): solutions: (1). reduce payment temporarily and substantially (2). Raise future premiums Defn of insurance: An arrangement that protects individuals from financial loss by covering the losses. Defn of gambling: Deliberate wager of money with the goal of winning money (no social benefit) 1847 first Canadian insurance company (Canadian Life) 1870 Mutuallife 1871: Sunlife Confederationlife Londonlife 1881: Northamericalife 1887: Manulife 1870-1880 huge growth Advantages of life insurance: 1. guarantee that a large sum of money is paid upon the loss of life (avoid additional money for the paying process) 2. pays directly and immediately to beneficiaries (save time) 3. confidential 4. protected from creditors 5. level of security/borrowing against policy (vs borrowings denied by banks) 6. tax free 7. unparalleled safe Disadvantages of life insurance: 1. not all people can have life insurance (not available to people in poor health) 2. the complex products and contracts are too hard for normal people to understand 3. cost of premiums reduces the amount of money for customary consumption Lecture 2 Snapshot of the life insurance industry in 2013 Canada. 1. Provides a wide range of financial products. Insurance: Death benefit products(pay beneficiary): Life insurance Living benefit products(reimburse policy holder/insured): Health (dental, prescriptive dugs, outside travel) Disability New products (less than 20 years): Long-term care Critical illness 2. Size of industry: Protects 26 million Canadians Pays out 1.1 billion CAD per WEEK 90% of payment made to living policy holders, 10% to death 3. Important role of life insurance: meet financial needs of all levels of government.(federal, provincial, municipal) For government: Revenues come from personal and cooperate income taxes, which are not enough to cover the expense of the government-run hospitals, schools, military and prisons. Government creates bonds and sells bonds to raise money. (typical federal gov. bonds: 100000 dollars, 1.8% interest rate with high credit, maturity 20 years ). Main buyers of government bonds are other countries, institutional investors (pension funds), banks and life and health insurance company. 20% of insurance industry assets are invested in government bonds 40% in corporate bonds and stock 20% in mutual funds 15% in mortgage 5% in others 4. Financially strong industry Most capitalized, secure industry in Canada. 5. Internationally successful 50% premiums/revenues from overseas, 50% domestic Highly competitive domestically (100+ companies) 6. Largest market share among all other industries (cars, smartphones, groceries, etc.) 87% of policies bought in Canada offered by Canadian insurance companies 7. Support small business Finance small business (financing mortgage, insurance products) Employment benefits (pensions, plans, health insurance, etc.) Provide consulting services 8. Two sides of insurance industry: Provide compensation to maintain people’s lifestyle Calculation, analytical industry 9. Market share by premium of Canadian insurers: Great-west group 23.5%: (Great West Life 10.81% Canada Life: 7.38% London Life: 5.27%) Manulife: 17.2% Sunlife: 16.3% Industrial Alliance: 7.5% Desjardins Financial Security: 6.1% Standard Life: 3% BMO: 2.8% Subtotal: 76.2% Others: 23.8% Lecture 3 Features of a life insurance policy: Third party contract Insurer, insured (policy holder), life insured (beneficiaries have no rights and can change) Unilateral contract: One party/policy holder can get out of the deal at any time, not the insurer. Differences between individual and group insurance policies: Individual insurance policy Group insurance policy 55% coverage 45% coverage Average of 165000$ per person Averages at 49000$ per person Types of coverage: Bought by: 1. Term Employers 62% 2. Permanent Creditors 31% Price similar to group insurance Associates (e.g. union) 7% Personally insured (vs a company being Underwriting done ate death, not at the the insured under the group policies) purchase of policy. Guarantee payout Chances of being not eligible for claiming benefits (death due to criminal activities, drunk, car crash…) Banks in the insurance industry (in Canada): Some insurance companies are purchased by banks. (e.g. BMO) Most companies owned by banks are of very small scale. Government policy regarding banks in the life insurance industry: Banks are allowed to purchase life insurance companies. Banks are not allowed to sell insurance policies in their branches. Banks cannot use their databases to find potential customers (banks have almost all records of purchases, payments, etc.). Financial independence: Obstacles between people and financial independence: 1. Lack of planning and review of financial goals 2. Lack of SMART goals(specific, measurable, attainable, realis
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