Textbook Notes (369,205)
Canada (162,462)
MTHEL 131 (32)
Chapter 3

Chapter 3 Reading Notes

6 Pages
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Department
Mathematics Electives
Course Code
MTHEL 131
Professor
David Kohler

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Chapter 3: History and Importance of Lice and Health Insurance Brief history of life insurance The most important insurance element (to the individual) is transfer of risk (relief from potential financial loss) Greek Societies and Roma Collegia - Greek societies assured its members of a proper burial (a funeral was necessary for entrance into paradise) - roman collegia evolved into mutual benefit associations with stated benefits and regular membership contributions Guilds of the middle ages - provided mutual assistance to their members for perils (ex. death, illness, shipwreck, etc.) - were not organized for relief purposes primary purpose was religious, social, economic - benefits not guaranteed—it was more of an organized charity English friendly societies - true mutual benefit groups - all societies had some form of death or burial fund benefit - unlike guilds, benefits did not depend on member’s need - before mortality tables, probability, mathematics young and old paid same rates, so young took the burden, and discontinues memberships - pioneered the formation of private health insurance Early European life insurers - individual underwriters who assumed the risks - this gave way to corporate underwriting - life insurance did not thrive until stock form gained acceptance and theory of probability and actuarial science was developed Early life insurers in the US - formations of new corporate insurers was prohibited - individuals weren’t knowledgeable or rich enough to compete with London - a deposit of $100 000 was an effective barrier against new mutual insurers - industrial life insurance enhanced public awareness of life insurance Early Asian life insurers - life insurance spread throughout japan after WWII - Japanese and British insurance companies contributed to development of insurance in other Asian countries The importance of life and health insurance Aside from financial protection, life and health insurance has other benefits, such as: - Assists in making savings possible - savings program can offer only small amount from the start, while insurance policy guarantees full face value from beginning - Furnishes safe and profitable investment - interest credited is exempt of taxes - life insurance are protected against claims of creditors - there are ways other than cash to provide for the beneficiary (ex. trust fund) - Encourages thrift - individuals who wouldn’t otherwise save will pay premiums - Minimizes worry and increases initiative - Furnishes an assumed income in the form of annuities - ex. if someone saved up a certain amount for retirement, it may not be enough - in an annuity contract, company promises to pay minimum amount annually until death - applying the law of large numbers, the insurer can further increase income payments, and guarantee that the annuant will not outlive payments - Helps preserve an estate - instead of hiers having to give up estate to pay government taxes, they can use life insurance - this way, they retain full ownership of estate assets Life and health insurance and society Insurance benefits society: - contributes to social stability—individuals face less financial stress - reduces financial burden on the state caring for the aged, families of deceased breadwinners - companies can invest in private and public sectors -- creates source of financing for new businesses, new homeowners, etc - generates employment - more favourable credit terms for loans – decreased risk of default - minimizes financial disruption to business caused by death of employees - employee benefit plans improve employee/employer relations Role of insurance in economics Substitutes for government security programs - insurance policies relieve pressure on welfare system Mobilizes savings - insurers offer same advantages as other financial intermediaries in channeling savings into domestic investment  investment is not confined to sector in which savings takes place - funds can flow to most productive sectors in an economy Fosters more efficient capital allocation - insurers gather substantial information to evaluate firms, projects, etc. Are therefore better at allocating financial capital - they monitor managers and entrepreneurs to reduce risk, therefore encouraging them to act in best interest of stakeholders - resolves principal-agent problem(where agent does not act in best interest of principal) Insurers enhance financial system efficiency in 3 ways: 1. As financial intermediaries, insurers reduce transaction costs between savers and borrowers  premiums are loaned to businesses and other ventures instead of each policy owner doing it individually 2. Insurers create liquidity  borrow short term and lend long term  borrowing means using premiums to make loans and investments  policy owners have access to payments and savings, while borrowers don’t need to repay loans immediately 3. Insurers can finance large projects (which are important to economic development)  by amassing large sums from thousands of smaller premi
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