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MTHEL 131 (32)
Chapter 23

Chapter 23 Reading Notes

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Department
Mathematics Electives
Course
MTHEL 131
Professor
David Kohler
Semester
Fall

Description
Chapter 23: Company Organization and Management Commercial life insurance companies are classified either as mutual, or stock. Stock companies vastly outnumber mutual. Stock: owned by stockholders Mutual: owned by policy-owners Organizational Form Principal-agent relationships - Agency theory focuses on incentive conflicts between 1) company owners, 2) company managers, 3) policy owners - Agents are supposed to increase company’s wealth - Stock companies should deal with group insurance, health insurance - Mutual companies should deal with whole-life contracts Control mechanisms are in place to ensure that management actions do not impose too much cost on shareholders: - Board of directors - Competition among managers - Threat of outside takeover Separation of managerial and ownership (risk-bearing function) - Means that managers do not bear the financial effects of their decisions - Managers would do things to maximize their own utility (power, prestige, income), which may be inconsistent with best interests of shareholders - Creates incentive conflicts - In a mutual company, ownership function is merged with policy-owner’s function. This minimizes incentive conflict Idk if - The rights of policy owners are more restricted, and upon termination, they important. have no rights to capital other than their CSV Too detailed. Separation of policy-owner and ownership - also creates incentive conflicts - stockholders have incentives to increase value of their claims at the expense of policy owners - Elimination of stockholder group reduced potential costs imposed on policy owners IN SUMMARY: the potential advantage mutual have in controlling the incentive program between policy-holders and stock-holders is offset by a worsened incentive problem between the owners and managers of the company (as compared with the stock company) Life insurance company formation - The form of an organization should provide permanence and security of payment - Corporation meets these requirements (and in some countries, is the only organization that can lawfully start a firm) - So, the operation of a life insurance business requires the formation of a corporation - Both stock and mutual insurers are organized as corporations Stock Life insurers - Makes profit for stockholders - Policy owners don’t share profits, or losses - Some companies have participating policies - Minimum capital and surplus requirements are intended to ensure that insurer can make deposit to become licensed, has enough funds for normal operations, has a contingency fund - Funds are obtained from sale of stock Mutual Life insurers - also a corporation, but has no capital stock and no stockholders - policy owners are both customers and owners of the insurer - assets and income are owned by the company. They are held for the benefit and protection of the policy-owners and beneficiaries (as reserves, surplus, or contingency funds), or distributed as dividends - policy owner pays ty
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