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Life Insurance Company Organization and Management.docx

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Mathematics Electives
David Kohler

Life Insurance Company Organization and Management Saturday, October 12, 2013 5:44 PM Stock  Can be owned by other stock life insurance companies, by mutual life insurance companies, or by companies outside the life insurance industry  More prevailing in activities that involve significant managerial discretion o Group and health insurance Mutual  More prevailing in lines of insurance that rely on good actuarial tables and long-term contracting (whole life insurance)  Ownership function is merged with the policyowners; function of minimizing the incentive conflicts  More restricted rights  Can elect directors and share in the value of the company if it is liquidated or demutualized  Potential advantage in controlling the incentive problem is offset by a worsened incentive problem between owners and managers Cost of controlling management is higher   Hardly any risk of takeover Organization Form in Life and Health Insurers Principle-Agent Relationships  Operation involves three primary parties o Company owners, company managers, policyowners  Large, open organizations seek agents with specialized skill and knowledge  Residual claims to common stock such as dividends are rewards for bearing the residual risk of the corp.  Board of directors, competition among managers seeking executive positions and the threat of an outside takeover all help reduce the costs imposed on shareholders and policyowners  Board of directors o Lobby for shareholder/policyowner interests o Capital markets function to price residual claims, enable shareholdrs to transfer these claims at a low cost, and improve the potential for takeovers  Long term contracts carry greater opportunities to change dividend, investment, and financing policies to the detriment of the policyowner  Managers try to maximize their own utility that may be inconsistent with the best interests of the stockholders  Stockholders have incentives to increase the value of their claims at the expense of the policyowner after policies are sold Life Insurance Company Formation  Organization should be one that provides permanence and a high degree of security of payment Stock Life Insurers  To profit  Traditionally sold guaranteed-cost, nonpar policies that did not involve the policyowner in any savings, profit or loss  Also sell par-policies without voting rights  Regulations set to ensure that any insurer can make the deposits required to become licensed, has sufficient funds for normal operations, and has a contingency fund to meet adverse fluctuations in experience Mutual Life Insurers  Policyowner is both a buyer and an owner  Contractual creditors with the right to vote for directors  Policyowner pays fixed premium but the actual n
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