PowerPoint Slides for Professors Spring 2010 Version This
PowerPoint Slides for Professors Spring 2010 Version This file as well as all other PowerPoint files for the book, Risk Management and Insurance: Perspectives in a Global Economy authored by Skipper and Kwon and published by Blackwell (2007), has been created solely for classes where the book is used as a text. Use or reproduction of the file for any other purposes, known or to be known, is prohibited without prior written permission by the authors. Visit the following site for updates: http://facpub.stjohns.edu/~kwonw/Blackwell.html.
To change the slide design/background, [View] [Slide Master] W. Jean Kwon, Ph.D., CPCU School of Risk Management, St. Johns University 101 Murray Street New York, NY 10007, USA Phone: +1 (212) 277-5196 E-mail: [email protected] Risk Management and Insurance: Perspectives in a Global Economy 21. Life Insurance
Click Here to Add Professor and Course Information Study Points Policies sold by life insurance companies Selected life insurance markets 3 Life Insurance Policies 4
Fundamentals Historically, policies sold by life insurers involved only life contingencies Payments to policyholders or their beneficiaries are determined by whether insureds are alive or dead. Definitions within the life branch are not always consistent internationally. Types of policies Mortality-based insurance policies Morbidity-based insurance policies
5 Mortality-based Policies Life insurance (assurance) and endowments Annuities 6 Life Insurance Policies Key Words
Face amount (sum assured) Insured Applicant Policyowner (policyholder) Beneficiary Classification Term life insurance Cash value life insurance
7 Term Life Insurance Coverage period Yearly renewable term (YRT) 10- and 20-year (level-premium) term policies Life-expectancy term
Term-to-age 65 Other features Conversion Reentry Low premium but with no cash value 8 Illustration of Term-to-Age 65 Policy (Figure 21.1)
9 Cash Value Life Insurance Fundamentals Cash value Net amount at risk (see Figure 21.2) Cost of insurance (COI) rate Participating vs. nonparticipating policies with respect to:
Mortality experience Insurer expense experience Investment experience Types Universal life Whole life Endowment insurance 10 Illustration of Whole Life Policy (Figure 21.2)
11 Universal Life Flexible-premium, adjustable death benefit contract Policy transparency Surrender charge back-end load Variable universal life (unit-linked) universal life Compare VUL with variable life in the next section! 12
Whole Life Unlike universal life policies, premiums for whole life Are directly related to the amount of insurance purchased Must be paid when due (or the policy will terminate) Are calculated to sure that the policy will remain in effect for the entire life time of the insured Classification based on premium-payment period Ordinary life (level premium whole life) Limited-payment whole life Single-premium whole life Paid-up policy
13 Whole Life Classification based on policyholder participation Current assumption whole life Also called as interest sensitive or fixed premium universal life Variable (unit-linked) whole life The premium is fixed. The policy is guaranteed to remain in effect for the whole of the insureds life. Not only the cash value but also the face amount can vary.
Classification based on the number of lives Single life (by default) First-to-die (joint) life Second-to-die (survivor) life 14 Endowment Insurance Two mutually exclusive insurer promises to pay the face amount if the insured Dies during the policy period level-premium term life element Survives to the end of the period pure endowment element Various policy durations
Year-based Age-at-maturity based 15 Annuities Living benefits Classification based on
Number of lives covered Premium payment options When benefit payments begin Benefit receipt options Redemption value Insurer obligations during The accumulation period The liquidation period 16 Annuities - Typo
(First Edition, First Printing) Typo in Figure 21.3 Second row of the boxes; Middle box When benefit payments begin The correct is When benefit payments begin The figure in the next slide contains no such an error. 17 Classification of Annuities
(Figure 21.3) Annuities Number of lives covered Premium payment options Beginning of benefit payments
Benefit receipt options Redemption options Single Single Immediate Life annuity
Currency Multiple Periodic Deferred Temporary Local
Period-certain Foreign Reversionary Unit-linked Fixed Flexible Life with refund
Installment Cash Fixed units Variable units 18 Illustration of Level-Premium Deferred Annuity
(Figure 21.4) 19 Morbidity-based Insurance Policies Potential economic losses associated with the health risk Medical expenses Expenses to provide long-term case Reduction (elimination) of income during the affected period Types of policies
Health insurance Long-term care insurance Disability income insurance 20 Health Insurance Policies Types (supplemental) health insurance Hospital confinement indemnity insurance Specified-disease insurance Dread-disease insurance
Guaranteed renewal vs. non-guaranteed renewal Ask students to check the story of cancer insurance offering by AFLAC in Japan! 21 Long Term Care (LTC) Insurance A rise in LTC needs in modern society Policy trigger based on daily living activities Scopes of coverage vary from market to market. A wide array of options (including the length of benefit period, maximum daily benefits, and the waiting period) available in selected
markets Individual LTC may be offered on a guaranteed renewable basis. 22 Disability Income Insurance Three major sources of external finance for the disabled Government social insurance Group plan from the employer Individual disability income insurance
Disability income insurance Provides monthly benefits to replace lost income during the period of disability Three basic components The elimination period The benefit amount The benefit period 23 Disability Income Insurance Definitions of disability Any occupation
Own occupation Supplemental benefits Residual disability benefits Partial disability benefits Inflation protection benefits Provisions for increased benefit amounts
24 Selected Life Insurance Market the U.S. 25 The Americas the U.S. The worlds largest market A mature market International interest by U.S. insurers has increased dramatically.
The U.S. market is mature The attractive growth rates existing in various overseas markets The search for more profitable business Increasing competition in U.S. market 26 The Americas the U.S. A wide array of products invented and sold 1,200 insurers compete a significant reduction from 2,343 in 1998
Distribution mainly by agents and brokers (90%) More companies experiment alternative distribution systems Bancassurance not popular Market issues Financial modernization
Regulatory concerns Health insurance reform Emphasis on financial stability Implementation of risk-based capital 27 The Americas the U.S. (Figure 21.5) 28 2010 U.S. Healthcare Reform
http://www.reuters.com/article/idUSN1914020220100319; http://www.reuters.com/subjects/healthcare 29 Percentage Uninsured Relative to State Population Three Year Average, 2005-2007 30 Healthcare Expenditure 1960-2010 31
The 2010 Reform (Based on Draft) 32 In 2010 (Selected) Affecting Current Practices Somewhat New
Insurers not allowed to drop coverage when they get sick Lifetime coverage limits eliminated Annual limits restricted Dependent children with a preexisting condition not excluded Dependent children covered until age 26 Tax credit available for small businesses providing coverage for workers.
Uninsured adults with a preexisting conditions being able to obtain coverage through a new program The new program expires once insurance exchanges begin operating in 2014. A temporary reinsurance program help companies maintain health coverage for early retirees between the ages
of 55 and 64. This program expires in 2014. 33 In 2011 (Selected) Medicare & Medicaid
Other Provides 10% bonus to primary care physicians and general surgeons A free annual wellness visit and personalized prevention plan service.
New plans required to cover preventive services with little or no cost to patients. Employers required to disclose the value of health benefits on employees' W-2 tax forms An annual fee imposed on pharmaceutical companies according to market share. Not applicable to companies with sales of
$5 million or less Payments to insurers offering Medicare Advantage services frozen at 2010 levels. A new program under the Medicaid plan for the poor allows states to offer home/community-based care for the disabled that might otherwise require institutional care. 34 In 2012
(Selected) Physician payment reforms implemented in Medicare To enhance primary care services Doctors to form "accountable care organizations" to improve quality and efficiency of care An incentive program in Medicare for acute care hospitals to improve quality outcomes The Centers for Medicare and Medicaid Services, which oversees the government programs, begin tracking hospital readmission rates and puts in place financial incentives to reduce preventable readmissions.
35 In 2013 (Selected) A national pilot program established for Medicare on payment bundling To encourage doctors/hospitals/other providers to better coordinate patient care The threshold for claiming medical expenses on itemized tax returns raised to 10% from 7.5% of income Remains at 7.5% for the elderly until 2016
Financing! The Medicare payroll tax is raised to 2.35% from 1.45% for Individuals earning >$200,000 and married >$250,000 Financing! 2.9% excise tax on the sale of medical devices Excluding those generally purchased at the retail level by the public Financing! 36
In 2014 (Selected) Opens state health insurance exchanges for small businesses and individuals Most people required to obtain health insurance coverage A fine imposed if they do not Healthcare tax credits available to people with incomes up to 400% of poverty Medicaid available to people with income up to 133% of the poverty level Health plans no longer exclude people due to pre-existing conditions Employers 50 workers face a fine of $2,000 for each employee if any worker
receives subsidized insurance on the exchange The first 30 employees are not counted for the fine. Health insurance companies begin paying a fee based on their market share. Financing! 37 In 2015 (Selected) Medicare creates a physician payment program
To reward quality of care rather than volume of services 38 In 2018 (Selected) An excise tax (40%?) on high cost employer-provided plans The first $27,500 of a family plan and $10,200 for individual coverage is exempt from the tax. Higher levels are set for plans covering retirees and people in high risk professions.
Financing! Initially billed to begin in 2013 but postponed until 2018 39 By 2020 (Selected) Gradually close the gap in drug coverage for Medicare beneficiaries
40 Selected Life Insurance Markets Internationally Updated market information from the Insurance Information Institute 41 The Americas Canada The market About 90% of the 105 insurers are federally regulated
Products and distribution systems Annuity and morbidity-based sectors accounted for 32% and 35% of the life insurance market Life insurance share continues to decline About 60% of business by full-time career agents Market issues Solvency crisis Entry of banks into market Qubec Sovereignty issue 42 Leading Life Insurers in the U.S. (2008)
Source: International Insurance Factbook 43 The Americas Latin America Fundamentals Remains relatively small in a global comparison Three major markets are Brazil, Mexico and Chile) Sporadic political and economic instability harming the growth of life insurance markets Still very strong growth potential A rise in foreign insurer presence
Products and distribution systems A rise in product scope, including hard currency-denominated policies Distribution traditionally by agents Recently, independent agents, brokers, marketing firms and international brokers have entered Bancassurance grows rapidly in Brazil 44 The Americas Latin America Market issues Regional trade agreements
NAFTA MERCOSUR Economic and political stability 45 Leading Life Insurers in Brazil (2008) 46 Leading Life Insurers in Argentina (2008) 47
Europe Fundamentals Products characterized as life insurance in many European countries would not meet the usual definition of life insurance, as they are pure investment/savings products with little or no mortality risk. Similarly in South Africa and selected Asian countries Represented 39% of the global life insurance market Numerous leading markets in Western Europe, such as the U.K., France, Switzerland, Belgium, Finland and Germany Key developments Expansion of the E.U. and the single market/license policy
Bancassurance France, Italy, Spain and Germany 48 Europe the United Kingdom Three market sectors Life insurance comprising basic life insurance and annuities, pension business, individual savings account business, overseas life insurance business, and basic life reinsurance business Other long-term business such as permanent health insurance and pension fund management activity Other than long-term business
Features The largest life insurance market in Europe Life insurance and pensions funds as traditionally preferred savings vehicles 160 insurers compete in the market 49 Europe the United Kingdom Features (continued) Insight 21.1 Bonuses are a key feature of many policies.
Reversionary bonuses Terminal bonuses Personal Equity Plan (PEP) as a means to increase saving Bancassurance not yet significant Distribution The Financial Services Act of 1986 and the independent financial advisor (IFA) as a new, now dominating, distribution channel Brokers, albeit still strong, continue to lose their market share. 50 Leading Life Insurers in the U.K. (2007)
51 Europe France Features One of the largest and most highly developed life insurance industries in the world Caisse Nationale de Prvoyance (CNP), AXA, Predica, BNP Parabas Assurance and Generali lead the market. Products and distributions A variety of products available, including capital redemption bonds Bancassurance dominates new policy markets
52 Leading Life Insurers in France (2007) 53 Europe Germany Features Largest companies were locally incorporated Allianz, HamburgMannheimer, Aschener und Munchener, R&V, and Deutsche Herold Products and distributions Annuities and endowment insurance most popular
Policy dividend treatment similar to that of the U.K. Tied agents as the main distributors, followed by independent agents and brokers Issues Tax reforms (no longer tax deductions for premium payments by individuals) 54 Leading Life Insurers in Germany (2007) 55
Europe Russia Features Largest European market by population Recently privatized, now with 1,500 life and nonlife insurance companies Rapid market growth in recent years Issues Rudimentary legal framework for free free-market insurance activities What legally constitutes an insurance company? What legal ownership it may take?
56 Leading Life Insurers in Russia (2007) 57 Europe Market Issues E.U. harmonization Introduction of International Financial Reporting Standards (IFRS) Bancassurance movement Direct response marketing Recession and unemployment
The evolving pension and health market 58 Asia-Pacific Features The worlds greatest life insurance potential Displays immense diversity in level of economic and political development, ethnicity, culture and religion Already developed include Australia, New Zealand, Japan, Korea, Taiwan, and Singapore China and India In economically affluent countries, life insurance products with strong
savings elements predominate. 59 Asia-Pacific Japan Features Worlds second largest after the U.S. Major reforms in financial services in the 1990s and 2000s Insurance Business Law revised in 1996 Life market liberalization as par of the reforms The third-sector in the life insurance market Industry associations greatly influence the market.
Products and distributions Traditional life policies remain popular Large network of part-time, female agents Insight 21.2 60 Asia-Pacific Japan Issues Role of non-conventional life insurers Kampo Zenkyoren
The deflationary economic condition is another risk Japan faces. Mega mergers and acquisitions Fallout from the bubble economy Aging population Westernization of the younger generation 61 Leading Life Insurers in Japan (2007) 62
Asia-Pacific Korea Features The worlds seventh largest The economy has recovered from the Asian economy crisis Several key reformatory measures in the market Industry associations greatly influence the market. Chronic problem of policy lapses and surrenders
Products and distributions Bancassurance strongly promoted by government Issues Products with limited period (up to 10 years) and pensions also sold by nonlife insurance companies 63 Leading Life Insurers in Korea (2007) 64
Asia-Pacific Taiwan Features A strong life insurance industry and the worlds highest life insurance penetration 30 life insurance companies including eight foreign companies operate. Products and distributions Traditional products such as whole life and endowment have the largest proportions of in-force business Unit-linked life and annuity products have shown strong recent sales Distribution mainly by part-time agents Brokerage channel and bancassurance growing rapidly
65 Leading Life Insurers in Taiwan (2007) 66 Asia-Pacific China Features The greatest growth potential in the world Life insurance premium growth at about 25% per year during the last decade Foreign insurer participation in its market only during the 1990s
Local insurers still dominate China Life, Ping An, and China Pacific Life Products and distributions Simple products thus far and via exclusive agents Issues Further market liberalization and deregulation Transparency Hong Kong and Macau 67
Leading Life Insurers in China (2007) 68 Asia-Pacific India Features Annual life premium growth averaged about 13% Privatized since 1999 Low consumption and penetration ratios Products and distributions Bancassurance and broker system introduced Provision of health insurance in the private sector emphasized
Issues Further deregulation Foreign ownership of local company 69 Leading Life Insurers in India (2007) 70 Asia-Pacific Australia and New Zealand Features Along with New Zealand, one of the worlds most sophisticated
markets Incredibly competitive, strict disclosure requirements, and strong consumer protection, solvency and actuarial standards Dominated by several large companies such as Australian Mutual Provident, National Australia, and ING (Australia) Products and distributions The largest product sales in superannuation Bank-owned life insurers accounted for 38% of new premiums written in 2005 71
Leading Life Insurers in Australia (2007) 72 Leading Life Insurers in New Zealand (2007) 73 Asia-Pacific ASEAN Features Both developed and developing economies Diversity in ethnic backgrounds Already a large number of foreign insurers in the market
Products and distributions Mainly traditional whole life and endowment but with unit-linked and annuity business growing rapidly in a few markets. Distribution almost exclusively on face-to-face selling by part-time, male and female captive agents Issues The image of life insurance in some societies or communities 74 Leading Life Insurers in Singapore (2007)
75 Leading Life Insurers in Vietnam (2007) 76 Africa Features Most markets long been hampered by political and economic turmoil African life insurance figures are dominated by South Africa. South Africa with the worlds second highest life insurance penetration Other markets, such as Namibia, Mauritius and Botswana, slowly
grow. Still the least known regional market in the world Exception: South Africa 77 Leading Insurers in Egypt (2006) 78 Leading Insurers in South Africa (2006)
79 Discussion Questions 80 Discussion Question 1 As the ASEAN insurance industry grows, we can expect continuing tensions between ASEAN countries with a welldeveloped market economy and those with more restrictive regimes. What advice would you give to an ASEAN insurance company that wishes to operate throughout the region?
81 Discussion Question 2 Many U.S. life insurers have been reluctant to enter international markets. Why have they been reluctant historically to do so? Why do you believe U.S. insurers have begun to increase their international activities? Do you believe they will succeed? 82 Discussion Question 3 In Europe, the direct marketing and bancassurance
movements have gained enormous momentum. In many other countries, insurance is still sold through personal contact with an agent. What do you see as the strengths and weaknesses from the consumers point of view of these three different strategies for selling life insurance? 83
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