Principles of Insurance and Risk Management

COURSE CODE: MGT 603

Course Instructor:
Emran Ahmed
Senior Lecturer
World school of Business
World University of Bangladesh
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Week 06

Insurance Company Operations I

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Week 06: Agenda

 The main operations of Insurance Companies

 Exposure of insurance companies to various forms of risk
 The factors that affect the value of insurance companies
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BACKGROUND

 Adverse selection problem, meaning that those who are most likely to
need insurance are most likely to purchase it.
 Furthermore, insurance can cause the insured to take more risks because they
are protected. This is known as the moral hazard problem in the insurance
industry.
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LIFE INSURANCE OPERATIONS

 Whole life insurance protects policyholders until death or as long as the

premiums are promptly paid.
 Term insurance is temporary, providing insurance only over a
specified term, and does not build a cash value for policyholders.
 Under variable life insurance, the benefits awarded by the life insurance
company to a beneficiary vary with the assets backing the policy.
 Universal life insurance combines the features of term and whole life
insurance.
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OTHER TYPES OF INSURANCE OPERATIONS

 Property and casualty (PC) Insurance: Property and casualty (PC) insurance protects
against fire, theft, liability, and other events that result in economic or noneconomic damage.
 Health Care Insurance: Insurance companies provide various types of health care insurance,
including coverage for hospital stays, visits to physicians, and surgical procedures.
 Business Insurance:
 Property insurance
 Liability insurance
 Credit line insurance
 Marine insurance
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OTHER TYPES OF INSURANCE
OPERATIONS
 Bond insurance: Bond insurance protects the investors that purchase
bonds in the event that the bond issuers default on their bonds.
 Mortgage Insurance: Mortgage insurance protects the lender that
provides mortgage loans in the event that homeowners cannot cover their
payments and default on their mortgages.
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EXPOSURE OF INSURANCE COMPANIES TO

RISK
 Interest Rate Risk
 Credit Risk
 Market Risk
 Liquidity Risk
 Exposure to Risk during the Credit Crisis
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VALUATION OF ANINSURANCE
COMPANY

 Change in Cash Flows

 Change in Required Rate of Return
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Factors That Affect Cash Flows

 Change in Payouts
 Change in Economic Conditions
 Change in the Risk-Free Interest Rate
 Change in Industry Conditions
 Change in Management Abilities
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Factors That Affect the Required
Rate of Return by Investors

 Change in Risk Free Rate

 Change in Risk Premium