lecture 1 - financial products
TRANSCRIPT
-
8/8/2019 Lecture 1 - Financial Products
1/47
Financial Products -Insurance
Lecture 1
-
8/8/2019 Lecture 1 - Financial Products
2/47
Many finan cial products provide benefits toindividu als o n specified future events
B e nefits a re usu ally either a regu lar incomeor a single c a sh sum
Possib le future eve nts include: retireme nt, ill he alth, de a th, unemp loyme nt da ma ge to propert y leg al lia bility
Insurance Products
-
8/8/2019 Lecture 1 - Financial Products
3/47
M ain benefit providers
The State oper a tes a social security scheme in many cou ntries, providi ng be nefits o n retireme nt,de a th, i ll he al th, u nemp loyme nt
Em ployers oper a te benefit schemes for their emp loyees, providi ng be nefits o n retireme nt, de a than d i ll he al th
Insurance co m panies se ll p olicies to emp loyersan d individu als, providi ng be nefits o n a wide r an geof co ntinge ncies
-
8/8/2019 Lecture 1 - Financial Products
4/47
Insurance
Life insur an ce comp an ies se ll (usu ally) long-termpo licies providi ng be nefits o n de a th, surviv al or sick ness
Ge ner al insur an ce (or non-life) comp an ies se ll (usu ally) short-term po licies which compe ns a te for
finan cial losses a rising o n specified eve nts
-
8/8/2019 Lecture 1 - Financial Products
5/47
R isk aversion and pooling
Insur an ce is possib le bec a use i ndividu als a re riska verse
To a void exposure to a r an dom loss the y will pay more th an the expected v alue of the loss
-
8/8/2019 Lecture 1 - Financial Products
6/47
Insur an ce comp an ies c an ma ke a profit b y se lling
po licies coveri ng a large number of i ndepe nde ntrisks
However the y need sufficie nt d a ta to estim a te theloss distributio n of these risks
R isk aversion and pooling
-
8/8/2019 Lecture 1 - Financial Products
7/47
Policies sold by life co m panies
The objectives of such po licies i nclude: p rotection , i.e. be nefits o n de a th or sick ness saving , i.e. be nefits p a id o n surviv al to the e nd of
the po licy term income , i.e. a regu lar income i n exch an ge for a
single premium
-
8/8/2019 Lecture 1 - Financial Products
8/47
Policies sold by non-life co m panies
The objective of most non-life po licies is to
indem nif y the po licyho lder a ga inst fi nan cial risks
For ex a mp le: leg al lia bility to 3rd p a rties da ma ge or loss of propert y finan cial loss from fr a ud or i nso lve ncy
-
8/8/2019 Lecture 1 - Financial Products
9/47
Insurance Co m panies
Propriet a r y
Mutu al
-
8/8/2019 Lecture 1 - Financial Products
10/47
Proprietary
S ha reho lders provide c a pital
Profits be long to sh a reho lders
S ha reho lders receive divide nds i n retur n for use of their c a pital
The comp any bui ld its c a pital ba se b y ret a iningprofits
-
8/8/2019 Lecture 1 - Financial Products
11/47
M utual
A ll po licyho lders ow n the comp any an d thereforeprovide the c a pital
Profits be long to po licyho lders
Po licyho lders receive divide nds i n the form of bo nuses
The comp any bui ld its c a pital ba se b y ret a iningprofits
-
8/8/2019 Lecture 1 - Financial Products
12/47
L ife Insurance Products
TermE ndowme ntW ho le LifeAnn uities
-
8/8/2019 Lecture 1 - Financial Products
13/47
Ter m Assurance
B e nefit p aya ble o n de a th withi n the term of
co ntr a ct chose n a t outset
Provides protectio n a ga inst fi nan cial loss for depe ndan ts a t a lower cost.
Commo nly so ld a s MRT A in Malay sia . W hy peop le bu y MRT A?
-
8/8/2019 Lecture 1 - Financial Products
14/47
Ter m Assurance (cont)
K e yman / K e y-perso n Insur an ce
Group form c an be used b y emp loyer toprovide be nefits to emp loyees
Usu ally no be nefit a va ilable o n surre nder.W hy?
-
8/8/2019 Lecture 1 - Financial Products
15/47
Convertible Ter m Assurance
S a me a s norm al term a ssur an ce, but with the
a dvan ta ge of bei ng a ble to
Co nvert to a perm an e nt form of co ntr a ct ieE ndowme nt or W ho le Life
Re new the origi nal co ntr a ct for a further period of ye a rs without he al th evide nce bei ng provided(unless be nefit leve l is incre a sed ).
-
8/8/2019 Lecture 1 - Financial Products
16/47
W hole L ife Assurance
A co ntr a ct th a t p ay s be nefit o n the de a th of
life insured whe never th a t might occur.Uses To p ay funer al expe nses To tr an sfer we al th Protectio n an d s a ving
Typic ally surre nder v alue is a va ilable
-
8/8/2019 Lecture 1 - Financial Products
17/47
E ndow m ent Assurance
P ay s be nefit o n surviv al to a specified d a te or
on e a r lier de a thCombi na tion of Term Insur an ce an d PureE ndowme ntOper a tes a s s a vings vehic le a s we ll a s
protectio nGroup e ndowme nt e na ble emp loyer toprovide retireme nt be nefit to emp loyee
-
8/8/2019 Lecture 1 - Financial Products
18/47
Uses Ta x efficie nt s a vings vehic le. W hy? Retireme nt Ca pital rep ay me nt eg Mortg a ge E duc a tion plan
E ndow m ent Assurance (cont)
-
8/8/2019 Lecture 1 - Financial Products
19/47
Annuities
Usu ally a retireme nt product
P ay s out regu lar a mou nts of be nefits a s longa s life insured survivesPurch a sed i n a dvan ce b y a single premiumMa in purpose is to co nvert c a pital intolifetime i ncomeB e nefit p ay me nts m ay be leve l or v a ria ble.How ?
-
8/8/2019 Lecture 1 - Financial Products
20/47
-
8/8/2019 Lecture 1 - Financial Products
21/47
D eferred annuities
Income st a rts m any ye a rs a fter the po licy is
ta ke n outCo nversio n terms m ay be gu a r an teed a toutset ( less like ly now)Can be fu nded b y regu lar premiums
-
8/8/2019 Lecture 1 - Financial Products
22/47
B asis of the products
W ith Profits (P a rticip a ting)
W ithout Profits (No n-P a rticip a ting)
Unit Linked
-
8/8/2019 Lecture 1 - Financial Products
23/47
W ithout-profits policies
Provide fixed mo net a r y be nefits o n de a th or surviv al
Most term a ssur an ces an d immedi a te ann uities so lda re without-profits
B ut most e ndowme nt an d who le- life po licies a re notwithout-profits
Insurer h a s to i nvest reserves b a cking such po liciesin fixed-i ncome securities
-
8/8/2019 Lecture 1 - Financial Products
24/47
W ith-profits policies
S ta rt off with a low mo net a r y be nefit
This be nefit is i ncre a sed over the term of thepo licy by bo nuses
B onuses a re not gu a r an teed i n a dvan ce, butcann ot be removed o nce gr an ted
-
8/8/2019 Lecture 1 - Financial Products
25/47
W ith-profits policies (cont)
A termi nal bo nus m ay be p a id a t the e nd
The leve l of bo nuses ref lect i nvestme ntexperie nce but permit smoothi ng
-
8/8/2019 Lecture 1 - Financial Products
26/47
U nit-linked policies
These a re s a ving po licies, t ypic ally pe nsio ns
or e ndowme nts
Premiums a re i nvested i n units of a mana gedfund chose n by the po licyho lder
The price of the u nits is b a sed o n the m a rketvalue of the a ssets of the fu nd
-
8/8/2019 Lecture 1 - Financial Products
27/47
U nit-linked policies (cont)
The po licyho lders u nits a re so ld a t m a rket
price to provide be nefits
Tr an sp a re nt ch a rges a re deducted from thefund an d premiums. How ?
-
8/8/2019 Lecture 1 - Financial Products
28/47
Index-linked
Offers a be nefit th a t is desig ned to move i n
line with the perform an ce of an investme nt or eco nomic i ndex.
-
8/8/2019 Lecture 1 - Financial Products
29/47
Q uick Q uestions
If without-profit co ntr a cts a re less risk y for
po licyho lders, wh y might an individu al ta keout a with-profit or u nit-linked co ntr a ct ?
How does the co nsumer a ccept a gre a ter e leme nt of the risk u nder u nit-linkedco ntr a cts th an the y do u nder with-profitco ntr a cts ?
-
8/8/2019 Lecture 1 - Financial Products
30/47
H ealth Insurance
Medic al E xpe nses Insur an ce
Critic al Illness
Income Protectio nD isa bility Insur an ce
-
8/8/2019 Lecture 1 - Financial Products
31/47
Medic al E xpe nses Insur an ce
Reimburses i nsured i n who le or i n pa rt for
the expe nse of medic al tre a tme ntB e nefits m ay be limited to fixed a mou nts for cert a in types of tre a tme ntComprehe nsive cover vs. Competitive r a tes
-
8/8/2019 Lecture 1 - Financial Products
32/47
Medic al E xpe nses Insur an ce (co nt)
In Malay sia usu ally hospit al ca sh allowan ce
is offeredOver all ann ual limit an d over all lifetime limita pp liesE xclusio ns a pp lies ( E xclusio ns.pdf )E xa mp le S chedu le of B e nefits.jpg
-
8/8/2019 Lecture 1 - Financial Products
33/47
Critical Illness (CI)
Lump sum p a id if the i nsured suffers from
one of a number of specified co nditionsProduct desig ned not to i ndem nif y thepo licyho lder. W hy?3 ch a r a cteristics for an illness to be
co nsidered to be i ncluded i nto a CI
product: Co nditio n perceived a s serious Co nditio n can be defi ned c le a r ly S ufficie nt d a ta is a va ilable to price
-
8/8/2019 Lecture 1 - Financial Products
34/47
Critical Illness (CI) (cont)
Ofte n so ld a s rider product, providi ng
a cce ler a tion of de a th be nefit in a terma ssur an ce co ntr a ctS tan dalone cover exist a s we llTermi nal Illness is ofte n a dded to comp letethe over all cover. W hy?Termi nal Illness usu ally not offered i n S tan dalone C I. W hy?
-
8/8/2019 Lecture 1 - Financial Products
35/47
Inco m e Protection Insurance
Provides an income duri ng dis a bility
Income m ay be for a period or for life
Income comme nces a fter a period of dis a bility (wa iting period ). W hy?
Used to protect po licyho lder an d depe ndan ts fromloss of i ncome due to Inca pa city before retireme nt
Protects le nder if used a s a mortg a ge a dd-o n
-
8/8/2019 Lecture 1 - Financial Products
36/47
Total and Per m anent D isability (TP D )
Usu ally included together with C I cover a ge.
W hy?Cost of TP D will depe nd o n the defi nition of dis a bility used Occup a tional -ba sed Re lated to A ctivities of D a ily Living ( AD Ls)
-
8/8/2019 Lecture 1 - Financial Products
37/47
Total and Per m anent D isability (TP D )
Occup a tional -ba sed
Ow n occup a tion A ll occup a tion to which suited b y educ a tion,
tr a ining or experie nce A ny occup a tion
Re lated to A ctivities of D a ily Living ( AD Ls ) W a shi ng - Toi leting Feedi ng - D ressi ng Mobi lity - Tr an sfer
-
8/8/2019 Lecture 1 - Financial Products
38/47
Total and Per m anent D isability (TP D )
Occup a tional -ba sed vs. AD Ls which o ne to
use ?
-
8/8/2019 Lecture 1 - Financial Products
39/47
G eneral Insurance
Lia bility insur an ce
Propert y da ma ge
Finan cial Loss
Fixed B e nefit
-
8/8/2019 Lecture 1 - Financial Products
40/47
L iability
L iability - Lia bility cover is used to provide
indem nity where the po licyho lder is leg ally lia ble to p ay compe ns a tion to a third p a rty usu ally due to some form of neg lige nce. E mp loyers lia bility Product Li a bility Pub lic Lia bility Professio nal Indem nity A tta ched to Ma rine an d A via tion
-
8/8/2019 Lecture 1 - Financial Products
41/47
L iability (cont)
E mp loyers lia bility:
A ccide nts c a used b y neg lige nce of the emp loyer or b y other emp loyees. E xposure to h a rmfu l subst an ces E xposure to h a rmfu l worki ng co nditions.
Pub lic Lia bility: Usu ally a tta ched to other po licies so wi ll depe nd
on the m a in po licy e.g. motor, househo ld
-
8/8/2019 Lecture 1 - Financial Products
42/47
L iability (cont)
Product Li a bility:
S ide- a ffects of drugs Misle a ding instructio ns
Professio nal Indem nity Typic ally obt a ined b y busi ness professio nal s who
provide a dvice to their customers
-
8/8/2019 Lecture 1 - Financial Products
43/47
-
8/8/2019 Lecture 1 - Financial Products
44/47
Propert y D a ma ge
The purpose of this i nsur an ce is to i ndem nif y
the po licyho lder a ga inst any loss or d a m a geto propert y tha t is covered b y the po licy Reside ntial B uildings Commerci al B uildings
Lan d Vehic les Ma rine Cr a ft & A ircr a ft
-
8/8/2019 Lecture 1 - Financial Products
45/47
Finan cial Loss
Pecuniary L oss . This covers the
nonperform an ce or i nso lve ncy of debtors an dgives protectio n a ga inst losses due to a co ntr a ctor goi ng inso lve nt.Fidelity G uarantee Insurance . A lso k nown
a s suretyship this protects the i nsured fromlosses due to fr a udu le nt pr a ctices or poor services of an other p a rty.
-
8/8/2019 Lecture 1 - Financial Products
46/47
Finan cial Loss (co nt)
B usiness Interruption Cover . A lso k nown
a s consequential loss insurance . Thisprotects the e a r nings of the i nsured whe n an incide nt stops the comp any from bei ng a bleto c a rr y out its busi ness.
Travel InsuranceE xtended W arranties
-
8/8/2019 Lecture 1 - Financial Products
47/47
Fixed B enefits
These c la ims a re usu ally pa rt of a perso nal
a ccide nt (P A
) po licy (eg UT A
R P A
)Under the po licy a loss of limb m ay e ntitle theinsured to m a ke a mo net a r y claim of 100,000