Lecture 1 - Financial Products

8/8/2019 Lecture 1 - Financial Products

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Financial Products -Insurance

Lecture 1


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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


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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


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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


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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


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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


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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


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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


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Insurance Co m panies

Propriet a r y

Mutu al


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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


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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


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L ife Insurance Products

TermE ndowme ntW ho le LifeAnn uities


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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?


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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?


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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 ).


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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


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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


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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)


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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 ?


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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


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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


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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


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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


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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


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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


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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 ?


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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.


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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 ?


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H ealth Insurance

Medic al E xpe nses Insur an ce

Critic al Illness

Income Protectio nD isa bility Insur an ce


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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


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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


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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


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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?


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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


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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)


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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


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Occup a tional -ba sed vs. AD Ls which o ne to

use ?


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G eneral Insurance

Lia bility insur an ce

Propert y da ma ge

Finan cial Loss

Fixed B e nefit


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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


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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


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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


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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


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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.


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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


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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

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Lecture 1 - Financial Products