Chapter Nineteen

Insurance Companies
and Pension Funds
Insurance Companies: Major Employer

Figure 19-1: Number of Persons Employed in the U.S. Insurance Industry, 19602000

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Fundamentals of Insurance

1. There must be a relationship between the insured

and the beneficiary
2. The insured must provide full and accurate
information to the insurance company
3. The insured is not to profit as a result of insurance
coverage
4. If a third party compensates the insured for the loss,
the insurance companys obligation is reduced by
the amount of the compensation
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Fundamentals of Insurance (cont.)

5. The insurance company must have a large number

of insured so that the risk can be spread out among
many different policies
6. The loss must be quantifiable
7. The insurance company must be able to compute the
probability of the losss occurring

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Adverse Selection in Insurance

Those most likely to suffer loss are most likely to

apply for insurance.
Insurance companies give lower rates to group plans
because they help control this problem

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Moral Hazard in Insurance

The insured is not as likely to protect property as

uninsured.
Insurance companies prefer deductible to help control
this problem.

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Figure 19-2: Number of Life Insurance
Companies in the U.S., 1950-1999

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Types of Insurance

Life Insurance
Health Insurance
Property and Casualty Insurance

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Life Insurance

Term Life
Whole Life
Universal Life
Annuities
Assets and Liabilities of Life Insurance Companies

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Expected Life of Persons at Various Ages

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Sample Annual Premiums

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Figure 19-3: Distribution of Life Insurance
Company Assets (beginning of 2000)

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Figure 19-4: Percentage of Life Insurance
Company Assets Invested in Mortgages

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Property and Casualty Insurance

Property Insurance
Named-peril policies
All-risk policies

Casualty Insurance
Reinsurance

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Insurance Management
(avoidance of moral hazard and adverse selection)

Screening
Risk-Based Premium
Restrictive Provisions
Prevention of Fraud
Cancellations of Insurance
Deductibles
Coinsurance
Limits on the Amount of Insurance

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Pension Plan

Definition: An asset pool that accumulates over an

individuals working years and is paid out during the
nonworking years.

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Types of Pensions

Defined-Benefit Pension Plans

Annual Payment =
2% average of final 3 years income years of service

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Types of Pensions (cont.)

Defined-Contribution Pension Plan

Private Pension Plans
Public Pension Plan
Social Security

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Figure 19-6: Number of Americans Covered by
Private Pension Plans, 19751999

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Private Pension Plan Assets

Figure 19-7: Distribution of Private Pension Plan Assets (end of 1999)

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Social Security

Pay as you go system

Projected number of workers is falling while
projected number of retirees is increasing

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Figure 19-8: Social Security Fund Assets,
19572000

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Figure 19-9: Projected Social Security
Trust Fund Assets

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