21 Life Insurance

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21. Life Insurance: 

21. Life Insurance Dr. Jan-Juy Lin Dept. of Risk Management and Insurance ETP course, CNCCU


Introduction Policies sold by life insurance companies Mortality-Based Insurance Policies Morbidity-Based Insurance Policies Selected life insurance markets Life insurance markets in the Americas European life insurance markets Life insurance markets in the Asia-Pacific region African life insurance markets Discussion Questions


Life Insurance Policies


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. (e.g. US, EU) Types of policies Mortality-based insurance policies Morbidity-based insurance policies

Mortality-based Policies: 

Mortality-based Policies Two classes Life insurance (assurance) policies / Endowments Pay a benefit if the insured dies during the policy term “Assurance”- Commonly used in Commonwealth countries Annuities / Pensions Pay a benefit if the insured survives for a prescribed time or to a certain age

Life Insurance Policies: 

Life Insurance Policies Key words Face amount (sum assured) Pay a death benefit as a stated sum of money Insured The individual whose death triggers payment of the face amount Applicant The person who applies for the policy Policyholder (policy owner) The person who can exercise all policy rights and with whom the insurer deals Beneficiary Receive the face amount on the death of the insured

Term Life Insurance: 

Term Life Insurance Coverage period Yearly renewable term (YRT) 10- and 20-year (level-premium) term policies Life-expectancy term Term-to-age 65 Users: low income, high coverage needed Other features Conversion Reentry (proof of insurability) Low premium but with no cash value

Illustration of Term-to-Age 65 Policy (Figure 21.1): 

Illustration of Term-to-Age 65 Policy (Figure 21.1)

Cash Value Life Insurance: 

Cash Value Life Insurance Policies combine term insurance and internal savings (cash value) within the same contract. Net amount at risk (NAR) – the difference between the policy face amount and the cash value Cost of insurance (COI) rate – a set of internal YRT rates that increase with age Participating vs. nonparticipating policies with respect to: Mortality experience Insurer expense experience Investment experience

Illustration of Whole Life Policy (Figure 21.2): 

Illustration of Whole Life Policy (Figure 21.2)

Universal Life: 

Universal Life Flexible-premium, adjustable death benefit contracts whose cash values and durations depend on the premiums paid into them. (a current A/C) Policy transparency their internal operations, interest rates and charges for COI and loadings are disclosed each year to the policyholder. Surrender charge / back-end load A graded penalty applied against the cash value if the policy is terminated within a few years of issue. Variable universal life (VUL) / unit-linked UL Combines the flexibility and transparency of a universal life policy with the investment flexibility and risk of a mutual fund. (Q: Unit-link v. Traditional Life)

Whole Life : 

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

Whole Life: 

Whole Life Classification based on policyholder participation Current assumption whole life (CAWL) Also called as interest sensitive whole life 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 insured’s life. Not only the cash value but also the face amount can vary. Comparison: WL with UL

Whole Life: 

Whole Life Classification based on the number of lives Single life (by default) First-to-die (joint) life The face amount is paid on the first death of either of two insured. Second-to-die (survivor) life Pays the face amount only after the second insured dies.

Endowment Insurance: 

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


Annuities To protect against the possibility of outliving one’s income – just the opposite of life insurance. It promises to make a series of payments through systematic liquidation of principal and interest for a fixed period or over a person’s lifetime. Life annuity – contingent on whether the annuity is alive Whole life annuity – payable for the whole of the annuitant’s life Annuity certain – payments for a set period of time Temporary life annuity – payable for the earlier of a fixed period or death

Classification of Annuities (Figure 21.3): 

Classification of Annuities (Figure 21.3)

Illustration of Level-Premium Deferred Annuity (Figure 21.4): 

Illustration of Level-Premium Deferred Annuity (Figure 21.4)

Nature of Insurance Company’s Obligations: 

Nature of Insurance Company’s Obligations Insurer obligations during The accumulation period Time period during which annuity fund values accumulate, commonly prior to retirement The liquidation period Time period during which annuity fund values are paid to annuitants

Morbidity-based Insurance Policies: 

Morbidity-based Insurance Policies Potential economic losses associated with the health risk Medical expenses Expenses to provide long-term care (LTC) Reduction (elimination) of income during the affected period Types of policies Health insurance Long-term care insurance Disability income insurance

Health insurance policies: 

Health insurance policies (supplemental) health insurance Extend indemnification to areas not covered by the primary health insurance Hospital confinement indemnity insurance A fixed sum for each day of hospital confinement Specified-disease insurance (dread-disease insurance) Individual coverage that can pay a variety of benefits up to substantial maximums solely for the treatment of diseases named in the policy Guaranteed renewal vs. non-guaranteed renewal  if the insured has the contractual right to continue the policy

Long-term care (LTC) insurance: 

Long-term care (LTC) insurance The common external sources of LTC financing include government, group plans and individual insurance. Private LTC insurance pays for services when the insured is unable to perform certain activities of daily living without assistance. Coverage varies from market to market and also based on how benefits are paid. Insureds may select from an array of options The length of the benefit The maximum daily benefit Length of the elimination period before benefits become payable

Disability Income Insurance: 

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 (waiting) period The benefit amount The benefit period

Disability Income Insurance: 

Disability Income Insurance Definitions of disability Any occupation v. Own occupation The insured will be deemed to be totally disabled if sickness or injury prevents them from the major duties of ANY / THEIR OWN occupations. (which one is wider in terms of coverage?) Supplemental benefits Residual disability benefits Partial disability benefits Inflation protection benefits Provisions for increased benefit amounts


Selected Life Insurance Markets Internationally

The Americas – the U.S.: 

The Americas – the U.S. The world’s largest 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

The Americas – the U.S.: 

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

The Americas – the U.S.: 

The Americas – the U.S. Market issues Financial modernization – Gramm-Leach-Bliley Act dramatically reduced restrictions on US financial institution integration Regulatory concerns – from the state level to the federal level Health insurance reform – the cost of healthcare rose Emphasis on financial stability – a company’s financial stability is as important as policy cost Implementation of risk-based capital (RBC) – greater risk business, greater capital required

The Americas – the U.S. (Figure 21.5): 

The Americas – the U.S. (Figure 21.5)

The Americas – Canada: 

The Americas – Canada The market About 90% of the 105 insurers are federally regulated Much cross-border business -- closely intertwined with US life insurance industries Products and distribution systems Annuity and morbidity-based sectors accounted for 42% and 35% of the life insurance market Life insurance share continues to decline About 60% of business by full-time career agents

The Americas – Canada: 

The Americas – Canada Market issues Solvency crisis Several insurance companies became insolvent CompCorp was established to minimize insolvencies Entry of banks into market A strong national banking system The legislation permitted banks to own insurers but prohibited banks from using their customer lists for marketing insurance Québec Sovereignty issue Québec may secede from Canada? Most Canadian insurers operate in Québec  uncertainty makes long range planning difficult

The Americas – Latin America: 

The Americas – Latin America Fundamentals Remains relatively small in a global comparison Three major markets are Brazil, Mexico and Chile) Rampant inflation and government instability harming the growth of life insurance markets Still very strong growth potential A rise in foreign insurer presence

The Americas – Latin America: 

The Americas – Latin America Products and distribution systems A rise in product scope, including hard currency-denominated policies Distribution traditionally by career agents Recently, independent agents, brokers, marketing firms and international brokers have entered Bancassurance grows rapidly in Brazil

The Americas – Latin America: 

The Americas – Latin America Market issues Regional trade agreements NAFTA and MERCOSUR It’s hard for domestic insurers to compete with foreign insurers. Economic and political stability Market economies remain early in that process Political parties in many opposite


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


Europe 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

Europe – the U.K.: 

Europe – the U.K. Features The largest life insurance market in Europe Life insurance and pensions funds as traditionally preferred savings vehicles 160 insurers compete in the market Bonuses are a key feature of many policies. Reversionary bonuses – paid-up additional life insurance Terminal bonuses – distribute unrealized capital gains Personal Equity Plan (PEP) as a means to increase saving Bancassurance not yet significant

Europe – the U.K.: 

Europe – the U.K. Three market sectors Life insurance comprising basic life insurance and annuities, pension business …… Other long-term business such as permanent health insurance and pension fund management activity Other than long-term business 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.

Europe – France: 

Europe – France Features One of the largest and most highly developed life insurance industries in the world Caisse Nationale de Prévoyance (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

Europe – Germany: 

Europe – Germany Features Largest companies were locally incorporated – Allianz, Hamburg-Mannheimer, 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)

Europe – Russia: 

Europe – Russia Features Largest European market by population Recently privatized, now with 1,500 life and non-life 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?

Europe – Market Issues: 

Europe – Market Issues E.U. harmonization Third Life Insurance Directive may no longer hinder competitions from insurers domiciled in other EU country. Introduction of International Financial Reporting Standards (IFRS) The EU and most other major markets are moving toward compliance with the IFRS of the IASB. Bancassurance movement As bancassurance widely accepted, it will be increasingly difficult for conventional insurers to support costly agency distribution systems.

Europe – Market Issues: 

Europe – Market Issues Direct response marketing Frequently benefit from an even lower cost structure than that of the bancaasuance companies. Recession and unemployment Europe continues to experience major unemployment problems, particularly among the youth. The evolving pension and health market It’s an opportunity for private insurers that provide supplemental health insurance and pensions.


Asia-Pacific Features The world’s 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  the most promising markets In economically affluent countries, life insurance products with strong savings elements predominate. ( e.g.Taiwan, Singapore)

Asia-Pacific – Japan: 

Asia-Pacific – Japan Features World’s 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 part 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

Asia-Pacific – Japan: 

Asia-Pacific – Japan Issues Role of non-conventional life insurers Kampo & Zenkyoren The government plans to restructure its postal agency as a holding company for privatization. Mega mergers and acquisitions Mergers and acquisitions likely guarantee the dominance of a few large life insurers in Japan.

Asia-Pacific – Japan: 

Asia-Pacific – Japan Fallout from the bubble economy The bubble economy came to an end but most insurers suffered heavy losses. Aging population The world’s oldest country in terms of population age Westernization of the younger generation The younger generation consumer much more than their parents, with a reduction in savings.

Asia-Pacific – Korea: 

Asia-Pacific – Korea Features The world’s 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

Asia-Pacific – Taiwan: 

Asia-Pacific – Taiwan Features A strong life insurance industry and the world’s 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

Asia-Pacific – China: 

Asia-Pacific – China Features The greatest growth potential in the world Life insurance premium growth at about 24% 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

Asia-Pacific – India: 

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

Asia-Pacific – Australia and New Zealand: 

Asia-Pacific – Australia and New Zealand Features Along with New Zealand, one of the world’s 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

Asia-Pacific – ASEAN: 

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


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 world’s second highest life insurance penetration Other markets, such as Namibia, Mauritius and Botswana, slowly grow. Still the least known regional market in the world


Discussion Questions

Discussion Question 1: 

Discussion Question 1 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?

Discussion Question 2: 

Discussion Question 2 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 consumer’s point of view of these three different strategies for selling life insurance?

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