INSURANCE & ANNUITIES 4.1 Life Insurance LI 4.2 Disability Income Insurance 4.3 Property Insurance 4.5 Liability Insurance 4.6 Other Types of Insurance 4.7 Annuities 4.4 Health/Medical I
Trang 1“ RISK MANAGEMENT FOR INDIVIDUALS ”
Overview of potential risks to indvs & households
Analysis of products & strategies to protect against those risks
Selection of an appropriate product & strategy
2 HUMAN CAPITAL AND FINANCIAL CAPITAL
furniture, clothes, personal residence) consumed/used
by an indv
appreciate in value
than their fair/mkt value
personal & invst features e.g real estate, jewelry, artwork etc.]
( )
complicated than models
Later in lifecycle as HC diminishes,
protect against LT health-care exp & long-life spending needs
1 INTRODUCTION
2 1 Human Capital 2 2 Financial Capital 2 3 Net wealth
Net wealth = Net worth + claims to future assets that can be used for consumption (e.g HC & PV of pension benefits) where Net worth = diff b/w traditional assets & liab
2.2.4 Non-publicly Traded Marketable Securities
2.2.2 Investment Assets
2.2.3 Publicly Traded Marketable Securities
2.2.5 Non-Marketable Assets
2.2.1 Personal Assets
2.2.6 Account Type
traditional B/S
instruments, bonds, common and preferred equity
characteristics are easier to
by countries but Gen are of three types:
HC = Human Capital
FC = Financial Capital Indv = Individual Imp = Importance B/S = Balance sheet Mortg = Mortgage Invst = Investment
LI = Life Insurance Adj = adjustment DVA = deferred variable annuity IFA = Immediate Fixed Annuity Pmt = Payment Exp = expense
Trang 22.2.5.1 Employer Pension Plans (Vested)
1) Employee-directed Saving Plan⇒
contribution amount & invst controlled by indv
2) Traditional Pension Plan⇒ guarantee some retirement benefits
= ∑ (())
and should consider plan’s funded status, credit quality and additional credit support
more secure and considered as bond-like
framework and political stability matters
2.2.5 Non-Marketable Assets
2.2.4 Non-publicly Traded Marketable Securities
2.2.4.1
Real Estate
2.2.4.2 Annuities
2.2.4.3 Cash-value Life Insurance
2.2.4.4 Business Assets
2.2.4.5 Collectibles
assets owned by
indvs
the largest fixed
obligations of indvs
recourse or
non-recourse
→riskier for lenders,
have ↑ interest rates
&/or ↑ borrower
credit standards
A private defined-benefit pension guaranteed by an insurance co for life/ over some fixed period for the beneficiary
Combines life insurance protection with some with some type of cash accumulation vehicle
Indv’s (especially self-employed) significant portion of total wealth
recent sales of comparable businesses (multiple of NI
or EBITDA)
market conditions
paintings, wine, precious metals
auction/specialized dealers and involves
↑ transaction costs
for the owner
2.2.5.2 Government Pensions
Trang 33 A FRAMEWORK FOR INDIVIDUAL RISK MANAGEMENT
3.1 The Risk Management
Strategy for Indvs
3.2 Financial Stages of Life
3.3 The Indv B/S
3.4 Indv Risk Exposures
3.1.1 Step 1 Specify the objective
3.1.2 Step 2 Identify Risks
3.1.3 Step 3 Evaluate risks &
select appropriate methods to manage the risks
3.1.4 Step 4 Monitor outcomes
& risk exposures &
make suitable adj
in methods
3.2.1 Education Phase
3.2.2 Early Career
3.2.3 Career Development
3.2.4 Peak Accumulation
3.2.5 Pre-retirement
3.2.6 Early Retirement
3.2.7 Late Retirement
3.3.1 Traditional B/S
netted against liab
recognizable marketable assets & liab
and pension benefits
3.3.2 Economic (Holistic) B/S
indv’s overall financial condition based on his holistic wealth
+ PV of non-marketable assets (HC, pensions) &
liab
(consumption needs, bequests)
3.3.3 Changes in Net worth
Lifecycle→Tangible assets dominate indv.’s portf
• Later in Lifecycle
Non-traditional B/S items ↑
stage→Total economic wealth is dominated by pension and real estate
• Volatility in invst portf of Indv with
variation in expected consumption
3.4.1 Earning Risk
include health, unemployment, underemployment
professionals are also prone to earnings variability
• May ↓ HC & FC
additional training, education, skills
3.4.2 Premature Death Risk
indv earlier than expected
affect FC
family the effect can be tragic
• A risk to consumption needs also occur if non-earning family member dies
3.4.3 Longevity Risk
an extended retirement period
indv’s lifestyle even when pension benefits are substantial
needed at retirement, financial planners may use:
Simulation
(adj for health factors)
outliving his money intends to work longer, has ↑ HC but at possible exp of less desirable retirement stage
3.4.4 Property Risk
person’s property may be lost, stolen, damaged or destroyed
loss⇒property’s $ loss value
loss⇒exps
incurred for property repairment
HC specially when property is used in business to create income
3.4.5 Liability Risk
may be legally liable for costs associated with property damage/physical injury
involve automobile accidents;
homeowner’s property may cause injury to a visitor/tenant
indv’s FC &/or
HC
3.4.6 Health Risk
illness or injury
implications to
HC and FC
Trang 44 INSURANCE & ANNUITIES
4.1
Life Insurance
(LI)
4.2 Disability Income Insurance
4.3 Property Insurance
4.5 Liability Insurance
4.6 Other Types
of Insurance
4.7 Annuities
4.4 Health/Medical Insurance
4.2 Disability Income Insurance
result of disability
additional rider
guaranteed renewable
4.4 Health/Medical Insurance
(some govts fund health care)
+ upgraded coverage for more pmt
approaches:
(HMO)
insurance covers the vast majority
of health care exp
insurance plan includes:
• 4.3.1 Homeowner’s Insurance:
property & liability
• Policies may be specified as “all risks”, include all risks except those specified as “named risks”
(more expensive) or Actual Cash Value (cost less dep.)
cover the outstanding mortgage amount
land value and losses are reimbursed at ↓ rate if home is underinsured
within the insurance policy
techniques such as surveillance system, fire extinguishers, bank’s safe deposit box, installing surge protectors etc
• 4.3.2 Automobile Insurance:
value and driver’s age & driving record
i Collision Coverage (for damage from accident)
ii Comprehensive Coverage (for damage from other sources glass, breakage, hail, theft)
damaged by uninsured/underinsured and passengers’ medical coverage
• If repair cost > actual cash value insurance companies reimburse only the actual cash value
gen covered within the policy
as wearing seat belts, avoiding extreme weather, backup camera, lane-change warning system etc
4.5 Liability Insurance
• If liability coverage in the homeowner’s and automobile insurance is less than one think
is appropriate
umbrella policy (relatively inexpensive) → pays claims if liability limit of homeowner’s
or automobile policy is exceeded
4.6 Other Types of Insurance
indv situation
(when purchasing a home, to make sure ownership of the property is not
in doubt)
(extended warranty) →when purchasing automobile, home appliances, sizeable products
to avoid repair cost
Trang 54.1.4.4 Consumer Comparisons of LI Costs Two popular indexes for comparison are:
1) Net pmt cost index 2) Surrender cost index Calculation Comparison
(assuming 5% discount rate & 20-yr period Steps Net Pmt Cost Index Surrender Cost Index Assumes insured
person will die at period end
Assumes policy will be surrendered at period end & policy owner will receive the projected cash flow
Annuity Due of Premium
Same
ordinary annuity of projected annual dividends
Same
Cost = A-B
20-yr Insurance Cost = A-B-20 yr projected Cash Value
per yr = Calculate Pmts for 20-yr
annuity due with FV equal to C
Same
thousand dollars of face value
Same
4.1.4.2 Calculation of the Net/Gross Premium
value of future death benefits
premium
early yrs and ↓ in later yrs
have advantage of ‘loss leader’ but health issue or accident can make indv
uninsurable
i Stock Companies
in pricing policies
ii Mutual Companies
This extra amount is paid back to policy owner as a policy dividend
4.1.4.1
Mortality
Expectations
on historical
data &
future
expectations
make adj to
general
mortality
table based
on factors
(e.g health
history,
smoking,
excess
weight etc.)
policies may
require
physical
examination
4.1.4.3 Cash value & Policy Reserves
stays constant
ii Face value → stays constant iii Cash value → ↑
iv Insurance value → ↓
1) withdrawn when policy terminate or 2) can be borrowed
as a loan
required by regulators to maintain policy reserves
4.1.1
Uses of LI
against earner’s
death
planning
tool→provides
immediate
illiquidity to
beneficiary
saving tool
↑, mortality
charge ↑
4.1.2 Types of LI
1.Temporary LI (TLI)
• Cost is less than PLI
2.Permanent LI (PLI)
surrender option, reduced paid up option, extended term option)
• Several types (e.g whole LI, universal LI) Whole LI:
insured’s whole life
feature appeals younger indvs
∆ due to co.’s profits)
or Non-participating (fixed value)
Universal LI:
investing the cash value
Common features of TLI & PLI
death & dismemberment AD&D, accelerated death benefit, guaranteed insurability, waiver
of premium)
to a 3rd
party)
4.1.3 Basic Elements of LI Policy
benefits)
• Riders (if any) to the policy
iii beneficiary
iv insurer
death
4.1.4 How
LI is Price
d
4.1 Life Insurance (LI)
4.1.5 How Much LI Does One Need?
person to person and based on the
no of dependents
purpose: to replace PV of future earnings
include:
immediate financial exp
& legacy goals
Trang 64.7.1 Parties to
an Annuity
Contract
Four primary
parties:
i Insurer
iii Contact
owner
4.7.5 Annuity Benefit Taxation
attractive tax benefits (e.g
in U.S offer tax deferred growth)
method varies
by countries
4.7.4 Payout Methods
• Gen similar for fixed or variable annuities
• Life Annuity: Pmt For annuitant’s entire life and cease at his death
• Period-certain Annuity: Pmts
for certain # of periods without regard to lifespan
• Life Annuity with period certain: Pmts for annuitant’s entire life but guaranteed min
# of yrs even if he dies
• Life Annuity with refund:
similar to life annuity with period certain but guaranteed pmt = initial invst – fees
• Joint Life Annuity: Pmt
Continue until two/more members are no longer living
mutually exclusive and frequencies may vary (e.g
monthly, quarterly etc.)
4.7.6 Appropriateness
of Annuities
benefit pmt
can be decomposed into i) interest ii) return of premium iii) mortality credit
• How much annuitize
→depends on indv’s preference for wealth max &
longevity risk aversion
4.7 Annuities
4.7.3.5 Inflation Concerns
affect real income of fixed annuities
annuities and riders of fixed annuities allow
↑ ↓in pmts
due to ∆in inflation
4.7.3.4 Fees Variable Annuities:
• ↑ fees
cause reduced price competition
Fixed Annuities:
• ↓ fees
compare
4.7.3.3 Future Market Expectations Fixed Annuities: (bond-like assets)
• have interest rate risk
market return on invst
Variable Annuities:
• possibility of ↑ future pmts in up market
mortality credit
4.7.3.2 Flexibility
offer guarantee of income for life
(market performance based) provide guaranteed income and flexibility
to access the funds
4.7.3.1 Volatility of
Benefit Amount
level of assurance of
benefit payouts
select fixed annuity
or variable annuity
that limits ∆ in
benefit over time
→ opt for variable
annuity
4.7.2 Classification
of Annuities
4.7.3 Advantages &
Disadvantages of Fixed & Variable Annuities Imp considerations when selecting fixed/variable annuities
Trang 74.7.2.2 Deferred Fixed Annuities (DFA)
less surrender charges
4.7.2.1 Deferred Variable Annuities (DVA)
options
contract value < initial invst.)
• Indv have the right to exit (sell) the contract
contract rider → guaranteed min pmt or 2) annuitize the contract
by converting DVA into immediate payout annuity (few investors choose to annuitize)
4.7.2 Classification of Annuities
to classify are:
2 Fixed vs variable
expected life span of two
annuitants)
4.7.2.3 Immediate Variable Annuities (IVA)
4.7.2.4 Immediate Fixed Annuities (IFA)
benefit
payout is ↑ for 85-yr.old compared to 65-yr old)
insurance co earn on premium
4.7.2.5 Advanced Life Deferred Annuities (ALDA)
begin immediately (unlike IPA)
begin far in the future
Trang 85 IMPLEMENTAION OF RISK MANAGEMENT FOR INDIVIDUALS
5.1 Determining the
Optimal Risk
Management Strategy
5.2 Analyzing an Insurance Program
5.3 The Effect of Human Capital (HC) on Asset Allocation Policy
5.4 Asset Allocation & Risk Reduction Policy
risk tolerance
control
(remove loss event
possibility)
(taking actions to ↓
probability of loss
event)
iii Loss reduction (↓
the size of loss)
through techniques of:
i Risk transfer
(insurance/
non-insurance transfers)
ii Risk retention
approach →consider the
optimal strategy for each
risk exposure
Plan
portfolio construction through:
performance is correlated with indv’s earnings
different HC risks (job loss impact on long-term HC, Health shock etc.)
• Overall riskiness of HC is ↓ if:
(unless their HC is highly correlated)
work force
• Overall riskiness of HC is ↑:
o if HC is tied to specific geographic location
o if HC is vulnerable to disability/premature risk
variance
mix of risky vs risk-free assets, based
on risk-tolerance & adj for ∆ in assets values over time:
time
• Invst risk, property risk & HC risk can be either idiosyncratic or systematic
• Idiosyncratic risks include:
reduced through invst portfolio strategies & insurance products
performance
healthcare improvements
• Systematic risks affect all households