Two reasons to buy insurance

Buy insurance for protection.

There are 2 reasons for buying insurance:

1.  To protect against loss which you are unable or unwilling to bear.

2.  The insurance company is selling you a policy that is too cheap.

Choose an insurance company with the ability to pay out, even in the most extreme situation.

Whole life insurance versus Renewable term insurance. The problems with whole life insurance.

Term insurance:

With term insurance all you pay for and get is protection.  If you die, they pay.

Term insurance rates start very low but go up every year.

Whole life insurance:  

With whole life you are buying a tax-sheltered savings plan as well.  Your policy accumulates "cash values."

Whole life rates start high but remain constant.



Insurance salesmen are eager to sell whole-life policies because their commissions are so much higher.

But you would be wiser to buy renewable term insurance and do your saving separately.  (With renewable policy you are assured of continuing coverage even if your health deteriorates.)


The problems with whole life:

• Many policies pay low interest.
• It is impossible for a non-expert to tell a good policy from a bad one.
• There is tremendous penalty for dropping the policy, as many people do, after just a few years.
• Most young families cannot afford the protection they need if they buy whole life.  The same dollars will buy five or six times term insurance.
• In later years, and particularly beyond the age of 50 or 55, term insurance premiums rise rapidly.  But by then you may have a less urgent need for life insurance.  The kids may be grown, the mortgage paid off, the pension benefits vested.  You will still need to build substantial assets for retirement, and to protect your spouse; but there are better ways to save for old age than whole life.   

Ref:  The Only Investment Guide you'll Ever Need  by Andrew Tobias

Read also:

Term Life Insurance is Value for Money

Why the Rich Don’t Buy Insurance and Unit Trusts

Not all insurance products and unit trusts are created equal. The writer wonders why most people at the top don’t believe in them.

—

Why did Warren Buffet buy an insurance company?

Because _______________.

I just returned from a harrowing experience at this local insurance company and a morning of blank faces and passive responses to my torrent of questions.

Why have I been paying S$7,000 per year and getting all these optimistic updates on fund performance, and after 10 years I end up losing more than 40 percent of my premiums?

Investment-linked what?

You see, I had blindly signed the papers when my mom suggested I buy a bunch of investment-linked products over a decade ago, and had paid scant attention to it until urged by an insurance adviser recently.

The realisation that I have been paying very, very expensive premiums over 10 years does not sit well with me and some introspection was required.

That amount that I had paid could have well gone into a life policy such as a universal life option, buying me the same coverage for a fixed payment with loan of 70 percent.

If we assume that an annual universal life premium of S$120,000 buys S$1 million cover for someone aged 30, my paid premiums could have gone to buying whole life coverage until I was 110 instead! (Note: This is probably for international insurance firms and not the local companies that insist on ripping folks off with their simply exorbitant premiums that they force some local banks to fund)

The blank faced staff gave me a scornful look and said if I continued paying I would reap the rewards from it too! Yes, if I had an IQ of 50 maybe.

If I continue paying another 10 years, I would perhaps break even.

Why don’t the rich folks buy these products? Why don’t the private banks sell unit trusts?

Because these are the black box priced deals that the public has no chance of fighting against. No transparency and no restitution (don’t even think of going to court).

Private bankers themselves only ever buy term life and medical policies leaving the investment bit out. Investments are separate. And all these articles in the papers telling people that insurance is the way to go for retirement. I just recently discovered that “financial planner” is just another word for insurance agent.

It makes me worried.

Because Warren Buffet knows how profitable it is.

https://www.drwealth.com/2014/12/22/why-the-rich-dont-buy-insurance-and-unit-trusts/?utm_medium=DISPLAY&utm_source=OUTBRAIN&utm_campaign=INVMT

Property/Casualty Insurance Accounting (A Conceptual Overview)

Property/Casualty Insurance Accounting 101

INCOME STATEMENT

UNDERWRITING PROFIT/LOSS
Premium revenue is used to fund claim payments, sales commissions for insurance agents and operating expenses.

Insurers typically express each of these expenses as ratios to earned premiums.

Claim expenses, for example, typically consume 75% of an insurer's net revenues.

Adding together these three ratios produces the combined ratio.

Combined ratio is an insurance company's key underwriting profit measure.

A combined ratio under 100 indicates an underwriting profit.

For example, a combined ratio of 95 means that the insurer paid out 95% of its premium revenue for losses.  The 5% remaining is the underwriting profit.

A combined ratio exceeding 100 indicates an underwriting loss.

For example, an insurer with a combined ratio of 105 paid out 105% of its premium revenue to cover losses, meaning that it had an underwriting loss equal to 5% of revenues.

Companies with combined ratios exceeding 105 for more than a short time have a difficult time recouping their losses via investment earnings, and this type of poor underwriting track record suggests that an insurer's competitive position is unusually weak.

Insurers unable to earn even the occasional underwriting profit will produce the industry's poorest returns and may be tempted to accept large investment risks to boost profitability.


INVESTMENT INCOME
Insurers also make money from investment income, which they often report as a ratio of premiums.

Adding the investment ratio to the combined ratio yields the operating profit ratio.

In many instances, investment income is a key profit determinant because it offsets underwriting losses.



BALANCE SHEET.

ASSETS

INVESTMENTS
The key asset for most insurers is investments.

In addition to float, most insurers invest a large portion of their own retained earnings as well.

The investments account reveals the size of an insurer's investments relative to its asset base and details the asset allocation employed.

As a starting point, look for insurers with no more than 30 percent invested in equities (unless the company is run by Warren Buffett).


UNEARNED PREMIUMS
Unearned premiums represent premiums received but not yet considered revenue.

When an insurer receives a premium, it is deemed to earn it gradually across the year.

After all, if a customer cancels a policy, the insurer must refund that portion of the coverage not consumed.

After six months, an annual auto policy would be 50% earned, and half the premium would be considered revenue.

Before this occurs, the premiums are held in the unearned premium account, and the insurer is free to invest them.




WHAT DO YOU WISH FOR.

Look for an insurer who is able to consistently earn underwriting profits on a large, growing customer base.

In effect, this insurer would be getting paid to profit from investing other people's money and could retain this float indefinitely (as long as it grows).

Unfortunately, for investors, these situations rarely occur.



FLOAT

Insurers enjoy a peculiar business advantage.

Premiums are received well in advance of the firm's requirement to pay claims.

This money is often referred to as float.

An insurer enjoys the use of this money between the time it receives a premium and the time it has to pay a claim.

Insurers exploit this by investing these premiums and keeping the money they make from the investments.

How much money they can make this way depends on market performance, the insurer's asset allocation, and how long the insurer holds premiums before making claim payments.

Insurers writing long-tail insurance hold premiums longer and, hence, can invest more in equities.

(The length of an insurance policy's tail refers to the time it takes for damages to become apparent.
Short-tail policies are those where damages incurred during the insured period become known quickly, such as a car accident.
Long-tail policies cover damages that may not become apparent for many years, such as an asbestos injury_

Financial statements of Life Insurance Companies (A Conceptual Overview)

Life insurance companies offer products that allow people:
(1) to protect themselves or their loved ones from catastrophic events such as death or disability or
(2) to provide greater financial protection and flexibility for situations such as retirement.

A life insurer pools the individual risks of many policy holders.

The life insurers then strives to earn a profit by taking in and/or earning more money than it is required to eventually pay out to its policyholders.

A bizarre fact of the industry is that when an insurer sells a policy, it doesn't really know how to effectively price that policy because it doesn't really know how much it will eventually cost.

Despite the best efforts of a life insurer's actuaries to estimate variables such as future investment returns, policy persistency rates (the length of time that customers keep their policies), and life expectancy, it can take years before the insurance company knows whether it made money on the policy.



Financial statements for life insurers (A conceptual overview).

BALANCE SHEET

ASSETS
On the asset side of the balance sheet are two major items:
(1) investments (the accumulated premiums and fees that an insurer builds up before having to pay out benefits to its policyholders) and
(2) deferred acquisition costs, which is the capitalized value of selling insurance or annuities policies.

For firms that sell variable annuities, separate account assets, which represent the funds that variable annuity owners have invested, constitute a third important asset type.

LIABILITIES
Because variable annuity owners manage their own investments, these assets are segregated and the separate account assets are offset by an equivalent amount of separate account liabilities on the opposite side of the balance sheet.

A life insurer's other liabilities basically consist of the actuarially estimated future benefits that need to be paid to the insurer[s policyholders.


INCOME STATEMENT

REVENUE
The two main sources of revenue are:
(1)  recurring premiums and fees and
(2) any earned investment income.

EXPENSE
The two main expenses are:
(1)  benefits and dividends paid to policyholders and
(2) amortization of the deferred acquisition costs.

Given how few revenue and expense lines there are, it is vital to keep track of their growth trends.

Property/Casualty Insurance Accounting

Property/Casualty Insurance Accounting

Income Statement of Property/Casualty Insurance Company

Premium revenue is also known as earned premium.  This premium revenue is used to fund:

1. Claim payments (loss expense).
2. Sales commissions for insurance agents (commission expenses)
3. Operating expenses (OPEX)

Claim expenses, for example, typically consume 75% of an insurer’s net revenues.

(1)    + (2) + (3) / Premium revenue = Combined ratio

Combined ratio is an insurance company’s key underwriting profit measure.

A combined ratio under 100 indicates an underwriting profit. 

For example:  A combined ratio of 95 means that the insurer paid out 95% of its premium revenue for losses.  The 5% remaining is the underwriting profit.

A combined ratio exceeding 100 indicates an underwriting loss. 

For example:  An insurer with a combined ratio of 105 paid out 105% of its premium revenue to cover losses,  meaning that it had an underwriting loss equal to 5% of revenues.

Companies with combined ratios exceeding 105 for more than a short time have a difficult time recouping their losses via investment earnings, and this type of poor underwriting track record suggests that an insurer’s competitive position is unusually weak.  Insurers unable to earn even the occasional underwriting profit will produce the industry’s poorest returns and may be tempted to accept large investment risks to boost profitability.

Investment income of Insurance companies

Insurers also make money from investment income.  They are often reported as a ratio of premium.

Adding the investment ratio to the combined ratio yields the operating profit ratio.  In many instances, investment income is a key profit determinant because it offsets underwriting losses.

Combined ratio  + Investment ratio  = Operating Profit ratio

Balance Sheet of Property/Casualty Insurance Company 

In addition to float, most insurers invest a large portion of their own retained earnings as well.  The investment account reveals the size of an insurer’s investments relative to its asset base and details the asset allocation employed.

Investment account = Float deployed + Retained Earnings deployed.

Look at the asset allocation of this investment account.  Look for insurers with no more than 30% invested in equities (unless the company is run by Warren Buffett).

Unearned Premiums of Property/Casualty Insurance Company

Unearned premiums represent premiums received but not yet considered revenue.

This oddity reflects an accounting convention.  When an insurer receives a premium, it is deemed to earn it gradually across the year.  After all, if a customer cancels a policy, the insurer must refund that portion of the coverage not consumed.  After six months, an annual auto policy would be 50% earned, and half the premium would be considered revenue.  Before this occurs, the premiums are held in the unearned premium account, and the insurer is free to invest them.

The best property/casualty insurer is one that is able to consistently earn underwriting profits on a large, growing customer base.  In effect, this insurer would be getting paid to profit from investing other people’s money and could retain this float indefinitely (as long as it grows).  Unfortunately, for investors, these situations rarely occur.



Insurance Companies of Malaysia
Click here: https://docs.google.com/open?id=0B-RRzs61sKqRWmp5ZEFEREw4VWM

Investor's Checklist: Asset Management and Insurance

Look for diversity in asset management companies.  Firms that manage a number of asset classes - such as stocks, bonds, and hedge funds - are more stable during market gyrations.  One-hit wonders are much more volatile and are subject to wild swings.

Keep an eye on asset growth.  Make sure an asset manager is successful in consistently bringing in inflows greater than outflows.

Look for money managers with attractive niche markets, such as tax-managed funds or international investing.

Sticky assets add stability.  Look for firms with a high percentage of stable assets, such as institutional money managers or fund firms who specialize in retirement savings.

Bigger is often better.  Firms with more assets, longer track records, and multiple asset classes have much more to offer finicky customers.

Be wary of any insurance firm that grows faster than the industry average (unless the growth can be explained by acquisitions).

One of the best ways to protect against investment risk in the life insurance world is to consider companies with diversified revenue bases.  Some products, such as variable annuities, have exhibited a good degree of cyclicality.

Look for life insurers with high credit ratings (AA) and a consistent ability to realise ROEs above their cost of capital.

Seek out property/casualty insurers who consistently achieve ROEs above 15 percent.  This is a good indication of underwriting discipline and cost control.

Avoid insurers who take repeated reserving charges.  This often indicates pricing below cost or deteriorating cost inflation.

Look for management teams committed to building shareholder value.  These teams often have significant personal wealth invested in the businesses they run.



Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey


Read also:
Investor's Checklist: A Guided Tour of the Market...

LPI Capital targets 15pct growth in gross premiums in FY11

LPI Capital targets 15pct growth in gross premiums in FY11
Written by Chong Jin Hun at theedgemalaysia.com
Thursday, 24 February 2011 14:03


KUALA LUMPUR: Insurer LPI CAPITAL BHD [] is targeting a 15% growth in gross premiums in the financial year ending Dec 31, 2011.

Its chief executive officer Tee Choon Yeow said on Thursday, Feb 24, the growth would be boosted by new businesses from strategic partners which are also global insurers.

He said LPI was also expanding its agency force with three planned branch offices in Peninsular Malaysia. It has 16 branches now.

“Net profit growth for FY11 should be more than 15%,” he told reporters after its AGM here. In FY10, LPI raked in RM755.93 million in gross premiums.

LPI Annual Report 2009 (Summary)

  LPI Annual Report 2009

Underwriting Surplus before Management Expenses By Class

RM’000                           Underwriting Surplus before management expenses
                                                                        2009                  2008
Fire                                                               93,030                68,603
Motor                                                           19,312                30,366
Marine, Aviation & Transit                       6,100                  5,290
Miscellaneous                                                54,997               38,083
Total                                                           173,439              142,342


SUMMARY OF GROUP FINANCIAL PERFORMANCE
At A Glance


                                                              2009 RM’000          2008 RM’000
Profit Before Taxation                                  161,335               141,564
Profit After Taxation                                     126,088               104,247
Total Assets                                              1,488,697               856,201
Shareholders’ Equity                                    900,673               363,741
Basic Earnings Per Share (sen)                           91.6                     75.7
Return on Equity (“ROE”)                                14.0%                14.0%*
Operating Margin                                              21.7%                 22.1%
Net Claims Incurred                                          46.7%                 51.2%

*Restated ROE after taking into account of FRS 139 adoption.



Profit Before Taxation By Segment
                                                                    2009 RM’000      2008 RM’000
General Insurance Operations                           126,311              108,679
Investment Holding                                             34,097                32,322
Financing of Leases                                                    (1)                   (34)
                                                                        160,407              140,967
Share of profit after tax of
equity accounted associated
company                                                                  928                    597
Profit Before Taxation                                       161,335              141,564



RM’000                 Fire          Motor       M.A & T#     Miscellaneous      Total
Gross premium     229,381    194,406       23,446          228,013        675,246
%                          34.0         28.8              3.5                 33.7             100.0
Underwriting
surplus before
management
expenses               93,030      19,312       6,100           54,997         173,439

Underwriting
surplus after
management
expenses               69,319       (9,724)      4,085           33,964           97,644


# Marine, Aviation and Transit




Class                  Total no. of policies    No. of policies per underwriting staff
                             2009        2008              2009         2008
Fire                    284,170     274,520          18,945      17,158
Motor                463,615     416,608          42,147       37,873
Marine, Aviation
& Transit             26,791       26,114            3,349        3,264
Miscellaneous    263,618     197,109            5,492        4,693
Total              1,038,194      914,351          12,661      11,875




Gross Premium By
Agents                                 27.3%
Financial Institutions             25.8%
Direct                                  14.7%
Broker                                 12.4%
Reinsurance Arrangement       5.6%




The statistics of claims registered and settled in 2008 and 2009 are as follows



Classes                         No. of claims registered             No. of claims settled
                                          2009      2008                         2009          2008
Fire                                    2,202      2,119                      1,188            915
Marine                                  849         719                         427            340
Personal Accident              5,667      6,730                       5,106        6,127
Miscellaneous                    2,404      1,768                       1,448           808
Health                                3,319      2,701                       2,589        1,841
Workmen Compensation    2,412      2,928                         997         1,183
Motor                              17,716    18,547                       8,892        7,264
Liability                              1,380      1,029                          467           219
Bond                                    333         123                          213             23
Aviation                                   1             0                              1               0
Engineering                           840        717                           321           161
Total                               37,123    37,381                      21,649      18,881



LPI has been consistent in its dividend payment since listed
in 1993. The gross dividend per share paid by LPI since
1993 is depicted below:

Year    Gross Dividend per share (sen)
2008     85.0
2007   110.0 N1
2006   105.0 N1
2005    70.0 N1
2004    60.0 N2
2003    25.0
2002    15.0*
2001    15.0*
2000    15.0*
1999    12.5*
1998    27.5
1997    40.0
1996    40.0
1995    30.0
1994    25.0
1993    18.0

* Tax Exempt

N1 - Including a special dividend of 25 sen less taxation

N2 - Including a special dividend of 30 sen less taxation

BALANCE SHEETS

AT 31 December 2009

                                                                      Group                    

                                                           2009              2008 

                                                           RM’000        RM’000 

Restated Restated

Assets

Plant and equipment                              6,290            6,435 

Investment properties                            9,487          10,947

Investment in subsidiaries                            -                     -     

Investment in associate                        12,230          11,482 

Investments                                                 -          725,903 

Available-for-sale financial assets       671,348                  - 

Held-to-maturity investments              172,515                 - 

Loans and receivables, excluding

 insurance receivables                         536,985         27,622

Insurance receivables                           69,904          60,735

Tax recoverable                                           -                    - 

Cash and cash equivalents                      9,938         13,077 

total assets                                      1,488,697        856,201 

equity

Share capital                                       138,723       138,723 

Treasury shares, at cost                        (8,628)         (8,611) 

Reserves                                            770,578        233,629

shareholders’ equity                            900,673        363,741

liabilities

Insurance liabilities

-  Claims liabilities                                229,021       242,654 

-  Premium liabilities                             222,545       188,258 

Deferred tax liabilities                                  557                   -     

Borrowings                                            72,880                  -     

Insurance payables                                 37,505         34,422 

Other payables                                      15,416          12,988 

Taxation                                                 10,100         14,138 

total liabilities                                        588,024        492,460 

total shareholders’ equity 

and liabilities                                       1,488,697      856,201

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/750d1c101e37ba4b482576b10032f4e8/$FILE/LPI-Page%20116%20to%20ProxyForm%20(3.2MB).pdf

Property/Casualty Insurance Accounting 101

Let us investigate how the PC insurance business works on an income statement and balance sheet.  Premium revenue (also known as earned premium) is used to fund claim payments (loss expense), sales commissions for insurance agents (commission expense), and operating expenses (OPEX).  Insurers typically express each of these expenses as ratios to earned premiums.  Claim expenses, for example, typically consume 75% of an insurer's net revenues.

Adding together these three ratios produces the combined ratio - an insurance company's key underwriting profit measures.  A combined ratio under 100 indicates an underwriting profit.  A combined ratio exceeding 100 indicates an underwriting loss.

Companies with combined ratios exceeding 105 for more than a short time have a difficult time recouping their losses via investment earnings, and this type of poor underwriting track record suggests that an insurer's competitive position is unusually weak.  Insurers unable to earn even the occasional underwriting profit will produce the industry's poorest returns and may be tempted to accept large investment risks to boost profitability.

Insurers also make money from investment income, which they often report as a ratio of premiums.  Adding the investment ratio to the combined ratio yields the operating profit ratio.  In many instances, investment income is a key profit determinant because it offsets underwriting losses.

On the balance sheet, the key asset for most insurers is investments.  In addition to float, most insurers invest a large portion of their own retained earnings as well.  The investments account reveals the size of an insurers investments relative to its asset base and details the asset allocation employed.  As a starting point, look for insurers with no more than 30% invested in equities (unless the company is run by Warren Buffett).

Finally, unearned premiums represent premiums received but not yet considered revenue.  This oddity reflects an accounting convention.  When an insurer receives a premium, it is deemed to earn it gradually across the year.  After all, if a customer cancels a policy, the insurer must refund that portion of the coverage not consumed.  After six months, an annual auto policy would be 50% earned, but half the premium would be considered revenue.  Before this occurs, the premiums are held in the unearned premium account, and the insurer is free to invest them.

Nirvana for an insurer is being able to consistently earn underwriting profits on a large, growing customer base.  In effect, this insurer would be getting paid to profit from investing other people's money and could retain this float indefinitely (as long as it grows).  Unfortunately, for investors, these situations rarely occur.

Insurers' business model

Insurers' business model

[edit]Underwriting and investing

The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept.

Profit can be reduced to a simple equation: 

Profit = earned premium + investment income - incurred loss - underwriting expenses.

Insurers make money in two ways:

1. Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks;
2. By investing the premiums they collect from insured parties.

The most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.

At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and comparing these prior losses to the premium collected in order to assess rate adequacy.^[8]Loss ratios and expense loads are also used. Rating for different risk characteristics involves at the most basic level comparing the losses with "loss relativities" - a policy with twice as money policies would therefore be charged twice as much. However, more complex multivariate analyses through generalized linear modeling are sometimes used when multiple characteristics are involved and a univariate analysis could produce confounded results. Other statistical methods may be used in assessing the probability of future losses.

Upon termination of a given policy, the amount of premium collected and the investment gains thereon, minus the amount paid out in claims, is the insurer's underwriting profit on that policy. An insurer's underwriting performance is measured in its combined ratio^[9] which is the ratio of losses and expenses to earned premiums. A combined ratio of less than 100 percent indicates underwriting profitability, while anything over 100 indicates an underwriting loss. A company with a combined ratio over 100% may nevertheless remain profitable due to investment earnings.

Insurance companies earn investment profits on "float". Float, or available reserve, is the amount of money on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or other income on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.^[10]

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held.

Naturally, the float method is difficult to carry out in an economically-depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.^[11]

[edit]

Claims

Claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for. Claims may be filed by insureds directly with the insurer or through brokers or agents. The insurer may require that the claim be filed on its own proprietary forms, or may accept claims on a standard industry form, such as those produced by ACORD.

Insurance company claims departments employ a large number of claims adjusters supported by a staff of records management and data entry clerks. Incoming claims are classified based on severity and are assigned to adjusters whose settlement authority varies with their knowledge and experience. The adjuster undertakes an investigation of each claim, usually in close cooperation with the insured, determines if coverage is available under the terms of the insurance contract, and if so, the reasonable monetary value of the claim, and authorizes payment.

The policyholder may hire their own public adjuster to negotiate the settlement with the insurance company on their behalf. For policies that are complicated, where claims may be complex, the insured may take out a separate insurance policy add on, called loss recovery insurance, which covers the cost of a public adjuster in the case of a claim.

Adjusting liability insurance claims is particularly difficult because there is a third party involved, the plaintiff, who is under no contractual obligation to cooperate with the insurer and may in fact regard the insurer as a deep pocket. The adjuster must obtain legal counsel for the insured (either inside "house" counsel or outside "panel" counsel), monitor litigation that may take years to complete, and appear in person or over the telephone with settlement authority at a mandatory settlement conference when requested by the judge.

If a claims adjuster suspects underinsurance, the condition of average may come into play to limit the insurance company's exposure.

In managing the claims handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome. Disputes between insurers and insureds over the validity of claims or claims handling practices occasionally escalate into litigation (see insurance bad faith).

[edit]

Marketing

Insurers will often use insurance agents to initially market or underwrite their customers. Agents can be captive, meaning they write only for one company, or independent, meaning that they can issue policies from several companies. Commissions to agents represent a significant portion of an insurance cost and insurers such as State Farm that sell policies directly via mass marketing campaigns can offer lower prices. The existence and success of companies using insurance agents (with higher prices) is likely due to improved and personalized service.^[12]

http://en.wikipedia.org/wiki/Insurance

Related:
Analyzing Insurance Stocks:  The Income Statement
http://myinvestingnotes.blogspot.com/2010/07/analyzing-insurance-stocks-income.html

A sound financial plan must address the insurance coverages you, your spouse and family members may require.

Risk Management
A sound financial plan must address the insurance coverages you, your spouse and family members may require.

• Life insurance is used to pay for funeral expenses, repay outstanding debts, make charitable donations and provide living expenses for surviving family members. It can also be used to cover estate taxes and probate fees to enable your estate to be liquidated in the most appropriate manner.
• Disability income insurance^§ is to help partially replace income of persons who are unable to work because of sickness or accident. In terms of its financial effect on the family, long-term disability can be just as severe as death. Disability income protection can come from several sources: social insurance programs, employer-provided benefits, and individually purchased policies.
• Long Term Care Insurance- Long Term Care Insurance is still a relatively new type of insurance product. Many people do not understand what long-term care insurance policies cover, how and when the policies pay benefits, and who should obtain coverage.

http://www.cspgllc.com/section2.cfm

Naked Truth on Default Swaps

May 20, 2010
Naked Truth on Default Swaps

By FLOYD NORRIS
Should people be able to bet on your death? How about your financial failure?

In the United States Senate, Wall Street won one this week when the Senate voted down a proposal to bar the so-called naked buying of credit-default swaps. If that were the law, you could not use swaps to bet a company would fail. The exception would be if you already had a stake in the company succeeding, such as owning a bond issued by the company.

On the other side of the Atlantic, Germany announced new rules to bar just such betting — but only if the creditors were euro area governments.

None of this argument would be taking place if regulators had done their jobs years ago and classified credit-default swaps as insurance.

As it happened, however, clever people on Wall Street followed the prescription laid down by Humpty Dumpty in Lewis Carroll’s “Through the Looking Glass:”

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”

When Alice protested, Humpty Dumpty replied that the issue was “which is to be master — that’s all.”

The word here is “swap.” It used to mean, well, a swap. In a currency swap, one party will win if one currency rises against another and lose if the opposite happens.

Credit-default swaps are, in reality, insurance. The buyer of the insurance gets paid if the subject of the swap cannot meet its obligations. The seller of the swap gets a continuing payment from the buyer until the insurance expires. Sort of like an insurance premium, you might say.

But the people who dreamed up credit-default swaps did not like the word insurance. It smacked of regulation and of reserves that insurance companies must set aside in case there were claims. So they called the new thing a swap.

In the antiregulatory atmosphere of the times, they got away with it. As Humpty would have understood, Wall Street was master. Because swaps were unregulated, calling insurance a swap meant those who traded in them could make whatever decisions they wished.

That decision, perhaps more than anything else, enabled the American International Group to go broke — or, more precisely, to fail into the hands of the American government. Had it been forced to set aside reserves, A.I.G. would have stopped selling swaps a lot sooner than it did.

The decision that swaps were not insurance meant that anyone could buy or sell them — or at least anyone who could find a counterparty.

Had credit-default swaps been classified as insurance, the concept of “insurable interest” might have been applied. That concept says that you cannot buy insurance on my life, or on my house, unless you have an insurable interest.

Gary Gensler, the chairman of the Commodities Future Trading Commission, recently laid out the history of that concept. It did not exist until the 18th century, when many people — not just owners of ships or cargos — began buying insurance against ships sinking.


More ships began sinking, and insurers cried foul.

The British Parliament outlawed such sales of ship insurance in 1746. Ever since, to buy that insurance you had to have an interest in the ship or its cargo. But it was another 28 years before Parliament extended the idea to life insurance.

So should it be illegal for me to buy credit-default swaps on companies even if I have no other interest in the company? And if I have an interest, should I be limited to buying only enough insurance to cover my exposure? That is, if I own $100 million in XYZ Corporation bonds, should I be able to buy $1 billion in insurance against an XYZ default?

To most on Wall Street, the answer is obvious: let markets function. My buying that insurance will probably drive up the price, and serve as a market indication that people are worried about the credit, which is good because it gives a warning to others.

In any case, it is legal to sell stocks short. That, too, is a way to bet that a company will fail. So what’s the difference?

One difference is that many people short stocks because they deem them overvalued, not because they think the company will go broke. They can profit even if the company does well, so long as the stock does turn out to have been overvalued.

Many who despise credit-default swaps argue that they can be used to force companies to fail. The swap market is thin, and even a relatively small purchase can drive up prices. That very movement may make lenders nervous, cause liquidity to dry up and bring on unnecessary bankruptcies.

There is another, little noticed, possible impact of credit-default swaps. They can undermine bankruptcy laws.

Normally, a creditor wants to keep a company out of bankruptcy if there is a decent chance it can survive. If it does go broke, the creditor wants to maximize the value of the company anyway, so that more will be available to pay creditors.

But what happens if a major creditor, who might even control one class of bonds, has a much larger position in credit-default swaps?

Will he not have interests directly at odds with those of other creditors, since he will do better if the company ends up with less to pay its creditors? Might that creditor seek to, and perhaps be able to, sabotage the company’s best hopes for revival?

At a minimum, such things should be disclosed, but that gets tricky when one part of a megabank (the one with the bonds) claims it is run independently from the other (the one with the swaps).

I don’t know whether it is necessary to treat credit-default swaps like insurance and require someone to have an insurable interest before swaps can be purchased.

The financial reform bill now being debated in the Senate has provisions intended to assure that many of the previous swap abuses are not repeated.

But I do think Germany’s decision was ill considered. First, it may have little effect if other countries do not join in. Buying a swap in New York or London, rather than Frankfurt, will not be difficult.

But the more important issue is one of limiting the targets of credit-default swap purchases. If Germany had simply required buyers of credit-default swaps to have an insurable interest, it would have been standing up for a principle.

By limiting the scope to swaps on debt of euro area governments, the German government sends two signals: it is acting in self-interest, and it is still worried that it may have to finance more bailouts.

http://www.nytimes.com/2010/05/21/business/economy/21norris.html?ref=business

Kenanga Research initiates coverage on LPI Capital with buy call

Kenanga Research initiates coverage on LPI Capital with buy call

Written by Kenanga Research
Monday, 03 May 2010 08:56


KUALA LUMPUR: Kenanga Research has initiated coverage on LPI CAPITAL BHD [] with a buy recommendation at RM15.04 and target price RM16.80, and said it favours LPI the most among general insurers in Malaysia due to its well-diversified business portfolio enabling the company to minimise its operating risks and generates the highest return on equity (RoE) to reward shareholders.

The research house said the auto insurance segment is expected to turn around in 2010-11 with the proposed increase in premium rates and the change of motor tariff structure, which is a re-rating catalyst.

"We have not factored in the potential tariff hike in this report, however, we estimate every 5% increase in net premium, could increase LPI's earning by 9%," it said.

The research house said LPI has multiple distribution channels including its own agency network and tapping into Public Bank's 250 branch networks.

"We believe its faster-than industry's organic gross premium growth rate of 15%-16% is achievable," it said.

Kenanga Research said historically, LPI's premium has grown at a CAGR of 15% for the last 10 years.

"We estimate LPI now trades at 12.7 times FY11 PER, offers 6.2% net dividend yield and we forecast RoE of 17.2%; which is better than most of the banking stocks.

"We believe its business model of growing revenues at the calculated risk should sustain its earning growth of 12%-14% over next two years and efficient capital structure do offer a solid dividend yield story to investors," it said.

The research house said LPI deserved a valuation premium given stronger growth, higher margin, low investment risk, better market position; whilst the downside is well cushioned by its 6.2% net dividend yield.


Related:

A quick look at LPI