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In: Finance

Question 1 Compare and contrast the primary activities of a life insurance company with that of...

Question 1

  1. Compare and contrast the primary activities of a life insurance company with that of a commercial bank, including the nature of the asset and liabilities of these institutions.
  2. Discuss the three (3) major risks faced by the life insurance companies
  3. Describe three (3) Main products offered by a life insurance company


Solutions

Expert Solution

Life insurance Commercial bank
Assets are premiums to be received from policy holders + future recoverables Assets are loans and advances
Liabilities are already realised losses (policies claimed)+ future unrealised losses Liabilities are deposits from customers
Not very much impaced by systemic contagions Banks are part of the wider financial system and can cause systemic contagions
Liquidity is used for their own growth and not for economy's liquidity or growth They Pass on liquidity into the system and help economic growth
subjected to interest rate risks They are also subjected to interest rate risks

Also regulations on both the bodies are different.

2. Risks on life insurance companies:

  • Actuarial risks: If the statistics, probabilities and methods are not correct, then speculated amounts (future claims, prob of events etc) will not be correct. Will result in sudden unprecedented losses
  • Liquidity risks: sudden unforeseen events if not properly captured, will raise to liquidity crisis as more claims will be claimed. Even In the events of sudden rise in surrender of policies, liquidity crisis will take place.
  • Mortality risk: if mortality numbers and their probabilities are not correctly estimated, more number of unprecedented mortailities will cause increase in claims and thereby losses.

3.

  • Whole life: Complete life insurance till death. Cash value component offered increases by time. Loans can be taken on this product.
  • Term life: Not covered on entire life, money will be given to beneficiaries if death occurs only in a specific time period. This is more affordable as premiums paid are less. It has options of increasing term or decreasing term life insurance
  • Endowment life insurance. Final amount will be paid to the cleint if he is alive or else to his beneficiaries. Acts as protection giver and savings provider. Premiums are higher but if the client dies then the nominees get promised amount + additional bonus

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