1. How profitable are property and casualty insurance companies? Answer: Property and casualty insurance protects property (houses, cars, boats, and so on) against losses due to accidents, fire, disasters, and other calamities. Property and casualty policies tend to be short-term contracts and, that’s why the subject to frequent renewal is, and one more characteristic feature is the absence of savings component. Property and casualty premiums are based on the probability of sustaining the loss. To estimate the key determinant of the price of an insurance policy, i. . risks, insurance companies take third-party proceedings that develop models of catastrophe loss probabilities. Based on the numbers form Exhibit 5 of the case we see that according to AIR Worldwide which provides information on the loss probability that Insured Loss if the listed Hurricanes Recurred in 2006 is 151. 2% more than the case writer estimates of Actual Reported Damage in 2006. As you see from the table below differences in monetary terms and percentage change between these two different sources are huge except those figures with minus sign.
So, we can say that prices are not fixed and depend on the third-party vendors’ probability calculations which are much higher than actual estimates suggested by casewiters. Consequently, the profits of property and casualty insurance companies can be high. [pic] * Casewriter estimate ** Source: AIR Worldwide Besides, Reinsurance may reduce their risk exposure by allocating a portion of the risk to another company in exchange for a portion of the premium. Reinsurance allows writing larger policies because a portion of the policy is actually held by another firm.
Also, profits of these companies strongly depend on unforeseen risks due to unpredictable nature of accidents, fire, natural disasters like hurricane, tsunami, etc. However, from the Exhibit 7 of the case we see that Investment Income is vitally important to continue operations of property-casualty insurance companies. To see the importance of the income from these companies’ investments and to see how it affects Net Income we put zero in the line on Investment Income holding other numbers constant (based on Exhibit 7: Income Statistics): [pic] We see that without property-casualty companies’ Investment Income the Net Income is negative.
So, we can say that Insurance Losses is offset by Investment Income from which these companies only gain. 2. Purchasing insurance: what should Joe Martinez do? Answer: According to the statistical data in the Exhibit 1 (see the 2006, Hurricane risk case study) about the frequency of US Hurricanes by state of Landfall (1900-2004), we can say that, unfortunately the most frequent hurricanes happened on the Southeast of US, especially in Florida. But the most of them have only 1-3 categories. This means that hurricanes may cause damages trees, shrubs and average damage to the building.
There was only one hurricane in the Florida, which had 1st category and seven of them had 4th category. The problem of Joe Martinez is that insurance rates are on the rise. These increases have been driven by a combination of higher than expected hurricane-related claims as well as increased costs related to reinsurance (i. e. , insurance sold to other insurers to mitigate the risk of losses). Beyond this, the recent economic turmoil has put additional strain on insurance companies, resulting in pressure to increase premiums. The bad thing is that Joe Martinez might be in need of hurricane protection.
From the case, we know that his house near the beach and it was no match for direct hit from hurricane, and this is good thing. But there is a high probability that the hurricane will destroy or damage his house at the next time. In many cases, the damage caused by hurricanes will be covered by basic homeowner’s insurance policy. An increasing number of policies actually exclude hurricane-related damage, in which case he’ll need to buy additional coverage. Note that, even if he does have coverage, he’ll still need to keep a decent amount of cash on hand to protect himself.
The reason for this is that the deductible for hurricane-related damage is typically a percentage of his home’s value, and can be quite high in some cases, in our case it is – $14 000, it is 2% from the home’s value (for 2006 – $648 390). Another extremely important point is that hurricane coverage is generally limited to wind damage, and thus does not cover damage due to a possible storm surge or subsequent flooding. As such, Joe Martinez will need to purchase flood insurance if he wish to be fully protected. Finally, given he potential for water intrusion during and after a hurricane, he should check to see if he is covered for mold damage. Mold can be an extremely expensive problem to deal with, and many homeowners’ insurance policies explicitly exclude mold damage, or at least limit the coverage associated with mold claims. So, you can see that there are a lot of reasons to buy the hurricane insurance. Analyzing Joe Martinez’s earnings (175 000$ annually), we can say that the total premium for $ 13 000 is quite large amount (7% of annual earnings). If we will compare this amount with his monthly earnings ($ 14 583) it is 89%.
But from another point of view, his eventual losses from hurricane’s devastation maximum can be $648 390, in case of 5th and 4th categories of hurricanes. We would like to give an advice to Joe Martinez, to buy standard and wind coverage insurance for $13 000, and he should think about an additional insurance, which will cover damage due to a possible storm surge or subsequent flooding or it can be mold damage. | | 3. Investing in insurance products: what should Suzanne Feller do? Answer: According to the case Suzanne Feller actually has 125 million of dollars.
The decision to invest or not will depend only on her risk tolerance. In this case we have following situation: 1) Nominal return (annualized) on the investment will range from 13% to 26%. It will depend on the date of the payment. 2) Expected return will range from 15. 84% to 25. 74%. 3) There is only 1% probability that triggering event will happen. 4) In exhibit 3 we can assume that only hurricanes of 5th category can damage more than 20 billion dollars. 5) In exhibit 1 we see that for the period 1900 – 2004 only once there was only 2 5 category hurricane.
Under these conditions the best decision is to invest. Another point is that Suzanne Feller has to diversify her portfolio. She has sold her business and she needs to safe her money for future. Under this circumstances decision will totally depend on her risk tolerance. For conservative scenario she can invest only 10% of her funds. For aggressive 50% or more. 4. How large is property and casualty insurance market in Kazakhstan? Who are main players in this market? Answer: First insurance companies founded in Kazakhstan in 1990.
Their organizational structures were developed from co-operatives and associations to joint stock companies. Now there are 41 insurance and reinsurance organizations currently operating in Kazakhstan including seven companies holding licenses for life insurance, according to Financial Supervision Agency of the Republic of Kazakhstan (FSA). The market features 13 insurance brokers and 63 actuaries. As it is known, the significant impact on Kazakhstan insurance market during its formation period was made by the commercial banks through their branch insurance companies.
Activation of the banks activity related to lending of the economy, including offering mortgage and consumer loans to individuals, stimulated sharp increase of insurance premiums on property, civil liability and casualty and life insurances. Increase of insurance premiums in 2004 was 39%, in 2005 – 68%, in 2006 -79%. As the results of decrease of lending by the commercial banks from the middle of 2007, rate of insurance market growth slowdown. Growth of aggregate volume of insurance premiums in 2007 was 23% in compare to the previous year, in 2008- (-9%) and in 2009 – (-15%).
In Diagram #1 (see the attachment 1 at the end of the document) you can see the portion of Property insurance premiums in the General insurance sector for 2007, 2008, 2009 years. Casualty insurance is included into General insurance sector. So in Diagram #2 (see the attachment 1 at the end of the document) you can see who the main players in this sector of insurance are. Kazakhstan insurance market for the first time showed growth during last two years. Kazakhstan’s insurance companies collected 74. 9 billion tenge in premiums in January-June 2010, or a 33. % increase compared to the same period last year, says a press release issued by the Kazakh Financial Supervision Agency (FSA). Within the overall volume of premiums, mandatory insurance amounted to 15. 8 billion tenge (up 21. 5% as compared to the same period last year), voluntary private insurance totaled 16. 4 billion tenge (up 56. 2%), and voluntary property insurance made 42. 7 billion tenge (a 31. 4% increase). According to the statement, the volume of insurance premiums collected for life insurance increased by 100% and totaled 7. 6 billion tenge as at July 1, 2010.
Life insurance premiums accounted for 10. 1% of all the insurance premiums (6. 8% as at July 1, 2009). According to the State Financial Supervision Agency (FSA), with the purpose to better protect the interests of the insurance customers, to develop life insurance services, to introduce a consolidated supervision over the insurance companies, to develop the infrastructure of the insurance market on July 18, 2010 Kazakh President Nursultan Nazarbayev has signed the law “On Amendments to Some Legislative Acts of the Republic of Kazakhstan Concerning Insurance”.
The document bans bonds issue by insurance companies, restricts their borrowings and imposes additional requirements for the intermediary services. The new law also bans any payments in cash to the insurance agent by the client against the insurance contract starting January 1, 2012.
