TAILIEUCHUNG - Lecture Financial institutions, markets, and money (9th Edition): Chapter 18 - Kidwell, Blackwell, Whidbee, Peterson
This chapter is about Wall Street firms and highlights what are typically referred to as investment banks, the premier players in the capital markets. We discuss investment banks' original primary business activities of underwriting new securities sold in the primary markets and their role as dealers and brokers in the secondary markets. | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University And Lanny R. Martindale, Texas A&M University CHAPTER 18 INSURANCE COMPANIES AND PENSION FUNDS The Insurance Service - Indemnify another against risk of economic loss. Requires pooling of a large number of similar, but independent risks - law of large numbers. Insurance is the last step after other pure risk control and reduction techniques of risk management. Pure risk, the chance of loss, differs from speculative or investment risk which is related to the variability of returns where one can have a gain or a loss. Insurance reduces society's cost of bearing risk. The Insurance Mechanism An insurer assumes objective risk which is the deviation of actual losses from expected losses. It is part of the operating risk of an insurance company. Insurable Risks homogeneous or similar. fortuitous, random or occurring by chance. circumstances of loss can be identifiable. a probability of loss can be estimated. the losses occur independent of each other-not all at once, such as a flood, wiping out the insurer. premiums must be economically feasible for the insured. Objective risk control methods include: use of loss prevention techniques such as "safety" programs. accept "average" risks as customers. require deductibles or shared losses with the insured. Insurance premiums represent the sum of: expected losses, plus operating costs, plus target profit, less premium investment income with adjustment as necessary for competitive conditions Interest rate risk affects insurance companies. Insurance contracts are long-term contracts: interest rates vary providing incentives for cancellations and revision of intentions. Because of long-term nature of liabilities, portfolios are heavily invested in bonds Life/Health Insurance Companies Dominated in numbers by stock companies; in
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