Investment Patterns of Insurance Companies
Chapter 1
INTRODUCTION
1.1 Introduction Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. More importantly, insurance company portfolio managers work under a different, and possibly more restrictive, set of regulatory constraints than other institutional investors (Badrinath, Kale, Ryan, & Jr, 1996). Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly shocking loss. Insurance executives would like to allocate equity in such a way that risk-adjusted return on equity is maximized (Holmer & Zenios, 1995). An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. (Caillaud, Dionne & Jullien, 2000) found that, the insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Integrated product management teams need new technical tools to determine the effects of alternative design, investment, and pricing strategies on the risk- adjusted return on the equity invested in each financial product (Holmer & Zenios et al, 1995). Insurance companies provide its customers with the assurance in return of their investment. This assurance is generally divided into two main categories i.e. life insurance and general insurance. (Carino et al, 1994). Life insurance is defined as a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's death or other event, such as terminal illness or critical illness. An empirical study by Hammond, Houston, and Melander (1967) and a theoretical article by Campbell (1980) both found that one of the main purposes of life insurance is to protect dependents against financial
INTRODUCTION
1.1 Introduction Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. More importantly, insurance company portfolio managers work under a different, and possibly more restrictive, set of regulatory constraints than other institutional investors (Badrinath, Kale, Ryan, & Jr, 1996). Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly shocking loss. Insurance executives would like to allocate equity in such a way that risk-adjusted return on equity is maximized (Holmer & Zenios, 1995). An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. (Caillaud, Dionne & Jullien, 2000) found that, the insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Integrated product management teams need new technical tools to determine the effects of alternative design, investment, and pricing strategies on the risk- adjusted return on the equity invested in each financial product (Holmer & Zenios et al, 1995). Insurance companies provide its customers with the assurance in return of their investment. This assurance is generally divided into two main categories i.e. life insurance and general insurance. (Carino et al, 1994). Life insurance is defined as a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's death or other event, such as terminal illness or critical illness. An empirical study by Hammond, Houston, and Melander (1967) and a theoretical article by Campbell (1980) both found that one of the main purposes of life insurance is to protect dependents against financial