Open Yale Lecture 5

Insurance 

http://www.youtube.com/watch?v=PhLjCfjpYeY&list=PL8F7E2591EE283A2E&index=5&feature=plpp_video

CLASS NOTES:

Insurance = A risk management device ßà security

Equity Premium Puzzle

Puscott + Mehra

(positive) 4% premium (US)

Selection Bias

Stock Market disruption                               Russia + China

Corporate profit tax, personal income tax

Dividends 90% WWII

15%

Risk Pooling -à Independent  x: num of accidents n: policies p: prob of accidents

F(x) = binominal distribution

Mean(x/n) = p

Sigma(x/n) = Root{p(1-p)/n}

Normal Approximation

Bell shape curve

Probability theory

Insurance as Invention

Contract design

Risks and Exclusions (moral hazard and selection bias)

Mathematical model

Corporate or Mutual

Government regulation

                Reserves

Classifying of Insurance companies

Multiline / Mono-line

Property + casualty $1.4 Trillion

                Automobiles >> home owners

Health

Life $4.9 Trillion 

SUMMARY:

The concept of insurance was invented as early in 17C. Now a day the concept became very important to secure one's family and properties, but its growth has been very slow. The problem was mainly in early history, insurance companies could not sell their products to the customers (especially life insurance was rejected, was thought bad luck? Did not sound right, etc.). So historically insurance companies’ efforts were 1) how to convince customers in nice way 2) how to prevent from canceling. Eventually they developed more attractive policies such as the insurance with cash values.