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Risk Management and Financial Institutions, + Web Site, 3rd Edition by John C. Hull

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CHAPTER 3

Insurance Companies and Pension Plans

The role of insurance companies is to provide protection against adverse events. The company or individual seeking protection is referred to as the policyholder. The policyholder makes regular payments, known as premiums, and receives payments from the insurance company if certain specified events occur. Insurance is usually classified as life insurance and nonlife insurance, with health insurance often being considered to be a separate category. Nonlife insurance is also referred to as property-casualty insurance and this is the terminology we will use here.

A life insurance contract typically lasts a long time and provides payments to the policyholder that depend on when he or she dies. A property-casualty insurance contract typically lasts one year (although it may be renewed) and provides compensation for losses from accidents, fire, theft, and so on.

Insurance has existed for many years. As long ago as 200 BC, there was a form of life insurance in ancient Greece where an individual could make a lump sum payment (the amount dependent on his or her age) and obtain a monthly income for life. The Romans had a different sort of life insurance where an individual could purchase a contract that would provide a payment to relatives on his or her death. In ancient China, a form of property-casualty insurance existed between merchants where, if the ship of one merchant sank, the rest of the merchants would provide compensation.

A pension ...

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