Chapter2:BanksSemester2,2013-14Wu,Wei-ShaoChapter2:BanksSemester2,201NatureofBankingCommercialbankingTakingdeposits,makingloans.Wholesalevs.retail.InvestmentbankingRaisingdebtandequityforcompanies;adviceonmergersandacquisitions,restructurings,etc.2NatureofBankingCommercialbaExampleofSimpleBankBalanceSheet:End2012AssetsCash5MarketableSecurities10Loans80FixedAssets5Total100LiabilitiesDeposits90SubordL.T.Debt5EquityCapital5Total1003ExampleofSimpleBankBalanceIncomeStatement:2012 NetInterestIncome 3.00 ProvisionforLoanLosses(0.80) Non-InterestIncome0.90 Non-InterestExpense(2.50)

Pre-TaxOperatingIncome0.604IncomeStatement:2012 NetIntYear2013Whathappensinyear2013ifitisthesameasyear2012exceptthatprovisionforloanlossesis4.0insteadof0.8?Pre-taxnetoperatingloss:0.6-3.2=2.6After-tax(30%)loss:2.6*0.7=1.8Equitycapitalis5%ofassetsAfter-taxlossis1.8%ofassets5Year2013WhathappensinyearWhatifBalanceSheetHadBeenMoreAggressive?AssetsCash5MarketableSecurities10Loans80FixedAssets5Total100LiabilitiesDeposits94SubordL.T.Debt5EquityCapital1Total1006WhatifBalanceSheetHadBeeYear2013Whathappensinyear2013ifitisthesameasyear2012exceptthatprovisionforloanlossesis4.0insteadof0.8?Pre-taxnetoperatingloss:0.6-3.2=2.6After-tax(30%)loss:2.6*0.7=1.8Equitycapitalis1%ofassetsAfter-taxlossis1.8%ofassetsIt’saissueofCapitalAdequacyYear2013Whathappensinyear7RegulationRegulatorssetminimumlevelsforthecapitalabankisrequiredtokeep.EquityisanexampleofTier1capital.SubordinatedlongtermdebtisanexampleofTier2capital.8RegulationRegulatorssetminimDepositInsuranceMostcountrieshavedepositinsuranceprogramsthatinsuredepositorsagainstlossesuptoacertainlevel.IntheUStheFDIC(FederalDepositInsuranceCorporation)hasprovidedprotectionfordepositorssince1933.Theamountinsuredwas$2,500(maximumlevel)in1933.Ithasbeenincreasedseveraltimes.Followingthecreditcrisisitwasincreasedfrom$100,000to$250,000inOctober2008.Whymightdepositinsuranceencourageabanktotakerisks?(moralhazard)9DepositInsuranceMostcountrieInvestmentBankingMethodsofraisingdebtorequityPublicoffering.Privateplacement.Bestefforts.Firmcommitment.10InvestmentBankingMethodsofrBestEffortsvs.FirmCommitment50millionsharesaretobeissuedandtargetpriceis$30pershare.Besteffortswouldleadtoafeeof30centspershare;firmcommitmentleadstobankbuyingat$30pershareBesteffortsFirmCommitmentCansellat$29+$15million?$50millionCansellat$32+$15million+$100million11BestEffortsvs.FirmCommitmeInitialPublicOffering(IPO)Usuallyonabesteffortsbasis.Bankwillsetofferingpricesufficientlylowthatsharesarealmostcertaintobesold.OftenpricerisesimmediatelyafterIPO.BanksoftenofferIPOsharestofundmanagersandtheirbestcustomers.12InitialPublicOffering(IPO)UInitialPublicOffering(IPO)InitialPublicOffering(IPO)13DutchAuctionIPOIndividualsandcompaniesbidbyindicatingthenumberofsharestheywantandthepricetheyarepreparedtopay.Thepricepaidisthelowestbidthatleadstoallthesharesbeingsold.14DutchAuctionIPOIndividualsaExample:

Howare1millionsharesallocatedinthissituation?BidderNumberofSharesPriceA100,000$30.00B200,000$28.00C50,000$33.00D300,000$29.00E150,000$30.50F300,000$31.50G400,000$25.00H200,000$30.2512345615Example:

Howare1millionshSecuritiesTradingWhydobankstrade?Tomeettheneedsofitscounterparties.(marketmaking)Toreduceitsownrisks.(hedging)Totakeaspeculativepositioninthehopeofmakingaprofit.(speculation)SecuritiesTradingWhydobanks16SecuritiesTradingBanksoftengetinvolvedinsecuritiestrading,providingbrokerageservices.Brokerageservices:FullservicebrokersOfferinvestmentresearchandadvice.DiscountbrokersChargelowercommissions,butprovidenoadvice.OnlineserviceProvideaplatformforcustomerstotradewithoutabroker.17SecuritiesTradingBanksoftenPotentialConflictsofInterestBankrecommendssecuritiesthatinvestmentbankistryingtosell.Commercialbankpassesconfidentialinformationonaclienttoinvestmentbank.Stockrecommendedasa“buy”topleasecompany’smanagementinordertogetinvestmentbankingbusiness.Investmentbankissuesecuritiesforacompanysothatcommercialbankcangetridofaloan.(商業(yè)銀行部門不想再借錢給某公司)18PotentialConflictsofInteresTheRisksFacingBanksCreditriskDefaultriskinloanandderivativestransactions.MarketriskDeclineinvalue.OperationalriskInternalsystemsfailtoworkorexternalevents.TheRisksFacingBanksCreditr19Chapter3:

InsuranceCompanies

andPensionPlansSemester2,2013-14Wu,Wei-ShaoChapter3:

InsuranceCompanie20TypesofLifeInsuranceTermlife(定期壽險(xiǎn))Temporarylifeinsurance:Lastapredeterminednumberofyears.Wholelife

(終身壽險(xiǎn))Permanentlifeinsurance:Overthewholelifeofthepolicyholder.Variablelife

(變額壽險(xiǎn))在保險(xiǎn)期內(nèi)保險(xiǎn)金額隨資金運(yùn)用的績(jī)效而變化的一種人壽保險(xiǎn)。21TypesofLifeInsuranceTermliTypesofLifeInsuranceUniversallife(萬能壽險(xiǎn))保險(xiǎn)公司為投保人建立投資帳戶并讓客戶參與賬戶內(nèi)資金的投資活動(dòng)，將保單的價(jià)值與獨(dú)立運(yùn)作的投保人投資帳戶的業(yè)績(jī)聯(lián)系起來。Endowmentlife

(生死合險(xiǎn)、養(yǎng)老保險(xiǎn))以被保險(xiǎn)人在保險(xiǎn)期限內(nèi)死亡或期滿生存為條件，都可獲得保險(xiǎn)金的一種保險(xiǎn)。GrouplifeTypesofLifeInsuranceUnivers22CostofWholeLifeInsuranceComparedwithAnnualPremiumCostperyearAnnualPremiumSurplus23CostofWholeLifeInsuranceCInvestmentofSurplusSomecontractsallowthepolicyholdertochoosehowthesurplusisinvested.Therearetaxdeferraladvantagescomparedwitharegularinvestmentbecausenotaxispaiduntilthereisapayoutonthepolicy.24InvestmentofSurplusSomecontAnnuityContracts

(年金)Typicallyalumpsumpaymentisusedtobuyalife-timeannuity.Convertingalumpsumintoregularpayments.Annuitycanbefixedorvariable.Annuitycanstartimmediatelyorbedeferred.Accumulatedvaluecandependinacomplicatedwayontheperformanceofstockindices.Theremaybepenalty-freewithdrawals.25AnnuityContracts(年金)TypicallExtractfromUSMortalityTables(2007):MaleAgeProb.deathwithinoneyearProb.SurvivalLifeexpectancy(yrs)300.0014280.9714747.13310.0014530.9700946.20320.0014870.9686845.27330.0015290.9672444.33Theprobabilityofamandyingwithinnextyear26ExtractfromUSMortalityTablExtractfromUSMortalityTables(2007):FemaleAgeProb.deathwithinoneyearProb.SurvivalLifeexpectancy(yrs)300.0006420.9846651.50310.0006780.9840350.53320.0007210.9833649.56330.0007710.9826648.60Theprobabilityofafemaledyingwithinnextyear27ExtractfromUSMortalityTablHowTablesAreUsedInPricing

LifeInsuranceConsiderafemaleaged30.Probabilityofdeathduringfirstyearis0.000642.Probabilityofdeathduringsecondyearis:

(1-0.000642)×0.000678Probabilityofdeathduringthirdyearis: (1-0.000642)×(1-0.000678)×0.000721….Minimumpremiumissuchthatpresentvalueofinflowsequalspresentvalueofoutflows.

28HowTablesAreUsedInPricingLongevityDerivativesE.g.,longevitybonds.Apopulationgroupisdefinedandthecoupononthebondatanygiventimeisdefinedastheproportionoflivingpeopletothepopulation.Attractivetoinsurancecompanies(whoissueannuitycontracts)andpensionfunds.Attractivetospeculatorsbecausethebondshaveverylittlesystematicrisk.LongevityDerivativesE.g.,lon29Property-CasualtyInsurancePropertyinsurance(產(chǎn)險(xiǎn))isconcernedwithlossordamagetopropertyfromfire,theft,etc.Casualtyinsurance

(意外險(xiǎn))isconcernedlegalliabilityexposures.Whatarethebiggestrisksfacingproperty-casualtyinsurers?Catastrophicrisk(巨災(zāi)風(fēng)險(xiǎn)).30Property-CasualtyInsuranceProExampleofRatiosfor

Property-CasualtyInsuranceLossRatio75%Expenseratio30%Combinedratio105%Dividends1%Combinedratioafterdividends106%Investmentincome(9%)Operatingratio97%Lose6%Earn3%31ExampleofRatiosfor

PropertOtherissuesHealthinsurance.Reinsurence.Specialrisk.32OtherissuesHealthinsurance.3MoralHazardandAdverseSelectionMoralhazardistheriskthattheexistenceoftheinsurancepolicycausesthepolicyholdertotakemorerisks.Adverseselectionisthetendencyforaninsurancecompanytoattractbadriskswhenitcannotperfectlydistinguishbetweengoodandbadrisks.33MoralHazardandAdverseSelecTypicalSummaryBalanceSheet:LifeInsuranceAssetsLiabsandNetworthInvestments90PolicyReserves80Otherassets10SubLongTermDebt10

EquityCapital10Total100100(Investmentsaremostlylong-termcorporatebonds)34TypicalSummaryBalanceSheet:TypicalSummaryBalanceSheet:Property-CasualtyInsuranceAssetsLiabsandNetworthInvestments90PolicyReserves45Otherassets10Unearnedpremiums15SubLongTermDebt10

EquityCapital30Total100100(Investmentsaremostlyliquidshortermaturitybonds)Thepayoutsforaproperty-casualtycompanyaremuchlesseasytopredictthanthoseforalifeinsurancecompany.35TypicalSummaryBalanceSheet:TheRisksFacingInsuranceCompaniesPolicyreservesarenotmeettheclaimsofpolicyholders.Theperformanceoftheinvestments.Theinvestments’liquidityrisks.Creditriskandoperationalrisk.TheRisksFacingInsuranceCom36PensionPlansDefinedbenefitplan(確定給付制)Contributionsarepooled.Benefitsaredeterminedbyaformuladependentonthefinalsalaryoftheemployeeandthenumberofyearsofservice.Definedcontributionplan(確定提撥制)Contributionsforeachemployeearekeptseparateandinvestedonbehalfoftheemployee.Whentheemployeeretirestheaccumulatedvalueofthecontributionsisusuallyconvertedtoanannuity.37PensionPlansDefinedbenefitpDefinedBenefitPlansActuariesestimateliabilitiesandcalculateasurplusordeficitfortheplan.ThediscountrateusedforprivateplansistheAAborrowingrate.Deficitsmustbefundedbythecompanywithinaprescribedperiod.Aperfectstorm:Decliningequitypricescoupledwithdeclininginterestrates.38DefinedBenefitPlansActuariesChapter4:MutualFundsandHedgeFundsSemester2,2013-14Wu,Wei-ShaoChapter4:MutualFundsandHe39MutualFundsPercentageoftotalnetassets,year-end2012MutualFundsPercentageoftota40MutualFundsOpen-EndFundsClosed-EndFundsExchange-TradedFunds(ETFs)MutualFundsOpen-EndFunds41Open-EndFundsMostcommontypeoffundisanopen-endfund.Thenumberofsharesinthefundgoesupasinvestorsbuymoresharesanddownastheyredeemshares.Aassetvalue(NAV)ofthefund.42Open-EndFundsMostcommontypeTypesEquity.Bond.Hybrid.MoneyMarket.Index.43TypesEquity.43CostsTaxAnnualfeeFront-endload(申購費(fèi)用)Back-endload

(贖回費(fèi)用)44CostsTax44Closed-EndFundsConsistsofafixednumberofsharesthataretradedinthesamewayasthesharesofanyothercompanyThesharepricetendstobelessthantheNAVcalculatedfromthemarketvalueoftheinvestments45Closed-EndFundsConsistsofaExchange-TradedFunds(ETFs)Since1993.Oftendesignedtotrackanindex.StartedbyaninstitutionalinvestorthatdepositsablockofsecuritiesandobtainssharesintheETF.Sharesaretradedonanexchange.(closed-end)Largeinstitutionalinvestorscanexchangesharesinthefundfortheunderlyingassets,andviceversa.(open-end)ThiskeepsthesharepriceclosetotheNAVofthefund’sinvestments.46Exchange-TradedFunds(ETFs)SiExchange-TradedFunds(ETFs)Exchange-TradedFunds(ETFs)47PerformanceofMutualFundsTheclassicstudyisbyJensen(1969).Hisresultshavebeenconfirmedinlaterstudies.Theaveragealphaofallfundsisslightlynegative.Goodperformancebyamutualfundmanagerinthepastisnotagoodguidetofutureperformance.48PerformanceofMutualFundsTheJensen’sResultsonthePersistenceofGoodPerformanceNumberofConsecutiveYearsofPositiveAlphaNumberofObservationsObservationsforwhichtheNextAlphaisPositive(%)157450.4231252.0316153.447955.854146.461735.3Theresultssuggestthatmanagerswhoobtainpositivealphasdosobecauseofluckratherthanskill.49Jensen’sResultsonthePersisMutualFundScandalsLatetrading.Markettiming.Frontrunning.Directedbrokerage.50MutualFundScandalsLatetradiHedgeFundsMutualFundsarerestrictedbecauseSharesmustberedeemableatanytime;NAVmustbecalculateddaily;Investmentpoliciesmustbedisclosed;Useofleverageislimited.Hedgefundsarenotsubjecttotheserestrictions.51HedgeFundsMutualFundsarereHedgeFundsSince1949.Theterm“hedgefund”impliesthatrisksarebeinghedged.Forsomehedgefunds,theword“hedge”isinappropriate.HedgeFundsSince1949.52HedgeFundFeesThefeesarehigherthanmutualfundsanddependentonperformance.Atypicalfeestructureis2plus20%.Thismeansthatthefundchargesa2%managementfeeperyearplusanincentivefeeequalto20%ofanynet(aftermanagementfees)profits.Thehedgefundmanagerhasanincentivetotakehighrisks.53HedgeFundFeesThefeesarehiConstraintonIncentiveFeeshurdlerates.Minimumreturntoapplyincentivefee.high-watermarksclausePreviouslossesmustberecoupedbynewprofits.clawbackclause.Applypartorallofpreviousincentivefeestocurrentlosses.ConstraintonIncentiveFeeshu54StrategiesLong/shortequity.Dedicatedshort.Distressedsecurities.Mergerarbitrage.Convertiblearbitrage.Fixedincomearbitrage.Emergingmarkets.Globalmacro.Managedfutures.StrategiesLong/shortequity.55HedgeFundReturnsStatisticsproducedbyDowJonesCreditSuisse(道瓊斯瑞士信貸對(duì)沖基金指數(shù))indicatethatThehedgefundindexgained9.42%peryearonaveragebetween2004and2010.TheS&P500gained1.8%peryearonaveragebetween2004and2010.Thestatisticsmaybebiasedbecauseonlyhedgefundsthatchoosetoreporttheirreturnsareincludedinthestatistics.Thesetendtobethehedgefundsthataredoingwell.56HedgeFundReturnsStatisticspSomeresearchershavearguedthatwhenbiasesareremovedhedgefundreturnsarenobetterthanmutualfundreturnsorS&P500returnsHedgeFundReturnsDowJonesCreditSuisseCoreHedgeFundIndexSomeresearchershavearguedt57FundsofFundsAfundofhedgefunds.Thereisanextralayeroffees.Atypicalfeeusedtobe1plus10%.58FundsofFundsAfundofhedgeTheSizeoftheFundsofFundsTotalNetAssetsandNumberofFundsofFundsBillionsofdollars,1998–2012TheSizeoftheFundsofFunds59演講完畢，謝謝觀看！演講完畢，謝謝觀看！60Chapter2:BanksSemester2,2013-14Wu,Wei-ShaoChapter2:BanksSemester2,2061NatureofBankingCommercialbankingTakingdeposits,makingloans.Wholesalevs.retail.InvestmentbankingRaisingdebtandequityforcompanies;adviceonmergersandacquisitions,restructurings,etc.62NatureofBankingCommercialbaExampleofSimpleBankBalanceSheet:End2012AssetsCash5MarketableSecurities10Loans80FixedAssets5Total100LiabilitiesDeposits90SubordL.T.Debt5EquityCapital5Total10063ExampleofSimpleBankBalanceIncomeStatement:2012 NetInterestIncome 3.00 ProvisionforLoanLosses(0.80) Non-InterestIncome0.90 Non-InterestExpense(2.50)

Pre-TaxOperatingIncome0.6064IncomeStatement:2012 NetIntYear2013Whathappensinyear2013ifitisthesameasyear2012exceptthatprovisionforloanlossesis4.0insteadof0.8?Pre-taxnetoperatingloss:0.6-3.2=2.6After-tax(30%)loss:2.6*0.7=1.8Equitycapitalis5%ofassetsAfter-taxlossis1.8%ofassets65Year2013WhathappensinyearWhatifBalanceSheetHadBeenMoreAggressive?AssetsCash5MarketableSecurities10Loans80FixedAssets5Total100LiabilitiesDeposits94SubordL.T.Debt5EquityCapital1Total10066WhatifBalanceSheetHadBeeYear2013Whathappensinyear2013ifitisthesameasyear2012exceptthatprovisionforloanlossesis4.0insteadof0.8?Pre-taxnetoperatingloss:0.6-3.2=2.6After-tax(30%)loss:2.6*0.7=1.8Equitycapitalis1%ofassetsAfter-taxlossis1.8%ofassetsIt’saissueofCapitalAdequacyYear2013Whathappensinyear67RegulationRegulatorssetminimumlevelsforthecapitalabankisrequiredtokeep.EquityisanexampleofTier1capital.SubordinatedlongtermdebtisanexampleofTier2capital.68RegulationRegulatorssetminimDepositInsuranceMostcountrieshavedepositinsuranceprogramsthatinsuredepositorsagainstlossesuptoacertainlevel.IntheUStheFDIC(FederalDepositInsuranceCorporation)hasprovidedprotectionfordepositorssince1933.Theamountinsuredwas$2,500(maximumlevel)in1933.Ithasbeenincreasedseveraltimes.Followingthecreditcrisisitwasincreasedfrom$100,000to$250,000inOctober2008.Whymightdepositinsuranceencourageabanktotakerisks?(moralhazard)69DepositInsuranceMostcountrieInvestmentBankingMethodsofraisingdebtorequityPublicoffering.Privateplacement.Bestefforts.Firmcommitment.70InvestmentBankingMethodsofrBestEffortsvs.FirmCommitment50millionsharesaretobeissuedandtargetpriceis$30pershare.Besteffortswouldleadtoafeeof30centspershare;firmcommitmentleadstobankbuyingat$30pershareBesteffortsFirmCommitmentCansellat$29+$15million?$50millionCansellat$32+$15million+$100million71BestEffortsvs.FirmCommitmeInitialPublicOffering(IPO)Usuallyonabesteffortsbasis.Bankwillsetofferingpricesufficientlylowthatsharesarealmostcertaintobesold.OftenpricerisesimmediatelyafterIPO.BanksoftenofferIPOsharestofundmanagersandtheirbestcustomers.72InitialPublicOffering(IPO)UInitialPublicOffering(IPO)InitialPublicOffering(IPO)73DutchAuctionIPOIndividualsandcompaniesbidbyindicatingthenumberofsharestheywantandthepricetheyarepreparedtopay.Thepricepaidisthelowestbidthatleadstoallthesharesbeingsold.74DutchAuctionIPOIndividualsaExample:

Howare1millionsharesallocatedinthissituation?BidderNumberofSharesPriceA100,000$30.00B200,000$28.00C50,000$33.00D300,000$29.00E150,000$30.50F300,000$31.50G400,000$25.00H200,000$30.2512345675Example:

Howare1millionshSecuritiesTradingWhydobankstrade?Tomeettheneedsofitscounterparties.(marketmaking)Toreduceitsownrisks.(hedging)Totakeaspeculativepositioninthehopeofmakingaprofit.(speculation)SecuritiesTradingWhydobanks76SecuritiesTradingBanksoftengetinvolvedinsecuritiestrading,providingbrokerageservices.Brokerageservices:FullservicebrokersOfferinvestmentresearchandadvice.DiscountbrokersChargelowercommissions,butprovidenoadvice.OnlineserviceProvideaplatformforcustomerstotradewithoutabroker.77SecuritiesTradingBanksoftenPotentialConflictsofInterestBankrecommendssecuritiesthatinvestmentbankistryingtosell.Commercialbankpassesconfidentialinformationonaclienttoinvestmentbank.Stockrecommendedasa“buy”topleasecompany’smanagementinordertogetinvestmentbankingbusiness.Investmentbankissuesecuritiesforacompanysothatcommercialbankcangetridofaloan.(商業(yè)銀行部門不想再借錢給某公司)78PotentialConflictsofInteresTheRisksFacingBanksCreditriskDefaultriskinloanandderivativestransactions.MarketriskDeclineinvalue.OperationalriskInternalsystemsfailtoworkorexternalevents.TheRisksFacingBanksCreditr79Chapter3:

InsuranceCompanies

andPensionPlansSemester2,2013-14Wu,Wei-ShaoChapter3:

InsuranceCompanie80TypesofLifeInsuranceTermlife(定期壽險(xiǎn))Temporarylifeinsurance:Lastapredeterminednumberofyears.Wholelife

(終身壽險(xiǎn))Permanentlifeinsurance:Overthewholelifeofthepolicyholder.Variablelife

(變額壽險(xiǎn))在保險(xiǎn)期內(nèi)保險(xiǎn)金額隨資金運(yùn)用的績(jī)效而變化的一種人壽保險(xiǎn)。81TypesofLifeInsuranceTermliTypesofLifeInsuranceUniversallife(萬能壽險(xiǎn))保險(xiǎn)公司為投保人建立投資帳戶并讓客戶參與賬戶內(nèi)資金的投資活動(dòng)，將保單的價(jià)值與獨(dú)立運(yùn)作的投保人投資帳戶的業(yè)績(jī)聯(lián)系起來。Endowmentlife

(生死合險(xiǎn)、養(yǎng)老保險(xiǎn))以被保險(xiǎn)人在保險(xiǎn)期限內(nèi)死亡或期滿生存為條件，都可獲得保險(xiǎn)金的一種保險(xiǎn)。GrouplifeTypesofLifeInsuranceUnivers82CostofWholeLifeInsuranceComparedwithAnnualPremiumCostperyearAnnualPremiumSurplus83CostofWholeLifeInsuranceCInvestmentofSurplusSomecontractsallowthepolicyholdertochoosehowthesurplusisinvested.Therearetaxdeferraladvantagescomparedwitharegularinvestmentbecausenotaxispaiduntilthereisapayoutonthepolicy.84InvestmentofSurplusSomecontAnnuityContracts

(年金)Typicallyalumpsumpaymentisusedtobuyalife-timeannuity.Convertingalumpsumintoregularpayments.Annuitycanbefixedorvariable.Annuitycanstartimmediatelyorbedeferred.Accumulatedvaluecandependinacomplicatedwayontheperformanceofstockindices.Theremaybepenalty-freewithdrawals.85AnnuityContracts(年金)TypicallExtractfromUSMortalityTables(2007):MaleAgeProb.deathwithinoneyearProb.SurvivalLifeexpectancy(yrs)300.0014280.9714747.13310.0014530.9700946.20320.0014870.9686845.27330.0015290.9672444.33Theprobabilityofamandyingwithinnextyear86ExtractfromUSMortalityTablExtractfromUSMortalityTables(2007):FemaleAgeProb.deathwithinoneyearProb.SurvivalLifeexpectancy(yrs)300.0006420.9846651.50310.0006780.9840350.53320.0007210.9833649.56330.0007710.9826648.60Theprobabilityofafemaledyingwithinnextyear87ExtractfromUSMortalityTablHowTablesAreUsedInPricing

LifeInsuranceConsiderafemaleaged30.Probabilityofdeathduringfirstyearis0.000642.Probabilityofdeathduringsecondyearis:

(1-0.000642)×0.000678Probabilityofdeathduringthirdyearis: (1-0.000642)×(1-0.000678)×0.000721….Minimumpremiumissuchthatpresentvalueofinflowsequalspresentvalueofoutflows.

88HowTablesAreUsedInPricingLongevityDerivativesE.g.,longevitybonds.Apopulationgroupisdefinedandthecoupononthebondatanygiventimeisdefinedastheproportionoflivingpeopletothepopulation.Attractivetoinsurancecompanies(whoissueannuitycontracts)andpensionfunds.Attractivetospeculatorsbecausethebondshaveverylittlesystematicrisk.LongevityDerivativesE.g.,lon89Property-CasualtyInsurancePropertyinsurance(產(chǎn)險(xiǎn))isconcernedwithlossordamagetopropertyfromfire,theft,etc.Casualtyinsurance

(意外險(xiǎn))isconcernedlegalliabilityexposures.Whatarethebiggestrisksfacingproperty-casualtyinsurers?Catastrophicrisk(巨災(zāi)風(fēng)險(xiǎn)).90Property-CasualtyInsuranceProExampleofRatiosfor

Property-CasualtyInsuranceLossRatio75%Expenseratio30%Combinedratio105%Dividends1%Combinedratioafterdividends106%Investmentincome(9%)Operatingratio97%Lose6%Earn3%91ExampleofRatiosfor

PropertOtherissuesHealthinsurance.Reinsurence.Specialrisk.92OtherissuesHealthinsurance.3MoralHazardandAdverseSelectionMoralhazardistheriskthattheexistenceoftheinsurancepolicycausesthepolicyholdertotakemorerisks.Adverseselectionisthetendencyforaninsurancecompanytoattractbadriskswhenitcannotperfectlydistinguishbetweengoodandbadrisks.93MoralHazardandAdverseSelecTypicalSummaryBalanceSheet:LifeInsuranceAssetsLiabsandNetworthInvestments90PolicyReserves80Otherassets10SubLongTermDebt10

EquityCapital10Total100100(Investmentsaremostlylong-termcorporatebonds)94TypicalSummaryBalanceSheet:TypicalSummaryBalanceSheet:Property-CasualtyInsuranceAssetsLiabsandNetworthInvestments90PolicyReserves45Otherassets10Unearnedpremiums15SubLongTermDebt10

EquityCapital30Total100100(Investmentsaremostlyliquidshortermaturitybonds)Thepayoutsforaproperty-casualtycompanyaremuchlesseasytopredictthanthoseforalifeinsurancecompany.95TypicalSummaryBalanceSheet:TheRisksFacingInsuranceCompaniesPolicyreservesarenotmeettheclaimsofpolicyholders.Theperformanceoftheinvestments.Theinvestments’liquidityrisks.Creditriskandoperationalrisk.TheRisksFacingInsuranceCom96PensionPlansDefinedbenefitplan(確定給付制)Contributionsarepooled.Benefitsaredeterminedbyaformuladependentonthefinalsalaryoftheemployeeandthenumberofyearsofservice.Definedcontributionplan(確定提撥制)Contributionsforeachemployeearekeptseparateandinvestedonbehalfoftheemployee.Whentheemployeeretirestheaccumulatedvalueofthecontributionsisusuallyconvertedtoanannuity.97PensionPlansDefinedbenefitpDefinedBenefitPlansActuariesestimateliabilitiesandcalculateasurplusordeficitfortheplan.ThediscountrateusedforprivateplansistheAAborrowingrate.Deficitsmustbefundedbythecompanywithinaprescribedperiod.Aperfectstorm:Decliningequitypricescoupledwithdeclininginterestrates.98DefinedBenefitPlansActuariesChapter4:MutualFundsandHedgeFundsSemester2,2013-14Wu,Wei-ShaoChapter4:MutualFundsandHe99MutualFundsPercentageoftotalnetassets,year-end2012MutualFundsPercentageoftota100MutualFundsOpen-EndFundsClosed-EndFundsExchange-TradedFunds(ETFs)MutualFundsOpen-EndFunds101Open-EndFundsMostcommontypeoffundisanopen-endfund.Thenumberofsharesinthefundgoesupasinvestorsbuymoresharesanddownastheyredeemshares.Allpurchasesandsalesofsha