Finance

2000 words, 8 resources, just APA style and need to have an introduction, recommendations, and conclusion

Q: Explain relevant saving, investment and insurance plans discussed in class. What are factors affecting individual saving and investment plans? What are determinants that are to be considered before investing into any individual saving plan. Use the real case references* to support your content.

*Real case references mean taking the real examples of financial products offered by any real bank/financial institution with interest rates or returns they are offering.

Module 14

Investment Companies

Outline

Investment Companies

Closed-End Investment Companies

Open-End Investment Companies

Different Types of Investment Funds

Pricing of Investment Funds

Fee Structure of Investment Funds

Regulation

Growth in Investment Funds

Hedge Funds

Exchange-Traded Funds

Investment Companies

Investment companies pool money from numerous individual investors and it to purchase securities.

This is a form of indirect investing.

The investors “own” the securities issued by IBM only indirectly through the investment company Windsor Funds.

IBM

Windsor Funds

Investors

securities

Investment Companies
Organizational Structure

Directors or trustees

Represent shareholders and hire people to operate the fund

Fund managers

Decide how and when to invest based on fund objectives

Fund distributors

Help sell shares to investors

Other service providers

Internal parties (marketing, legal, reporting units)

External parties (custodian, transfer agent and independent public accountant)

Investment Companies
Organizational Structure

Shareholders

(Owners)

Board of Directors

(oversee the fund’s activities)

Fund Manager

(handle investment)

Brokers or Dealers

(sell shares)

Internal Administrator

(follow rules)

Custodian

(collect/distribute cash)

Closed-End Investment Companies

Closed-end investment companies issue shares only at start-up to invest in the securities and assets of other firms.

Reinvest proceeds and borrowings in a portfolio to earn income and capital gains.

A fixed supply of outstanding shares are traded OTC or on stock exchanges.

In 2019, about $265 billion was managed by closed-end companies.

Example: RioCan Real Estate Investment Trust (REIT)

Open-End Investment Companies

Open-end investment companies (mutual funds) constantly sell new shares to the public and use the proceeds to manage a portfolio of securities.

Right of redemption is the most distinguishing feature of open-end investment companies.

Number of shares in existence varies based on net sales and redemptions.

In 2019, about 140 open-end investment companies handled more than 4,000 funds.

Mutual fund investments rose to $1.71 trillion in 2020.

By setting up their subsidiaries, banks and insurance companies are major players in the industry.

Open-End Investment Companies

Mutual Fund Company	Parent Company
BMO Investments	Bank of Montreal
CIBC Securities	CIBC
Royal Mutual Funds	Royal Bank
Scotia Securities	Scotiabank
TD Investment Services	TD Canada Trust
Manulife Investment Management	Manulife Financial Group
Sun Life Capital SLC Management	Sun Life Financial Group
AGF Investments	Independent
Fidelity Investments Canada	Fidelity Investments, U.S.
Franklin Templeton Investments	Franklin Templeton Investments, U.S.

Different Types of Investment Funds

There are two basic types of investment funds available to investors.

Long-term funds

Bond funds, Equity funds, Balanced funds and Specialty funds

Short-term funds

Money market funds

Investment Funds Standards Committee (1998) provides a complete 35 categories listing for investors and industry standardization.

Different Types of Investment Funds

IFSC mutual fund categories (partially selected classes):

Alternative Strategies	Global Equity
Asia/Pacific Rim Equity	Healthcare
Canadian Dividend	Labor Sponsored Venture Capital
Canadian Small Cap	Natural Resources
Emerging Markets Equity	Precious Metals
European Equity	High Yield Bond
Financial Services	US Equity
Foreign Bond	US Money Market

Different Types of Investment Funds

A mutual fund typically focuses on specific types of investments.

Type	Investment Mix
Money market	Short-term fixed income securities (e.g., treasury bills)
Fixed income	Fixed income securities (e.g., government, corporate bonds)
Equity	Equity shares (e.g., stocks or income trust units)
Balanced	A mix of equities and fixed income securities
Global	Foreign equities or fixed income securities
Specialty	Aim at specific areas (e.g., Asia or information technology)
Index	Mimic a specific index (e.g., S&P/TSX Composite Index)
Fund of funds	Other mutual funds

Pricing of Investment Funds
Open-End Fund

Open-end fund: shares can be redeemed at any time at a price that is tied to the fund’s net asset value (NAV).

NAV is the total value of the fund’s assets minus any liabilities, divided by the number of shares outstanding.

NAV is the price investors get when selling shares back to the fund that day or buying any new shares in the fund that day.

Pricing of Investment Funds Example: NAV

Assets:

Stocks: $35m

Bonds: $15m

Cash: $3m

Total value of assets = $53m

Accrued fees: $0.8m

Total value of liabilities = $0.8m

Net worth = $52.2m = $53m − $0.8m

Outstanding shares: 15m

Thus, NAV = $52.2m/15m = $3.48 per share

Pricing of Investment Funds
Closed-End Fund

Closed-end fund: shares are non-redeemable and sold with an amount fixed at the initial offering.

Example: real estate investment trusts (REIT)

In Canada, closed-end funds are far less popular than their open-end counterpart.

Investors must trade among themselves in the market, just like with corporate stocks.

Price of the shares may be at either a premium or a discount to the fund’s NAV depending on supply and demand conditions.

Fee Structure of Investment Funds

Investment funds are classified based on the types of sales commission (i.e., load) charged.

Load funds charge a commission on the purchase and/or sale of shares.

Front-end load fund: fee is paid at the time of purchase

Back-end load fund: fee is paid at the time of sale

Fees reduce return on the investment

No-load funds do not apply direct sales charges.

Funds sell directly to the public (bypassing brokers) with no sales fees.

Fee Structure of Investment Funds Example: Loads

An investment fund has a NAV of $10 and a 3.75% front-end load.

As load is assessed as a percentage of premium paid into the fund, therefore purchase price = $10/(100% − 3.75%) = $10.39

$0.39 is 3.9% = $0.39/$10 of the net amount invested.

A fund has a NAV of $10 and a 5% back-end load with a selling price = $10 × (100% − 5%) = $9.50

$0.5 is 5.26% = $0.5/$9.5 of the net amount received.

Fee Structure of Investment Funds

Other fees in addition to sales commissions may also be charged to investors.

Early redemption fees, switching fees and account activation fees

Some fees are not directly paid out by investors:

Management fee is paid to fund managers.

Operating expenses include all fees payable for overseeing the fund, in particular sales professionals.

Summarized by a management expense ratio (MER) and expressed as a percentage of NAV.

Trailer fee is paid to the selling organizations.

Fee Structure of Investment Funds
Example: Mutual Fund Operation

Total net assets = $4,000 (beginning) and $4,800 (ending).

Management fee and operating expenses (excluding brokerage fee) = $35.

Brokerage fee = $53

MER = [(Aggregate fees and expenses payable during the year)/(Average NAV for the year)] × 100%

MER = (35+53)/[(4,000+4,800)/2] = 88/4,400 = 2%

If a fund earns a gross return of 20%, with a MER of 2%, it will report an annual return of 18%.

Published rates of return are calculated after deducting the MER.

Regulation

Most investment companies are regulated by the securities acts of the provinces within which they operate.

E.g., Ontario Securities Commissions in Ontario

Securities regulations are based on the principles of personal trust, disclosure and enforcement required by Canadian Securities Administrators (CSA):

Registration requirements

Prospectus requirements

Fund operations and sales conduct

Regulation

Each investment company is a members of a self regulating organization (SRO):

Investment Industry Regulatory Organization of Canada (IIROC) is a national SRO.

Dealer/advisor must be a member to sell mutual funds.

Mutual Funds Dealer Association of Canada (MFDA) is the national SRO overseeing mutual dealers

Regulates its members’ distribution of investment funds, but not their management.

Regulation

Investors must file a claim within 180 days after the firm declares bankruptcy.

Investment funds are covered by either of the following:

Canadian Investor Protection Fund (CIPF): provides protection of up to $1 million to eligible customers of a member of IIROC.

MFDA Investor Protection Corporation (IPC): provides protection of up to $1 million to eligible customers of MFDA members.

These funds do not cover losses from other causes (e.g., changing market values of securities, unsuitable investments the default of an issuer of securities).

Regulation

Even though investment companies are closely regulated, investor abuses still occur.

Market timing: excessive buying/selling of securities to take advantage of arbitrage opportunities between different markets

Late trading: illegally buying/selling securities submitted after the closing time at that day’s price

Directed brokerage: paying brokerage firms to promote a fund not appropriate for clients

Improperly assessed fees: misrepresenting the fee structure

Growth in Investment Funds

The barriers to entering the industry are low.

Banks and insurance companies have made their inroads starting from 2013.

Corporations have expanded into investment funds through the holding company structures owning them.

E.g., IGM Financial, Investors Group, Mackenzie Financial are under Power Corp. of Canada.

The retirement markets have fueled investment funds by introducing mutual funds into RRSPs.

Mutual funds account for 64% of RRSP portfolios.

Growth in Investment Funds

Households hold the vast majority (89%) of investment fund assets.

Retail investors use funds for goals like retirements

This growth also attracts more participation from institutional investors.

Particularly controversial in recent years has been a type of institutional investor called sovereign wealth funds (SWF), state-owned investment funds investing in foreign assets.

Have non-transparent operations.

Growth in Investment Funds

Sovereign Wealth Fund Company	Country	Assets
Norway Government Pension Funds (1990)	Norway	$922 billion
Abu Dhabi Investment Authority (1976)	UAE	$828 billion
China Investment Corporation (2007)	China	$814 billion
Kuwait Investment Authority (1953)	Kuwait	$592 billion
SAMA Foreign Holdings	Saudi-Arabia	$514 billion
HK Monetary Authority Investment Portfolio (1993)	Hong Kong – SAR	$457 billion
SAFE Investment Company (1997)	China	$441 billion
Government of Singapore Investment Corp. (1981)	Singapore	$350 billion
Qatar Investment Authority (2005)	Qatar	$335 billion
China’s National Social Security Fund (2000)	China	$295 billion

Hedge Funds

No legal definition exists.

Limited partnerships targeting small number of “sophisticated” individuals whose wealth exceeds $1 million or corporations of $5 million net assets.

Not subject to regulatory requirement, generally sold without prospectus, only through offering memo.

Fund managers have great flexibility in managing their assets with alternative investment strategies.

Charge both an asset management fee (e.g., 2%) and a performance fee (e.g., 20%).

Hedge Funds

Top Ten Canadian Hedge Funds Honoured by Alternative IQ

Agilith North American Diversified Fund

Blair Franklin Global Credit Fund

CC&L Absolute Return Fund

Exemplar Canadian Focus Portfolio

JM Catalyst Fund

King & Victoria Fund LP

PH&N Absolute Return Fund

ROMC Fund

Vertex Managed Value Portfolio

Vision Opportunity Fund LP

Hedge Funds
Investment Strategy

Unlike mutual funds, a hedge fund’s investment universe is only limited by its mandate.

A hedge fund can basically invest in anything, including land, real estate, stocks, derivatives, and currencies.

More risky because of the investing style.

Non-directional: bet only on relative performance

Event driven: seek to profit from price imbalances

Opportunistic: take advantage of special situations

Leverage: use borrowed money to amplify returns

Hedge Funds

Comparing mutual funds (MF) to hedge funds (HF):

Characteristic	MF	HF
Sales charges	Yes	Yes
Sold by licensed dealers	Yes	Yes
Use of derivatives	Limited	Yes
Sold through prospectus	Yes	No
Liquidity	High	Low
Performance fee	No	Yes
Return measurement	Relative	Absolute
Regulatory Oversight	Heavy	Light

Exchange-Traded Funds

Exchange-traded funds (ETFs) are investment funds traded on stock exchanges.

Like mutual funds, an ETF is a collection of bonds or stocks. Unlike open-end funds, ETFs have a fixed number of shares.

Like a stock, buy/sell on the markets.

Margin purchase and short sales are allowed.

As ETF share price changes throughout the day, ETF share values stay pretty close to their NAVs.

Exchange-Traded Funds

ETFs are designed for active traders.

ETFs differ from mutual funds in several ways:

They are traded throughout the day on exchanges.

They have lower management fees.

They allow short selling.

They may be purchased on margin varying among dealers.

They have lower portfolio turnover with restricted capital gains, in turn reducing taxes.

Exchange-Traded Funds

The first ETF was created and traded on TSX in April 1990 with a simple design of tracking the major stock indexes.

Mutual fund dealers are legally permitted to sell ETFs in Canada.

ETFs used to be a microscopic share of the dealers’ client assets, but fast-forward developed in the last 10 years.

Today, investors are no longer confined to using broad-market index funds.

Exchange-Traded Funds

The strong growth of ETFs lies in the specialty or sector funds.

Rather than passively tracking a benchmark, specialty ETFs use strategies to select stocks with certain characteristics (e.g., high dividend yields).

Higher cost is the drawback, as ETFs are typically inactively managed, keeping a low MER

Of the $40 billion invested in Canadian ETFs, only about $1 billion is in actively managed ETFs.

Exchange-Traded Funds
Canadian Example

BMO 2020 Corporate Bond Target Maturity ETF

Ticket: ZXC

Company Name: BMO Asset Management

Strategy: Active

Category: Fixed income

CIFSC Category: 2020 target date portfolio

Inverse: No

Leverage: No

Trailers Paid: No

Module 15

Pension Funds

Outline

Pension Funds Defined

Pension Fund Industry

Employer-Sponsored Registered Pension Plans

Types of Pension Plans

Government-Funded Pension Plans

Personal Savings Plans

Regulation of Pension Plans

Pension Funds Defined

Pension funds are retirement savings accumulated from contributions of employers, employees or both when individuals are still working.

Funds are collectively managed and invested with influence from government regulations.

The primary objective is to provide individuals who have reached retirement age with income in the form of a lifetime pension or capital.

Pension Funds Defined

Three ways of saving money for retirement:

Government-funded plans

E.g., Canada Pension Plan and Quebec Pension Plan

Employer-sponsored pension plans

E.g., trusted pension funds, profit-sharing plans and group RRSPs

Individual savings plans

E.g., RRSPs

Employer-Sponsored Registered Pension Plans

A private pension plan is organized by a company that provides individuals with retirement income.

Plans must be registered with the government to have tax-sheltered status.

Under these plans, employee and employer (or just the employer) regularly contributes money to the plan.

Upon retirement, individuals collect benefits from the plan.

If they are vested, employees can transfer the old pension to a new plan when they switch jobs and work with a different employer.

Employer-Sponsored Registered Pension Plans

Plan members may wonder if the money kept in the pension account sufficiently supports the promised payments.

If the exact amount of money needed is available, the plan is fully funded.

If funds are inadequate, it is underfunded.

If excess funds are in the account, it is overfunded.

The assets of pension plans must be managed under the “prudent person rule.”

Private pension plans offered by employers can vary widely along different dimensions:

Contributory or non-contributory: employer does or does not match employee’s contributions.

Voluntary or compulsory: the employee may or may not choose whether to join the plan.

Trusteed or insured: the plan is managed by a committee of trustees and contributors or by an insurance company.

Types of Pension Plans

How retirement benefits are earned divides employer pension plans into two main types:

Defined-benefit plans

Employers use a specific formula to promise to pay employees a set amount of retirement income.

Both parities contribute to the plan.

Employers invest and manage the fund while employees do not involve themselves with any investment decisions.

Pension benefit does not depend on how well the investments perform, but it may be inflation-adjusted.

Types of Pension Plans
Example: Defined-Benefit Plan

Annual benefit is calculated with this formula: 2% × avg salary from last three years × # of years worked.

An individual has worked 20 years for a company, and their salaries for the last three years were $45,000, $50,000 and $55,000.

Benefit = 2% × $50,000 × 20 years = $20,000/year

Yearly payment of $20,000 under this defined-benefit plan lasts throughout retirement, making budgeting easier for the employee.

Types of Pension Plans

Defined-contribution plans

Employees know how much they pay into the plan, but benefits are unknown and depend on how the plan is managed and how the investments perform.

Contributions by employees and the employer are fixed and the assets grow on a tax-deferred basis.

Employees may choose how the money is invested, but with limited options.

Funds cannot be withdrawn before the owner retires.

Types of Pension Plans
Example: Defined-Contribution Plan

An individual making $60,000/year joins a defined-contribution plan at 45 and retires at 65.

This employee puts 5% of their earnings into the plan, and their employer agrees to match the contribution.

A 4% return per year is assumed over 20 years.

Total contribution is 10% of the worker’s annual salary = 0.1 × 60,000 = $6,000/year ($3,000 from employee and $3,000 from employer).

A lump sum retirement income = 6,000 {[(1 + 0.04)20 – 1] /0.04} = 6,000 × 29.778 = $178,668.

Types of Pension Plans

The increased prevalence of defined-contribution plans is reflected in nearly all plan sizes but almost exclusively in the private sector.

The changing labour market structure and different business practices of employers have encouraged the growth of this type of plan.

Although defined-contribution plans have some undeniable advantages for employees, their increased prevalence suggests a transfer of risk from employers to worker.

Types of Pension Plans

A cash balance pension plan was developed in the US as a response to the shortcomings of defined-benefit and defined-contribution plans.

Benefit in this plan is a lump sum amount determined by a formula rather than a periodic contribution.

Is an offshoot of the traditional defined benefit plan.

Due to the pension adjustment requirements and other restrictions on calculating the cash balance, this hybrid pension plan is not popular in Canada yet.

Government-Funded Pension Plans

While many funds are privately run, a public pension plan is one sponsored by a government body.

Old Age Security (OAS) pension is one of the two pillars of Canada’s retirement income system.

Benefit is not based on employment history.

It is a monthly payment available to seniors aged 65 and older with Canadian legal status, having lived at least 10 years in the country since age 18.

For seniors with lower income, this pension is supplemented by the Guaranteed Income Supplement (GIS), which is added to the monthly OAS payment.

Government-Funded Pension Plans

The other pillar is the Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP).

The CPP is now managed by the CPP Investment Board.

The Caisse de depot et placement du Quebec (CDPQ) is in charge of the QPP.

Membership in both plans is mandatory for all persons in the labour force between the ages of 18 and 65.

The demographic change has almost crashed the system, forcing government to restructure the pension plan with aggressive investment strategies.

Government-Funded Pension Plans

Unlike the OAS, CPP and QPP benefits are based on the collecting time, an individual’s total lifetime contributions and pre-retirement income level.

CPP pension is a monthly, taxable benefit that replaces part of an individual’s income at retirement.

Once a person is qualified, the benefit will be paid for their remaining lifespan.

CPP payments are not automatic.

Recipient should apply six months in advance of when they want their pension to start, as early as age 60.

Government-Funded Pension Plans

Taking CPP at age 60 will cause the retiree to lose up to 36% of their pension permanently due to a 0.6% reduction for every month before the normal retirement age of 65 (7.2% per year).

Payments will be permanently increased by 0.7% for each month after age 65 up to age 70 (8.4% per year) by delaying CPP.

There is no further increase after age 70.

Most people start receiving CPP the month after their 65th birthday.

Government-Funded Pension Plans

CPP payment for new beneficiaries receiving benefit for the first time as of January 2020:

Type of benefit	Average monthly amount	Yearly average amount	Monthly maximum amount
Retirement pension, age 65+	$679.16	$8,149.92	$1,175.83
Retirement pension, delayed to age 70	$944.40	$11,572.89	$1,669.61

Government-Funded Pension Plans

The maximum pensionable earnings under the CPP for 2020 increased to $58,700 (from $57,400).

Contributors who earn more than $58,700 in 2020 are not required or permitted to make additional contributions to the CPP.

Anyone earning less than $3,500 is automatically exempt from CPP contribution.

At age 70, a person stops contributing to CPP even if they are still working.

Government-Funded Pension Plans

Top 10 public pension funds by asset size:

Canada Pension Plan Investment Board (CPPIB)

Caisse de depot et placement du Quebec (CDPQ)

Ontario Teachers’ Pension Plan Board (OTPP)

British Columbia Investment Management Corporation (BCIMC)

Public Sector Pension Investment Board (PSP Investment)

Ontario Municipal Employees Retirement System (OMERS)

Healthcare of Ontario Pension Plan (HOOPP)

Alberta Investment Management Corp (AIMCo)

Ontario Pension Board (OPB)

OPSEU Pension (OP Trust)

Personal Savings Plans

Registered Retirement Savings Plans (RRSPs) are not truly pension plans.

Like pension plan contributions, no tax is assessed on this income or on its yield as long as the fund remains in the account.

After age 71, the RRSP account must be converted to a Registered Retirement Income Fund (RRIF).

RRSP is a tax-free savings plan used to invest for the retirement .

RRIF is a tax-sheltered account allowing individuals to withdraw income in retirement.

Personal Savings Plans

RRSPs are registered with the Canada Revenue Agency (CRA), which determines the maximum annual contribution limit for every individual taxpayer.

In 2020, the RRSP contribution limit was still 18% of earned income in the previous year, with a dollar limit of $27,230.

Contribution limit will be adjusted with other employer-sponsored registered pension plans.

All Canadians are eligible to purchase RRSPs regardless of age.

Regulation of Pension Plans

Pension regulation in Canada falls mostly within provincial jurisdiction by virtue of the property and civil rights power granted by the Constitution Act, 1867.

Emphasis is on the best interests of the owners or beneficiaries of the pension plans.

The Financial Services Commission of Ontario (FSCO) is responsible for the administration and enforcement of matters like pension plan funding, vesting of benefits, fiduciary responsibility, pension fund transferability and pension fund insurance.

Module 12

Insurance Companies

Outline

Foundations of Insurance

Insurance Categories

Organization of Insurance Companies

Insurance Industry Structure

Life Insurance Companies

Property and Casualty Insurance Companies

Insurance Industry Regulation

Insurance Industry Recent Trends

Foundations of Insurance
Major Issues

Adverse selection occurs when the people most likely to benefit from a transaction are the ones who actively seek out the transaction and are thus likely to be selected.

Insured have higher risk than general population.

Loss probability statistics gathered for the entire population may not truly reflect the loss potential for the people who actually want to buy policies.

Foundations of Insurance
Major Issues

Moral hazard refers to the fact that an insurance policy changes the behaviour of the insured person.

A fire insurance policy written for more than the value of the property may induce the owner to arson.

A generous automobile insurance policy may encourage reckless driving.

Concern arises when we cannot observe people’s actions and so cannot judge whether a poor outcome is intentional or just a result of bad luck.

Solutions to the moral hazard problem are hard to find.

Foundations of Insurance

To alleviate problems, insurance companies try the following:

information collection and screening

risk-based premium

restrictive provisions

prevention of fraud by investigations

cancellations of insurance

deductibles

co-insurance

limits on the insurance coverage

Foundations of Insurance

The insured (party covered by insurance) and the beneficiary (party receiving payout if loss occurs) must be related.

The insurer (party selling the insurance) must be provided with complete and accurate information by the insured.

The insured is not supposed to profit from buying insurance.

The payout needs to be adjusted with any compensation from a third party.

The insurer must have a pool of insured large enough to diversify the risks.

The loss must be quantifiable.

The insurer must be able to estimate the loss occurrence.

Foundations of Insurance

Risk-averse people with incentives buy insurance.

Insurance is usually sold through agents.

Independent agent: sell insurance for a number of different companies (i.e., insurance broker)

Exclusive agent: sell insurance for only one company (i.e., insurance agent)

Regardless of the sales approach, insurance companies hire an underwriter who decides whether to accept or reject the issuance of a policy.

Insurance Categories

Insurance: a device whereby an individual or a business transfers the risk of uncertain financial loss by payment of a premium.

Broadly grouped as life insurance and property and casualty insurance with further classifications:

Life insurance

Health insurance

Property insurance

Liability insurance

Credit insurance

Farm insurance

Reinsurance

Insurance Categories

Ten largest insurance companies (as of December 31, 2019):

Company	Total Assets
Manulife Financial Group	$809.130 billion
Great-West LifeCo	$451.167 billion
Sun Life Financial	$297.202 billion
Fairfax Financial	$92.203 billion
Industrial Alliance Financial Corp.	$73.148 billion
Desjardins Insurance	$53.152 billion
Intact Financial	$32.292 billion
E-L Financial Corp. (Empire Life)	$23.749 billion
RBC Insurance	$18.191 billion
Co-operators Group	$15.002 billion

Organization of Insurance Companies

Mutual Insurance company: accumulated profits owned by policyholders.

Policyholders

Mutual Insurer

Policy and Ownership Rights

Policy Dividends

Organization of Insurance Companies

Stock Insurance company: accumulated profits owned by shareholders.

Policyholders

Mutual Insurer

Policy Rights

Shareholders

Stock Dividends

Ownership Rights

Insurance Industry Structure

Insurance pools risk exposures, allowing losses to be shared and reducing the uncertainty of loss.

Insurance industry is a clunky legacy system.

Clients have evolving expectations for insurance transactions, insurance products and services.

Online distribution platform for insurers with a direct-to-consumer channel.

Montreal-based InsurTech: Breath Life

Insurance Industry Structure

A healthy economy supports earnings growth at Canadian life insurers and premium growth for property and casualty firms, despite the ongoing drag of low interest rates on the insurers’ profitability and investment performance.

Solid asset quality remains a driver of the stable outlook.

Insurers have the capacity to invest in technology to guard against competitive disruption.

This investment should enhance client interface and drive opportunities for all insurers to benefit from claims efficiencies and risk segmentation.

Life Insurance Companies
Overview

Protect nearly 29 million Canadians with various life insurance products and pay $98 billion in benefits.

The average life insurance protection per household is $423,000 in 2019, up from $417,000.

The industry is competitive, with 100 Canadian insurers and 38 foreign-owned insurers.

78 private life insurers, 8 not-for-profit health benefit providers and 14 fraternal benefit societies

Many private life insurers are diversified financial institutions offering more than life insurance.

Life Insurance Companies
Overview

Top six life insurers based on annual revenues (2019):

Company	Founded	A.M. Rating	Annual Revenues	Net Income
Manulife Financial	1887	A+	$77.83 B	$5,276 M
Great-West LifeCo (Canada Life)	1891	A+ (Superior)	$44.71 B	$2,492 M
Sun Life Financial	1846	A+	$39.69 B	$2,713 M
IA Financial	1892	A	$15.27 B	$708 M
RBC Insurance	1864	A	$4.27 B	$775 M
Empire Life (E-L Financial)	1923	A (Excellent)	$2.12 B	$187.44 M

In 2019, life insurers in Canada hired 156,000 workers locally and 169,000 employees outside Canada

Although there has been an annual growth of 2.5% over the past decade, the momentum may not continue due to different challenges ahead.

Life insurance companies hold over $850 billion of assets in Canada.

Canadian life and health insurers operate in more than 20 countries serving 60 million people with total assets of $898 billion

57.2% Canada, 12.% US, Asia 11.1%, Europe 9.0%, others 10.5%

Life Insurance Companies
Insurance Contract

Pay upon insurance event

Life Insurance Policy

Insurance Company

Beneficiary

Asset Mgmt.

Policyholder

Life Insurance Companies
Lines of Life Insurance: Ordinary Life

Ordinary life insurance is sold to individuals—policyholders make periodic premium payments in exchange for coverage.

Term life policy is pure life insurance with expiry date and no savings element attached.

Permanent life policy offers a package of pure life insurance protection and investing opportunities with no expiry.

Whole life

Universal life

Life Insurance Companies
Lines of Life Insurance: Ordinary Life

Term life insurance

temporary insurance protection

low cost

no cash value

usually renewable

likely convertible to permanent life insurance without further underwriting

Life Insurance Companies
Lines of Life Insurance: Ordinary Life

Permanent Life Insurance

meet life-long protection needs

have an investment component

no expiry date as long as premiums are paid

more expensive to own

build cash value

loans are permitted against the policy

favourable tax treatment of policy earnings

flexible premium allocation

Life Insurance Companies
Lines of Life Insurance: Ordinary Life

Permanent Life insurance can be divided into two categories:

Whole Life: traditional form where insurer takes on all risks related to death and the underlying investment performance.

Premiums partly fund an increase in cash value.

Expensive.

Universal Life: policyholders select investment options and insurer assumes the risk related to death.

Policyholder may vary the timing and amount of premium as circumstances change.

Cash value depends on the pace of the premium.

Life Insurance Companies
Lines of Life Insurance: Group and Credit

Group life insurance covers a large number of people under a single policy.

Contributory: both the employer and the employee cover a share of the premiums.

Noncontributory: the costs are borne entirely by the employer.

Credit life insurance protects lenders in the event a borrower dies prior to the repayment of a debt contract, such as a mortgage or car loan.

Life Insurance Companies
Lines of Life Insurance: Other Activities

Other activities of life insurers include the sale of annuities, private pension plans, and accident and health insurance.

Annuities protect against the risk of outliving your retirement money.

Contract is initiated by investing a lump sum or making periodic payments before the annuity payments begin.

Canadians’ retirement savings in RRSP, TSFA and RRIF are managed by the industry.

Health insurance supplements government benefits.

Life Insurance Companies
Assets and Liabilities

With a steady flow of premiums and predictable benefit payments, life insurers can securely invest in long-term capital markets.

The mix of investments within general and segregated funds reflects the nature of the underlying insurance contracts of two funds.

Liabilities come from the premiums paid by insured clients and from pension funds under management.

Invest over $780 billion in long-term capital markets

bonds (36%), mutual funds (30%), stocks (18%), mortgages (6%), real estate (3%) and others (7%)

Total premiums have grown to $117 billion in 2019 written on various life insurance lines:

$22.7 billion (19%) from life insurance policies with 80% individuals and 20% group

$48.0 billion (41%) from annuities with 83% from registered plans (e.g. RRSP, TSFA, RRIF)

$46.3 billion (40%) from health plans with 10% individuals, 90% group

Benefit payments increase to $98 billion or nearly $1.9 billion a week, up 50% from 10 years ago.

$13.2 billion on life insurance benefits

$7.7 billion paid as death benefits and $553 billion paid to living policyholders as disability benefits, cash surrenders or dividends

$36.1 billion on health insurance benefits

$11.7 billion for prescription drugs, which accounts for about 35% of Canada’s total spending on prescription drugs

$48.7 billion on retirement benefits with annuity payments on employer-sponsored and individual products

Increase at an average rate of 6% per year since 2008

Life Insurance Companies
Assets and Liabilities

Segregated funds are kept separate from the rest of the insurer’s activities.

Assets ($762 B)	Liabilities ($665 B) and Equities ($97 B)
General Funds ($470 B)
5% short-term investment	72% policyholder liabilities
87% long-term investment	7% other liabilities
8% other investment	21% equities and long-term debt
Segregated Funds ($292 B)
16% cash & other investment	100% policyholder liabilities
34% real estate & mortgages
50% mutual funds

Property-Casualty Insurance Companies

Currently, 198 companies sell property-casualty (P&C) insurance in Canada, and approximately half of them are foreign firms.

Top 10 firms hold 65% market share.

In 2018, Intact Financial was the top firm, writing 14.4% of all P&C insurance premiums.

Most banks have insurance subsidiaries, as they are not allowed to sell insurance through their branch networks.

Property-Casualty Insurance Companies

Property insurance protects the insured against losses of real and personal property from fire, theft, storm, explosion and even neglect.

The policy can be either a named-peril policy or an open-peril policy.

Named-peril policies cover losses associated with specific named events (e.g., flood insurance).

Open-peril policies insure against all perils except those specifically excluded by the policy (e.g., war)

Property-Casualty Insurance Companies

Casualty insurance offers protection from legal responsibility for losses stemming from damage to another’s property or an injury to another person.

Distinctions between property and casualty insurance are increasingly become blurred because they are often sold together.

Auto insurance: you wrecking your car is covered under property insurance, while you accidentally hitting another car with yours is covered under casualty insurance.

Property-Casualty Insurance Companies

Top ten leading private P&C Insurers (2019):

Company	Market share
Intact Group	14.44%
Aviva Group	8.91%
Desjardins Group	8.33%
Lloyd’s Underwriters	5.91%
Cooperators Group	5.57%
Wawanesa Mutual Insurance Company	5.47%
TD Insurance Group	5.39%
RSA Group	5.13%
Economical Group	4.10%
Northbridge Group	2.88%

P&C Insurance Companies
Lines of P&C Insurance

Insurance companies earn revenues through premiums and on investments they make.

Report premiums in two ways:

Direct written premiums: total premiums collected

Net written premiums: total amounts adjusted for portions paid to reinsurers

To spread the risk, a reinsurance company agrees to accept risks of another insurance company in exchange for a payment.

P&C Insurance Companies
Lines of P&C Insurance

P&C insurers have $59.6 billion in direct written premiums on six major lines in 2019.

Among the net written premiums of $54.1 billion:

Automobile Insurance: 44.1%

Property Insurance:

Personal: 22.2%

Commercial:14.2%

Liability Insurance: 10.2%

Specialized Insurance: 7.1%

Accident and Sickness Insurance: 2.2%

P&C Insurance Companies
Lines of P&C Insurance

Total direct claim costs by line in 2019:

Net claims incurred are the total claim costs less any share to be paid by reinsurers.

Line of Business	$ million	% of the total claims
Auto	18,205	44.6
Personal property	7,810	20.0
Commercial property	6,466	16.5
Liabilities	3,746	9.6
Specialized	1,985	5.1
Accident and sickness	871	2.2
	$39,084	100%

P&C Insurance Companies
Assets and Liabilities

Assets

Out of the total investment of $117 billion, many of those assets have fixed returns that can be liquidated easily.

Assets	Amount	Fraction
Bonds	$80,586 M	68.9%
Stocks	$10,904 M	9.3%
Mortgages	$1,202 M	1.0%
Real estates	$530 M	0.5%
Term deposits	$4,436 M	3.8%
Others	$19,366 M	16.5%

P&C Insurance Companies
Assets and Liabilities

Liabilities

About 57% of the total liabilities and equity are unpaid claims and adjustment expenses items.

Risk exposure of property insurance is limited to the property value, but liability risk exposure is much more difficult to determine.

Liability risk exposure can have long lag times (tails).

Liability lines may be subject to social inflation.

P&C Insurance Companies
Assets and Liabilities

To determine insurance premiums, insurers consider the likelihood of a customer making a claim and how much those claims will like cost.

Underwriting risk is the risk that premiums are insufficient to cover losses and operating expenses after taking into account investment income.

Three sources of underwriting risk:

unexpected increases in loss rates

unexpected increases in expenses

unexpected decreases in investment yields

P&C Insurance Companies
Assets and Liabilities

Four key ratios:

Loss ratio: the actual claims incurred on a business line relative to the net premium earned

Expense ratio: the expenses incurred relative to the net premium written, including loss adjustment expenses and mainly employee compensations

Combined ratio: includes both the loss ratio and the expense ratio

Operating ratio: measures overall profitability by subtracting the investment yield from the combined ratio

Investment yield is measured as net interest income divided by premiums earned

P&C industry ratios in 2019:

earned loss ratio = 67.7%

expense ratio = 30.9%

combined ratio = 98.6%

investment yield = 2% lowest on record

operating ratio = 98.6% − 2% = 96.6%

Overall profitability = 100% − 96.6% = 3.4%

Less profitable firms exit the industry, and there is a rapid increase in premiums among the survivors.

P&C Insurance Companies
Assets and Liabilities

Insurance Industry Regulation
Life Insurance Companies

Federal and provincial governments share jurisdiction.

OSFI: governs through the Insurance Companies Act

prudential regulation, concerned with safety and soundness of the industry

Provincial regulation

marketing of insurance products and licensing requirements

Canadian Life and Health Insurance Compensation Corporation: industry-funded organization to protect policyholders

$200,000 on claims in case of bankruptcy

$60,000 in cash policy coverage.

Insurance Industry Regulation
P&C Insurance Companies

As P&C insurers may be federally or provincially incorporated, regulation is shared by provincial and federal government.

OSFI is the federal regulator responsible for 75% of companies.

Property and Casualty Insurance Compensation Corporation: pay outstanding claims and refund premiums paid in advance up to the following limits:

auto and commercial insurance policies: up to $250,000

home insurance policies: up to $300,000 per policy

Insurance Industry Recent Trends Major Issues

Insurance industry becoming more global

cross-country mergers (insurance companies as well as universal banks)

Insurance crime

Severe weather claims

Catastrophic losses

Introduction and acceleration of insurance market reforms

auto insurance

Insurance Industry Recent Trends
InsurTech

Insurers are increasingly focused on consumers’ needs with more tailored product offerings.

Despite lower premium growth and rising claims costs, insurance companies continue to innovate and adapt through the following:

artificial Intelligence (AI)

robotic process automation (RPA)

machine learning

Insurance Industry Recent Trends
InsurTech

Insurance companies must resolve the “synthesis challenge”—integrating innovation into the legacy resistant environment.

Many are beginning to pivot from investments that support business as usual to financing innovations that facilitate more fundamental business model changes.

All need to adapt a more customer-centric approach to run their businesses.

DISCLAIMER

CONTACT US

Our Special Guarantees

Ace your studies with our custom writing services! We've got your back for top grades and timely submissions, so you can say goodbye to the stress. Trust us to get you there!

Looking for top-notch essay writing services? We've got you covered! Connect with our writing experts today. Placing your order is easy, taking less than 5 minutes. Click below to get started.

DISCLAIMER

CONTACT US

Our Special Guarantees