LOMA 307 Chapter 6

final goods

Goods that are consumed rather than those used to produce another product.

hyperinflation

Out-of-control inflationary spiral; when inflation rate reaches 10-12%+.

nominal GDP

GDP that has not been adjusted for changes in price levels.

interest-crediting rate

The interest rate that an insurer applies to annuity contract values to determine the annuity's accumulated value.

prime rate

The interest rate that commercial banks charge their best corporate customers.

Effects of Increase Life Expectancy on Life Insurers (2)

1. Decrease in benefit costs for issuers of life insurance. Insureds live longer, insurers are able to invest premiums for longer periods before they have to pay benefits. 2. Increase in benefit costs for issuers of life annuities. Insurers may pay benefits on life annuities for longer periods than they had anticipated.

Phases of the Business Cycle (4)

1. Expansion. 2. Contraction. 3. Recession. 4. Recovery.

Variations of Business Cycles

1. How long they last. 2. How many businesses they affect. 3. The degree to which they affect those businesses.

Goals of Monetary Policy

1. Price stability. 2. Relatively full employment. 3. Satisfactory rate of economic growth.

Types of Variations (3)

1. Seasonal. 2. Cyclical. 3. Random.

Rate of inflation in % =

= (Current CPI - Previous CPI)x100 / Previous CPI

Interest spread =

= Interest rate earned - Interest-crediting rate

fixed deferred annuity's accumulated value =

= Net amount paid for the annuity + Interest earned - Withdrawals or fees

real rate of inflation =

= Nominal rate of interest - Expected inflation rate

Unemployment rate =

= Unemployed / Civilian labor force

GDP =

= consumption (C) + investment (I) + government purchases (G) + net exports (X)

trend

A movement in a specific direction, either upward or downward. For insurers, increase in life expectancy is important.

business cycle

A recurring pattern of fluctuations in the economic activity of a nation over a specified period of time, generally a year or more.

recession (slump)

A significant decline in economic activity spread across the economy, lasting more than a few months. Unemployment is generally high and GDP usually falls for 2 or more quarters. Most businesses stop growing and housing prices and interest rates typically decrease.

depression

An economic condition in which real GDP declines drastically and, for a period of at least two years, unemployment is unusually high. Prices for most goods and services are unusually low, and there is generally inability to purchase goods and services relative to the amount that could be produced using current resources and technology.

Decreased Market Rates Affect on Bonds

Bond prices increase. Liabilities increase when fixed-rate products stay in force longer. Either spread compression or expansion can happen.

budget surplus

Budget in which government revenues exceed government spending.

budget deficit

Budget in which government spending exceeds government revenues.

variation

Change or fluctuation in a trend.

stagflation

Combination of inflation, slow economic growth, and high unemployment.

market basket

Consists of 80,000 goods and services that a typical urban family buys

contractionary(restrictive) fiscal policy

Decreases aggregate demand to slow down the economy; used to fight inflation. Decrease spending and/or increase taxes.

deflation

Fall in the general price level. The purchasing power of money rises. Typically occurs during recessions or depressions. Customers with fixed-rate products are likely to keep these products in force. Customers with products whose value varies by market performance are likely to sell these products and buy fixed-rate products. Insurers could find themselves earning less on investments than it credits to these contracts.

per capita GDP

GDP divided by a country's population; GDP per person.

real GDP

GDP that has been adjusted for changes in price levels.

Affects of Inflation on Life Insurers

Increased salary expenses, which can lead to actual expenses being higher than assumed in pricing products. Increased market rates, which can lead to reduction in value of fixed-income investments, such as bonds.

personal consumption expenditures (PCE)

Indicate how much money people are spending on goods and services.

industrial production

Measures the raw volume of goods produced by industrial firms (factories, mines, electrical utilities), newspaper businesses, and the publishing industry. Excludes the services sector of the economy. The Non-Manufacturing Report, or Service Report, contains these figures.

tight monetary policy

Monetary policy in which the money supply decreases. It has a negative effect on employment and economic growth. It can reduce negative effects of inflation.

loose monetary policy

Monetary policy in which the money supply increases. It has a positive effect on employment and economic growth. It can result in inflation.

expansion (boom)

Phase in the business cycle in which unemployment is low and real GDP rises for 2 or more consecutive quarters. Business profits rise, overall spending increases, and production increases. Housing prices tend to increase. Insurers are likely to develop new products or offer existing ones to new markets, as well as widen investment opportunities. More employees may need to be hired.

recovery

Phase of the business cycle in which real GDP increases for 2 or more quarters after a recession or depression. Typically begins in the last quarter or 2 of a recession or depression. Business profits generally improve, and employment moves toward full employment. Overall spending begins to increase.

cyclical variations

Result from changes that affect more than one phase in the business cycle over a period of several years. They occur as an economy changes from recession to recovery or from expansion to contraction. Example: change in interest rates with expansion or contraction.

random variations

Result from changes that are either unexpected or one-time occurrences. Examples: wars, natural disasters.

seasonal variations

Result from routine patterns that typically occur in the course of on year. Examples for insurance companies: weather changes,flu season.

inflation

Rise in the general level of prices in an economy over a period of time, resulting in a loss in the purchasing power of money.

coincident indicators

Statistical variables that tend to change about the same time that GDP changes. Examples: figures on industrial production and personal consumption.

lagging indicators

Statistical variables that tend to change after GDP changes. Examples: prime rate, unemployment rate.

leading indicators

Statistical variables that tend to change before GDP changes. They typically predict what the economy will be like in the near future. Increases happen during recovery phase. Examples: unemployment benefits claims, new building permits issued, new orders for goods and materials, stock prices, consumer expectations.

gross domestic product (GDP)

The market value of all final goods and services produced within a country in a given time period, usually a year.

guaranteed minimum interest-crediting rate

The minimum rate that the insurer must credit to the contract's accumulated value. In most jurisdictions, this rate must be either 2% or 3%.

Federal Reserve System (The Fed)

The central banking system and monetary authority in the United States.

Consumer Price Index (CPI)

The most important measurement of inflation in the U.S. and Canada. It compares the average price of a market basket of goods and services at a stated point in time to the average price of the same market basket at a different point in time. It is reported monthly by the Bureau of Labor Statistics

spread compression

The narrowing of an insurer's interest spread. When customers immediately demand to receive higher market rates on investments Average rate of return on insurer's existing invested assets rise slowly, because they continue to earn lower rates that were available in the financial markets when the assets were purchased. When insurer chooses to keep interest spread constant, they might face sales drops or lapses.

unemployment rate

The percentage of people in the labor force who are without jobs but who are actively seeking jobs.

market value

The price that people are willing to pay for a good or service.

current interest-crediting rate

The rate the insurer declares and pays, based on the owner's election to keep the contract in force for a chosen minimum interest-crediting period. After that point, it is typically set based on current market conditions.

fiscal policy

The use of government spending and taxation to change aggregate demand (indicated by the level of spending) in the economy.

Increased Market Rates Affect on Bonds

The value of bonds decrease. Instead of selling at a loss, an issuer may keep bonds collecting par value upon maturity. Spread compression can happen.

spread expansion

The widening of an insurer's interest spread. When the average rate of return on an insurer's existing assets decline slowly, they might enjoy the affects. Insurer can choose to keep spread constant or reduce interest-crediting rates to the new market level, thus continuing to earn a higher overall rate of return.

contraction (downturn)

Unemployment begins to rise and real GDP decreases. Overall spending tends to decrease. Life insurance sales may increase because people are less optimistic and want to protect their existing assets and financial futures.

expansionary fiscal policy

Used to increase aggregate demand to increase pace of the economy; used to fight recession. Increase government spending and/or decrease taxes.

monetary policy

Used to increase/decrease the money supply in effort to stabilize the economy.

disintermediation

When a large number of customers withdraw funds from financial intermediaries.