Chapter 21: Insurance Companies and Pension Funds

public pension plan

A pension plan sponsored by a government body

reinsurance

Allocating a portion of the risk to another company in exchange for a portion of the premium

certainty equivalent

An amount that will be received or spent with certainty. An insurance payment is a certainty equivalent since it removes the risk that unexpected amounts will need to be spent.

pension plan

An asset pool that accumulates over an individual's working years and is paid out during the nonworking years.

fully funded

Describing a pension plan in which the contributions to the plan and their earnings over the years are sufficient to pay out the defined benefits when they come due

underwriters

Investment banks that guarantee prices on securities to corporations and then sell the securities to the public

casualty insurance

Protection against financial losses because of a claim of negligence

Employee Retirement Income Security Act

a comprehensive law passed in 1974 that set standards that must be followed by all pension plans

Pension Benefit Guarantee Corporation (Penny Benny)

a government agency that performs a role similar to that of the FDIC, insuring pension benefits up to a limit if a company with an underfunded pension plan goes bankrupt

defined-benefit plan

a pension plan in which the benefits are stated up front and are paid regardless of how the investments perform

defined-contribution plan

a pension plan in which the contributions are stated up front but the benefits paid depend on the performance of the investments

private pension plans

a pension plan sponsored by an employer, group, or individual

deductible

an amount of any loss that must be paid by the insured before the insurance company will pay anything

mutual insurance companies

an insurance company that is owned by the policyholders and has the objective of providing insurance for the lowest possible price

stock company

an insurance company that issues stock and has the objective of making a profit for its shareholders

coinsurance

an insurance policy under which the policyholder bears a percentage of the loss along with the insurance company

annuity

an insurance product that provides a fixed stream of payments

underfunded

describing a pension plan in which the contributions and their earnings are insufficient to pay out the defined benefits when they come due

overfunded

describing a pension plan that has assets greater than needed to make the projected benefits payments owed by the plan

named-peril policies

insurance policy that protects against loss from perils that are specifically named in the policy

property insurance

insurance that protects against losses from fire, theft, storm, explosion, and neglect

individual retirement accounts

retirement account in which pretax dollars can be invested by individuals not covered by some other retirement plan

law of large numbers

the observation that when many people are insured, the probability distribution of the losses will assume a normal probability distribution