Managing for Solvency and Profitability in Life and Health Insurance Companies.
Article Type:
Book Review
Books (Book reviews)
Bohn, James G.
Pub Date:
Name: Journal of Risk and Insurance Publisher: American Risk and Insurance Association, Inc. Audience: Trade Format: Magazine/Journal Subject: Business; Insurance Copyright: COPYRIGHT 1998 American Risk and Insurance Association, Inc. ISSN: 0022-4367
Date: June, 1998 Source Volume: v65 Source Issue: n2
NamedWork: Managing for Solvency and Profitability in Life and Health Insurance Companies (Book) Review Grade: A
Reviewee: Conant, Susan; Desoutter, Nicholas L.; Long, Dani L.; MacGrogan, Robert

Accession Number:
Full Text:
By Susan Conant, Nicholas L. Desoutter, Dani L. Long and Robert MacGrogan (Life Office Management Association, 1996)

Reviewer: James G. Bohn, Board of Governors of the Federal Reserve System

This book presents a practical guide to the management of the modern life insurance company. Although the authors intended this text to prepare students for the LOMA FLMI Course 371 examination, this volume could also be used as the main text for an undergraduate course in life insurance company management. This text is also rich in industry-level institutional and regulatory detail and would be a valuable tool for those interested in gaining an understanding of the major operational and regulatory issues facing life insurance companies.

The text's twenty chapters present a complete and concise guide to insurance company management. The first two chapters are introductory. The remainder of the book could be divided into two sections. The first, which includes chapters 3 to 9, discusses methods for pricing insurance contracts and determining the adequate level of policy reserves. The second section, chapters 10 through 20, addresses company operations and financial management. Since the book is intended to be a guide to insurance company management, there is relatively little discussion of specific provisions of insurance contracts or the selection of risks. Unlike the typical undergraduate life insurance text, this book does not include chapters on the history or the social significance of the insurance industry.

Each chapter begins with a brief outline of the concepts to be covered and the major learning objectives for the reader. The authors make liberal use of tables and figures to assist the reader in organizing the information presented in the text. One of the outstanding features of this book is the collection of brief Insight sections in each chapter. The Insights are excerpts of articles which have appeared in insurance industry publications. There are up to five Insights per chapter. The authors have clearly taken great care to find articles that are both appropriate and timely for the Insight sections. Almost all of the excerpts are from articles that have appeared since 1993.

The text takes a somewhat unique approach to insurance product pricing in the first section of the book. The authors first discuss the determination of the value of the different cash inflows and outflows from insurance contracts - investment returns, benefit payments and company operating expenses. Then, unlike most other texts, the authors discuss the factors that affect the company's margin on each of the three components of the contract instead of a single margin for the entire contract. This approach allows the authors to more closely connect the pricing decision with the contract's riskiness and major provisions as well as the firm's competitive environment. Given the degree of heterogeneity between insurance contracts and insurance markets, the authors' disaggregated approach to pricing is intuitively appealing.

The text comes with Execuview, a PC application that allows the user to develop forecasts of the profitability of a company that offers up to four different types of life insurance contracts. The program allows the user to enter assumptions concerning lapse rates, future interest rates, selling expenses and company product mix. The text contains a number of examples using Execuview which illustrate the effect on profitability of altering product assumptions. Execuview would be a wonderful teaching tool particularly for group projects or homework assignments. The program was easy to install and use and had an attractive user interface.

The second section of the book concerns the management of insurance companies. The text discusses a number of important strategic issues including risk-based capital requirements, asset-liability management, the use of reinsurance, and regulatory monitoring of insurer solvency. The text presents the tradeoffs associated with different operating or financial choices facing insurance company managers. The authors also present a practical guide for managers to follow in pursuing certain objectives. For instance, the section on asset-liability management (ALM) first discusses the technical details for measuring mismatches between asset and liability portfolios. Then the chapter goes on to discuss how managers can set up reporting schemes for risk measurement and facilitate communication between investment managers and actuaries to develop an effective ALM program.

A consistent theme in much of the second half of the book is that the level of capital is a key factor in determining the strategic flexibility of an insurance company. The text outlines the factors that affect the capital requirements of the firm and the various methods by which insurance companies raise capital from external sources including through the issuance of surplus notes. The text also discusses how financial engineering can be used to increase regulatory capital levels through the use of securitization or sale-leaseback transactions. The discussion of the financing choices available to insurance companies and the discussion of the resolution process for failed insurers are both superb.

Overall, the authors have produced a very useful text that could be adapted for classroom use or would serve as an excellent guide to practitioners interested in insurance company management. While the book has no exercises per se, there is a prep-pak for the Course 371 exam available from LOMA that should provide ample opportunity for the development of homework exercises. The only improvement that this reviewer would suggest is that the authors make more extensive use of footnotes and end-of-chapter references to link the issues discussed in the text with relevant material in the insurance literature.
Gale Copyright:
Copyright 1998 Gale, Cengage Learning. All rights reserved.