Risk Management and Insurance - Assignment Example

 Risk Management and Insurance Case 1 In order to be cognizant with estate law changes, brought about by the American Taxpayer Relief Act, there is need for a deep analysis of the modifications in estate planning strategies. The Act, which was passed in 2013, was developed with the intention of adopting new automated tax increases and spending cuts. The Act has altered a number of provisions of gift tax and estate tax. Specifically, an inserted “portability” provision in the Act, aims to change core practices in estate planning. According to Taylor, blended families in America have become very common over the last couple of decades. Many families have children from previous marriages, whom they would want to incorporate into their estate plan. Many parents want to ensure the financial security of all their children. For families with a nucleus set- up, with no children from previous relationships, it is very easy to distribute the estate appropriately, but in blended families, it is a bit complicated. Therefore, an effective estate plan, designed and managed by an estate planning advisor, can enable families find financial direction and avoid unnecessary taxation (Taylor, 2002). Since 2013, both the gift and estate tax use the same rate schedule. Additionally, gifts in life can affect the bequest’s taxation at death. Taxable estate at death and taxable gifts given during a lifetime are taxed at 40%, but the tax is only imposed on bequests and gifts above substantial lifetime exclusion sums and moderate exclusion amounts on an annual basis. The generational skipping tax is an additional tax property, where property passed from a grandparent to a grandchild and or future successive generations, through a trust or will, results in the imposition of a tax. The tax can also be passed on to individuals who are 37.5 years younger than the original owner. The tax was developed and implemented in order to ensure that estate taxes were no longer evaded. Wells states that, AB trusts and their portability are also discussed, with regards to estate tax exemption. Since 2011, federal estate tax exemption can be transferred between married couples and they can be able to utilize federal estate tax exemptions via AB Trusts (Wells, 2011). The second to die life insurance highlights the affordability of the policy with regards to estate planning. To develop the policy, a second policy is set up between a married couple, however, neither one of them is able to collect a payout in the event that one of them dies. It is mainly set up to ensure the financial stability of the spouses’ beneficiaries after their death. Case 2 Conseco’s bankruptcy gives insight into the topic of market assumptions and risk. Conseco was a holding company that publicly traded but wasn’t an insurance company. However, it dealt in consumer finance activities and insurance via a couple of subsidiary companies. Conseco was not the same as the subsidiary companies, because as a holding company, it had a distinct legal entity. The company collapsed due a massive debt load that it accumulated in the 1990s and particularly due to the purchase of Green Tree, valued at $6 million. The poor market assumptions assumed by Conseco are responsible for its eventual bankruptcy in 2002. Jacques states that in the 1980s and 1990s, many companies started providing long term care (LTC) insurance. The industry’s initial growth spurt however subsided in 2003, with very few companies offering any substantial policies. Many companies that entered the LTC insurance market, did so with the intention of reaping profits and by providing market leadership through selling new products. A large percentage of the companies like Conseco, were only concerned with claims risk that were future oriented, coupled with the fact that LTC risk was long tailed (Jacques, 2010). The companies failed to consider the assumptions of voluntary lapse rate and interest rate, which affected the pricing of the LTC products. Their disregard for these two factors ultimately contributed to the downfall of Conseco and other firms. Due to their failure to consider the pricing strategies many firms failed to reach their projected profit levels and the high capital requirements for providing and managing the LTC products. Additional contributing factors include- the risk management strategies, absence of reinsurance coverage and regulatory policy. Conseco failed to develop market strategies that would attract adequate capital to match profitability, coupled with regulatory approaches and public policies that were aimed at reducing policy costs and risk. Case 3 In this case, critical illness insurance from the perspective of the life insurers and the consumer is discussed. The position of critical illness insurance regarding the environment of health insurance and changing healthcare, are analyzed with a future oriented perspective. It is very important to comprehend critical illness insurance from the perspective of the consumer. A customer needs to understand product features with regards to what matches their needs. Critical illness insurance is part of the whole customer insurance portfolio. When considering the amount of health insurance one should buy, a consumer is supposed to consider their level of income protection and the quality of the healthcare. Other considerations include considering whether the consumer can be able to pay premiums over an extended period of time. Prioritizing the structure of health insurance and individual health needs, are reliant on a consumer’s ability to pay for premiums. Additionally, when a consumer wants to add insurance policies, they should check if they are covered under their previous health insurance policy. The consumer should also be careful not to have additional medical expense policies, since extra policies doesn’t mean additional benefits. When looking for a suitable health insurance product, a number of factors should be considered-premiums, age limit, ending a policy, renewing a policy and policy exclusions. With regards to factors to consider when making a health insurance application, a consumer’s duty is providing the necessary and correct information so that the policy can cover him/her appropriately. The next step is accepting the application. Additional information required when taking a health insurance policy includes, seeking advice from a financial advisor, taking a 14 day period to review the policy and knowing that insurance cover is worldwide. There are a number of health insurance products-medical expense insurance, hospital cash insurance, disability income insurance, long term care insurance and critical illness insurance. Schendel argues that, critical health insurance is characterized by the payment of a lump sum when the consumer is diagnosed with a disease covered under his/her insurance policy. The payment of this amount is not reliant on actual medical expenses or going to the hospital. The type of illnesses covered varies from insurance companies but most major illness like cancer, stroke, heart attack and kidney failure are generally covered. However, in Singapore, definitions of diseases are constant in all insurance companies (Schendel, 2014). Case 4 In 2013, it was estimated that between 2016 and 2022, through tax revenue, the Social Security Fund would spend more funds than it took. Additionally between 2029 and 2035, there would be a depletion in the balance of the Trust Fund, which would in turn result in pension benefits reductions. Many analysts estimated that the U.S Social Security Fund, needed new mechanisms to address serious financial issues in order to prevent long term financial adversities. The experiences of other countries such as Sweden, Australia and Mexico, provides a basis for the U.S to develop and implement reform in their social security system. According to Gruber, the most recent census data showed that median household incomes declined for every age group except for those that are 65 years and above, which grew by an estimated 5.5%. However, household income is bound to rise in the future due to old people (60 years and above) combining households. The increasing number of pensioners forced to continue working, will also contribute to the increase in household income. These are some of the reasons that have contributed to the fiscal burden against the federal government. Additionally, the population of seniors is steadily increasing, thus putting a strain on the social security fund (Gruber, 2007). A couple of strategies have been recommended with an aim of offsetting the fiscal burden on the social security fund. One of the measures is raising the age of retirement. Since many people are living longer, it means that they are enjoying benefits for longer periods. Therefore, by increasing the retirement age, the period for enjoying benefits will be shorter and less costly for the government. However, this will cause problems to potential retirees, like those with hard jobs that they don’t like. Another measure proposed is changing the calculation of cost of living. At the moment, the fund’s cost of living adjustment is calculated using the conventional Consumer Price Index. However, by adopting the proposed chained CPI, it will be able to reflect the flexibility of consumer expenditure habits in response to changes in price. Essentially, the adoption of the chained CPI will lead to lesser benefit packages. The other proposed measure is shifting funds from the wealthiest pensioners to those that need it the most. However, this measure might cause problems in future, since redistribution of pension funds is not a popular stand. Many argue that those that pay more when working should reap the most benefits in retirement. Furthermore, history suggests that such a program, which focusses on low income workers, is bound to decline. Privatizing the fund could be used to counter the burgeoning fiscal burden. This measure is not very popular due to its negative implication on the future benefits of current workers, coupled with the stock market losses experienced in recent years. Increasing the payroll tax cap has also been suggested as a reform measure. The current cap is $ 106,800 annually, but by increasing the cap, higher wage earners will pay larger portions of their wages to the system and help in closing the deficit. However, this measure has redistributive tendencies that are not very popular. References Gruber, J. (2007). Social security programs and retirement around the world fiscal implications of reform. Chicago: University of Chicago Press. Jacques, D. (2010). International directory of company histories. Detroit, Mich.: St. James Press. Schendel, L. (2014). Critical illness insurance in life cycle portfolio problems [version 3 march 2014]. Frankfurt am Main: Univ.-Bibliothek Frankfurt am Main. Taylor, V. (2002). Estate planning. St. Paul, Minn.: Thomson/West. Wells, R. (2011). The new federal estate tax, generation skipping transfer tax, and gift tax law of 2010. Concord, N.H.: New Hampshire Bar Association. Read More