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CONTRACTUAL SAVINGS INSTITUTIONS

CONTRACTUAL SAVINGS INSTITUTIONS. PENSION FUNDS INSURANCE COMPANIES. TYPES OF INSTITUTIONS. PROVIDENT FUNDS LIFE INSURANCE COMPANIES FUNDED SOCIAL SECURITY SCHEMES OCCUPATIONAL PENSION FUNDS PERSONAL PENSION PLANS. ROLE OF CONTRACTUAL SAVINGS. PERSONAL SAVINGS AND ECONOMIC GROWTH

kavindra-gaurhari
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CONTRACTUAL SAVINGS INSTITUTIONS

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  1. CONTRACTUAL SAVINGS INSTITUTIONS PENSION FUNDS INSURANCE COMPANIES

  2. TYPES OF INSTITUTIONS • PROVIDENT FUNDS • LIFE INSURANCE COMPANIES • FUNDED SOCIAL SECURITY SCHEMES • OCCUPATIONAL PENSION FUNDS • PERSONAL PENSION PLANS

  3. ROLE OF CONTRACTUAL SAVINGS • PERSONAL SAVINGS AND ECONOMIC GROWTH • DEBT MARKETS • CAPITAL MARKETS • LATIN AMERICAN EXPERIENCE

  4. PENSION FUNDSISSUES • PUBLIC OR PRIVATE • DEFINED BENEFIT/DEFINED CONTRIBUTION • VOLUNTARY OR COMPULSORY • FUNDED OR UNFUNDED • LUMP SUM OR PENSION

  5. PENSION FUNDSORIGINS • BISMARCK • UNION NEGOTIATIONS • ILO

  6. SOCIAL SECURITY REFORM • INCENTIVES ARE FISCAL AND SOCIAL, BUT ALSO FINANCIAL • PRIVATIZATION AS PART OF THE SOLUTION • CREATE PRIVATE FUNDS • MULTI-PILLAR APPROACH • COROLLARY INSURANCES

  7. CHILE • PRIVATELY MANAGED FUNDS • $25 BILLION UNDER MANAGEMENT • 40% GDP • 12% REAL RETURN 1981-1995

  8. 1981: GOV’T 28% TERM DEP 62 MORT SEC 9 CORPORATE 1 1994: GOV’T 40% EQUITIES 32 MORT SEC 14 TERM DEP 6 CORPORATE 6 INV FUNDS 1 FOREIGN 1 CHILEASSET STRUCTURE

  9. PENSION FUNDING EMPLOYER CONTRIB EMPLOYEE CONTRIB INVESTMENT INCOME EXPENSES BENEFITS

  10. INSURANCE COMPANIES • HISTORY • PURPOSES • APPROACHES TAKEN IN VARIOUS COUNTRIES • STATE-OWNED VS PRIVATE • COMPULSORY

  11. HOW INSURANCE AIDS ECONOMIC DEVELOPMENT REDUCES ANXIETY CAN SUBSTITUTE FOR GOV’T PROMOTES FINANCIAL SECURITY SECURITY PROGRAMS MOBILIZES SAVINGS

  12. HOW INSURANCE AIDS ECONOMIC DEVELOPMENT (2) • ENABLES RISK TO BE MANAGED MORE EFFICIENTLY • ENCOURAGES LOSS MITIGATION • FOSTERS A MORE EFFICIENT CAPITAL ALLOCATION

  13. ASSETS DEBT GOV’T CORPORATE MORTGAGES SHARES FIXED ASSETS RECEIVABLES CASH LIABILITIES TECHNICAL RES UNPAID CLAIMS PAYABLES AGENTS OTHERS CAPITAL RETAINED EARNINGS BALANCE SHEET

  14. PREMIUMS (NET OF REINSURANCE) INVESTMENT INCOME CLAIMS (NET OF REINSURANCE) EXPENSES, TAXES COMMISSIONS INCREASE IN TECHNICAL RES INCOME STATEMENT

  15. PERMANENT VS TERM NEW FORMS UNIVERSAL LIFE UNIT-LINKED LIFE INSURANCE

  16. PROPERTY/CASUALTY INSURANCE • RISK MANAGEMENT • COMPULSORY TPL • LINES OF BUSINESS • REINSURANCE

  17. INSURANCE AND CONTRACTUAL SAVINGS OBJECTIVES Developing Long Term Savings Developing Risk Management Capabilities MEANS • Developing an enabling environment • Regulation, Supervision, Tax Treatment • Corporate Governance • Financial and ESW Products for Natural Hazard Risk Transfer • Reform of Pension Systems • Private Sector Alternatives • Integrated Design

  18. PROBLEMS AND ISSUES • OBJECTIVE IS TO ESTABLISH A NURTURING ENVIRONMENT • ELIMINATE REPRESSIVE REGULATION • ESTABLISH EFFECTIVE SUPERVISORY SYSTEMS

  19. IMPEDIMENTS TO GROWTH IN CONTRACTUAL SAVINGS • MACROECONOMIC INSTABILITY • LACK OF DISPOSABLE INCOME • RELIANCE ON EXTENDED FAMILY • REPRESSIVE REGULATION

  20. WORLD BANK EFFORTS TO PROMOTE CS • CREATE AN ENABLING ENVIRONMENT • REFORM OF REGULATION • OPEN MARKET • INVESTMENT RULES • STRENGTHEN SUPERVISION • TAX TREATMENT • CORPORATE GOVERNANCE • BUILDING INSTITUTIONS

  21. CONSUMER PROTECTION • PROBLEMS OF INFORMATION • DISCLOSURE • REGULATORY SYSTEMS

  22. MINIMUM CAPITAL REQUIREMENTS • INITIAL AND CONTINUING • PF ASSET MANAGERS • EU STANDARDS

  23. VALUATION • ASSET ITEMS • LIABILITIES • CONTINGENT EVENTS • LONG-TERM • ACTUARIES • INDEPENDENT EVALUATORS

  24. SUPERVISORY APPROACH • NOT A “CAMEL” BUT A CARAMEL • INCLUDE CONCERNS WITH RESPECT TO • REINSURANCE • ACTUARIAL RESERVES

  25. CARAMEL • CAPITAL ADEQUACY • ASSET QUALITY • REINSURANCE • ACTUARIAL RESERVES • MANAGEMENT • EARNINGS • LIQUIDITY

  26. ENVIRONMENTAL ISSUES • FINANCIAL INFRASTRUCTURE • ACCOUNTING • PAYMENTS SYSTEMS • INVESTMENT OPPORTUNITIES • HOUSING • PUBLIC UTILITIES

  27. PRUDENTIAL RULES • INVESTMENTS • QUALITY • DIVERSIFICATION • MATCHING • FOREIGN PLACEMENTS

  28. FIVE PLAYERS • BOARD OF DIRECTORS • MANAGEMENT • AUDITOR • ACTUARY • SUPERVISOR

  29. SUPERVISION • PREPARATION OF ADEQUATE REGULATORY SYSTEM • PREPARATION OF EFFECTIVE • PROCEDURES • WORK INSTRUMENTS • TRAINING • TWINNING

  30. CONSEQUENCES OF REGULATORY FAILURE • LOSS OF CONFIDENCE • SYSTEM RISK • RESTRICTED GROWTH

  31. GUARANTEES • IDENTIFY RISKS • INVESTMENT RESULTS • MISMANAGEMENT • FRAUD • SUPERVISION COMES FIRST • COUNTRY EXAMPLES

  32. INSURANCE COMPANIES • STATE-OWNED MONOPOLIES • PRIVATIZATION • LACK OF DEVELOPMENT OF MARKET: • CIS COUNTRIES • AFRICA • NUMEROUS SMALL COMPANIES

  33. REPRESSIVE REGULATION • INVESTMENT RULES THAT MANDATE PURCHASE OF GOVERNMENT SECURITIES • CONTROL OF PREMIUM LEVELS • CONTROL OF CONTRACT PROVISIONS

  34. TYPICAL CASE • LARGE, STATE-OWNED MONOPOLY • LIMITED OR NO SUPERVISION • PUBLIC SKEPTICAL ABOUT INSURANCE • INSURANCE BENEFITS COMPROMISED THROUGH INFLATION

  35. REMEDIAL ACTION • WRITE NEW INSURANCE LEGISLATION • ENCOURAGE ENTREPRENEURS • NEED HIGH INITIAL CAPITAL • WELCOME ENTRY OF FOREIGNERS • ESTABLISH SUPERVISORY AGENCY • RE-STRUCTURE STATE COMPANY

  36. RE-DRAFT LEGISLATION • REMOVE CONTROLS • LIBERALIZE INVESTMENT PROVISIONS • ENHANCED ROLE FOR AUDITOR • ENHANCED ROLE FOR ACTUARY

  37. SOLVENCY MONITORING • REGULATOR CONCENTRATES ON MEASUREMENT OF FINANCIAL STRENGTH • CAPITAL ADEQUACY RULES • FREEDOM IN PRICING/PRODUCT DESIGN • REGULATOR REQUIRES A HIGH DEGREE OF PROFESSIONALISM

  38. CAPITAL STANDARDS • EUROPEAN COMMUNITY • LIFE INSURANCE : 4% + 3/MIL • PROPERTY/CASUALTY: • 16-20% OF CLAIMS • 16-20% OF PREMIUMS • USA AND CANADA: • RISK-BASED CAPITAL FORMULA

  39. SUPERVISORY AGENCY • RECRUIT STAFF • PROVIDE TRAINING • SEMINARS ON-SITE • CROSS-TRAINING /OTHER COUNTRIES • PREPARE PROCEDURES MANUALS • DEVELOP PRESCRIBED FINANCIAL RETURNS (STATEMENTS)

  40. DEVELOPING COUNTRIES - ISSUES • MACROECONOMIC PROBLEMS • LACK OF HUMAN CAPITAL • LEVEL OF DISPOSABLE INCOME • TAXATION • CONSUMER CONFIDENCE • AVAILABLE INVESTMENT OPTIONS • ROLE OF STATE COMPANIES

  41. AGRICULTURAL OR CROP INSURANCE • LARGE AGENCY COSTS AND MORAL HAZARD • REDUCE THESE AND PRIVATE SECTOR WILL DESIGN NEW PRODUCTS • OBJECTIVE IS TO OPTIMIZE GOVERNMENT SUBSIDIES

  42. FINANCIAL RISK MANAGEMENT FOR NATURAL DISASTERS • STUDY EFFECT ON FINANCIAL SECTOR • EFFECT ON ECONOMIC GROWTH • ROLE OF FINANCIAL MARKETS IN PROMOTING RISK MITIGATION

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