Premium payment

A less known but equally important impediment to stable environmental insurance markets (because of fhe long lag time between premium payment and damage claims) is erratic real interest rates. The political mismanagement of monefary and fiscal policy and fhe resulting inflation during the 1968-1979 period continue to affect real interest rates even today. 

Insurance is accepting a small loss now (premium payment) to prevent a potentially larger loss in the future. If you take out a policy to protect yourself against a loss (such as theft), in a sense, you win if you are robbed. You were smart enough to protect yourself. On the other hand, if you paid the premium for 20 years and were never robbed, you still won because you transferred the risk at a small cost and gained peace of mind. Insurance is a way to transfer risk and worry to another so you come out ahead. No time is more important to transfer worry than when you retire. 

An estimated 30 million people in the U.S. are xmderinsured, i.e., having health insurance coverage less than adequate. As a consequence, these individuals and families experience high out-of-pocket costs (e.g., premium payments, deductibles, and copayments) and maximum benefit limits. Many policies exclude specific services, such as maternity services, mental health... 

The MLR is a cost revenue ratio. It is calculated by dividing the total costs of delivering the health and medical care covered by plan benefits (i.e. total costs) by the total revenues received from members in the form of dues or premium payments (i.e. total revenues), and then multiplying by 100%. 

The financial conundrum. There are a myriad of choices for funding the prescription benefit. Costs could be financed as they are right now with Part B participation. Beneficiaries and the government contribute to the benefit. Workers and retirees enrolled in employer-sponsored heath plans will have to be taken into account. Beneficiaries who are on Medicaid will present issues that the state and federal governments will have to resolve. Recent drug benefit proposals for the low-income participants have indicated a strong preference for full or partial subsidies for the premium payments and cost sharing for the prescriptions and pharmaceutical services utilized. 

These are an attractive product for the borrower who is required (perhaps by mandate) to obtain protection against higher interest rates, but who doesn t think that such protection is really needed. A self-funding cap has no up-front premium payment. Moreover, if interest rates stay below the strike rate, no premium is payable in arrears, either. Only when rates rise through the strike rate is a premium eventually payable, but this is typically double what the vanilla premium would have been. 

The buyer of protection pays to the seller a periodic premium, often quarterly, and expressed on a per annum basis. The actual cash amounts of all future premium payments are always known, since the terms of the default swap are set on the trade date. Therefore, we can think of these payments as a series of cash flows and value them according to the method above. We define d to be a function representing the number of calendar days since the inception of the default swap. We then define an integer variable / to represent each premium payment date, such that d is a function of /, d(j). Time is also a function of /, and that is simply the number of years from t = 0 until t = j For our sample 2-year credit default swap, the dates are shown in Exhibit 22.2. 

The function d(j) comes in handy as the premium payments for the credit default swap are calculated using the Actual/360 convention, therefore it is necessary to know the number of calendar days in each period. The present value of the series of premium payments is therefore ... 

Here each premium P is calculated on the notional amount and multiplied by its appropriate daycount fraction. The resulting cash flow is then discounted at the risk-free rate and finally multiplied by its survival probability, that is, the probability that the relevant preminm payment will actually take place, since in the event of a default all future premium payments will be cancelled. 

For our 2-year default swap example. Exhibit 22.3 displays the calculation of the value of each premium payment and their sum. 

The final component of the default swap is the accrued premium that may be payable by the buyer to the seller. If a default occurs somewhere in between two premium payment dates, which is likely considering there are only four payment dates a year on a quarterly default swap, then it is standard market practice for the buyer of protection to pay the accrued premium from the most recent premium payment date to and including the date of default. The value of this accrued on default is calculated in a similar manner to the value of the default protection above. However, instead of receiving 1 - R upon a default, the buyer will be paying a certain amount of accrued interest. 

Further, if there were a variety of bonds of a particular issuer outstanding, with different maturities, a term structure of hazard rates could be constructed—which in turn could be used to price default swaps of any maturity. By reducing everything to the hazard rate X, we are able to calculate correctly the prices of different instruments regardless of their interest or premium payment frequencies and daycount conventions. Similarly each instrument s mechanics are stripped away (e.g., a default swap versus a bond) to reveal the true hazard rate. 

Insurance companies sometimes conduct audits— generally for one of two reasons. First, they want to establish the correct premium payment. Second, the insurance company wants to help their client company operate more safely so that there is less chance that payments will have to be made, and that, if they are made, that they are of a smaller size. 

The queshon to be asked in respect of no fault liability, where individual employers contribute to a national scheme according to their performance, is whether the remoteness of the penalty (premium payment) from the events (the accidents and compensation pa5unents) demotivates employers from taking actions necessary to remove the cause of the accident. This is a complex area since it inevitably involves humanitarian attitudes as well as the purely economic. 

In equation (10.11), the first part of the left-hand side (LHS) is the expected present value of the stream of premium payments if no default occurs, and the second part of the LHS is the expected present value of the accrued premium payment in the period when default occurs. The right-hand side of (10.11) is the expected present value of the default payment in the period when default occurs. 

With the change in administration incoming Secretary of Transportation Brock Adams abandoned the Coleman Rule on the bases that public acceptance is not part of the traffic safety mandate, passive restraints clearly will be effective in improving traffic safety and the cost of the restramts will be more than offset through savings on insurance premium payments. In June 1977 under the Adams Rule, passive restraints were mandated for standard and luxury cars by the 1982 model year, for intermediate and compact size cars by the 1983 model year, and for subcompact and mini-size cars by the 1984 model year. The Adams Rule survived congressional and judidal review. ... 

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