Financial Chapter 6

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Financial Chapter 6
2011-12-05 15:08:55

Chapter 6: How the Economy Affects Insurance Companies
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  1. gross domestic product (GDP)
    the market value of all final goods & svcs produced w/in a country in a given time period, usually a year.
  2. market value
    the price that ppl would be willing to pay for a good or svc, rather than the cost of producing it.
  3. final good
    A good that is consumed rather than a good used to produce another product.
  4. real GDP
    Gross domestic product that has been adjusted for changes in price levels.
  5. per capita GDP
    GDP divided by a country's population.
  6. unemployment rate
    % of ppl in the labor force who don't have jobs but are actively seeking jobs.
  7. business cycle
    A recurring pattern of fluctuations in the econonomic activity of a nation over a specified period of time, usually a year or more.
  8. expansion
    The phase in the business cycle where unemployment is LOW and real GDP RISES for 2 or more consecutive quarters.

    aka boom
  9. contraction
    Phase in bus. cycle; unem rises, real GDP decreases from an earlier quarter.

    aka downturn
  10. recession
    A significant decline in economic activity spread across the economy, lasting more than a few months. Unem is usually high and real GDP usually falls for 2 or more quarters.

    aka slump
  11. depression
    An economic condition where real GDP declines drastically and, for a period of at least 2 years, unemployment is unusually high, prices for most goods & svcs are unusually low, and there is a general inability to buy stuff relative to the amount that could be produced using current resources and technology.
  12. recovery
    The phase of the business cycle where real GDP increases for two or more quarters after a recession or depression.
  13. trend
    A movement in a specific direction, either upward or downward.
  14. life expectancy
    The avg # of yrs of life remaining for a group of ppl.
  15. variation
    A change or fluctuation in a trend.
  16. seasonal variation
    A variation that results from routine patterns that typically occur in the course of one year.
  17. cyclical variation
    A variation that results from changes that affect more than one phase in the business cycle over a period of several years.
  18. random variation
    A variation that results from changes that are either unexpected or are one-time occurrences.
  19. economic indicator
    A statistical variable that demonstrates the direction of an economy.

    see leading indicator, coincident indicator, and lagging indicator.
  20. leading indicator
    A statistical variable that tends to change BEFORE gross domestic product (GDP) changes.
  21. coincident indicator
    A statistical variable that changes at about the same time that gross domestic product (GDP) changes.
  22. industrial production
    A coincident indicator that measures the raw volume of goods produced by industrial firms, like factories, mines, and electrical utilities.
  23. personal consumption expenditures (PCE)
    A coincident indicator that contains figures on how much $ ppl are spendng on goods & svcs.
  24. lagging indicator
    A statistical variable that changes AFTER GDP changes.
  25. prime rate
    The interest rate that commercial banks charge their best corporate customers.
  26. inflation
    A rise in the general level of prices in an economy over a period of time.
  27. Consumer Price Index (CPI)
    A measurement that compares the avg price of a market basket of goods/svcs at a stated point in time to the avg price of the same mkt basket at a different point in time.
  28. real rate of interest
    The difference b/t the nominal, or stated, rate of interest and the expected inflation rate.
  29. accumulated value
    For a fixed deferred annuity, the net amt paid for the annuity, plus interest earned, less the amount of any w/drawals or fees.
  30. guaranteed minimum interest-crediting rate
    For a fixed deferred annuity, the min rate that an insurer must credit to the contract's accumulated value.
  31. current interest-crediting rate
    For a fixed deferred annuity, the rate of interest that an insurer declares and pays; this rate of interest is generally higher than the guaranteed min interest-crediting rate.
  32. disintermediation
    A process in which large #s of ppl w/draw funds from financial intermediaries, like banks, savings & loan associations, and ins co's, in order to directly invest in instruments yielding higher returns.
  33. deflation
    A fall in the general price level.
  34. disinflation
    A decrease in the rate of inflation.
  35. hyperinflation
    An out of control inflationary spiral.
  36. stagflation
    A combo of inflation, slow economic growth, and high unemployment.
  37. spread compression
    The narrowing of an insurer's interest spread.
  38. refinance
    To make new borrowing arrangements, usually because of a drop in market interest rates.
  39. fiscal policy
    In economics, the use of gov's spending and taxation to change aggregate demand - indicated by the level of spending - in the economy.
  40. expansionary fiscal policy
    The type of fiscal pol used to increase aggregate demand in order to increase the pace of the economy.
  41. budget deficit
    In fiscal policy, budget where gov't expenditures exceed gov't revenues in a given time period.
  42. contractionary fiscal policy
    fiscal policy used to decrease aggregate demand in order to slow down the economy.
  43. budget surplus
    In fiscal policy, a budget where gov't revenues exceed gov'd expenditures in a given time period.
  44. monetary policy
    the strategy a country's monetary authority uses to increase or decrease the money supply in an effort to stabilize the economy.
  45. Federal Reserve System
    In the US, the central banking system and monetary authority.
  46. Objective: How is GDP used to measure an economy's performance?
    By tracking annual and quarterly data for real GDP (GDP adjusted for changes in price levels), in a given country, we can assess the performance of that country's economy over time.
  47. Objective: be able to calculate the unemployment rate for a country.
    Unemployment rate = Unemployed / Civilian labor force
  48. Objective: List the phases of the business cycle & what occurs during ea phase.
    • Expansion: unem low, real GDP rises for 2 or more consecutive quarters. Profits rise, spending & production increases.
    • Contraction: unem rises, real GDP decreases from earlier quarter, overall speding decreases, new home construction stabilizes.
    • Recession: significant decline spread across economy lasting more than a few months. Unem high, real GDP falls for 2 or more quarters, businesses stop growing, housing/interest rates decrease.
    • Can worsen into a depression.
    • Recovery: real GDP increases for 2 or more quarters after a rec/depression. Typically begins in last quarter or 2 of a rec/dep.
  49. Objective: What are the effects of trends and seasonal, cyclical and random variations?
    They affect the business cycle. Increased life expectancies result in decrease in benefit costs for life insurers, but an increase in costs for life annuity issuers.
  50. Effects of seasonal, cyclical and random varations?
    • Seasonal: more claims during flu season, hurricane season.
    • Cyclical: change w/the business cycle, like intest rates.
    • Random: unexpected or 1 time occurrences like wars & natural disasters, may have to pay claims all at once.
  51. Objective: Describe the purpose of the leading, coincident, and lagging economic indicators, and give examples of each.

    Leading Indicators
    • statistical variable changes BEFORE GDP changes.
    • First time claims for unem ins rise.
    • New building permits issued.
    • New orders for goods/materials.
    • An overall change in stock prices.
    • Consumer expectations/confidence.
  52. Objective: Describe the purpose of the leading, coincident, and lagging economic indicators, and give examples of each.

    Coincident Indicators
    change at the same time as GDP.

    Figures on industrial production & personal consumption.
  53. Objective: Describe the purpose of the leading, coincident, and lagging economic indicators, and give examples of each.

    Lagging Indicators
    Change after the GDP changes.

    • the Prime Rate
    • the Unemployment Rate
  54. Objective: How do changes in price levels affect insurance companies?
    • Inflation - increased salary expenses. Increased market interest rates, resulting in lower value on its fixed-income investments like bonds.
    • Withdrawal of funds by customers (disintermediation).
    • Deflation - co earns less on its investments than it credits to some contracts; bonds issuers more likely to default.
  55. Objective: Explain the effects on insurers of increasing market interest rates and decreasing market interest rates.
    • Nondiversifiable risk.
    • Influences the interest-crediting rates co's pay to customers w/interest sensitive products like cash value life ins & fixed deferred annuities.
    • Influences market values of bonds, mortgages and other securities.
  56. Objective: Differentiate b/t fiscal policy and monetary policy & explain how ea is used to stabilize and economy.
    • Both have same goals, but differ in how they pursue them.
    • Fiscal: use of gov't spending & taxation to change aggregate demand.
    • Monetary: a country's monetary authority increases or decreases the money supply to try to stabilize the economy.