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1 - Introduction and life insurance practice

Published online by Cambridge University Press:  13 August 2009

Thomas Møller
Affiliation:
PFA Pension, Copenhagen
Mogens Steffensen
Affiliation:
University of Copenhagen
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Summary

Introduction

This chapter provides an introduction to life insurance practice with focus on with-profit life insurance. The purpose is to give the reader sufficient insight to benefit from the remaining chapters. In life insurance, one party, the policy holder, exchanges a stream of payments with another party, the insurance company. The exchanged streams of payments form, in a sense, the basis of the insurance contract and the corresponding legal obligations. When speaking of life insurance practice, we think of the way this exchange of payments is handled and settled by the insurer. We take as our starting point the idea of the policy holder's account. This account can be interpreted as the policy holder's reserve in the insurance company and accumulates on the basis of the so-called Thiele's differential equation. Its formulation as a forward differential equation plays a crucial role, and this chapter explains in words the construction and the elements of this equation and its role in accounting. Note, however, that the policy holder's account is not in general a capital right held by the insured but a key quantity in the insurer's handling of his obligations.

The life insurance market

In this section we explain the most typical environments for negotiation and contractual formulations for a life insurance policy. We distinguish between defined benefits and what we choose to call defined contributions with partly defined benefits.

Defined contributions with partly defined benefits cover the majority of life insurance policies.

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Publisher: Cambridge University Press
Print publication year: 2007

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