The insurer business model
Thursday, March 6, 2008 | | |Result = earned premium + investment income - suffered losses - fees.
Insurers make money two ways: (1) the subscription, the process by which insurers select the risks to be insured and decide on the amount of premiums charged to accept these risks and (2) investing in the they collect premiums from policyholders.
The most difficult aspect of the insurance business is making policies. Using a wide assortment of data, insurers predict the likelihood that a complaint be filed against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they charge for them. The data are analyzed to project quite precisely the rate of future claims based on a given risk. The actuarial science uses statistics and probability to analyze the risks associated with the range of risks covered, and these scientific principles are used to determine an insurer's total exposure. In the event of termination of a given policy, the amount of premiums collected and investment earnings less about the amount paid out in claims is the insurer of the benefits of this policy. Of course, the insurer's point of view, some policies are winners (ie, the insurer pays less in claims and expenses than it receives in premiums and investment income) and others are losers (ie, the insurer will pay more in claims and expenses than it receives in premiums and investment income).
The insurer underwriting performance is measured in its combined ratio. The loss ratio (incurred losses and loss adjustment expenses divided by net earned premiums) is added to the expense ratio (underwriting expenses divided by net written premium) to determine the company combined ratio. The combined ratio reflects the company's overall underwriting profitability. A combined ratio below 100 percent indicates underwriting profitability, while more than 100 indicates an underwriting loss.
Insurance companies also earn profits on investment "float". "Float" or reserve available is the amount of money at hand at any given time, an insurer which has collected insurance premiums, but has not been paid in claims. Insurers start investing insurance premiums as they are collected and continue to earn interest on the debt until paid.
In the USA, loss of property and accident insurance companies was $ 142.3 billion during the five years ending in 2003. But overall profit for the same period was $ 68.4 billion, following the float. Some insurance industry, including Hank Greenberg, do not believe that it is always possible to maintain a profit of floating without a profit and underwriting, but this view is not universally. Naturally, the "float" method is difficult to be carried out in an economically depressed period. In declining markets caused insurers to abandon the investment and strengthen their underwriting standards. So, a bad economy, generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the "subscription" or cycle of insurance. [6]
Property and casualty insurers currently the most money on their auto insurance industry. Generally better statistics are available on auto and underwriting losses on this line of business has greatly benefited from advances in computing. In addition, property losses to the USA, because of natural disasters have exacerbated this trend.
Finally, claims and loss handling is the materialized usefulness of insurance. In managing the processing of applications function, insurers seek to balance the elements of customer satisfaction, administrative expenses, and claims too many leaks. Under this balance, the fraudulent practices of insurance are a major business risk that must be managed and overcome.
Insurers make money two ways: (1) the subscription, the process by which insurers select the risks to be insured and decide on the amount of premiums charged to accept these risks and (2) investing in the they collect premiums from policyholders.
The most difficult aspect of the insurance business is making policies. Using a wide assortment of data, insurers predict the likelihood that a complaint be filed against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they charge for them. The data are analyzed to project quite precisely the rate of future claims based on a given risk. The actuarial science uses statistics and probability to analyze the risks associated with the range of risks covered, and these scientific principles are used to determine an insurer's total exposure. In the event of termination of a given policy, the amount of premiums collected and investment earnings less about the amount paid out in claims is the insurer of the benefits of this policy. Of course, the insurer's point of view, some policies are winners (ie, the insurer pays less in claims and expenses than it receives in premiums and investment income) and others are losers (ie, the insurer will pay more in claims and expenses than it receives in premiums and investment income).
The insurer underwriting performance is measured in its combined ratio. The loss ratio (incurred losses and loss adjustment expenses divided by net earned premiums) is added to the expense ratio (underwriting expenses divided by net written premium) to determine the company combined ratio. The combined ratio reflects the company's overall underwriting profitability. A combined ratio below 100 percent indicates underwriting profitability, while more than 100 indicates an underwriting loss.
Insurance companies also earn profits on investment "float". "Float" or reserve available is the amount of money at hand at any given time, an insurer which has collected insurance premiums, but has not been paid in claims. Insurers start investing insurance premiums as they are collected and continue to earn interest on the debt until paid.
In the USA, loss of property and accident insurance companies was $ 142.3 billion during the five years ending in 2003. But overall profit for the same period was $ 68.4 billion, following the float. Some insurance industry, including Hank Greenberg, do not believe that it is always possible to maintain a profit of floating without a profit and underwriting, but this view is not universally. Naturally, the "float" method is difficult to be carried out in an economically depressed period. In declining markets caused insurers to abandon the investment and strengthen their underwriting standards. So, a bad economy, generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the "subscription" or cycle of insurance. [6]
Property and casualty insurers currently the most money on their auto insurance industry. Generally better statistics are available on auto and underwriting losses on this line of business has greatly benefited from advances in computing. In addition, property losses to the USA, because of natural disasters have exacerbated this trend.
Finally, claims and loss handling is the materialized usefulness of insurance. In managing the processing of applications function, insurers seek to balance the elements of customer satisfaction, administrative expenses, and claims too many leaks. Under this balance, the fraudulent practices of insurance are a major business risk that must be managed and overcome.
From this post I got to know so many hidden secrets about insurers and the way they used to make money. You have posted extremely different and unique information that I haven't read anywhere else. Thanks.
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