Ains Insurers Financial Performance Flashcards
insurers receive income from these two major sources:
the sale of insurance (underwriting) and the investment of funds.
The sale of insurance generates
underwriting income. which is the amount remaining (either a gain or a loss) after underwriting losses and expenses are subtracted from premiums.
The investment of funds generates
investment income, which is the amount remaining (either a gain or a loss) after investment expenses are subtracted from the gross amount earned on investments during a period.
Written premiums
the total premiums on all policies put into effect, or “written,” during a given period. For example, when a policy is written to become effective on July 1 for a premium of $600, that entire $600 is counted as written premiums on July 1, even though the insurer may not have collected it yet.
if the policy were subsequently canceled by the insurer or the policyholder, the unearned income would not be earned. Consequently, the use of written premiums could create a false impression of profitability.
Earned and Unearned premiums
the portion of the written premiums that apply to the part of the policy period that has already occurred. The remaining portion of written premiums applies to the policy period that has not yet occurred and is therefore called unearned premiums, representing insurance coverage yet to be provided.
Underwriting expenses
The losses paid by an insurer’s policies plus the expenses associated with controlling and adjusting those losses are the primary underwriting expenses.
the major expense category for most insurers is payment from losses related to claims.
Claims are demands for payment made by insureds based on the conditions specified in their insurance policies. For property-casualty insurers, loss payments often represent 70 percent to 80 percent of their total costs.
Investment is included
loss adjustment expenses is included
payment for losses is included
policyholders’ surplus
insurer is legally required to maintain a certain amount of funds, called policyholders’ surplus, to meet its obligations even after catastrophic losses. When the insurer is operating profitably, its policyholders’ surplus is generally available for investment.
must also have funds available if the insured cancels its policy during the policy period and needs to provide a refund for the unearned premiums.
Insurer’s Expenses:
expenses from underwriting and investment. some insurer’s also pay dividends to their policyholders. with investment expense: salaries and expenses with running the investment dept
In addition to losses and loss adjustment expenses, the costs of providing insurance include significant “other underwriting expenses,” which can apply to multiple departments and can be categorized as these: acquisition expenses; general expenses; and premium taxes, licenses, and fees.
Paid Losses
Losses that have been paid to, or on behalf of, insureds during a given period.
Incurred Losses
The losses that have occurred during a specific period, no matter when claims resulting from the losses are paid.
Incurred Losses = Paid Losses + Loss Reserves
Incurred But Not Reported (IBNR)
Losses that have occurred but have not yet been reported to the insurer.
loss adjustment expenses
property insurance claims, a claim representative must identify the cause of the loss and decide whether the loss is covered by the policy.
For a liability claim, the insurer must determine either the insurer is responsible for the property or bodily injury and if so, for how much.
Thus, determining the legal responsibility of the insured for a loss might require a complex and costly investigation. also liability insueres may have to defend the insurer in a lawsuit regarldess if they are ultmately held responsible.
Acquisition expenses
this is a signifant expense in regards to the category of underwriting expenses. property-casualty insurers have a marketing system to market and distribute their products. This includes the producers invovled in the sale and the admin who assist in the process of the sale.
General expenses
these are expenses that are not directly related to claims, marketing, or underwriting but are still necessary to run the insurer’s operations. staffing and maintaining functional departments such as accounting, legal, statistical and data management, actuarial, customer service, information technology, and building maintenance. In addition, insurers must provide the necessary services to support these functions.
Taxes
Like other businesses, insurers pay income taxes on their taxable income. Taxable income might differ from net income before taxes because of the special requirements of the tax code. For example, a portion of interest earnings from qualified municipal bonds is not taxed, and deductions for certain expenses are limited. Insurers often adjust their investment strategy in response to changing tax laws.
To compare revenue and expenses:
To compare revenue and expenses, an insurer must calculate not only its paid losses but also its incurred losses.
Financial monitoring
To monitor financial performance, insurers and others, including regulators and financial rating organizations (such as A.M. Best Company and Standard & Poor’s Corporation), examine insurers’ financial statements.
An insurer’s financial statement shows a loss reserve and an unearned premium reserve. These reserves are part of the insurer’s Total Liabilities.
Two statements used: balance sheet and income statement
Balance Sheet
shows an insurer’s financial situation at a particular point in time. This includes the insurer’s admitted assets, liabilities (such as unearned premium reserve, loss reserves), and policyholder’s surplus. cash and short-term investments are also shown on an insurer’s balance sheet.
assets
insurers accumulate funds when they receive premiums and investment income. insurers invest them in income-producing assets. Assets include:
cash
stocks
bonds
properties (buildings, office furniture, equipment)
accounts receivable (policyholders, agents, brokers, reinsurers)
Finciancial reports filed with state insurance regulators require an insurer’s assets to be classified as either admitted assets or nonadmitted assets
Admitted Assets
types of property that regulators allow insurers to show as assets on their fincancial statements. they are types of assets that are easily liquidated or converted to cash at or near the property’s market value- regulators allow admitted assets to be shown on the insurers’ financial statements. Admitted assets include: -cash
- stocks
- bonds
- mortgage
- real estate
- certain computer equipment
- premium balances due in less than ninety days.
Nonadmitted Assets
cannot be easily converted to cash at or near market value if the insurer were to liquidate its holdings. so regulators do not allow insurers to show them as assets on their financial statements. nonadmitted assets include premiums that are more than 90 days overdue.
Liabilities and Financial Statements
insurer has a financial obligation to its policyholders-to satisfy legitimate claims. three types of liabilities are found on an insurer’s financial statements :
Loss Reserve and Loss Expense Reserve
Unearned Premium Reserve
Other Liabilities (typically small, micellaneious obligations)
Loss Reserve
this is considered a liability because it represents a fincial obligation owed by the insurer. It is the insurer’s best estimate of the final settlement amount on claims that have not yet been settled. while it seems impossible to establish the loss reserve amount, insurers use their experience, the law of large numbers, and their actuarial and statistical expertise to make reliable estimates of future claim settlement values. also set up loss expense reserve to estimate the cost of settling the claims included in the loss reserve.
Unearned Premium Reserve
this is a liability because it represents insurance premiums prepaid by insured for services that the insurer has not yet rendered. If the insurer ceased operations and canceled all of its policies, the unearned premium reserve would represent the total of premium refunds that the insurer would owe its current policyholders.
