The Private Insurance Industry: Financial Operations of Insurers

The Private Insurance Industry:
Financial Operations of Insurers
指導老師：王詩韻老師
學生：曾雅琪 (69936017) ，藍婉綺 (69936011)
Contents
 Balance Sheet of Insurer
 Income & Expense Statement of Insurer
 Financial Statements: Life Insurer vs. Property & Casualty
Insurer
 Rate Making in Property and Casualty Insurance
 Rate Making in Life Insurance
Balance Sheet of Property &
Casualty Insurer
Balance Sheet of Property &
Casualty Insurer (contd.)
 Assets: Primarily financial assets.
 Liabilities: Since premiums are paid in advance, but the
period of protection extends into the future, an insurer must
establish certain reserves to assure that premiums collected
in advance will be available to pay future losses.
 Loss Reserves: an estimated amount for (1) claims reported and
adjusted but not yet paid, (2) claims reported and filed but not yet
adjusted, and (3) claims for losses incurred but not yet reported to
the company
 Three types - case reserves, reserves based on the loss ratio method, and reserves
for incurred-but-not reported claims
 Unearned Premium Reserve: the unearned portion of gross
premiums on all outstanding policies at the time of valuation
 Policyholders’ Surplus: the difference between an insurance
company’s assets and liabilities
Income & Expense Statement of
Property & Casualty Insurer
Income & Expense Statement of
Property & Casualty Insurer (contd.)
 Revenues: Cash inflows that the company can claim as
income - Premiums and Investment income
 Expenses: Cash outflows from the business
 Measuring Profit or Loss
 Loss ratio
 Expense ratio
 Combined ratio
 Investment Income ratio
 Overall operating ratio

Financial Statements:
Life Insurer vs. Property & Casualty Insurer
 Assets of life insurance companies tend to be of longer
duration than the assets of property and casualty insurers
 A policyholder may borrow the cash value. So, life insurance
policy loans are an asset for life insurers
 Life insurers maintain separate accounts for the assets
backing interest-sensitive products, such as variable
annuities
 The major liability item for a life insurance company is the
policy reserve. Two other important reserves are the reserve
for amounts held on deposit and the asset valuation reserve
 A life insurer’s net gain from operations equals total
revenues, less total expenses, policyholder dividends, and
federal income taxes.
Rate Making in Property and
Casualty Insurance
 Rate making objectives:
 Regulatory – rates must be adequate, but must not be excessive and unfairly
discriminatory.
 Business – simplicity, responsiveness, stability, and encouragement of loss
control
 Rate - Price per unit of insurance
 Exposure unit: The unit of measurement used in insurance pricing.
 Pure premium: Portion of the rate needed to pay losses and loss-
adjustment expenses
 Loading - Amount that must be added to the pure premium for other
expenses, profit, and a margin for contingencies. Gross rate - Consists
of the pure premium and a loading element
 Gross premium: consists of the gross rate multiplied by the number of
exposure units
Rate Making in Property and
Casualty Insurance (contd.)
Three basic rate-making methods in property and casualty insurance:
Judgment rating: Each exposure is individually evaluated, and the rate
is determined largely by the judgment of the underwriter
Class rating: Exposures with similar characteristics are placed in the
same underwriting class, and each is charged the same rate
 pure premium method and the loss ratio method
Merit rating: a rating plan by which class rates (manual rates) are
adjusted upward or downward based on individual loss experience
 Schedule rating, experience rating, & retrospective rating
Rate Making in Life Insurance
 Life insurance actuaries determine the probability of death in any
given year, and based on this probability determine the expected
value of the loss payment.
 These expected future payments are discounted back to the start of
the coverage period and summed to determine the net single
premium.
 The net single premium may be leveled to convert to installment
premiums.
 A loading for expenses is added to determine the gross premium.
Thanks
Ref. Ch 7 from Rejda et al. 13th Ed.

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The Private Insurance Industry:

Financial Operations of Insurers

 Investment Income ratio

 Overall operating ratio

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