FIN360 CHAPTER 7 FINANCIAL OPERATIONS OF INSURERS

NOT DONE

Financial operations for PROPERTY & CASUALTY companies

Financial operations for life companies

Elements of insurance company balance sheets

LOSS RESERVE

AN ESTIMATED AMOUNT FOR:

• CLAIMS REPORTED AND ADJUSTED, BUT NOT PAID YET (SHORT TERM)

• CLAIMS REPORTED AND FILED, BUT NOT YET ADJUSTED

• CLAIMS INCURRED AND FILED, BUT NOT YET REPORTED (IBNR) TO THE COMPANY (HAPPENED BUT DOESNT KNOW ABOUT IT YET)

INCURRED-BUT-NOT-REPORTED (IBNR) RESERVES

A RESERVE THAT MUST BE ESTABLISHED FOR CLAIMS THAT HAVE ALREADY OCCURRED BUT THAT HAVE NOT YET BEEN REPORTED

PROPERTY & CASUALTY INSURANCE STATE LAWS REQUIRE:

1. RATES SHOULD BE ADEQUATE FOR PAYING ALL LOSSES AND EXPENSES

2. RATES SHOULD NOT BE EXCESSIVE, SUCH THAT POLICYHOLDERS ARE PAYING MORE THAN THE ACTUAL VALUE OF THEIR PROTECTION

3. RATES MUST NOT BE UNFAIRLY DISCRIMINATORY; EXPOSURES THAT ARE SIMILAR WITH RESPECT TO LOSSES AND EXPENSES SHOULD NOT BE CHARGED SIGNIFICANTLY DIFFERENT RATES

LIFE INSURANCE STATE LAW REQUIRES: ????

ACTUARIES USE A MORTALITY TABLE OR INDIVIDUAL COMPANY EXPERIENCE TO DETERMINE THE PROBABILITY OF DEATH AT EACH ATTAINED AGE

MEASUREMENTS OF PROFITABILITY FOR PROPERTY & CASUALTY INSURANCE

• LOSS RATIO

• EXPENSE RATION

• COMBINED RATIO

• INVESTMENT INCOME RATIO

• OVERALL OPERATING RATIO

LOSS RATIO

THE RATIO OF INCURRED LOSSES AND LOSS ADJUSTMENT EXPENSES TO PREMIUMS EARNED

• Loss ratio = (incurred losses + loss adjustment expenses)/ premiums earned

EXPENSE RATIO

 EQUAL TO THE COMPANY'S UNDERWRITING EXPENSES DIVIDED BY WRITTEN PREMIUMS

• expense ratio = underwriting expenses / premiums written

COMBINED RATIO

THE SUM OF THE LOSS RATIO AND THE EXPENSE RATIO

 INVESTMENT INCOME RATIO

COMPARES NET INVESTMENT INCOME TO EARNED PREMIUMS

• investment income ratio = net investment income/ earned premiums

OVERALL OPERATING RATIO

EQUAL TO THE COMBINED RATIO MINUS THE INVESTMENT INCOME RATIO

• overall operating ratio = combined ratio - investment income ratio

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THE AMOUNT ADDED TO THE PURE PREMIUM FOR OTHER EXPENSES, PROFIT, AND A MARGIN FOR CONTINGENCIES