Profit = Earned Premium + Investment Income - losses - cost of subscriptions.
Insurers make money in two ways. Through the subscription, the process by which insurers choose which risks insuring and deciding how much premium to charge for accepting those risks and by investing the premiums collected from policyholders.
The most difficult aspect of the business of insurance is the subscription policy. On the basis of a wide variety of data, insurers predict the likelihood that a claim is made against their policies and price products accordingly. At the end of the policy term, the amount of premiums collected less the amount paid out in claims is the insurer underwriting profits.
The insurer underwriting performance is measured in its combined ratio. The loss ratio (incurred losses and loss adjustment expenses divided by net earned premium) is added to the list of costs (subscription costs divided by net premium written) to determine the ratio of the combined company. The combined ratio is a reflection of society overall underwriting profitability. A combined ratio below 100 percent indicates profitability, while anything over 100 indicates a loss.
A company that is renowned for achieving the commitments of benefit is American International Group.
Berkshire Hathaway, by contrast, is famous for making money "float" instead of the benefits of subscribing. "Floating" describes a process by which insurance companies invest insurance premiums as soon as they are collected and the interest on that money before the claims are to be paid.
Naturally, the "float" method is difficult to implement in a period of economic depression. Bear markets that cause insurers to shift investments and to toughen the rules of your subscription. Therefore, a poor economy generally means high insurance premiums.
Insurers currently most of its money is from the automobile insurance line of business. Generally better statistics are available on losses and automated underwriting this line of business has benefited greatly from advances in information technology. Additionally, property losses in the U.S. due to natural disasters have perpetuated this trend.
Monday, 29 June 2009
Principles of Insurance Contract
A property insurance policy or liability is a "personal contract", a "conditional contract", a "unilateral contract", an "adhesion contract", a "contract of indemnity and a contract that requires the person insured has an insurable interest in the contingency insured against.
Plus: a contract of insurance is one of Uberrima faith. This is a Latin phrase meaning "good faith" (or literally translated, "more abundant faith"). Name is a legal doctrine which governs insurance contracts. This means that all parties to an insurance contract must deal in good faith, make a complete declaration of all material facts in the insurance proposal. This contrasts with the legal doctrine of caveat emptor (let the buyer beware).
Contract for personal property policies and liability insurance cover persons and not property or operations. Although the terms "insured my house" or "insured my motorcycle" are used commonly, they are not technically correct. The contract between the insurer and the insured is a contract between an insurer and a person (s) on the basis of their financial needs, "insurable interest" in the subject or the responsibility to be insured. In other words, the question of whether the payment is due to the occurrence of a contingency, and how this payment will be measured, depends on the economic losses suffered by the person (s).
Conditional
Property and liability insurance policies are said to be "conditional contracts" because the obligation of the insurer to perform may be conditioned to policyholders who meet certain conditions.
Unilateral contract
Only one party is legally bound to contractual obligations after the premium is paid to the insurer. Only the insurance company has made a promise of future performance, and the insurer can only be charged with breach of contract.
Adhesion contract
Property and liability insurance policies are said to be "contracts of adhesion" because the insurer and the insured are of unequal bargaining power where the insured can not negotiate the terms of the contract and must supply the insurer as it did. Importantly, the rule of law regarding "contracts of adhesion" is that any ambiguities resolved in favor of policyholders.
Contract of Indemnity
Property and liability insurance policies are said to be "guarantee contract" because the purpose of insurance is to indemnify the insured, ie, to overcome a loss that the insured has suffered. The principle of compensation is that the insured should not benefit from the policy. This does not preclude that the insured suffers a loss. In fact, many policies include a deductible which guarantees that each party will pay the insured for the loss of self.
Insurable interest
Insurable interest is an economic loss was suffered an adverse event to the person (s) of the insured. An insurance contract is valid under the law only if the insured has an insurable interest, ie if you have a legally recognized financial relationship with the subject of insurance and could lose if the item is damaged.
Compensation
An entity seeking to transfer risk (an individual, corporation or association of any type) becomes the 'insured' party once risk is assumed by an insurer, "said the party through a contract , defined as an insurance policy. " This contract establishes the terms and conditions specified by the amount of coverage (compensation) to be provided to the insured by the insurer to the assumption of risk in the event of loss, and all covered against specific hazards ( compensation), for the term of the contract.
When insured experience a loss for a given risk, the coverage entitles the policyholder to make a claim against the insurer of the amount of loss as specified in the policy contract. The fee paid by the insured to the insurer to assume the risk is called the "premium." Insurance premiums from many clients are used to fund accounts reserved for paying claims later in the theory of a relatively small number of claimants and the overheads. While an insurer maintains adequate funds for the expected loss, the remaining margin becomes their profit.
Plus: a contract of insurance is one of Uberrima faith. This is a Latin phrase meaning "good faith" (or literally translated, "more abundant faith"). Name is a legal doctrine which governs insurance contracts. This means that all parties to an insurance contract must deal in good faith, make a complete declaration of all material facts in the insurance proposal. This contrasts with the legal doctrine of caveat emptor (let the buyer beware).
Contract for personal property policies and liability insurance cover persons and not property or operations. Although the terms "insured my house" or "insured my motorcycle" are used commonly, they are not technically correct. The contract between the insurer and the insured is a contract between an insurer and a person (s) on the basis of their financial needs, "insurable interest" in the subject or the responsibility to be insured. In other words, the question of whether the payment is due to the occurrence of a contingency, and how this payment will be measured, depends on the economic losses suffered by the person (s).
Conditional
Property and liability insurance policies are said to be "conditional contracts" because the obligation of the insurer to perform may be conditioned to policyholders who meet certain conditions.
Unilateral contract
Only one party is legally bound to contractual obligations after the premium is paid to the insurer. Only the insurance company has made a promise of future performance, and the insurer can only be charged with breach of contract.
Adhesion contract
Property and liability insurance policies are said to be "contracts of adhesion" because the insurer and the insured are of unequal bargaining power where the insured can not negotiate the terms of the contract and must supply the insurer as it did. Importantly, the rule of law regarding "contracts of adhesion" is that any ambiguities resolved in favor of policyholders.
Contract of Indemnity
Property and liability insurance policies are said to be "guarantee contract" because the purpose of insurance is to indemnify the insured, ie, to overcome a loss that the insured has suffered. The principle of compensation is that the insured should not benefit from the policy. This does not preclude that the insured suffers a loss. In fact, many policies include a deductible which guarantees that each party will pay the insured for the loss of self.
Insurable interest
Insurable interest is an economic loss was suffered an adverse event to the person (s) of the insured. An insurance contract is valid under the law only if the insured has an insurable interest, ie if you have a legally recognized financial relationship with the subject of insurance and could lose if the item is damaged.
Compensation
An entity seeking to transfer risk (an individual, corporation or association of any type) becomes the 'insured' party once risk is assumed by an insurer, "said the party through a contract , defined as an insurance policy. " This contract establishes the terms and conditions specified by the amount of coverage (compensation) to be provided to the insured by the insurer to the assumption of risk in the event of loss, and all covered against specific hazards ( compensation), for the term of the contract.
When insured experience a loss for a given risk, the coverage entitles the policyholder to make a claim against the insurer of the amount of loss as specified in the policy contract. The fee paid by the insured to the insurer to assume the risk is called the "premium." Insurance premiums from many clients are used to fund accounts reserved for paying claims later in the theory of a relatively small number of claimants and the overheads. While an insurer maintains adequate funds for the expected loss, the remaining margin becomes their profit.
Insurance
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial losses. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium and duty of care.
The type and distribution of losses must be predictable: To set premiums (prices) of insurance must be able to estimate with precision. This is done with the Law of Large Numbers, which states: The greater the number of homogenous exposures considered, the more informed of the loss is equal to the underlying probability of loss. If coverage is unique, the insured pays a higher premium for. Lloyd's of London often accepts single coverage. (E.g. insurance Tina Turner's legs and buttocks Jennifer Lopez)
The loss must be significant: The legal principle of De minimis dictates that trivial matters are not covered. Moreover, the rational insurance use existing insurance when the transaction costs that determines the presentation of a claim is not rational.
The loss should not be catastrophic: If the insurer is insolvent, is unable to pay the insured. In the United States, there is a system of guarantee funds to run at the state level to reimburse insured insurance companies that have become insolvent.
[1] This program is managed by the National Association of Insurance Commissioners (NAIC).
[2] To avoid catastrophic depletion of their own capital, insurers around the world in almost purchase reinsurance to protect against excessive accumulations of risk in one area, and to protect against major disasters. Additionally, "speculative risks" like those incurred through gambling or by purchasing the stocks are not insurable.
The type and distribution of losses must be predictable: To set premiums (prices) of insurance must be able to estimate with precision. This is done with the Law of Large Numbers, which states: The greater the number of homogenous exposures considered, the more informed of the loss is equal to the underlying probability of loss. If coverage is unique, the insured pays a higher premium for. Lloyd's of London often accepts single coverage. (E.g. insurance Tina Turner's legs and buttocks Jennifer Lopez)
The loss must be significant: The legal principle of De minimis dictates that trivial matters are not covered. Moreover, the rational insurance use existing insurance when the transaction costs that determines the presentation of a claim is not rational.
The loss should not be catastrophic: If the insurer is insolvent, is unable to pay the insured. In the United States, there is a system of guarantee funds to run at the state level to reimburse insured insurance companies that have become insolvent.
[1] This program is managed by the National Association of Insurance Commissioners (NAIC).
[2] To avoid catastrophic depletion of their own capital, insurers around the world in almost purchase reinsurance to protect against excessive accumulations of risk in one area, and to protect against major disasters. Additionally, "speculative risks" like those incurred through gambling or by purchasing the stocks are not insurable.
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