Insurer Financial Performance

Insurer Financial Performance

1. INSURER PROFITABILITY

   • Overall gain or loss from operations = Net investment gain or loss + Net underwriting gain or loss
   • Net investment gain or loss
     • Net investment gain or loss = Investment income - Investment expenses
   • Net underwriting gain or loss
     • Net underwriting gain or loss = Underwriting income - Underwriting expenses
   • Insurer's Net Income
     • Insurer's net income before taxes = (Total earned premiums + Investment income) - (Total losses + Other expenses)

2. INSURER INCOME

   • Insurers receive income from two major sources:  1. Sale of insurance  2. Investment of funds
   • Underwriting Income
     • Underwriting Income = Earned Premiums -(Insurer's Paid Losses + Loss Adjustment Expenses)
   • Investment Income
     • To maintain: 1. Policyholders' Surplus 2. Settle Claims or Refund Unearned Premiums

3. INSURER EXPENSE

   • Underwriting Activity Expenses
     • Losses
       • Incurred losses = Paid losses + Loss reserves Incurred losses = The losses that have occurred,no matter when, claims resulting from the losses are paid. Paid losses = Losses that have already been paid. Loss reserves = Losses in the process of settlement or  (IBNR) losses.
     • Loss Adjustment Expenses
       • Expense that an insurer incurs to investigate, defend, and settle claims.
     • Other Underwriting Expenses
       • 1. Acquisition expenses 2. General expenses 3. Premium taxes 4. Licenses 5. Fees 6. Dividends
   • Investment Activity Expenses
     • Investment Department
       • Staff salaries and maintenance.
     • Investment Department's Activities
       • Purchasing and selling stocks, bonds, and other investments.

4. INSURER FINANCIAL STATEMENTS

   • Balance Sheet
     • Assets
       • 1. Admitted assets (Included) - stocks, bonds, mortgages, real estate, computer equipment, and premium balances due in less than 90 days 2. Nonadmitted assets(Excluded)
     • Liabilities
       • 1. Loss reserve and loss expense reserve 2. Unearned premium reserve 3. Other liabilities (typically small, miscellaneous obligations)
     • Policyholders' Surplus
       • Policyholders' Surplus = Admitted assets - Liabilities
   • Income Statement
     • Revenues
       • Earned premiums
     • Expenses
       • Incurred losses, loss adjustment expenses, and other underwriting expenses (acquisition expenses; general expenses; and premium taxes, licenses, and fees)
     • Net undetwriting gain or loss
       • Earned Premiums - Total Expenses
     • Net investment income
       • Investment income - Investment expenses
     • Net income before income taxes
       • Net underwriting gain (loss) + Net investment income

5. INSURER FINANCIAL RATIOS

   • Loss ratio
     • Loss ratio =Incurred losses (including loss adjustment expenses)  / Earned premiums
   • Expense ratio
     • Expense ratio = Incurred underwriting expenses / Written premiums
   • Combined ratio
     • Combined ratio = Loss ratio + Expense ratio
   • Investment income ratio
     • Investment income ratio = Net investment income / Earned premiums
   • Overall operating ratio
     • Overall operating ratio = Combined ratio - Investment income ratio