RMIN 4000 Test 3
Income Statement Revenues: 2 Major Components: - -Earned Premiums &
Investment Income
- Earned Premiums - -The only part of the premium that has been "earned"
by the insurer. This is the portion of the year where the policy has been in
force.
- Example of Earned Premiums - -$1,200.00 Insurance Contract. 1 Year
Long. On April 1st, only 25% ($300.00) can be considered an earned
premium. Unearned premiums are a liability on the balance sheet.
- Investment Income - -Reoccurring money earned on interest from bonds,
dividends on stocks, rental income on real estate. Single time payments on
capital gains from securities sold.
- Income Statement Expenses: 3 Major Components - -Incurred Losses, Loss
Adjustment Expense (LAE), Everything Else
- Incurred Losses - -All Claims experienced by their policyholders (paid and
unpaid.) The paid losses are expenses only. Unpaid losses are considered as
an expense and a liability on the balance sheet. This includes adjustments to
prior year loss reserves. (For example, in if the insurance company
underestimates how much they need to pay a claim, they will add another
expense to balance it out.)
- Loss Adjustment Expense (LAE) - -These are costs to investing claims and
admin costs for paying claims. For example, if the company finds out that a
claim is frodulent, they have to sue. This expense is directly related to the
claim and will be added to the loss adjustment expense. Also implies if the
insurance company gets sued for bad faith.
- Everything Else: - -Commissions, Premium Taxes, Overhead, Marketing,
etc... All the other expenses that are not directly related to the claim
- Income Statement - -Revenues - Expenses = Net Income OR
Earned Premiums + Investment Income - Incurred Losses - LAE - Everything
else = Net Income
- Balance Sheet - -Assets = Liabilities + Policy Holder Surplus (traditionally
would be stockholder equity but it isn't because it belongs to the
policyholder. They can make a claim on it. Stays this way until dividends are
paid out.
, - Assets on the Balance Sheet - -Primarily Investments and Cash
- Liabilities: 2 Major Components - -Loss Reserves & Unearned Premium
Reserve
- Loss Reserves: Part 1 - -The estimated cost of settling claims for losses
that have occurred but have not been paid. This includes losses reported to
the insurer but not yet paid.
- Loss Reserves: Part 2 - -Also, includes losses that are incurred by
policyholders, but not reported to the insurer yet. This is known has IBNR -
Incurred but not reported. Actuaries are essential in estimating reserves but
ultimately, management sets the reserves. Higher loss reserves today means
higher profit down the road. Lower loss reserves today means higher profits
today and fewer profits tomorrow. It is a relatively squishy number.
- Unearned Premium Reserve - -Premiums that have not been earned by
the insurer. Needed if the insured cancles the policy early.
- Policy Holder Surplus: - -The difference between an insurer's assets &
liabilities. This is the "cushion" that can help pay losses if liabilities are higher
than expected.
- Key Ratios (3) - -Loss Ration, Expense Ratio, Combined Ratio
- Loss Ratio - -(Incurred Losses + Loss Adjustment Expense (LAE)) /
(Premiums Earned)
Tells us how much earned premium goes to paying losses.
We want an LR of <0.7, but it depends on the type of insurance or line of
business.
- Expense Ratio - -Underwriting Expenses / Premiums Written
- Why are the denominators between LR and ER different? - -The loss ratio
paid a person a premium and had a certain claim. It is directly related to the
contract. Expense Ratios are not tied to any contract or time period
(marketing for example.) Any non-loss expense will be put over total revenue
(premiums written) rather than what we have only earned for the year.
- Combined Ratio - -Loss Ratio + Expense Ratio
Gives us an idea of our overall measure of underwriting performance. We
prefer to have them less than 100 (or 1 depending on how you measure.)
The Combined ratio is very directly related to loss ratio size as the expense
ratio remains farily constant.
Income Statement Revenues: 2 Major Components: - -Earned Premiums &
Investment Income
- Earned Premiums - -The only part of the premium that has been "earned"
by the insurer. This is the portion of the year where the policy has been in
force.
- Example of Earned Premiums - -$1,200.00 Insurance Contract. 1 Year
Long. On April 1st, only 25% ($300.00) can be considered an earned
premium. Unearned premiums are a liability on the balance sheet.
- Investment Income - -Reoccurring money earned on interest from bonds,
dividends on stocks, rental income on real estate. Single time payments on
capital gains from securities sold.
- Income Statement Expenses: 3 Major Components - -Incurred Losses, Loss
Adjustment Expense (LAE), Everything Else
- Incurred Losses - -All Claims experienced by their policyholders (paid and
unpaid.) The paid losses are expenses only. Unpaid losses are considered as
an expense and a liability on the balance sheet. This includes adjustments to
prior year loss reserves. (For example, in if the insurance company
underestimates how much they need to pay a claim, they will add another
expense to balance it out.)
- Loss Adjustment Expense (LAE) - -These are costs to investing claims and
admin costs for paying claims. For example, if the company finds out that a
claim is frodulent, they have to sue. This expense is directly related to the
claim and will be added to the loss adjustment expense. Also implies if the
insurance company gets sued for bad faith.
- Everything Else: - -Commissions, Premium Taxes, Overhead, Marketing,
etc... All the other expenses that are not directly related to the claim
- Income Statement - -Revenues - Expenses = Net Income OR
Earned Premiums + Investment Income - Incurred Losses - LAE - Everything
else = Net Income
- Balance Sheet - -Assets = Liabilities + Policy Holder Surplus (traditionally
would be stockholder equity but it isn't because it belongs to the
policyholder. They can make a claim on it. Stays this way until dividends are
paid out.
, - Assets on the Balance Sheet - -Primarily Investments and Cash
- Liabilities: 2 Major Components - -Loss Reserves & Unearned Premium
Reserve
- Loss Reserves: Part 1 - -The estimated cost of settling claims for losses
that have occurred but have not been paid. This includes losses reported to
the insurer but not yet paid.
- Loss Reserves: Part 2 - -Also, includes losses that are incurred by
policyholders, but not reported to the insurer yet. This is known has IBNR -
Incurred but not reported. Actuaries are essential in estimating reserves but
ultimately, management sets the reserves. Higher loss reserves today means
higher profit down the road. Lower loss reserves today means higher profits
today and fewer profits tomorrow. It is a relatively squishy number.
- Unearned Premium Reserve - -Premiums that have not been earned by
the insurer. Needed if the insured cancles the policy early.
- Policy Holder Surplus: - -The difference between an insurer's assets &
liabilities. This is the "cushion" that can help pay losses if liabilities are higher
than expected.
- Key Ratios (3) - -Loss Ration, Expense Ratio, Combined Ratio
- Loss Ratio - -(Incurred Losses + Loss Adjustment Expense (LAE)) /
(Premiums Earned)
Tells us how much earned premium goes to paying losses.
We want an LR of <0.7, but it depends on the type of insurance or line of
business.
- Expense Ratio - -Underwriting Expenses / Premiums Written
- Why are the denominators between LR and ER different? - -The loss ratio
paid a person a premium and had a certain claim. It is directly related to the
contract. Expense Ratios are not tied to any contract or time period
(marketing for example.) Any non-loss expense will be put over total revenue
(premiums written) rather than what we have only earned for the year.
- Combined Ratio - -Loss Ratio + Expense Ratio
Gives us an idea of our overall measure of underwriting performance. We
prefer to have them less than 100 (or 1 depending on how you measure.)
The Combined ratio is very directly related to loss ratio size as the expense
ratio remains farily constant.
