How to choose an insurance company, Assets of the insurer...

How to choose an insurance company

For risk managers and heads of organizations, the issue of how to choose a reliable and sustainable insurer, assess its viability and achieve contract performance in the event of an insured event is of vital importance. Before concluding an insurance contract, the risk manager of the firm must form a rational insurance portfolio of the firm within the framework of integrative risk management and select an adequate insurer that will not only agree to insure such a portfolio of risks at reasonable prices, but also provide guarantees of its own reliability. Indeed, the whole point of insurance is the transfer of risk to a professional who knows how to handle it better. The increase in risks for the insurer must be skillfully compensated by various methods: the volume of insurance operations, risk syndication, risk securitization, diversification of risks, reinsurance, accumulation of adequate reserves, careful investment, etc. In essence, the insurer, shifting one risk to the insurer, acquires a new risk - risk of bankruptcy of the insurer, and with proper insurance the second risk should be less than the first.

So, before entering into an insurance contract, the risk manager of the insurer must make sure that the prospective insurer has sufficient signs of consistency. You can use the following criteria for the stability and solvency of the insurer:

• Absence of charges of the insurer in non-compliance with laws and regulations;

• good reputation of the insurer for one hundred clients;

• the presence of a sufficiently large volume of insurance operations;

• the development of reinsurance practice;

• reasonable investment of insurance reserves;

• qualification of insurance portfolio management;

• a well-founded tariff policy;

• Reasonableness in the specialization of an insurance company in a particular market niche.

In addition to these criteria, it is advisable to apply the following methodology for assessing the financial soundness of an insurance company. Financial solvency of an insurance company is its ability to pay on all legal claims against it arising from the sale of insurance policies. Two concepts of consistency are important: technical and continuous. Technical sufficiency is that the insurer must have more equity than the minimum set by the relevant laws. Continuous solvency - is the availability of a sound company balance sheet and income declaration at any time.

The meaning of technical solvency lies in the fact that the state in the interests of the stability of society and through the authorized body of state insurance supervision seeks to make sure that the owners of the insurance company have invested in the business a sufficient amount of their own money. Special laws establish a minimum level of equity capital, which must be the insurance company of this type. The formula used here is simple:

Assets of the insurer - Obligations of the insurer & gt; & gt; Minimum capital.

Example

Suppose that the law establishes a minimum level of equity of the insurance company in 20% of the value of its assets. We estimate the technical viability of an insurance company that has the financial characteristics presented in Table. 10.1. This insurance company from the point of view of state insurance supervision bodies is technically sound.

Table 10.1

Financial characteristics of an insurance company, USD

Assets

75000000

Policy Obligations

40000000

Other Liabilities

10000000

Equity capital

25000000

Evaluation of technical solvency.

The law requires: 7.5000000 × 20% = 15000000.

Equity: 25 million.

25000000 & gt; 15000000.

Conclusion. This insurance company is technically sound from the point of view of the legislator.

However, from the point of view of insurers (buyers of insurance policies of this insurance company) and owners of ordinary shares (investors) of an insurance company, perhaps the concept of continuous solvency is more important. There are four main factors influencing the continuous consistency. The insurance company must:

• have a good, qualified underwriting;

• have active and qualified control over your costs;

• Have a well thought out concept and manage your investments professionally;

• Be open to an impartial and qualified internal and external audit.

The term underwriting means the process of studying the risk and deciding whether to insure it or not. Conscientious insurance companies do not insure all risks in a row. Common underwriting means that the insurer:

• understands the nature and parameters of this risk;

• is able to study its specific manifestations in this potential insured;

• can calculate, accumulate and invest adequate reserves;

• is able to take a sober decision to accept him for a fair and well-founded award;

• is able to understand the validity of claims for an insured event.

The control over costs includes the following observable moments:

- the insurer pays fair, but not wastefully generous commissions to insurance agents and other people who help him to sell insurance;

- the company is able to rationally organize its work by paying fair, but not excessive salaries and bonuses to its employees;

- the company must adhere to the saving mode, avoiding too high overhead, administrative and representation expenses.

The investment program should be formulated in writing and ready for provision to potential insurers. Insurance companies usually invest only in low-risk securities, avoiding too high-yield, but risky investments

An impartial internal audit is that the responsibilities for internal control should be clearly allocated. The internal auditor should be officially endowed with the authority, sufficient for constant check of efficiency of work and personal honesty of employees of the insurance company. The risk management policy of the insurance company itself must be clearly and in writing formulated and ready for presentation and explanation to potential customers and partners. It is especially important to check the absence of fraud in transactions with agents, brokers and reinsurers across the insurance company's entire line of business.

The external audit should be conducted regularly by an independent audit firm with a good name and all the licenses required by law.

Continuous financial solvency is assessed in several ways. One of the most popular is to study the financial statements of the insurance company, which are usually included in its annual report. Consider the main guidelines for such analysis, however, puzzling that this is not the ultimate truth, and analysis itself is not only science but also art that are applied in different ways in different markets and under different external circumstances.

Consider the balance sheet and profit and loss account of the insurance company, which we estimate using six coefficients. This technique allows you to quickly assess the financial condition of the company. However, the first criterion of a good condition of an insurance company consists not in the coefficients, but in the willingness of the insurer to submit its financial documents on demand in the very form of these documents. Negligent or too generalized reports with incomprehensible terms - this in itself is already a serious symptom of the unfavorable state of the firm. A good kind of documents does not say anything.

The main guidelines in the judgment on the state of the insurer company according to six factors are given in Table. 10.2.

Table 10.2

Approximate parameters of a healthy insurance company

Coefficient

Landmark

Meaning

Coefficients of the balance sheet of the insurance company

Capital/Assets

More than 20%

Sufficient security laying for fluctuations in assets and liabilities

Sum of insurance premiums/Capital

Less than 3

The insurer must not sign too many insurance obligations in comparison with own capital

Amount of reserves/Capital

No more than 3

The owners of the insurance company must make a significant part of the reserves to form its assets from their own funds, but only the rest to occupy. Margin of safety in case of unexpected losses

Income statement ratio of the insurance company

Total insurance payments/Amount of earned premiums

Common sense and harmony

Shows the sanity of the insurer when signing insurance contracts

The amount of costs of running a business (without insurance payments)/The amount of premiums

Must

be

no worse than competitors

Shows the relative effectiveness of organization of work in this company

Amount of payments and costs/Bonus amount

Must be less than 1

The indicator of the effectiveness of the insurance company in the main business. Overall efficiency requires the accounting of income from investing

Consider now a simple conditional numeric example. Despite its simplicity and conventionality, it is suitable for understanding the issue at a level sufficient for a potential insurer. In Table. 10.3 shows the balance with which the insurance company begins the financial year.

Table 10.3

Balance of the insurance company at the beginning of the year, USD

Assets

Beginning of the year

Financial assets (securities)

9000000

Current account with the bank (cashier)

1000000

Funds receivable

3000000

Fixed assets

2,000,000

Assets of the whole

15000000

Commitments

Reserves

12000000

Capital

3000000

Total Commitment

15000000

Having started a goal with this balance, the insurance company worked during this year, and the results of this work are shown in the profit and loss account (Table 10.4).

Table 10.4

Profit and loss statement of the insurance company for the year, USD

Premiums signed during the year

35000000

Percentage of premium earning

85.71%

Bonuses earned this year

30000000

Income from the invested 5 million

2,000,000

Total Revenue

32000000

Losses and Payouts

(20000000) (66.67%)

Subscription costs

(5000000) (16.67%)

Other costs

(3000000) (10%)

Operating Income

4000000

Taxes at a rate of 25%

(1000000)

Income after taxes

3000000

Dividends declared for payment

(2,000,000)

Change in capital (retained earnings)

1000000

Such activities led the company to complete the year in question with the balance shown in Table. 10.5.

Table 10.5

Conditional balance of the insurance company at the end of the year, USD

Assets

End of the year

Financial assets (securities)

15000000

Current account with the bank (cashier)

1000000

Funds receivable

3000000

Fixed assets

2,000,000

Assets of the whole

21000000

Commitments

Reserves

17000000

Capital

4000000

Total Commitment

21000000

Apply these six coefficients to assess the financial soundness of this insurer.

Capital on Assets (beginning of the year) = 3/15 = 20%.

Capital on Assets (end of the year) = 4/21 = 19%.

The amount of bonuses on Capital (the beginning of the year) = 30/3 = 10.

The amount of bonuses on Capital (end of the year) = 30/4 = 7.5.

Reserves for Capital (beginning of the year) = 12/3 = 4.

Reserves for Capital (end of the year) = 17/4 = 4.25.

Bonus payments = 20/30 = 66.7%.

Premium Cost = 8/30 = 26.7%.

Payments and Bonus costs = 28/30 = 93.3%.

The general conclusion from the analysis of the aggregate of these coefficients is approximately the following: if the accounting and reporting in this insurance company are conducted correctly and if the actuarial valuation of the required reserves is realistic, then the insurance company considered is close to the requirements for financial solvency, but the dynamics of its financial position should be carefully watch. From the perspective of the risk manager of a potential insurer, you can put this company an estimate of "three with a plus."

It is worth recalling that this is not the only method for assessing the insurer's consistency. There are more sophisticated in-depth techniques. However, for the operational needs of the risk manager of the firm, they are beyond their control, and are not needed. If he has suspicions in this direction, it will be useful to attract professionals who will appreciate the insurance company in detail. Or maybe you just need to look for another insurance company?

If the insurer is right for you, you should work with him and the insurance broker to develop a risk insurance program for the firm, which is a subroutine of integrated risk management. Insurance is a very convenient tool for risk management, but, firstly, not all risks can be insured, and, secondly, many insurance policies are unacceptably expensive. The basis of the insurance program is the results of the company's risk diagnostics. When the firm's risks are identified, analyzed, evaluated, and evaluated, it is time to assess the opportunities, scales and feasibility of part insurance. The most modern concept of insurance of firm risks is an integrated approach to the formation of its insurance portfolio. With this approach, the range of insured risks expands, and the price of comprehensive insurance of large groups of risks in terms of each of these risks, as a rule, is less than for individual insurance of each risk separately. This approach is beneficial to both the insured and the insurer. The policyholder expands coverage, eliminates overlapping insurance of various risks, rationalizes insurance schemes and, ultimately, saves on insurance premiums. The insurer receives premiums for a greater number of risks; receives risks packed sets that are easier to manage; acquires a client-insurer, which is more responsible for risk management, thereby reducing the frequency and magnitude of insured events.

It is natural to start the development of a company's insurance program by drawing up a list of risks that are subject to compulsory insurance by law, due to contractual obligations previously made by the firm or at the request of counterparties under contracts to be concluded (for example, but to the bank's requirement as a loan provision). Then a voluntary insurance program is formed up to that level of expenses for insurance premiums that the policyholder can afford. The remaining risks are taken to the self-insurance program. On this basis, a document is drawn up, called a proposal to the insurance market, which is drawn up to clarify and fix its own position in negotiations with insurers. The insurance program adopted and formalized by the relevant insurance contracts is usually reviewed as the general program of integrated risk management of the company develops.

The situation "The borrowed capacity of the firm" Wire and cable of New England "

Watch the movie "Other People's Money" available on the Internet.

How much could this company borrow from banks? In other words, what is its borrowed capacity?

What determines the level of the demand for this company in borrowed capital?

What could be used for borrowed funds?

What will change in the insurance portfolio of this company when the company is transformed into a global one?

What will change in the insurance portfolio of this company with a full-scale revision of the strategy of using bank loans?

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