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Financial Performance of Insurers Measured

Insurer Profitability

Like any other business, an insurance company must manage its income and expenses to produce an overall gain from its operations and to ensure the profitability on which its survival depends.

Sources of Income for Property and Liability Insurance Companies

Income

An insurance company receives income from two major sources: -

· Sale of Insurance

· Investment of Funds

Premium Income is the money an insurer receives from its policyholders in return for the insurance coverage it provides. When measuring its total premium income for the year, an insurance company must determine what portion of its written premiums is considered as earned premium and unearned premium incomes.

Written Premiums are premiums on policies put into affect or written during a given period.

Earned Premium represents the portion of the written premium that is recognized as income only as time passes and as the insurance company provides the protection promised under the insurance policies.

Un Earned Premium is the portion of written premium that applies to the part of the policy period that has not occurred.

Investment Income An insurance company collects premiums from its policyholders and pays claim for its policyholders, the insurer handles large amount of money. Insurers invest available funds to generate additional income particularly during periods of high interest rates and high returns in the stock market, the income generated by these investments are Investment Income.

The reasons for investments of its funds are as follows: -

· Insurers are legally required to maintain a certain amount of funds called policyholder surplus so it can meet its obligation even after catastrophic losses.

· Insurance company has funds available for investments are that it usually receives premium before it pays claims on the corresponding policies.

How Is the Financial Performance of Insurers Measured

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