Losses The major expense category for most insurance company is payment for losses arising from claims. Claims are not settled immediately after a loss occurs. This is due to lengthy and at times legal proceedings or sometimes loss may be occurred in one year but are settled in the later year or loss may be occurred in one year and may be reported in the succeeding years. In any given year, an insurance company knows only the amount of losses it has paid so far, but not the definite amount it will ultimately have to pay. To compare income and expenses however an insurer must calculate not only its paid losses but also incurred losses for the period.
Paid Losses All claim payments that an insurer has made in a given period.
Incurred Losses For a particular period equal to sum of paid up losses and changes in losses reserves (loss reserves at the end of the period minus loss reserves at the beginning of the period).
Loss Reserves these are the amounts designated by insurance companies to pay claims for losses that have already occurred but not yet settled. A loss reserve for a particular claim is the insurer’s best estimate of the total amount that will pay in the future for the losses that has already occurred.
Incurred But Not Reported Losses The Losses that are incurred in a particular period but not reported to the insurance company in the given period.
Loss Expenses Expenses necessitated by the process of investigating insurance claims in settling term according to the term specified in the insurance policy.
Other Underwriting Expenses In addition to the losses and loss expenses the cost of providing insurance includes other significant underwriting expenses. The major category of insurers’ underwriting expenses is
· Acquisition Expenses
· General Expenses
· Taxes and fees
Acquisition Expenses The expenses associated with acquiring new business are significant such as payment of commission, brokerage, bonus paid on the sales, profit and other measures of productivity, etc., Advertising expenses can be significant component of acquisition expenses for most of the insurers, regardless of whether the advertising is directed towards the general public or specifically towards insurance producers.
General Expenses The General Expenses include expenses associated with staffing and maintaining insurance departments such as accounting, legal, research, product development, customer service, electronic data processing and building maintenance. In addition insurers must provide office space, telephones and other utility services for smooth running of the organization.
Taxes and Fees All the insurance companies in the fifty states levy premium taxes usually between 2 to 4 percent on all premiums generated by the insurers in a particular state. Fees component include such things as expenditure involved for licensing and participating in various insurance programs such as Guarantee Funds and Automobile insurance plans.
Investment Expenses An insurer’s investment department includes staff of professional investment managers who oversee the company investment program. Investment expenses include the salaries and all other expenses related to the activities of the investment department. On their financial statement, insurance companies deduct these expenses related to the activities of the investment department to show net income.
Gain or Loss from Operations An insurers net underwriting gain or loss is its earned premium minus its losses and underwriting expenses for the specific period. When an insurer adds its net investment gain or loss results to its net underwriting gain or loss, the resulting figure is the overall gain or loss from the operations.
Net Income before tax is its total earned premium and investment income minus its total losses and other expenses in the corresponding period.
Income Taxes Like other businesses insurance company pay income taxes on the taxable income.
Net operating income or loss After an insurance company has paid losses and reserved money to pay additional expenses, losses and income taxes the reminder is net operating income, which belongs to the owners of the company.
How Is the Financial Performance of Insurers Measured
