Underwriting and investing

The business model is to offer more in premium and investment returns, as they gathered to pay damages, and competitive prices that consumers receive. The result can be reduced with a simple equation: profit = premium + accept returns - and losses - the cost of the insurance business.

Insurers money in two ways:

1. to ensure through underwriting, the process by which sound risk insurance and to decide how much premium to receive with risk management;

2. By investing the premium they collect from the insurers.

The most complicated aspect of the insurance business is actuarial science tariff policy (pricing) policy that uses statistics and probability theory to estimate the number of future claims for certain risk. Once the production rates, insurance companies use discretion to reject or accept the risk through the underwriting process.

At the lowest level of the first covering collective bargaining, the frequency and severity of those risk and hazards can see the expected payments on average, generated from danger. So the insurance companies will collect historical loss, the loss of the data collected on the present value and compare this loss before the premium was to assess the level of losses adequacy ratio  and the cost .. This assessment involves a different risk characteristics at the lowest level compared with a loss "relativities Loss" - a policy with monetary policy twice, because the cost has doubled. However, a more complex multivariate analysis using general linear model is sometimes used when some characteristics that are involved and the results of univariate analysis, to generate confusion. Other statistical methods in assessing the likelihood of future losses can be used.

After the completion of certain policies, premium and investment income to pay less the amount in claims, insurance underwriting profit on politics. Insurance underwriting performance is measured in the combined ratio that the ratio of claims and expenses, premium earned. A combined ratio of less than 100 percent indicates underwriting profitability, while there is something more than 100 technical losses. A company with a combined ratio above 100%, but still can be profitable because of investment income.

Insurance companies get investment profits on "float". Float or reserves are available, the amount of money on hand at any given time, insurance companies, insurance premiums, but not yet paid on the loan. Insurers start investing insurance premiums as they are collected and paid on interest or other income, they get to claims. Association of British Insurers (400 collect insurance companies and 94% of UK insurance companies) has nearly 20% of investment on the London Stock Exchange. [10]

In the United States is an underwriting loss of property and casualty insurance companies 142300000000 $ in five years until 2003. But overall profit for the same period was $ 68400000000, as a result of these float. Some people in the insurance companies, in particular, Hank Greenberg, do not think that it is always possible to profit from float without underwriting profit also continued, but this view is not universally held.

Of course, the float method is very difficult to apply in time of economic depression. Bear markets do cause changes in insurance investment and to strengthen their underwriting standards, so that the poor economy generally means high insurance premiums. This trend between the periods of favorable and unfavorable swing from time to time generally known as underwriting or insurance cycle.