Hence, buying a reinsurance policy becomes quite important for an insurance company and comes in the expense list. In return, it has to pay a percentage of the premium earned from the client. In this way, a part of the revenue earned that goes into the agent’s account comes under the list of expenses for the insurance company.Įvery insurance company seeks to buy a reinsurance policy that saves itself from the unavoidable risks. This is done to incentivize the sales and motivate the insurance agents. Hence, advertising costs turn out to be a major chunk in the logistics of an insurance company.Īpart from hiring the insurance agents on a salary basis, companies give a fixed percentage of any new client. As a result, insurance companies indulge in creative marketing campaigns by advertising their services and getting it endorsed by public figures as their ambassadors. Like any other business, insurance companies have to compete in the market where other players offer attractive premium rates. It is an integral part of any insurance company, hence including this as part of the expenditure is significantly important. The cost of servicing required in processing the claims made by the clients is technically called servicing the premiums. Underwriting and Servicing the premiums:.Here is the list of few of the expenses that contribute towards a major portion of expenditure: Hence, it is required that we define what expenses mean for an insurance company. The term expenses can be subjectively used to include various things. In other words, the cost of operating an insurance company shown in comparison to the percentage of sales is known as the Expense Ratio. In layman’s terms, the formula to get the Expense Ratio is dividing the expenses of the insurance company by Net Premium Earned. It is used while calculating it through GAAP. The latter (Net Premium Earned) consists of both new business and revenue earned from existing policies. Net Premium Written is the new business brought in by the company in a given financial year. The only difference is that the statutory accounting method uses Net Premium Written instead of Net Premium Earned. In order to do that, they use Statutory Accounting as opposed to generally accepted accounting principles (GAAP). However, the insurance companies in particular focus on getting conservative ratios. There are generally two ways by which companies calculate the expense ratio. Signifying the efficiency of an insurance company and measuring its profitability, the expense ratio gives a clearer picture of the financial aspects of the company. Among them, the Expense Ratio serves as the ideal measure providing clarity on the logistics. To measure the financial sustainability, insurance companies use various different methods and techniques. However, sustaining its own capability to finance its customers becomes its priority. Providing financial security to its consumers is the ultimate aim of an insurance company.
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