INSURANCE PART 1.pptx

Financial Statement Analysis for Insurance Companies Insurance Companies Risk Pure Insurable Speculative Information Asymmetry! Eliminate? Transfer Risk Premium Insurance Company However… Information Asymmetry Availability of information is not the same for transacting parties. One business party p...

Financial Statement Analysis for Insurance Companies Insurance Companies Risk Pure Insurable Speculative Information Asymmetry! Eliminate? Transfer Risk Premium Insurance Company However… Information Asymmetry Availability of information is not the same for transacting parties. One business party possesses more information than the other party they are dealing with. This can lead to:  Adverse Selection  Moral Hazard Adverse Selection  Situation: Undesirable results occur because two parties in the transaction have asymmetric information (before the transaction)  Insurance: Person has cancer buys life insurance Solutions to Adverse Selection Medical Examination Other information Moral Hazard  Situation: One party takes an excessive amount of risk or reckless behavior because it knows another will bear the burden of such. (this happens after the transaction)  Insurance: Person drives car carelessly after purchasing a vehicle insurance. Solutions to Moral Hazard Deductible clause Increased premium for certain actions. Insurance Insurance Company Insured Agent Sells Under- Actuary Insurance Claims writer Statistic s Issue s Term s Adjuster Risk Premium Insurance Financial Statement Analysis Common ratios for insurance companies. Expense Ratio Underwriting Exp. Net Earned Prem Insurance Loss Ratio Claims Expense Net Earned Prem RBC2 Combined Operating Ratio Und Exp + Claims Exp Net Earned Prem Margin Insurance Profit Net Earned Prem Total Ave. Capital Ratio* RBC Requirement *RBC2 Ratio is like CAR but more complex Insurance Financial Statement Analysis Introducing the Net Earned Premium For Example: Gross written premium (annual premium sold) is P12,000. The GEP is P12,000 Jan 1 – Dec 31 Deduct Reinsurance Expense from GEP NEP Calculate the following: 1. Expense ratio 2. Loss ratio 3. Combined Operating ratio 4. Insurance margin Calculate the following: 1. Expense ratio 2. Loss ratio 3. Combined Operating ratio 4. Insurance margin Expense Ratio Underwriting Exp. Net Earned Prem P14,000,000,000 P38,000,000,000 36.84% Calculate the following: Loss Ratio 1. Expense ratio 2. Loss ratio 3. Combined Operating ratio 4. Insurance margin Claims Expense Net Earned Prem P39,000,000,000 P38,000,000,000 102.63% Calculate the following: Combined Operating Ratio 1. Expense ratio 2. Loss ratio 3. Combined Operating ratio 4. Insurance margin Und Exp + Claim Exp Net Earned Prem P14B + P39B P38,000,000,000 139.47% Calculate the following: Insurance 1. Expense ratio 2. Loss ratio 3. Combined Operating ratio 4. Insurance margin Margin Insurance Profit Net Earned Prem P5,000,000,000 P38,000,000,000 13.16% Insurance Regulation  Insurance Commission (IC) Under the Department of Finance (DOF)  Insurance + Reinsurance Companies  Health maintenance organizations  Mutual Benefit Associations  Rating organizations  Pre-need companies  Local Corporations or Foreign branch  Minimum Capital Requirement 2019 P 900,000,000 2022 P 1,300,000,000 Insurance Regulation  Minimum Capital Requirement 2019 P 900,000,000 2022 P 1,300,000,000  New Business: Paid-up capital: At least P1,000,000,000  Microinsurance: At least P500,000,000  Risk-based capital (RBC) Requirement?: Yes! Total Ave. Capital RBC2 RBC Ratio Requirement RBC2 Ratio ≥ 100% T2 Capital ≤ 50% of T1 Capital