Insurance companies base their business models around risk and risk assumptions. An important insurance model involves taking risks from individual payers and distributing a large portfolio. Most insurance companies generate cash in two ways: pay premiums in exchange for insurance and then reinvest those penalties in other assets that accrue interest. Like all private companies, insurance companies try to sell well and reduce administrative costs.
Price and risk management
The specification for the income model varies for health insurance companies, property insurance companies and financial insurers. However, the first duty of any insurer is to risk the price and collect a premium for taking it.
Suppose an insurance company offers a policy with a premium of $ 100,000. It requires assessing the probability that the prospective buyer pays the conditional payment and increases that risk based on the duration of the policy.
This is where insurance coverage is important. Without good writing, the insurance company will charge too many clients and some are too small to see the risk. This can cost less risky customers and ultimately generate price increases. If a company claims its risk more effectively, it should contribute more revenue to premiums instead of spending it on conditional payments.
In a sense, the real insurance product is insurance claims. When a customer makes a claim, the company must evaluate it, evaluate the accuracy and send the payment. This repair process is necessary to resolve a fraud claim and reduce the risk of losing the company.
Interest and income
Assume that the insurance company receives $ 1 billion in premiums for its policies. You can retain cash in cash or deposit it in a savings account, but that doesn't work well: very little, those savings will be at risk of inflation. Instead, a company can acquire a safe and temporary asset to invest in its assets. This generates additional revenue for the company while waiting for a possible payment. Common instruments of this nature include Treasury bonds, high corporate bonds and interest-related cash equivalents.
Some companies participate in fundraising to reduce risk. Reinsurance is the insurance that insurance companies buy to protect themselves from excessive loss due to excessive exposure. Reinsurance is an integral part of the efforts of insurance companies to maintain the solvent and avoid automation due to payment, and regulators authorize companies of all sizes and types.
For example, an insurance company may sign insurance against major storms, based on models that show the low probability that a hurricane is damaging a region. If the worst happened in a hurricane that hit the region, there could be a great loss for the insurance company. Without reconstructing risk taking on the table, insurance companies can close the business every time a natural disaster occurs.
Regulators require the insurance company to issue the policy at 10% of its value unless it is reproduced. Therefore, reinsurance allows insurance companies to be more aggressive to gain market share, as they can transfer risks. In addition, reinsurance undermines the natural flexibility of insurance companies, which can see significant deviations from my profits and losses.
For most insurance companies, it is the same as arbitration. They charge a higher insurance rate for individual buyers and receive lower rates for renewing this policy on a larger scale.
By adjusting business flexibility, reengineering makes the entire insurance industry more attractive to investors.
Insurance companies, like any other non-financial service, are evaluated based on their profitability, expected growth, payment and risk. But there are also some problems in the sector. As insurance companies do not invest in fixed assets, less depreciation and less expenses are recorded. Also, calculating the cost of insurance is a daunting task because there are no standard accounts. Analysts do not use metrics that include firm and business values; instead, they focus on capital metrics, such as earnings (P / E) and cash-to-book ratios (P / B). Analysts perform a risk analysis calculating a specific insurance rate to evaluate companies.
The P / E ratio tends to increase in insurance companies that show high expected growth, high payment and low risk. Similarly, P / B is high in insurance companies with high profit growth, a high risk profile, a high repayment and a high return on capital. Keeping everything constant, the return on capital has a greater impact than the P / B ratio.
When comparing the P / E and P / B relationships in the insurance sector, analysts have to consider other complexities. Insurance companies make limited plans for their future expenses. If the insurer is too conservative or too aggressive to measure coverage, the P / E and P / B ratio may be too high or too low.
The degree of variation also makes comparisons difficult throughout the insurance sector. It is common for insurers to participate in a single or different insurance business, such as health, injury and property insurance. Depending on the degree of diversification, insurance companies face different risks and returns, which makes their P / E and P / B ratio different across the industry.
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