The Ultimate Guide to Understanding Insurance Rates
Understanding insurance rates is critical to selecting an adequate plan that suits your coverage needs and making informed decisions about potential plans.
Geoscientists use rates as a method for measuring changes over time for any two variables which change simultaneously, such as plate tectonic velocity, crystal growth rate or river and groundwater discharge rates.
Insurers’ Profits
Profits in the insurance industry typically result from two sources. They come from underwriting performance and investment returns on its portfolio of invested assets, as well as overhead expenses, dividend payouts and taxes.
To calculate profit, an insurer must consider both their incurred losses and expenses, and collected premiums during a given timeframe. A combined ratio is computed by dividing their incurred loss and expense ratio with their earned premium ratio.
The combined ratio is an invaluable metric for insurance companies as it allows them to identify if they are spending more on claims than premiums collected, making this ratio used by regulators, investors and consumers in their assessment of an insurer’s profitability. Therefore, insurance firms should aim for as low a combined ratio as possible in order to sustain profitable operations over time.
Policyholders’ Risks
Insurance premiums are payments policyholders agree to make in exchange for financial compensation from an insurer. Premiums may be paid monthly, quarterly, semi-annually or annually and vary based on risk assessments of losses that the insurer is willing to cover with compensation payments. To determine these rates accurately and fairly, insurers employ actuaries – professionals trained to use mathematical, statistical and financial models and analyses in determining premium rates.
Actuaries use historical data to predict future costs, though not all risks can be precisely predicted and insured against; some risks are even uninsurable due to moral hazard concerns;
As a general rule, the higher a person’s risk relative to that of other policyholders is, the higher their insurance premium will be. This basic principle helps mitigate adverse selection and moral hazard impacts on policyholders.
Insurance Companies’ Liquidity
Many insurance companies utilize premiums collected to invest and grow their assets, which state insurance regulators require them to keep on hand as part of guaranteeing financial compensation to policyholders.
An insurance company’s liquidity refers to its current assets (such as cash and cash equivalents ) versus liabilities and ceded reinsurance balances payable. When combined, their quick ratio measures how well their current assets cover liabilities without needing new business to do it. A higher quick ratio indicates an insurance company is easily covering its obligations without being dependent on new contracts for coverage.
An insurer’s current liquidity can be negatively impacted by negative changes to its risks, such as increases in policyholder surrender rates or changes to liability values and asset yields, which affect their solvency margins without being explicitly measured through liquidity analysis; holding more capital does not help an insurer avoid liquidity strain events.
