The fact that people pay as a rule in advance for insurance means that insurers find themselves with money in hand until they have to meet any claims that may be made at a later date. In life insurance in particular, as we have seen in considering reserves, long periods may elapse before claims are made. Early in the eighteenth century, when insurance and banking were in their infancy an insurance company would keep its money in a chest out of which claims were paid.
It was soon realised however that money should not lie idle but could be used to earn interest until it was needed.
Today British insurance companies have upwards of £500 billion invested world-wide, about four-fifths relating to life insurance.
Their investment departments are not large but those who advise on the choice of investments are highly skilled.
Actuaries are prominent among them.
In choosing investments insurers are subject to various constraints.
In classes of insurance where large claims may arise at any time they must ensure that they have the funds to pay promptly without having to sustain losses on a forced realisation of assets.
In other words they must maintain a certain liquidity.
When buying government securities for their non-life insurance accounts they will tend to select those that are due to be repaid within a few years because the value of these is likely to remain stable.
For life insurance funds, on the other hand, the need is for a steady income over a long period so government securities which have a long term to run will be preferred.
And attention has to be paid to what is called matching. This means choosing investments suitable to meet the company's liabilities when they arise. If, for example, a company issues a lot of policies payable in a foreign currency, with claims payable in that currency, it is likely to need investments in that currency. Otherwise it will risk losing money if it has to realise securities in another currency and the rate of exchange is unfavourable.
One principle of investment is not to put too many eggs in one basket for fear of too great a loss if things go wrong. Insurance companies therefore spread their investments. They will have a proportion in securities that pay a fixed rate of interest, a proportion in land and buildings, and a proportion in variable interest securities, that is the ordinary shares of companies on which the dividends paid each year are related to the profitability of the company concerned.
An important accounting activity is costing. The accountant analyses the expenses of the company to show how they are spread over its different activities. This enables management to see which activities are profitable and which not. Analysis may show, for example, that some types of insurance or some branches of the company, or some of its agencies, are consistently unprofitable and that remedial action needs to be taken.
Taxation gives rise to a good deal of work on the part of a few skilled people in making returns and agreeing assessments to tax by the Inland Revenue.... see: Costing
Our insurance website is an independent marketing website which acts as an introducer to 'whole of market' companies who offer specialist Independent Financial Advice. Each company is authorised and regulated by the Financial Services Authority.
We are not authorised to give advice and we are not liable for any financial advice provided by, or obtained through a third party. The information published on this website is for information purposes only. This site has been approved for compliance purposes by a Firm of Independent Financial Advisors who are authorised and regulated by the Financial Services Authority (FSA). The Chartered Insurance Institute
To contact us, send an email and we will get back to you as soon as we are able. If you are looking for independent life insurance quotations then click here. If you are looking for any of the folliowing: Car insurance
Bike insurance, Travel insurance, Home insurance, Life insurance, Landlord insurance, Pet insurance, Medical insurance, Dental insurance, Business insurance please click here
Have something to say?
We publish financial articles on this site if they fulfil our requirments. more>>