How general insurance premiums are used
Last week, my write-up was on what premiums are generally and what they are used for with emphasis on life insurance premiums. This week, however, the focus will be on non- life or general insurance premiums and how they are used. The objective is to demystify the school of thought by many an insured that insurance premiums are free monies for insurance companies!
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Akin to life insurance premiums, non-life or general insurance premiums are collected based on a stated period and the possibility of a mishap occurring during that period.
It must be well understood that in the event that the mishap does not occur to a particular insured does not mean that no member of the pool was affected hence at the end of the insurance period, the money paid is said to have ‘burnt’!
This notwithstanding, some insurance companies, as a result of marketing dynamics in the face of stiff competition, have introduced what is called premium cash-back or profit-sharing on an agreed percentage. The No Claims Discount (NCD) offered at renewal of a policy has also become a standard component in this regard.
Non-Life Insurance Premiums
Premiums from non-life insurance portfolios such as motor, fire and burglary, contractors-all-risks, marine and hull, etc. are usually paid and last for a period not exceeding 12 months. In the event of no claims being made, the insurance company could be said to have earned such premiums.
Perhaps, this in part, explains why most managers of insurance companies, apart from prudent underwriting, say a lot of prayers that nothing happens in a particular year as a heavy claim can lead to a substantial loss!
What Informs General Insurance Premiums?
General insurance premiums are often informed by such factors as the nature of the perceived or expected risks, value of the item or property; expected sum assured, and the lifestyle of the insured. For example, a single person’s premium on a motor insurance is expected to be higher than the premium of a married parent for the same risk at the same value.
Do Non-Life Insurers Earn Such Premiums?
The answer may not be a straight forward Yes or No. The reason is that an insurance company with a portfolio of high risk businesses stands the risk of making marginal or no earnings at all or at best break even.
On the other hand, an insurance company with prudent underwriting of businesses could still earn some premium when there are not too many claims made in a particular insurance year.
This is where it is important to note that the fact that my teacher who insures her vehicle with company ‘A’ did not get involved in accident for which she could have made claims during the period, does not mean my doctor who also insures with the same company ‘A’ has not run into anybody’s brand new range rover for which he has to fall on insurance for compensation / indemnity.
Suffice it to say with the fact that unlike joining an STC bus from Accra to Kumasi, where once you reach your destination, the transport owner can make use of the fare paid less other costs to them; insurance premiums cannot be for insurance companies until an insured event occurs, or thankfully fails to occur.
Insurers incur huge costs from premiums received
In reality, apart from the minimum required capitalisation, it is from the received premiums which are often invested by insurance companies. On the other hand, however, the cost of distribution such as commissions / brokerages to intermediaries, administrative costs, and other expenditures are borne from premiums. Imagine the situation where insurers had to rely on only premiums and reinsurance arrangements at the time the June 3, 2015 disaster struck!
Industry Statistics
Globally, the insurance market is forecasted to have a value of $4,608.5 billion in 2012 – an increase of 24.9 per cent since 2007.
The performance of the Ghanaian insurance industry is in tandem with the global industry. Although a greater percentage of total industry premiums are generated from the non-life sector, the percentage growth in premiums from life insurers far outweighs that of the non-life sector.
For instance, whereas the non-life sector grew by 17.1 per cent in 2013 in Ghana, the life business recorded a remarkable growth of 31.4 per cent over the 2012 figures. In other words, the growth rate of the life sector is almost twice that of the non-life business (NIC, 2013); these are measured in premium terms and this trend is likely to remain so for some time.
Non-life insurance sector
Cumulative premium income for the non- life sector of the industry earned cumulative premium of GH¢571m in 2013 and within the same period incurred claim and administrative costs of GH¢317m representing 55 per cent of premium incomes earned in 2013!
Investment of funds as life blood of continuous existence of insurers
As earlier explained, the continuous existence of insurance companies is dependent on how they invest their funds to generate investment earnings which contribute significantly towards claim payments.
From the above analysis, it is evidently clear that insurance companies do not just take premiums for free but spend most of it to pay claims and meet operational expenses and any excess premiums left are used to build up savings reserves towards future claim payments and also build up strong asset base to enable them have strong balance sheets.