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What is Earned Premium in Insurance?

What is Earned Premium?

Earned premium is the part of the premium (collected by the insurance company) that can be attributed to the period of the policy that is already over. For e.g. if you are paying $1200 per year as premium for a particular risk coverage for a year, and the first 3 months of the policy period is already over without any claims reported, then $300 is the earned premium. This term is mainly used by the companies while reporting their financial statements, to account for the per

All you need to know about Llyod’s of London

What is Lloyds of London?

Lloyds of London is one of the world’s oldest and most popular insurance markets headquartered in London. It is not an insurance company, it’s a market regulated and overseen by Lloyds Corporation. It has a unique position in the industry for providing coverage for most complex and unique risks. The buyers are individual entities or corporate. The sellers are group of investors called syndicates who are ready to take the risk for a premium. The policies are handcrafted (risks are underwritten) with both representatives of both parties sitting together in the market place (which explains the iconic building construction with hundreds of underwriter tables). Most of the business takes place through brokers, and middle men who has expertise to do so.

How is Lloyds of London different from insurance companies?

Insurance companies are individual entities having specific nature of business as like auto, life, home etc). The insurance companies provide a predesigned set of policies for a target group of customers, and are not custom made. In most cases, the risks covered are generic, and the companies have their own limitations on what risks to cover, based on the overall strategy. Where as Lloyds is an open market; we need to go back to the basics to explain the Lloyds operations i.e business between people who want their risk to be covered, and who would like to cover them. The two parties meet and make business.

In simple, an insurance company is a single entity that designs and markets insurance products where Lloyds is an open market place where companies and customer come together desing products that meets both their needs through a broker.

Who are the players in the Lloyds market?

The best way to explain this is through an example. Imagine that Mr. John works for a company that does offshore oil extraction, and his company sends him to find an insurance cover for specific valves that are laid under the ocean and form key component of the extraction process. Obviously this is one of its type cover that Mr. John cannot find in the commercial market. He goes to the Lloyds, finds a broker and explains him the cover requirements. The broker then takes the cover needs to the Lloyd’s underwriting room, where he meets with underwriters representing the different syndicates. Syndicates are formed to accept risks on behalf of the members, who are basically investors. The specialist underwriters measure the risk, calculate the premium and sometimes negotiation takes place with the broker. The broker, after meeting up with different underwriters, compares the options available on the table and takes it back to the Mr.John & his company (in this case the policy holder). And if both the parties are satisfied, deal!

This entire process is overseen by the corporation of Lloyd’s, ensuring that future valid claim if happens is fully paid. Its because of the existence of the corporate that Lloyds is not one of the most reliable and sustaining market place trusted by each stakeholder we have seen above.

How does Lloyds work?

Lloyds of London Explained

Lloyds of London Explained

Why Lloyds of London?

-          Lloyds market offers custom made insurance solutions for unusual and complicated risks

-          Lloyds clearly is well regulated and associated with trust and reliability. The leading rating agency A.M. Best has rated it as A (Excellent). The agencies Standard & Poor and Fitch has given A+ (Strong)

-          Lloyds also holds track record in responsible paying for valid claims

The famous Lloyd’s building

This unique insurance market is housed in a unique building. The Lloyds building, built in 1986, is often cited as ‘inside-out’ building. Looks like an industry from outside, with huge pipes and ducts, leaving an uncluttered space inside. The building, till today, is considered one of the innovative architectures in the world.

Top issues faced by today’s world insurance companies

Top issues faced by insurance companies

Regulations

The regulatory environment has always been one of the most influential force affecting the insurance companies, and with no surprise it still remains one of the important concerns. In the 2012 PwC 15th annual global CEO survey ,the over regulation pushing the insurance companies has been voted as the second largest threat to the growth. Though the regulatory complexity have been prevailing for longtime in the history of insurance companies, the increasing pressures from country level authorities by rolling out requirements specific to the local market poses severe challenges.

Social Media

Insurance industry is one of its kind where historically, the trust and relationship between the customers and the company representatives (agents or brokers) have played a critical role in doing business. But now the world is changing, information is easily available for the customers through various technology mediums like internet; customers can reach out to their computers, tablets or mobile phones to get information on various products and premiums. Though the significance of these middlemen in making the customers comfortable in buying an insurance policy has not been reduced significantly, the world is changing. Thanks to the recent economic lessons history has taught us, the companies are more proactive towards embracing the social media change. But ‘How’ still remains a big question, at least in the insurance industry.

Increasingly maturing market

Though the recession has not hit insurance industry as badly as it hit the banking industry, the overall growth has slowed down significantly. Mature markets like US and UK have been seeing negative growth, and if they do recover the growth is expected to stay less than 1%. So the CEOs are left with a choice to either take aggressive performance improvements to squeeze out better margins, or to expand into the growing markets. No wonder why data analytic and optimization is seeing enormous growth in recent times!

Costs vs Service

As the revenues decrease, the insurance companies face hard time dealing with increasing costs as well. Just like any other companies, as the margins get reduced the companies’ services decrease, partly due to the limited human resource power. With the average age of employees in insurance industry wavering around 50, the challenge in retaining the talent pool becomes another critical issue for the insurance companies.

7 possible ways to reduce your monthly auto insurance premium

While fuel efficiency is a critical factor in countries like India  the monthly insurance premiums in countries like Canada adds up in your credit card bill and makes a notable impact. Lets look into five important factors that you need to take into account to reduce your insurance premium

Well, we all know that the age is one of the important factor influence your insurance premium. Well as we look out of such things on which we don’t have much control on, there are always certain levers through which we can have optimal control on our insurance premiums. Lets look at some of them.

1) The balance between the old and the new.
As the principal amount insured on a new vehicle is quite high, the premium tends to be a higher too. The older the car gets the lesser the insured value, and eventually the insurance premium. However, that’s not always the case. Often, it turns out the older cars has lesser safety features, and more the risk of loss, which in turn fuels the increase in insurance premium. So its always the optimal balance between the age of the car, and features preferred by the insurance companies, that gives you the scope for saving that extra money in the premium.

2) Drive less
Yeah it sounds stupid, then whats the point in buying a car? But what I try to mean here is that, drive for and when needed. Sometimes, small efforts can make big changes. For e.g. if you have a convenient public transportation for your office, you can avoid driving a car and take public transit. This could save you significant bucks, not just in insurance premium ,but in parking too & fuel too. Insurance companies tend to decrease the premium rate for people who drive lesser miles/km.

3) Insurance as a factor in your buying choice

The best precautionary measure that one can take in reducing his/her monthly auto insurance premium, is considering the insurance premium as an important factor for making a purchase decision on your car. Reach out to an insurance agent, provide him with your choice of cars, and get insurance premium quote for each of your selected model, and choose the best fit for you.

4) Voluntary deductible

Do you have this question in your mind – ‘I am confident that I will drive safe, I really don’t want to pay this much for my premium’ , then voluntary deductible in a car premium insurance contract is a good option for you. This means that, you can actually volunteer to take part of the risk on yourself and in turn, you get to pay less monthly premium. But remember, in case of an accident, you might have to shell out more money from your pocket to cover your loss

5) Buying multiple insurance coverage from the same company

Most of the big insurance companies offer various insurance products under their portfolio. For example, the same insurer might offer home, auto, travel insurance etc. Often, when you buy two or more insurance coverage from the same company, you get significant discounts on your premiums. You can go for a recognized and reliable insurance company in your city, and buy all your insurance needs from that particular company.

6) Have a safe driving record

Not but not the least, probably this is the best solution to keep your premiums low in a long term basis. Drive safe, build safe record in your driving regulation authority’s database, and you are given discounts automatically.

7) Build your driving history

Drive your own car to build a strong driving history. I have heard people sold off their personal car, fearing higher insurance premiums, and rent a private car every weekend. That might save you some fixed costs of owning a car, but it wont help you build a profound driving history, which is important too.

Happy saving on your insurance premiums !

How big is Canadian Insurance Industry?

The insurance and financial services industry is the highest contributor for Canada’s GDP, and there is constant growth observed year by year. In 2011, $84.2 bn of the total GDP was contributed by the Insurance & Financial Services sector.

The following graph shows how the GDP contribution has been steadily increasing.

Gross Domestic Product (GDP)

Source: Industry Canada

Property & Casualty Insurance is one of the vital sector in Canadian Insurance industry, employing nearly 115,000 Canadians, and paying more than $7 bn in taxes alone ,and a premium base totaling $44 bn [Source: Insurance Bureau of Canada]

In 2009, the total GDP contribution by the property & casualty insurers to just the Ontario province is $7.5 billion, which is substantial.

Difference between an Actuary and an Underwriter in Insurance Industry

Actuaries

- Actuaries, in an insurance company, help design and price insurance policies for their companies, such that they remain competitive and maintain profits. They extensively use analytics, economics and mathematics skills and tools to evaluate risks. They are the ones who set guidelines for each risk class and category. The underwriter’s role comes after an actuary’s role and decision.

- An actuary’s role in a company is similar to that of a brain in a human body. If actuaries do wrong pricing for the policies, then the companies cannot make profits. If the price is very low, then the profit margin is not adequate, where as if the price is very high the customers won’t buy any policies from the company.

- Roles: Determine likelihood size of the policy holder’s losses and put a price tag. This is called ratemaking. Apart from this, they also perform reserving, risk management, reinsurance roles

Underwriters

- Underwriters, in an insurance company, decide the category in which each customer falls, based on the table/matrix created by the actuaries. They look at the data of the individual customers and decide in which risk class and category the particular customer falls in.

- Underwriters evaluate each client’s risk and decide upon how much coverage the client can be given, and for which how much premium he should pay. Sometimes they make decision as in whether certain client’s risk is coverable or not.

A perfect Analogy explanation

I remember reading a perfect analogy explaining the role of an actuary and an underwriter.
“An actuary, an underwriter, and an insurance salesperson are riding in a car. The salesperson has his foot on the gas, the underwriter has his foot on the brake, and the actuary is looking out the back window telling them where to go.”

Organizational chart for Actuaries and Underwriters

Organizational chart for actuaries and underwriters

Ontario in trouble, Hoping for Solvency!

Ontario province faces huge outstanding debt securities. What is Don Drummond and Moody’s saying?
Brief 

Ontario Province face huge debt (has huge outstanding debt securities)

Don Drummond’s report/recommendations for Ontario released on Wednesday

Ontario’s rating outlook was cut to negative from stable by Moody’s Investors Service

Who is who?

Dalton McGuinty

The Premier of Ontario (Premier ministre de l’Ontario in French) is the first Minister of the Crown for the Canadian province of Ontario.

Mr. Don Drummond

Mr. Drummond is the recently retired Senior Vice President and Chief Economist with the TD Bank. Prior to joining TD in 2000, the native of Vancouver had a long and distinguished career in the federal public service.

Moody’s Investors Service, often referred to as Moody’s, is the bond credit rating business of Moody’s Corporation, representing the company’s traditional line of business and its historical name. Moody’s Investors Service provides international financial research on bonds issued by commercial and government entities and, with Standard & Poor’s and Fitch Group, is considered one of the Big Three credit rating agencies.

Ontario province

Ontario has about $190 B in outstanding debt securities.

Ontario’s struggles are crucial for the country because its economy is larger than that of many countries, including Sweden, Poland and Belgium, and accounts for about 40 per cent of the national economy, with a gross domestic product of $612-billion last year.

However, the province has a $16-billion deficit and a rate of growth that is slower than that of some other provinces, which makes it difficult to find ways to balance the books.

A credit rating downgrade would not only make Ontario’s government bonds – which accounted for just over half of all trading in Canadian provincial bonds in the first nine months of 2011 – less attractive to investors, it could also make it more expensive to borrow money at the very time when the debt is mounting.

Drummond’s recommendation released

It has been about a year since Premier Dalton McGuinty asked him to dive into Ontario’s public services and find ways for the minority Liberal government to wipe out a $16-billion deficit by 2017. Mr. Drummond and his three co-authors on Wednesday served up 362 recommendations spanning more than 540 pages – the biggest print job in Queen’s Park history. He is proud of this. The executive summary is 62 pages.

 “We call it the ‘summary for the not-very-busy executive.’ ” Drummond says

Drummond’s Proposals

His proposals range from overhauling health care by moving more services away from hospitals, to scrapping electricity subsidies, to making tax breaks for businesses conditional on whether they help boost productivity, not just whether they create and maintain jobs. The general thrust through the entire document is making the success of all programs measurable, so they are run more efficiently, or junked. So far, the McGuinty Liberals have outright rejected only one recommendation – to kill all-day kindergarten.

“I hope they’ll implement them, but if they don’t, I don’t think it’s because they weren’t good ideas,” he says. “I would probably do 350 of them even if I had a huge fiscal surplus. I mean, why would you want to run a program inefficiently?” –Don Drummond says

His recommendations – hard to implement

It’s certainly nothing compared to the massive “radicalization” he is about to call for in how Canada’s most populous province operates. Mr. Drummond sounds supremely confident that his sweeping and sometimes draconian proposals offer the best hope for Ontario to get its house in order. But he is realistic about how hard it will be to implement them.

“No government in the world has ever done this before,” he says. “I’m calling for a revolutionizing, a radicalization, of virtually everything a government does, to make it focus on efficiency, not just in one area at a time, but simultaneously in virtually everything they do. It’ll take unbelievable courage and unbelievable intelligence, and it’ll take an unbelievable capacity at both the political level, and the bureaucratic level.”

Moody’s

Moody’s Investors Service warned on Thursday that it might lower the rating if the province doesn’t take serious steps in the next budget to deal with its multibillion-dollar deficit.

If we don’t do what he recommends, then Moody’s (Investors’ Service, the debt-rating agency) might downgrade us, increasing the cost of borrowing.” Moody’s cites Ontario’s slowing growth and growing debt for revision.

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