Showing posts with label insurance. Show all posts
Showing posts with label insurance. Show all posts

19 March 2018

2 Ways How Insurance Companies Make Money In Nigeria

Ways Insurance Companies Make Money In Nigeria, Insurance companies in Nigeria

Insurance firms in Federal Republic of Nigeria and round the world operate within the money services sector. The business of insurance involves the insurer guaranteeing replacement or repairs or shorty for associate quality or service which will are broken or impaired or defaulted under terms and conditions in exchange for a premium. as an example, associate underwriter insures your vehicle against it being purloined or broken by chance by exchanging it or repairing it at no further price to you in exchange for the premium you want to have paid direct.

How Insurance Companies Make Money In Nigeria

Ok now, take for example, if the value of the sum insured is N5million you typically will pay a premium of N250k to the insurance company. If the car gets stolen or gets damaged the insurance company is made to pay a maximum sum of N5million towards repair or replacement of the vehicle depending on the claim type. Your premium typically has a duration of one year. If during the year you do not have any claims, the insurance company does not return any part of the premium to you.

Above is a basic overview of the insurance business model. However, from an investors point of view there is a little more to it than above. The insurance business as you must have drawn from above is a risky one and so Insurance companies that are profitable are also associated with proper risk assessment to ensure the risk they are taking on is not too much to drive them into losses. So lets look at how they make money?

  • Insurance Companies make money in two major ways. Net Premium Income and Income from Investments.

Income From Investments – Insurance companies also make money through investing. Remember they receive a lot of money from premiums during the year in exchange for a commitment to pay claims. These premiums are also interest free unlike bank deposits where banks pay some form of interest for the amount deposited with them. Rather than allow the premiums lay idle, they also invest the premiums in several assets such as bonds, shares, treasury bills, private equity, real estate etc. The income derivable from these investments is an addition to the underwriting profits. Around the world Insurance companies are often bigger than banks and next to Pension funds own billions of dollars in investments. Warren Buffet for example, is able to finance a lot of its investments from premiums received from GEICO (a multi-billion dollar insurance company it owns). Premiums are purely cash backed and free of interest making them one of the most liquid armory required for investing.

SEE ALSO: Banking: How to Earn Big Money From Savings and Fixed Deposit Accounts Nationwide

Net Premium Income – Net premium income is the money the insurance company gets after it deducts claims against it in a particular year from the gross premium it receives. This is called Underwriting Profits. Using the vehicle example above, the insurance company receives a premium of 5% (N250k) in exchange for insurance of N5million. So assuming it agrees to insure 5000 cars worth N5million each it basically has taken a risk of N25billion in exchange for a premium of N1.25billion. They also know that it is unlikely that all vehicles insured will make claims during the year. This is part of their risk assessment. So if during the year, they pay claims of N500million then their underwriting profits is N750million. So the higher the claims during a financial year the lower the underwriting profits and vice n versa.

What about Profits? If you noticed, I have not talked about other expenses. Insurance companies do run a huge operation and employ staffs. Therefore, profits are actually made after you deduct operating cost and taxes from  Underwriting Profits and Investment Income you have a positive number.

Is it Possible to have an underwriting Loss – Underwriting losses are very common in economies where competition is rife. In this instance, Insurance companies offer several layers of discounts to customers making their premium fall below what they typically would have received. For example, instead of 5% they can ask for 2.5%. The aim here is similar to a turnover model. They believe if they collect a lot of premium at a cheap percentage to claims, even if the claims is more than gross premium and leads them to an underwriting loss they adequately make up for it through income from investments. This is because the larger the premium (cash) the more investment you can make and the more investment income you get which covers for the underwriting loss. To them, as long as you make better than the year before profits at the end of the year it really doesn’t matter whether you make underwriting losses.

What to look out for as an Investor – As a capitalist, I attempt the maximum amount as attainable to take my self aloof from what the markets think and stick to the fundamentals. Insurance corporations should create improved underwriting profits, increase investment financial gain and post inflated gain. this can be however they're judged. they have to have a awfully sensible risk management system and balance the requirement for inflated gross premium growth owing to competition with the requirement to mitigate risk. you'll forgo one for the opposite. however that's my take, others would possibly assume otherwise.
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