- CFA Exams
- 2025 Level II
- Topic 3. Financial Statement Analysis
- Learning Module 13. Analysis of Financial Institutions
- Subject 4. Analyzing an Insurance Company
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Subject 4. Analyzing an Insurance Company PDF Download
Insurance companies are typically categorized as property and casualty (P&C) or life and health (L&H).
- The underwriting expense ratio is an indicator of the efficiency of money spent on obtaining new premiums.
- The loss and loss adjustment expense ratio is an indicator of the quality of a company's underwriting activities - the degree of success an underwriter has achieved in estimating the risks insured.
- For both ratios, the lower, the better. The combined ratio is the sum of the two ratios: the total insurance expenses divided by the net premium earned. It is a measure of the efficiency of an underwriting operation. A combined ratio of less than 100% is considered efficient.
- The loss reserve account is usually subject to management discretion.
They earn revenues from premiums (amounts paid by the purchaser of insurance products) and from investment income earned on the float (amounts collected as premiums and not yet paid out as benefits).
Important areas for analysis include business profile, earnings characteristics, investment returns, liquidity, and capitalization.
Property and Casualty Insurance Companies
P&C insurers' policies are usually short-term, and the final cost will usually be known within a year of a covered event. Their claims are more variable and "lumpier", because they arise from accidents and other less predictable events.
The business is cyclical and price sensitive. When the industry's combined ratio is low, new entrants will be entering into the hard market and bringing the premiums down.
Analysis of P&C companies' profitability includes analysis of the combined ratio and loss reserves.
- The underwriting expense ratio is an indicator of the efficiency of money spent on obtaining new premiums.
- The loss and loss adjustment expense ratio is an indicator of the quality of a company's underwriting activities - the degree of success an underwriter has achieved in estimating the risks insured.
- For both ratios, the lower, the better. The combined ratio is the sum of the two ratios: the total insurance expenses divided by the net premium earned. It is a measure of the efficiency of an underwriting operation. A combined ratio of less than 100% is considered efficient.
- The loss reserve account is usually subject to management discretion.
P&C insurers typically favor low-risk, steady-return, high-liquidity assets.
Life and Health Insurance Companies
L&H insurers' policies are usually longer term. Their claims are more predictable because they correlate closely with relatively stable, actuarially based mortality rates applied to large populations.
L&H insurers typically have lower capital requirements and seek higher returns than P&C companies.
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