In the insurance sector, the term profitability is very important to assess the financial performance of a insurance. It may seem that it only interests the shareholders or the company itself, but it is also important for the insured, as it influences the premiums, the products offered and the stability of the company.
Profitability in insurance
It concerns the the ability of an insurer to generate benefits from the premiums it charges and the investments it makes. This concept covers both the income that the insurer obtains through the policy subscription (what is called technical profitability) as the yields it generates from its financial investments (financial return).
The objective of an insurer is to find a balance between the payment of claims, risk management and the collection of sufficient income to cover its operating costs and generate benefits. A number of financial indicators are used to measure this capacity, such as the combined ratiothe net benefits and investment returns.
Profitability rates
There are two major approaches to measuring it: technical andfinancial. Each of them provides a different view of how the insurer generates income.
1. Technical performance
It refers to the profitability of the insurer from the insurance subscription, that is, of the premiums that charge less claims and other related expenses. This metric is based on the results of its main operations: subscribe risk and risk management. The technical profitability is generally measured using the combined ratio.
Combined Ratio: It is a key indicator in the assessment of the technical profitability of an insurer. It is calculated by adding the % sinister (proportion of premiums to be paid) and Index of expenditure (proportion of premiums spent on operational expenditure). A combined ratio of less than 100% indicates that the insurer is making profits from its subscription operations. If it is more than 100%, it means you are losing money in your technical activity.
2. Financial performance
In addition to their insurance activity, insurance companies invest part of the premiums they receive in different financial assets, such as bonds, shares or real estate. The financial return is the return on these investments. This is essential, as insurers often have large amounts of money that are not used immediately and that can generate additional income through prudent investments.
The profitability of the Sure. It is very important, as it involves long-term sustainability, investment capacity and improvement or market confidence, among other indicators.
In short, the profitability of the insurance world is a broad concept that covers both efficient premium management and strategic investment of funds. For insurers, good profitability ensures their sustainability and growth, while for insurers it means greater security and stability in their coverage.
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