söndag 20 november 2016

Financial institutes and how they create money (Insurance Companies)

This is part of a series of posts, be sure to check out the other ones too:

  • Banks
  • Investment banks
  • Insurance companies

  • The time has come to another financial institute that most of us has some kind of relation to:
    The Insurance Companies.

    The basics

    Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.
    So, people and companies pay a set amount of money (premium) each year, to safeguard against a specific type of risk (for example car accident). If the risk becomes real, a claims request is sent to the insurer, who then pays the damages.

    Investment companies receive money in the form of premium payments from their customers. And at another point in time, they have to pay out claims.
    The naive way to think about these kind of companies would be that they create money by overcharging the premium part so that the total claims during a year would be smaller than the total premiums.

    Modern insurance companies

    The modern insurance business does not actually profit from the premium/claims difference but instead by taking advantage of the time difference between a premium paid and claims received.
    The idea is to collect a lot of premiums into an investment pool and then invest that into guaranteed and/or low risk papers, shares etc.
    When claims are received, they liquidate (cash-out) a part of the total investment and move that money to handle the request.

    Disclaimer. I am in no way an expert on capital management or investing. On this blog I only wish to share my findings, ideas and comments on current events and fields that interest me. I hope that my thoughts can entertain you. I expect that everyone reading take their time and do their own research before acting on anything read on this blog. Investing is not for everyone. E&OE.

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