An insurance portfolio is the sum of all insurance contracts concluded between an insurance company (insurer) and its clients (policyholders). Its effectiveness is assessed by such parameters as profitability, level and type of risk, profitability.
What it is?
An insurance portfolio is not a single document or a list of documents. In fact, this is the base of all the insured persons of a particular insurance company who bought policies and therefore have the right to demand compensation from it in the event of insured events. A personal account is opened for each client, on which all information collected before and after the conclusion of the contract is recorded. Based on these data, the risk level for the concluded contract and the amount of mandatory payments (contributions) are calculated.
How to rate
The more contracts the insurer managed to conclude in terms of volume and amount of cash contributions, the higher the stability of the insurance portfolio. This rule applies to all companies, regardless of the specifics of the insured objects. However, the more contracts are included in the portfolio, the more difficult it is to assess the level of risk and profitability. For some companies, the volume of concluded contracts reaches several hundred thousand and even millions. To speed up the process of evaluating portfolio profitability, use special methods and techniques for assessing risk and profitability:
- Homogeneous objects are considered as one. For example, if 2-3 or more citizens have insured their homes located on the same street in case of flood or fire. Such objects should be considered as one, since in the event of a natural disaster, it is likely that all the insured will suffer.
- The cost of the policy, as well as the amount of insurance payments, should be calculated based on the physical condition of the insurance object.
- Statistics are taken into account for the country, for a certain region, for the scope of activity / use of the insured object.
All policies are classified by the degree of probability of occurrence and the size of payments. In insurance, it is customary to divide the risk into specific, high, moderate and low. Accordingly, after the first assessment of the insurance object and the conclusion of the contract, it is assigned to a certain category according to the degree of risk, and only then they evaluate the entire portfolio.
Types of Insurance Portfolios
All portfolios of insurance companies are classified by field of activity, for example, car insurance, housing and life insurance, and by degree of risk. The following types are distinguished:
- Classic insurance portfolio. It includes those types of insurance objects that have been used for a long time. This includes contracts for compulsory and voluntary property insurance. The risk is medium, profitability is low, although steady. In order to use this type of insurance, a company must have a large margin of financial strength.
- Specialized insurance portfolio. This is such a type of insurance, when the object is those areas of activity and those items whose use has a highly specialized purpose. For example, space insurance, insurance of currency and exchange risks, medical insurance. The risk for such facilities is specific, the profitability is high. Legal entities with the necessary authorized capital, which have a state license to conduct this type of activity, are entitled to engage in these types of insurance.
- Combined insurance portfolio.It combines the elements of a classic and specialized type of insurance. This approach reduces risk, but profitability also decreases.
In addition to the above, there is another special type of portfolio - a balanced insurance portfolio. Its feature is that all objects are homogeneous in terms of profitability, and not in degree of risk - even the cost of each policy included in the portfolio is the same.
Who should conduct risk assessment and classification
Analysis and calculation of risks and their classification, including by type of insurance portfolio, should be carried out by a specialist in the company, who is called an underwriter in the professional environment, and the process of analysis, assessment and calculation is called underwriting. As a rule, underwriting is carried out by a separate specialist who does not sell policies, but performs exclusively analytical work.
How to calculate portfolio profitability
During the formation of the insurance portfolio, the insurer must calculate not only the level of profitability and degree of risk, but also profitability. If you do not carry out these calculations, then there is a great risk of not calculating the funds, which can lead to bankruptcy. The profitability of the insurance portfolio is calculated by the formula:
R = D / V
Where D is the profit of the company, V is the size of the insurance portfolio.
The profitability indicator shows what is the profitability of the insurance company for each concluded insurance contract. It should distinguish between profitability in monetary terms and in absolute terms - in percent. In absolute terms, growth in profitability is estimated, which is of particular importance in this area.
Bankruptcy insurance companies
Insurance activity requires the entrepreneur to be more careful when developing and implementing a business strategy. Since this is not only one of the most profitable, but also one of the most risky activities, many, without calculating their strength, go bankrupt. The most common cause of bankruptcy is an attempt by entrepreneurs to dump in the insurance market. But policyholders can be calm, because in accordance with Russian law (Article 960 of the Civil Code of the Russian Federation) after bankruptcy, the insurance portfolio is transferred to another company or transferred to the state for temporary management.
