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the business model of an insurance company in the insurance world there is so much to learn and explore which can be a very very big deal today at insurance reassurance we are going to break down the business model of an insurance company in this video the information will cover the following topics the risks of running an insurance company how the interest earnings and revenue operate reinsurance how assessing insurers takes place and of course the pe and pb ratios of an insurance company as these are all very important components of an insurance company we know this is information we all may have been wondering at one point or another so with that being said let's not waste any more time and let's jump straight into the video insurance companies base their business models around assuming and diversifying risk the fundamental insurance model includes pooling risk from individual payers and redistributing it across a bigger portfolio most insurance companies produce income in two ways charging premiums in return for insurance coverage at that point reinvesting those premiums into other interest generating assets like every single private business insurance companies attempt to advertise effectively and limit administrative costs estimating and assuming risk when estimating and assuming risk we must keep in mind that revenue model specifics differ among health insurance companies property insurance companies and financial guarantors the first assignment of any insurer in any case is to value risk and charge a premium for accepting that risk let's assume an insurance company is offering a policy with a one hundred thousand dollar conditional payout for the insured it needs to evaluate how likely a prospective buyer is to trigger the conditional payment and extend that risk based on the length of the policy and then this is the place where insurance underwriting is important without good underwriting the insurance company would charge a few clients way too much and others very little for assuming risk this could price out the least risky clients ultimately making rates increase even further on the off chance that a company prices its risk effectively it will usually bring in more revenue through premiums then it spends on conditional payouts it could easily be said an insurer's real product is insurance claims at the point when a client files a claim the company should deal with this claim check the claim for accuracy and finally submit the payment this adjusting process is important in order to successfully filter through any fraud claims and limit the risk of loss to the company interest earnings and revenue interest earnings and revenue are the major income streams for an insurance company assume the insurance company gets 1 million dollars in premiums for its policy it could hold on to the money in cash or spot it into a savings account however that isn't very efficient at the very least those savings will be exposed to inflation risk all things being equal the company can discover safe short-term assets to invest its funds this produces extra interest revenue for the company while it waits for possible payouts some common instruments of this kind may include treasury bonds high-grade corporate bonds as well as interest-bearing cash equivalents re-insurance there are a few companies that participate in re-insurance to decrease risk what reinsurance is exactly is insurance that insurance companies purchase to protect themselves from excessive losses due to high exposure reinsurance is an important part of insurance companies efforts to keep themselves solvent and to stay away from default due to payouts and regulators mandate it for companies of a specific size and type for instance an insurance company may write too much hurricane insurance based on models that show low odds of a hurricane hitting a geographic area on the off chance that the unfathomable occurred with the hurricane hitting that area considerable losses for the insurance company could follow without reinsurance taking a portion of the risks off the table insurance companies could be out of business at whatever point a natural disaster hits regulators mandate that an insurance company should only issue a policy with the cap of 10 of its value except if it is reinsured along these lines reinsurance permits insurance companies to be more aggressive in winning market share as they can transfer risks from just one company also reinsurance smooths out the regular fluctuations of insurance companies which can see critical deviations and profits and losses for some insurance companies it's like arbitrage they charge a higher rate for insurance to individual consumers and afterwards they get less expensive rates reinsuring these policies on a large scale assessing insurers before assessing insurers and smoothing out the fluctuations of the business reinsurance makes the whole insurance sector more appropriate for investors insurance sector companies similar to some other non-financial services are assessed depending on their profitability expected growth payout and risk but there are additional problems specific to the sector since insurance companies don't make investments in fixed assets little depreciation and little capital expenditures are recorded additionally calculating the insurers in capital is a difficult exercise since there are no regular working capital accounts analysts don't utilize measurements that include firm and enterprise values all things considered they focus on equity measurements some of these equity measurements for example may include price to earnings also known as pe and price to book also known as pb ratios analysts perform ratio analysis by calculating insurance specific ratios to evaluate these certain companies the p e ratio will in general be higher for insurance companies that show high anticipated growth high payout and low risk also pb is higher for insurance companies with high anticipated earnings growth a generally low risk profile high payout and high return on equity holding everything steady return on equity has the biggest impact on the pb ratio when comparing pe and pb ratios across the insurance sector analysts need to manage with more complicated factors insurance companies make estimated deliveries for their future claims expenses in the event that the insurer is too conservative or too aggressive in assessing such arrangements the pe and pb ratios might be excessively high or excessively low the level of diversification also hampers comparability across the insurance sector it is expected for insurers to be engaged with at least one unmistakable insurance business for example such as life property and casualty insurance depending upon the level of diversity insurance companies face various risks and returns which is making their p e and pb ratios diverse across the sector and that brings us to the end of this video thanks for joining us today if 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