Insurance Company Reserves – Are They Enough?
In the insurance industry, an insurance company is a legal entity with many different aspects and functions. A typical insurance company, which can either be for profit, non-profitable or government-operated, sells the guarantee to cover expenses in exchange for either a regular premium or a variable rate. For instance, when one buys health insurance, the insurance company can pay for (part of) a client’s medical expenses, whether any. However, an insurance company may not pay for all the insured’s lost wages and may only be paid for the actual value of the insured’s benefits, less the premiums paid. It also depends on the insurance company how they define “full” coverage, and how much it actually costs them to provide that service.
Insurance policies are either based on contract law or on a variety of different theories including claims management. In contract law, there is a clear distinction between liabilities and damages. Liabilities are those things that an insurance company is legally required to compensate for. Examples of these would be losing in business, wrongful death, property damage, and so on. Damages, on the other hand, refer to any financial loss or expense that has been suffered by the insured. These types of losses are usually referred to as “wear and tear” in insurance policies.
Many insurance policies specify what is meant by “wear and tear.” Basically, this means that the type of accident, weather, or other factors will determine how much an insurance company pays out for a claim. If it were possible for all accidents to be anticipated, then the financial loss from each claim would be the same, because each occurrence would have the same impact on the insured’s ability to pay premiums. However, in the real world, things aren’t always smooth, and when there is an accident, things can sometimes go south even before they begin.
As an example, consider a married man who purchases insurance on life insurance for his wife and children. Once his wife passes away, he suddenly discovers that he is not able to collect the death benefit, because the time period for paying premiums was exceeded. Because of this, he must now pay the full amount of premiums, without any lapse in payments. This life insurance policy, originally intended to help offset funeral costs and other financial loss resulting from death, has now become a financial disaster for him and his family.
In order to avoid this kind of scenario, insurance companies take many steps to protect their interests. One such step is to establish a death benefit, which is the maximum amount of money that the insured person’s family is entitled to receive if he or she passes away. Most life insurance companies also set aside a reserve fund’s line of credit, which can be used to make necessary payments in the event that there is a gap in premium payments or if a claim is made. Insurance companies use these reserves to balance their portfolios, in order to assure that they are prepared for both potential short-term and long-term investment returns. While this may not seem like a profitable investment strategy, institutions such as banks and other large financial institutions depend on these long-term investment returns, so it is little wonder that they are very concerned about these reserves.
If these reserve plans were not in place, insurance companies could be forced to foreclose their operations, or sell their assets, all of which are highly disruptive to the financial services industry. One way that insurance companies are taking care of their excesses is by creating what are called “unit trusts.” These are financial services units that provide the insured with individual investments that are designed to yield only a specific percentage of the total returns on the investment portfolio. Investors in these units do not face the prospect of losing any money as the investment grows; instead, they will only receive a portion of the return when the portfolio has reached a certain level. This method of managed risk seems to work very well, and it has been found that most institutional investors prefer it over putting their money into “over-the-counter” (OTC) securities and other similar products.