Insurance Policies - A Numbers Game Watching the Numbers From a financial perspective, insurance providers are interested in coming out of the following equation positively: Net Revenue = paid premium + other income – claims for losses – operating costs The process of providing the financial coverage behind an insurance policy approved is called “underwriting.” The underwriter is the actual entity going on record that it will provide the financial means to pay off a loss specified in the insurance policy. This risk is calculated by the underwriter using various demographic and historical data, frequency of similar claims under similar policies, and offsets from price revenue. Statistics are used to figure out the probabilities of included risks, which is referred to as “actuary.” The win-loss ratio of an insurance provider basically represents the mathematical calculation of losses versus expenses versus premiums collected. This benchmark is then used by the industry to determine if a particular provider is performing well or is going in the direction of soon being in the red. However, insurance providers don’t make all their money just from insurance policies. The premiums paid don’t automatically go back out in costs or claims paid. Providers use the money, referred to as the “float,” and invest it for additional profits. This serves two purposes: one, the company then has a reserve to pay claims against, and two investment produce additional profits to work with. Floats tend to be much smaller for companies when times are rough, as in during a recession, than when times are good. This of course means insurance providers will try to make up the difference to stay on track with profit, which translates to higher premiums charged in general. Additionally, an insurance provider likely cannot survive on the profit of the float alone, and will eventually need to come back to its insurance policy revenue to function. However, others who are very good at investing debate the matter.