Internal:Training/IFRS17/The economics of an insurance contract: Difference between revisions

 

🔍 '''Underwriting profit in action.''' Consider a simplified example. An insurer in Italy writes 10,000 [[Definition:Home insurance|home insurance]] policies at an average premium of €500 each, collecting €5 million in total. Its [[Definition:Actuaries|actuaries]] estimated expected claims of €3.2 million and expenses of €1.2 million, leaving an expected underwriting profit of €600,000. But actual claims in a given year are never exactly equal to the estimate. If a harsh winter brings heavier-than-expected [[Definition:Water damage|water damage]] claims, actual claims might reach €3.6 million, cutting the underwriting profit to €200,000. Conversely, a mild year could see claims of only €2.8 million, boosting the underwriting profit to €1 million. This variability is the essence of [[Definition:Underwriting risk|underwriting risk]]: the insurer committed to a price before knowing the true cost.

 

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⚠️ '''Common misconception.''' A common error is to think that if an insurer pays out more in claims than it collects in premiums, it must be losing money. This ignores the investment side entirely. The [[Definition:Combined ratio|combined ratio]], which measures claims and expenses as a percentage of premiums, can exceed 100% and the insurer can still be profitable if investment income more than covers the gap. Equally, a combined ratio below 100% does not guarantee overall profitability if the insurer has made poor investment decisions or faces large [[Definition:Unrealised losses|unrealised losses]] on its [[Definition:Investment portfolio|portfolio]].