INSURANCE COMPANY

AND ITS PROFITABILITY

FACTORS
IRISH J

III YEAR B.COM

BFS303066
INSURANCE COMPANY

• A company, which may be for-profit, non-profit or government-owned, that sells the

promise to pay for certain expenses in exchange for a regular fee, called a premium. For
example, if one purchases health insurance, the insurance company will pay for (some of)
the client's medical bills, if any. Likewise, in life insurance, the company will give the
client's beneficiary a certain amount of money when the client dies. The insurance
company covers its expenses and/or makes a profit by spreading the risk of any one client
over the pool of premiums from many clients.
OBJECTIVE OF INSURANCE COMPANIES

• Insurance companies generate a profit when they sell more in policy dollar amounts than they pay out in insured claims. As
such, insurance companies have an objective of using a process called underwriting to examine every insurance applicant.
They then make a determination about whether that client will be an asset or a liability, and make coverage offers accordingly.
Insurance companies also utilize deductibles - the amount of money you have to pay out-of-pocket before insurance kicks in
with the rest, and co-pays, or the portion of coverage you have to pay before insurance covers the remainder.

• Many types of insurance have qualifiers that affect eligibility and premiums. For example, if you are 95 years old and in poor
health, a life insurance or health insurance policy may not be available -- if it is, you will be required to take a physical exam
and will likely be charged very high premiums. Insurers are, after all, trying to mitigate their own risk in covering you.
Likewise, if you have a terrible driving record, with numerous collisions and citations, auto insurance will cost you
significantly more than someone who has never had an accident.
 TYPES OF INSURANCE COMPANIES.
• Captive insurance company. This is an entity that exists to underwrite the risks of its parent owner. The concept can also be
used to provide insurance for a group of participating entities. The risk of loss is confined to the captive entity.

• Domestic. This is an insurance company that is incorporated in the state within which it is domiciled. This entity is
considered a domestic insurer within that specific state, and a foreign insurer within all other states (though it can still be
licensed to do business in other states).

• Alien. This is an insurance company that is incorporated under the laws of another country. It is considered an alien entity
from the perspective of any other country within which it does business.

• Lloyds of London. This is a business underwriting insurance under the authorization of the English Parliament. These
entities are more likely to issue coverage for more unusual or high risk items, as well as the usual types of insurance.

• Mutual. The policy holders own this type of business, so earnings are distributed back as dividends. Losses are not usually
charged back to policy holders, based on the terms of their insurance agreements.
PROFITABILITY

• Profitability is a situation in which an entity is generating a profit. Profitability arises when the aggregate amount of revenue is greater
than the aggregate amount of expenses in a reporting period. If an entity is recording its business transactions under the accrual basis
of accounting, it is quite possible that the profitability condition will not be matched by the cash flows generated by the organization,
since some accrual-basis transactions (such as depreciation) do not involve cash flows.

• Profitability can be achieved in the short term through the sale of assets that garner immediate gains. However, this type of
profitability is not sustainable. An organization must have a business model that allows its ongoing operations to generate a profit, or
else it will eventually fail.

• Profitability is one of the measures that can be used to derive the valuation of a business, usually as a multiple of the annual amount
of profitability. A better approach to business valuation is a multiple of annual cash flows, since this better reflects the stream of net
cash receipts that a buyer can expect to receive.
EXAMPLE

• There are many reports to use when measuring the profitability of a company, but
external users typically use the numbers reported on the income statement. The financial
statements list the profitability of the company in two main areas.

• The first signs of profit show in the profit margin or gross margin usually calculated and
reported on the face of the income statement. These ratios measure how well the company
is using its resources to generate profits.
FINANCIAL OBJECTIVE OF PROFITABILITY

• Retailers set a lot of objectives for themselves. Some, like TOM's, want to make a difference in the world by donating
shoes for every pair purchased. Others focus on things like employing just the right number of people or being open an
ideal number of days and hours to provide good customer service and entice people to make purchases.

• Some, however, use the concept of profitability, or the business' ability to earn a profit, as an objective in doing business.
And for good cause. Businesses that are not financially profitable will likely struggle, fail, and ultimately close their
doors.

• Profitability depicts a retailer's ability to sustain its business. Setting an objective for the total revenue a business will
make after all its bills are paid can help retail management do everything from make important hiring decisions to decide
when and where to build additional locations. There are five common profit objectives that we'll look at in this lesson.
PROFITABILITY ANALYSIS

• When a company is incepted, one of the sole purposes of it is to make profits. Basically, to earn more than you
spend is what every business owner wants for his company. Thus, to assess the growth of your business, careful
study on profit is important, and that is pretty obvious. However, the nuances that secretly lie under various
financial statements, will give you the real picture of your company’s profits.

• Analysing of the profits which is basically the money remaining from the capital after subtracting all the overhead
costs, will help you keep a track of your business’ performance. Profitability analysis allows companies to
maximise their profit. Thus, resulting in maximising the opportunities that business can take advantage of, in order
to continue growing in an extremely dynamic, competitive, and vibrant market. Profitability analysis helps
businesses identify growth opportunities, fast/slow-moving stock items, market trends, etc, ultimately helping
decision-makers see a more concrete picture of the company as a whole.
FACTORS THAT AFFECT THE PROFITABILITY OF
FIRMS