1. The essence of insurance company
1.1. Concept of insurance company and classification of insurers
1.2. Business legal structures
2. Economic indicators of insurance company’s activity
2.1. Profits of assure
2.2. Expenses of insurance company
1.Federal Law № 51 ‘The Civil Code of the Russian Federation (The First Part)’ of 30.11.1994. Federal Law № 73 as amended of 03.06.2006// http://www.consultant.ru.
2.Federal Law of the Russian Federation № 4015-1 «About the organization of an insurance activity in the Russian Federation» of 27.11.1992. Federal Law № 90 as amended of 21.07.2005 // http://www.consultant.ru.
3.Basakov M.I. Insurance industry in questions and answers. – Rostov-on-Don: «Phoenix», 2003.
4.The fundamentals of insurance activity: Textbook / Executive editor professor. T.A. Fedorova. –: Publishing house BEK, 2004.
5.Shihov A.K. Insurance. – Moscow: Yuniti – Dana, 2005.
1. Receipts from insurance amounts under the contracts of insurance, coinsurance and reinsurance minus insurance payments, transfers to the insurance reserve and insurance payments under the contracts transferred to reinsurance;
2. Return amounts of insurance reserves;
3. Selling concession and share of profits;
4. Compensations of the share of insurance payments to reinsurers;
5. Savings of money that were meant for realization compulsory medical insurance.
Other receipts of insurance activity include given below incomes:
1. Profits from investment of insurance reserves and other funds;
2. Sum of interests charged of premium deposit;
3. Amount of regress;
4. Other profits.
The following incomes can be referred to the profits from any other activity:
1. Profits received from dis
Показать всеposal of fixed-capital assets and other assets;
3. Accounts receivable;
4. Written off accounts payable;
5. Other profits from any activity not forbidden by the current legislation.5
On the basis of official classification it is possible to offer different variants of insurer’s incomes grouping.
Incomes of the insurance organizations depending on the source of receipt can be conditionally subdivided into three groups:
1. Incomes of insurance operations;
2. Incomes of investment activity;
3. Other incomes received from activity that is not directly connected to insurance operations.
Incomes of insurance operations. Incomes of insurance operations are the basic source of replenishment of profits of the insurance company and also the basic condition of the organization of insurance activity.
The central element of these incomes is the payments of insurants or insurance premiums under contracts of direct insurance. The volume of cash receipts in the insurance company depends on structure of an insurance portfolio, a price (tariff) policy, marketing strategy and some other factors. Action of these factors is interrelated and mutually conditioned. For instance, realization of the developed marketing strategy is impossible without carrying out of a suitable tariff policy, at the same time successful marketing strategy provides equation of an insurance portfolio.
However charging of insurance premiums by the insurer also depends of objective factors: business environment tone of market, inflation rate, legislative and normative base, taxation system, the degree of monopolization of the insurance market, changes of loan interest, a level of development of the state social protection, etc. Action of these factors increases or reduces a stream of insurance payments in the insurance company.
The insurance company can accomplish insurance operations by means of the mechanism coinsurance, assuming the certain share of the general risk (responsibility) and receiving an adequate part of the cumulative insurance premium. Availability and size of receipts of the insurance premium from reinsurance operations depend on a degree of development of reinsurance in region, demand on reinsurance protection, availability of professional reinsurer, that, in turn, are defined by capacity of the primary insurance market, the sizes of insurable risks. Participating in reinsurance system as reinsure, under treaty provisions in case of occurrence of loss the insurance company receives compensation of the share in the loss connected with risks transferred to reinsurance.
Along with accomplishment of insurance coverage the insurance company can carry out intermediary functions. For instance, in the scheme of risk transfer in reinsurance the primary insurer receives a commission fee for granting of refined risk to the reinsurer. Hypothetically there is an opportunity when the insurance company receives commission fee and broker’s commission not accepting risk because of some circumstances, for example, of assignment of this risk to another insurance company. In contracts of proportional reinsurance the payment for commission on profit to the reinsurer is usually supposed. It is the form of participation of the primary insurer in the profit of the reinsurer. Because of such income reception it is possible to refer this type of profits to the group of commission fees and broker’s commissions.
Incomes of investment activity. Investment activity of the insurance companies is not connected directly to insurance. It is based on the use of payments of the insured as the source of capital investments. Being at the disposal of the insurer during the certain term, insurance premiums are invested in profitable actives according to the established rules and bring the insurance company the investment income. From the point of view of investment opportunities long-term life insurance reserves possess the greatest appeal because of being at the disposal of the insurer over a long period of time. The income of investments consists of interests on deposit, yields on shares, payoffs and income from real property, etc. The investment income is the important source of profits for insurance companies. Due to this source the insurer guarantees bonuses to its clients. In the countries with the developed stock market the investment income of some types of insurance allows to block negative result of insurance operations.
Other incomes. Besides receipts of realization of insurance operations and incomes of investment activity the insurer can receive other incomes. These incomes can be subdivided into the following ones: the sum of interests charged of premium deposit; the amount received by way of regress; profits received from disposal of fixed-capital assets, stocks of materials and capital equipment and other assets; incomes from rentals; the sums of return of insurance reserves; incomes from rendering of consultation services, training. During signing the reinsurance contract, contract holders can mention such condition on which reinsured (direct insurer) deposits only part or the entire reinsurance premium. When the time of contract expires and under the stipulation that there was no loss occurrence, the premium and the interests charged of premium deposit is transferred to the reinsurer. The size of the accrued interest is provided by the contract of reinsurance. Granting of such guarantee provides the use of the premium as a financial resource.
Within the bounds of the civil legislation, the insurance company can represent the concern of customers and accordingly it has the right to the regressive action to the initiator of loss occurrence. The receipt of the sums by way of regress usually occurs after fulfillment of engagements by the insurer, it’s the way that allows the insurance company compensates charges appeared as payments of the amount of indemnity. The insurance company as the business entity has the right to disposal of fixed-capital assets, which are not used in economic activity. In this case the profit can be calculated as a difference between sales proceeds and the balance (residual) cost of fixed-capital assets increased by the amount of expenditure incidental to property disposal. The property owned by the insurance company can be rented. For example, non-movable assets, fixed-capital assets in some cases are used as leased property and they are the source of such income as rent expenditure.
Return of insurance reserves at the insurance companies is made on the basis of special calculations. These are the sums of reduction of insurance reserves.
One more source of incomes of the insurance company is incomes from rendering of consultation services, training. Using high-qualified personnel the insurance company can offer services on risk management, installation of software, to train experts. These incomes are not connected to granting insurance coverage, but directly connected to insurance activity.
2.2. Expenses of insurance company
During its activity the insurer bears the certain charges, in other words, granting of insurance coverage is accompanied by the certain expenses. The charges caused by realization of charter activity and represented within the legal terms in the accounting reporting, are referred to the costs of the insurance company. They can be classified by various criteria:
1. By the time of realization (consecution of financing);
2. By relation to principal activity (coherence with insurance operations);
3. By designated purpose (the contents of operations).
By the time of realization the costs of the insurance company can be subdivided into the charges premonitory the signing of the contract of insurance; the charges which are carried out at the signing and during performing contract (during the period of insurance); the charges of the insurer in case of the occurrence of loss (the expiration of the contract or the expiry of the term of insurance); the expenses which are not closely connected to insurance activity, and also the operational expenditure. Before signing of the contract, in other words, till the moment of sale of an insurance product, the insurance company incurs advertising expenses, expenditures connected with the introduction of goods into the market, with preparation of documents (formulation of terms of contract, calculation of tariffs, printing of forms), with payments to assessors, with financing of consulting services, etc.
The signing of the contract (underwriting), its transaction and performance are accompanied by the most significant charges. These costs are subdivided into the salary of those employees of the insurance company that negotiate the contract (treat), who gather insurance premiums (encashment), serve insureds – the customers of company. Another charges that can be also referred to this group are payments of commission fee to agents (intermediaries), the salary of employees who handle contracts, and also expenses of transaction contracts (for example, transport charges of agents).
The main cost item of execution of the insurance contract is payment for the amount of indemnity (insurance coverage) or financing of the loss. This group of expenditure includes expenses of regulating of damage (payment for services of rescuers, experts).
Relation to principal activity subdivides charges into two large groups: the charges connected to realization of insurance operations, and the charges that are not directly connected to insurance activity. The items of expenses connected with the contents of insurance coverage represent the first group. The largest cost item is formed by payments of the insurer in case of loss occurrence; these payments are the amount of indemnity (insurance coverage). The second important cost item represents assignments to insurance reserves. These funds are used for execution of obligations of insurance contract in the future. Alongside with above-mentioned reserves the insurance company forms reserves for financing precautionary actions that are also formed by special assignments. While reinsurance operations are accomplished the insurer incurs the following expenses: transfer of payments of risks transferred to reinsurance, compensation of the share in the loss connected with risks accepted in reinsurance, payment of a commission fee and commission on profit.
The investment activity of the insurance company is conditioned by branch specificity, and accompanied by the certain expenses that are not directly connected to its principal activity. As a significant source of the insurer’s profits, investment activity, in turn, implies the certain expenses connected to sale of investments, charge-off of the difference between an acquisition value and a denominational value of the government stocks.
Running the insurance business is accompanied by proper administrative expenditures. The insurer defines them as expenses of transaction. The share of this cost’s group occupies one of high-end places in a total of charges of the insurance company. The structure of transaction expenses includes expenses that are general for any other company, and the charges that represent the specificity of insurance activity. The last ones are the expenses of transaction used for realization of insurance operations: broker’s commissions, payment for expert’s services, surveyors, medical institutions, services payment for granting the statistical data.
By designated purpose, or by the contents of insurance operations, the expenses of the insurance companies are subdivided into the expenses connected to preparation, signing and performance of the contract, expenses mediating the transaction of the contract. The expenses connected to preparation and signing of insurance contracts include expenses of development of contract terms, expenses connected with drawing custom (acquisition costs), and also commission expenses, payment for services connected to risk assessment and other preliminary charges. Performance of the contract is provided by formation of reserves and realization payments in case of loss occurrence, including reinsurance charges and investments expenses. Mediation charges can include expenses of management of contracts and administrative expenditures, including a rent, and also other payments and losses. The last ones embrace the sums of the taxes paid by insurers, the loss from disposal of assets of the insurance company and so forth.
The whole expenses of the insurer form the cost price of insurance service. The size of the cost price has essential value at determining financial result from insurance operations and revealing of taxable base. The concept of the cost price of insurance service can be examined from various points of view.
The calculated or estimated value of the cost price is defined at the moment of formation of the price (tariff) for certain kind of insurance. Calculation of the tariff proposes creation of funds for the cover of current and future losses (the last ones include payment for insurance money and creation of reserves); formation of reserves used for financing precautionary actions; and also financing of activity of the insurance company (running a business). All above-mentioned cost items are represented by proper elements in structure of the insurance tariff (the net - premium). However peculiarity of insurance activity, first of all, consists in a relativity of calculations, their approximateness and preliminary nature. That’s why forecasting value of the cost price can differ from the actual cost price of insurance service. The actual cost price depends on results of transition of insurance contracts, upon actual unprofitableness of the insured sum, operation profits of the insurance company, and also economy or the overexpenditure of means for the administrative purposes, including the salary of employees.
Reference of insurer’s expenses to the cost price is regulated not only by general normative documents but also by the decree of the Government of the Russian Federation № 491 ‘About peculiarities of determination of taxable base for payment of the profit tax by insurers’ of 16.05.94. According to it the charges included in the cost price of insurance services rendered by insurers and other charges taken into account at calculation of taxable base for payment of the profit tax include expenses given below:
Assignments to reserves of precautionary actions;
Compensation of the share of insurance payments under the contracts accepted in reinsurance; Скрыть
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