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AOF Insurance Unit 4, Lesson 13 How Insurance Companies Protect Against Risk Copyright © 2009– 2014 NAF. All rights reserved.
Insurance companies face risks like any other business Like other businesses, insurance companies: • Seek to make a profit • Require investors and lenders • Have employees, buildings, and vehicles Do you think insurance companies ever need to buy insurance from other companies?
Insurance companies share similar risks with other businesses Poor Investment Returns New State or Federal Regulations Catastrophic Disasters Decline in Business Volume
Insurance companies try to protect against risks Insurance companies use several methods to try to protect their financial stability: 1. Purchase reinsurance. 2. Maintain a diversified investment portfolio. 3. Cut costs wherever possible. 4. Underwrite carefully, limiting exposure to high risk. 5. Try to understand the financial impact of major disasters through disaster modeling. 6. Provide policyholders with information and assistance to prevent losses.
Reinsurance is a type of protection for insurance companies The reinsurance model: Insurer Insurance company One or more writes one or more individuals or policies covering organizations want that risk coverage for a major risk such as a hurricane Reinsurer writes a policy protecting the insurance company for some or all of the covered risk
It is important that insurance companies remain capitalized In the insurance industry, a good reputation is important. Individuals and organizations that purchase insurance policies want to be sure that the insurer will have enough money to pay for any claim. Because of the importance of insurance to individuals and organizations, insurance companies are carefully regulated and watched over by the state and federal government to ensure that they can keep their contractual promise to pay claims.