Many companies that have been running for a few years or a big company that has operated for decades suddenly closed down due to bankruptcy. Various questions arise, what causes these companies go bankrupt? While other companies can survive and developing rapidly with the income continues to increase every year.
Here are the factors that cause the company ran out of money:
The investment fund of an insurance client can not be used to pay the liabilities of the company to third parties, except the payment to the client. Only if there are excess funds, it can be used to pay to a third party.
Examples of real cases is AMI as mutual insurance in New Zealand. For more details about what had happened to AMI, you can read it here.
This company has insured many houses in Christchurch. With a low premium, of course, many customers are interested. Then bad event had happened at that time, a major earthquake hit Christchurch. Many properties were damaged and people are suffering enormous losses.
It is a risk, and insurance companies should bear the loss because of natural disasters such as earthquake. However, there are times when the company was not able to cover all the claims, because it takes a lot of fund. Because of this, the company was finally sold. Then the government pays the remaining claims.
To minimize the risk of irregularities in business operations and to support operational speed problem resolution, as well as increasing labor harmony whole company, it would require a unit with the job description to take on the role of monitoring and / or control, known as Internal Auditor.
The purpose of internal audit is to provide facts about the actual state of the company. These facts include the financial, management and so on, summarized into a report.
Internal audit reports typically include degree of compliance with the provisions of SOP and monitor the implementation of risk management. This report can also be equipped with a trend analysis of the entire company's risk profile as well as suggestions for improvement. Report submitted to the Directors and other relevant executive.
Internal audit is as one of the functions of internal control system of a company that should be implemented effectively in order to secure the assets of the company, ensuring that all business activities comply with laws and regulations as well as company policies.
Although the the state have the guarantee fund and the fund is sufficient to meet the claims of consumers, but insurance companies still required, under the rules of state to have adequate reserves. Overall the industry, such as reports FIO Annual Report, US Department Of Treasury has reported a good condition of the premium to surplus ratio.
You can find information about the insurer's financial assessment through the web like A.M Best.
AM Best provides grade on the financial condition of insurance companies and also the prospect of their financial condition in the future.
State insurance departments organize reserves required for each type of insurance company. In addition, state agencies will also help to ensure that financial practices are done in wisdom and able to protect insurance policy holders with sufficient funds to pay their claims. Each department of the related insurance will take action to fix the problem if the insurance company can not meet the financial responsibilities.
National Association of Insurance Commissioners (NAIC) is an organization that provides valuable information which is standard and has been widely adopted by countries with the aim to protect consumers from unfair accounting and bad financial practices by insurance companies.
NAIC can issue a Uniform Application for Certificate Of Authority which is the minimum statutory capital and surplus requirements.
Surplus ratio is the ratio between Net Premiums and Capital & Surplus, or Net Premiums divided by Capital & Surplus. Surplus ratio is important because it is a benchmark of the financial health of insurance companies.
You can get annual report on the insurance industry from Federal Insurance Office, US Department Of Treasury.
If you look at the report, you will find that Net premium written / Average Capital and Surplus is 79% for the end of period of 2012, and this is a reasonably good condition.
Although there are companies in a minor percentage which has fallen because they did not hold up in dealing financial pressure, but there are many mechanisms that have been prepared to face this kind of problem, so that the company could continue to meet its obligations to clients.
Here are the factors that cause the company ran out of money:
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- Can't afford to meet customer needs
A company should be able to meet consumer needs so that the service or products offered can be accepted by the market. However, if it is ignored, then what is presented by the company will be useless, because it is not able to attract consumers, this due to does not fit their needs. - Overly focuses on product development
The focus on product development is a good thing and should be maintained. However, what happens if too focused on it? Besides being able to forget the key needs of consumers, the company that are too focusing on product development will lose sensitivity to what is going inside the company, the market situation, and others. - Excessive fear
The fear of bankruptcy, fear of loss, fear of not being able to serve consumers, fear because of the inability to overcome the problem, it is a natural thing as long as it is still in normal portion. However, if these fears exceed normal limits, it will hinder the company's performance and can lead to destruction. - Stop for innovation
Innovation is something that must be done by each entrepreneur. Without innovation, the products are sold for a long time will seem boring and outdated and for the people who become the target of marketing of a product, this would not be a good sign. - Not observing the movement of competitors
Not or less observing the movement of competitors, it will cause a company can not compete and lagging far behind. A company still must consider the measures undertaken by competitors. - The price is too expensive
Some people believe that high prices will create a company's products look nicer and more luxurious than the original. However, what happens if there is a new company that release products are similar to the company's product and sell it much cheaper?
What if the insurance companies fail?
So, you already buy an insurance and you want to know what if the insurance company ran out of money? The important thing to note is that if the insurance company bankrupt or liquidated then you as a insured have the primary right over the distribution of wealth from the insurance company.The investment fund of an insurance client can not be used to pay the liabilities of the company to third parties, except the payment to the client. Only if there are excess funds, it can be used to pay to a third party.
Examples of real cases is AMI as mutual insurance in New Zealand. For more details about what had happened to AMI, you can read it here.
This company has insured many houses in Christchurch. With a low premium, of course, many customers are interested. Then bad event had happened at that time, a major earthquake hit Christchurch. Many properties were damaged and people are suffering enormous losses.
It is a risk, and insurance companies should bear the loss because of natural disasters such as earthquake. However, there are times when the company was not able to cover all the claims, because it takes a lot of fund. Because of this, the company was finally sold. Then the government pays the remaining claims.
Internal Audit In Insurance Companies
What is the purpose of audit on the insurance companies?To minimize the risk of irregularities in business operations and to support operational speed problem resolution, as well as increasing labor harmony whole company, it would require a unit with the job description to take on the role of monitoring and / or control, known as Internal Auditor.
The purpose of internal audit is to provide facts about the actual state of the company. These facts include the financial, management and so on, summarized into a report.
Internal audit reports typically include degree of compliance with the provisions of SOP and monitor the implementation of risk management. This report can also be equipped with a trend analysis of the entire company's risk profile as well as suggestions for improvement. Report submitted to the Directors and other relevant executive.
Internal audit is as one of the functions of internal control system of a company that should be implemented effectively in order to secure the assets of the company, ensuring that all business activities comply with laws and regulations as well as company policies.
The Insurance Company Has Adequate Reserves
Insurance companies need to meet regulations, to manage the finances which can meet to pay claims. Thus, the risk of runs out of money becomes very small even though the risk is still there, as in the case of AMI, New Zealand as described above.Although the the state have the guarantee fund and the fund is sufficient to meet the claims of consumers, but insurance companies still required, under the rules of state to have adequate reserves. Overall the industry, such as reports FIO Annual Report, US Department Of Treasury has reported a good condition of the premium to surplus ratio.
You can find information about the insurer's financial assessment through the web like A.M Best.
 |
| A.M Best Web |
AM Best provides grade on the financial condition of insurance companies and also the prospect of their financial condition in the future.
State insurance departments organize reserves required for each type of insurance company. In addition, state agencies will also help to ensure that financial practices are done in wisdom and able to protect insurance policy holders with sufficient funds to pay their claims. Each department of the related insurance will take action to fix the problem if the insurance company can not meet the financial responsibilities.
National Association of Insurance Commissioners (NAIC) is an organization that provides valuable information which is standard and has been widely adopted by countries with the aim to protect consumers from unfair accounting and bad financial practices by insurance companies.
NAIC can issue a Uniform Application for Certificate Of Authority which is the minimum statutory capital and surplus requirements.
Surplus Ratio
What is the surplus ratio and why it became important for insurance companies?Surplus ratio is the ratio between Net Premiums and Capital & Surplus, or Net Premiums divided by Capital & Surplus. Surplus ratio is important because it is a benchmark of the financial health of insurance companies.
You can get annual report on the insurance industry from Federal Insurance Office, US Department Of Treasury.
 |
| P/C Sector Annual Premium-to-Surplus Ratio Source: FIO Annual Report, US Depertment Of Treasury |
If you look at the report, you will find that Net premium written / Average Capital and Surplus is 79% for the end of period of 2012, and this is a reasonably good condition.
Conclusion
The conclusion is that the insurance industry have strict regulations as well as the business is clear. The risk of general insurance companies for not being able to pay the claims of its clients due to runs out of money is very small.Although there are companies in a minor percentage which has fallen because they did not hold up in dealing financial pressure, but there are many mechanisms that have been prepared to face this kind of problem, so that the company could continue to meet its obligations to clients.
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