Insurance Premium Allocation

The premiums of many policyholders pay the claims of the few who suffer a claim. Insurers put premiums toward a mix of claims costs, investments and operational expenses.

There are some common misconceptions about what insurance companies do with the money they collect in premiums. Some believe it sits in an account until they make a claim. Others think that premiums pay for claims that have already happened. Neither of these is true.

Most of your premium dollar goes to pay claims one way or another. For example, if you suffer a loss, a portion of your premium dollar and those of several other policyholders finds its way back to you, to help you recover.

What Happens To Your Premiums

In insurance accounting, money is always moving. Insurance companies settle claims, and pay taxes and other business-related costs (such as salaries, equipment and rent) on a daily basis.

Insurers set money aside so they can respond quickly to disasters. This is known as a legal reserve, which insurance companies are required by law to maintain. This guarantees that an insurer can pay a large number of claims within a short period of time.

Prudent Insurance Investments

Insurers are among the most careful investors in Canada. On average, approximately three-quarters of their investments are in government bonds.

To ensure that insurers can pay claims, the federal government makes certain the industry’s investments are low risk. Insurers strive to maintain portfolios that allow for quick liquidation of investments to pay claims.

Why Do Insurance Companies Invest The Money?

Your insurance company holds your premium until it is needed to pay claims. By investing the money and making a return, the company can offset the cost of claims. This means it can charge you less than you would otherwise pay. In some lines of business, claims can arise years after the policy expires. This requires diligent financial management so such claims can be paid.

INSURECONOMY – An Economic Forecast for Insurance

INSURECONOMY reports present the results of an IBC economic impact and future growth study of a province's high-value insurance sector. The report is available in Ontario, New Brunswick and Nova Scotia. The Conference Board of Canada and Jupia Consultants developed these reports.