Your reading for this week included a discussion of Policyholders’ Surplus for Life Insurance companies as well as Property and Casualty Insurers. All businesses, for-profit and not-for-profit alike, need to be “in the green.” Your objectives for this week’s tasks are to demonstrate your understanding of how to calculate a policyholders’ surplus (part one) and demonstrate a wider understanding of how important surpluses are for healthcare administration and provision (part two).
Given the values below, determine the policyholders’ surplus for XYZ Insurance company:
- Total invested assets: $50,000,000
- Loss reserves: $40,000,000
- Total liabilities: $70,000,000
- Bonds: $35,000,000
- Unearned premium reserve: $25,000,000
- Total assets: $90,000,000
Discuss how you arrived at your answer.
Discuss the importance of operating “in the green.” Why is having a surplus important to both insurance and healthcare operations? What factors impact a surplus? What conditions are necessary to have and maintain a surplus? Your textbook (and the additional Internet Resources, p. 151) provided insights related to insurance company surpluses. Expand your discussion by researching the role of surpluses in both for-profit and non-profit healthcare operations.
Your paper must be a minimum of 2000 words, not including title or reference pages. Include a minimum of 4 references, 1 from the course textbook and the rest of your choosing. Use proper APA 7th edition citations on the reference page and in text.
This week your textbook explored the links between single financial statements and the overall financial operations of insurance companies. Use what you have learned in Chapter 7 to complete the following problem:
For the past calendar year, a property insurer reported the following financial information for a specific line of insurance:
- Premiums written: $25,000,000
- Expenses incurred: $ 5,000,000
- Incurred losses and loss-adjustment expenses: $14,000,000
- Earned premiums: $20,000,000
For this line of coverage, calculate the:
- Insurer’s loss ratio
- Expense ratio
- Combined ratio
Expert Solution Preview
In this assignment, we will address two separate questions related to the topics covered in the reading material. The first question focuses on calculating the policyholders’ surplus for a given insurance company, while the second question explores the importance of having a surplus in insurance and healthcare operations, along with factors impacting a surplus. Let’s proceed to answer each question separately.
Answer to Part One:
To calculate the policyholders’ surplus for XYZ Insurance company, we need to subtract the total liabilities from the total assets. The formula for calculating the policyholders’ surplus is as follows:
Policyholders’ Surplus = Total Assets – Total Liabilities
Given the values provided, we can now calculate the policyholders’ surplus for XYZ Insurance company:
Total assets: $90,000,000
Total liabilities: $70,000,000
Policyholders’ Surplus = $90,000,000 – $70,000,000
Policyholders’ Surplus = $20,000,000
Therefore, the policyholders’ surplus for XYZ Insurance company is $20,000,000.
Answer to Part Two:
Operating “in the green” is essential for both insurance and healthcare operations. Having a surplus provides financial stability and ensures the ability to meet unexpected expenses or claims. Surpluses act as a buffer against financial risks and uncertainties that may arise in the future.
Factors impacting a surplus include:
1. Claims Experience: The actual claims paid out by the insurance company affect the surplus. If the claims exceed the premiums collected, it can lead to a decrease in the surplus.
2. Investment Performance: Insurance companies often invest the collected premiums to earn additional income. The investment returns can contribute to the surplus. However, poor investment performance can negatively impact the surplus.
3. Underwriting Practices: The underwriting process determines the premiums charged to policyholders. Proper assessment of risks, accurate pricing, and effective risk management can help maintain a surplus.
To have and maintain a surplus, certain conditions are necessary:
1. Adequate Reserves: Insurance companies must set aside adequate reserves for expected losses and other liabilities. This ensures that funds are available to cover potential claims and maintain the surplus level.
2. Effective Risk Management: Implementing sound risk management practices helps mitigate potential risks and reduces the impact on the surplus. This includes measures such as proper underwriting, loss control strategies, and reinsurance.
Now, let’s extend our discussion to the role of surpluses in both for-profit and non-profit healthcare operations.
In for-profit healthcare operations, a surplus is crucial for ensuring financial stability, attracting investors, and reinvesting in the organization. It allows companies to invest in new technologies, expand services, and deliver high-quality care. Additionally, surpluses act as a safety net during periods of economic downturn or unforeseen events, ensuring the continuation of healthcare services.
In non-profit healthcare operations, a surplus plays a similar role in financial stability, but with a different objective. Surpluses are reinvested in the organization to fulfill its mission and improve patient care, rather than distributing profits to shareholders. Non-profit healthcare organizations often use surpluses to fund community outreach programs, research initiatives, and subsidize services for underserved populations.
In summary, maintaining a surplus is crucial for both insurance and healthcare operations. It provides financial security, allows for investment in growth and innovation, and ensures the ability to meet unexpected expenses or claims. Factors impacting a surplus include claims experience, investment performance, and underwriting practices. To maintain a surplus, adequate reserves and effective risk management are necessary. In both for-profit and non-profit healthcare operations, surpluses have a pivotal role in ensuring financial stability and supporting the organization’s objectives.
[Include references according to APA 7th edition guidelines]