Question

Examples in my notes usually provided scenarios with manufacturing companies so finding costs is quite straight forward, like direct material costs etc.
Then my homework asked for costs examples in the context of an insurance company and i got confused as insurance is not like manufacturing where there are physical products.

Please help so i can get a better understanding on this.

and also what would be the cost objects in this case.

Thanks you so much.

Answer 1

Insurance policy is a written commitment to pay an agreed amount to the insured, forpayment of a fixed periodical amount called premuim to the insurance company.

For example premiums for a life insurance policy are based on two basic concepts

ie.mortality(risk of death is shared by a group of people & the policy holder) ,

interest--- earned by investing the policy holders' premiums in interest -earning bonds/stocks ---& lastly

all other operating expenses the insurance company meets like selling policies, investing the premiums, and settling claims.

1..Major income for Insurance companies is premiums on various policies issued by them

Next in line, will be the interest income from the premium-amounts invested in interest-earning securities--to meet the expenses in maintaining the policies-in-force & other operating expenses.

2.. Major expense/cost for the insurance companies is the claim amounts settled ,in due course ,or as a result of any contingent event, happening.

Other expenses include Interest & bonus on policies &other regular operating expenses.

A typical Insurance company's Income Statement will have most of the following line items:

Revenues

Premiums received

s from investment

Annuity

Accident & Health

Property & casualty

Other policy revenues

Investment Income

Other income

Expenses

Benefits to Policy holders

Claims settled

Interest credited to policy holders' a/cs.

Commission for acquiring & servicing of policies

Operating expenses

Salaries expense

Administration expense

Depreciation expense

Interest expense

Income tax expense

Dividend to stockholders