Make Investments Using Other People’s Money
The great advantage of running an insurance company is that it holds money it does not yet owe. Premiums collected today cover claims that fall due years from now — and in the meantime that money can be invested in bonds and stocks, producing sizable income for the company.
Two ways an insurance company makes money
| Source | Where it comes from |
|---|---|
| Underwriting profit | Premium income from underwriting policies, less claims and operating expenses. |
| Investment profit | Income from financial instruments — bonds and stocks. |
The screenshot above shows an insurance company losing money on insurance — a negative underwriting profit, under heavy competition — while making a large profit from its investments. The second column can carry the first.
Claim reserves on the balance sheet
Claim reserves are funds set aside for future claims, drawn from part of the premiums paid by life insurance policyholders.
They appear as liabilities, because the company is obliged to pay those claims out over the life of the contracts.
Until those claims are paid, the company is free to invest the reserves — earning bond interest, stock dividends, and gains in the market value of what it holds.
Investing in stocks
On the stock market screen, select your insurance company — it is marked with an icon in front of its name — and the purchase is made with its cash.
Investing in bonds
The same on the bond market screen: select the insurance company first.
Seeing it in the financial statements
The holdings appear on the Balance Sheet as Stock Assets and Bond Assets.
The Income Statement carries the combined Investment Income — bond interest, stock dividends and market-value gains together.
