Insurer Investments
Insurance companies are profit-making businesses so they will run their businesses according to business principles. Because short term insurance companies deal with the general public there are strict regulations as to the running of an insurance company. The major portion of the insurance companies’ income comes from the premiums insured people pay every month on their car and other insurance.
The insurance company does not keep all the premium income in the bank to cover insurance claims; they invest the funds in interest-bearing investments or for capital growth. The income from such investments will form part of the insurance companies’ income for the year.
The short-term insurance act lays down specific ratios of what percentage needs to be kept in liquid or short-term deposits or investments. Insurance companies usually spread their investments, or assets as it is also referred to, over a number of different investment products. A short-term insurance company must always protect its cash flow as insurance business is unpredictable. For example, a major storm can be the cause of a flood of car insurance claims that could find the insurer short of cash if it did not invest its funds properly. For this reason the insurers are forced to maintain certain financial ratios.