How Insurance Companies Make Money?

Q1. Insurance companies invest in many areas, but most of all they invest in bonds. This makes sense because bonds are perhaps the safest of all investment categories. Insurance companies – being in the business of risk assessment – would logically find the low risk that bonds represent appealing, but there are other reasons as well.

Questions:

a. How Insurance Companies Make Money?

b. Why Insurance Companies Invest?

c. What Insurance Companies Invest In?

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Q2. “Reinsurance is considered as a significant process which provides necessary securities to insurer which safeguards them from financial problems that arises from any future unexpected events.” Comment on the statement and explain the meaning and benefits of the term “Reinsurance.” Also read the following statements and identify the relevant reinsurance type/contract for each case.

• This type of reinsurance is based on the features such as ceding of percentage of risk to the reinsurer and recover of same ceded percentage from reinsurer related with all losses on those risks. Such kinds of contracts are generally used by new companies.
• Under this contract, the pro rata basis is being used to share the premium and losses by the reinsurer and insurer.
• This type of reinsurance is based on the determination of loss ratio as an expression of predetermined limit in which insurer is required to retain all claims during a specified period.
• This refers to retention of insurer on all losses arising from a single occurrence.

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Q3. What is State Guaranty Fund? What kind of support and tasks it implies? How it accumulates fund?

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Q4. Discuss methods of setting premium rates in insurance companies (Manual rating, merit rating, judgement rating)

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Q5. Identify any two insurance companies in Kingdom of Saudi Arabia and explain any two insurance products offered by them. Your answer should be based on following points:

• Name of the Company
• Type of Insurance
• Premiums
• Significant features of the insurance product

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Q6: Discuss in detail the various functions involved in “Transaction Cycle” with suitable examples.

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