Insurers

An insurance company is a company that covers financial risks for a fee. Most people need financial security in their lives. They want to protect themselves, and possibly their family, against the financial consequences of events that may occur. It may be that someone is faced with a loss after which he suddenly needs an amount of money, or someone may want the amount of money in his life at a certain time. Insurers play an important role in this. In addition to insurance products, many insurers also offer banking products, such as loans and savings products.

Insurers generally have the following activities:

Hedging risks
As mentioned, the insurer provides people with financial security by taking over their risks. People pay an amount to the insurer and receive security in return. The insurer manages the money paid and pays out an amount in the event of damage, theft, death and the like.

Transformation

Because insurers receive premiums for taking over their risks, they receive large amounts from all customers together.
The money raised in the form of premiums is placed on the asset market by insurers. Insurers invest their money in shares and real estate, among other things. Insurers also provide mortgage loans. For insurers, transformation is a derived function of covering risks.
Insurers and pension funds are institutional investors from the perspective of the derived transformation function.

Risks for insurers

For insurers, there are two important risks associated with the aforementioned activities:
The risk that less premiums have been received than must be paid out.
It is important that an insurer can pay out in the event of damage without getting into financial problems itself. An insurer must therefore properly assess the risks. It may happen that an insurer considers the risk of a particular insurance policy to be too great. A solution for such a case is risk spreading. An insurer then decides not to bear the risk alone. There are various options for spreading risk:

Coinsurance

With coinsurance, a number of insurers take on a percentage of the insurance. Each insurance company then signs for part of the insurance. This often happens if the insured amount is very high. Coinsurance is usually established on the so-called insurance exchange.

Pool

Even when a so-called pool is formed, an independent insurance company, the risk is spread over several insurers. A pool is formed for very specific risks where the consequences of any damage are very extensive. Examples of a pool are the atomic pool and the environmental pool. Or Rialto, the pool for serious risks of motor vehicles or fire. The loss or profit from the insurance policies in the pool is distributed among the participating insurers.

Reinsuring

A form of risk spreading that is also widely available is reinsurance. The insurer insures part of the risk with other insurers. The risks are then transferred to special reinsurers who operate internationally.

The investment risk

As mentioned, insurers are institutional investors. The premium income is invested in order to meet the obligations towards the policyholders. This investing is of course done with the aim of growing capital, but there is a risk involved. For example, if an insurer has used premium income to purchase shares, these shares may decline in value over time. In that case, an insurer suffered a loss when the shares were sold.

Insurers and the insurance industry

The internal organization of insurers can be structured in different ways.
A market-oriented approach involves a division into customer segments. This could include, for example, a private sector department, a department serving small and medium-sized businesses and a department serving large companies. With a product-oriented approach, there are departments per product type, for example a department for pensions, a department for legal expenses insurance, etc.

Most insurers offer all kinds of insurance. Insurers are required by law to organize their claims and life activities in different companies. The legislator has determined this this way because there is a risk that the non-life insurer could go bankrupt due to, for example, unexpectedly large claims payments. In this case, life insurance benefits may not be jeopardized. The division of the insurer's activities into different companies serves to protect consumers.

Insurers can have the following legal organizational forms:
Public limited company
Mutual insurance company