The Analysis of Insurance Earnings

Book excerpt: Analysis of earnings in most industries consists of a relatively simple breakdown of revenue and expenses. Insurance business is more complex; the emergence of profit is determined by pricing assumptions, reserves and divergences between the assumptions and actual experience over the lifetime of the business. These extra complexities have given rise to a process commonly known as earnings-by-source. This process is designed to explain earnings relative to the underlying sources. Unfortunately in many companies, even if this process is carried out, the usefulness of it as a management tool is frequently overlooked. The reasons for this are varied, ranging from difficulty in explaining results to questions over the validity of the results themselves. The formula and methodology described in this book was developed from first principles in order to address these issues and make it beneficial as a management tool.