Risk Management and Insurance - Assignment Example

? RISK Introduction Effective risk management and profitable insurance have become increasingly challenging in the current environment of devastatingnatural disasters, high liability settlements and competition, amongst other factors. However, insurance companies can mitigate and control their risks at least to some extent by various strategies such as periodic risk inspections, prudent underwriting, high deductibles property subscription policies, reinsurance and careful investment of premium income. The US based company I wish to examine in terms of its’ performance in the current marketplace is Great American. Company News On October 11, 2013 the Great American Insurance Group announced that its’ Professional Liability Division had formed an alliance with the Herbert Lindy Insurance Agency to offer professional liability insurance in all states except Louisiana and Alaska effective April 1, 2014. (Yahoo Finance 2013) Professional liability insurance is a specialized form of liability insurance which indemnifies a professional who causes a loss to his or her client due to the negligent performance of their duties or which is not up to the professional standards stipulated by the professional association regulating the particular professional. For example, if a real estate agent arranged the sale of a property to a buyer on the basis that it would provide a specified level of rental income and it failed to do so, the real estate agent could be held liable for the shortfall on the basis of negligent misrepresentation. The article goes on to state that Great American Insurance Group’s Professional Liability Division launched earlier this year with offices in New York and Pennsylvania. Great American Stock Performance The following material was obtained from http://ir.greatamerican.com/stockquote.htm. It was obtained at 2:06 pm. ET Nov. 22, 2013. Last Price Change Open Day High 52 Week High $0.26 $0.00(Down 7.63%) $0.26 $0.26 $0.50 Volume Previous Close Day Low 52 Week Low 11,500 $0.26 $0.26 $0.15 Year End Stock Prices Stock Price ($) $3.70 $0.49 $0.12 $0.31 Year 2009 2010 2011 2012 The website goes on to stipulate that the above information is intended for informational and not trading purposes and is provided by a third party and not Great American. Description of Company Great American Insurance Group is engaged primarily in property and casualty insurance focusing on specialized commercial products for businesses and in the sale of traditional annuities.(Great American Insurance Group) The Property and Casualty Group (P and C) is among the oldest in the US, dating from the founding of the Great American Insurance Company in 1872. The website advises it has about 30 specialty lines of insurance to meet the needs especially of a variety of small and mid sized businesses. (Presumably this is because larger companies tend to have sufficient resources to self insure for many of the risks.) The site also claims that the company builds relationships with the markets and the communities it serves so that they can concentrate on their core business rather than on the risks they may face. While this is likely true, it must be remembered that companies too small to have their own risk manager tend to rely on their insurance broker for sound impartial advice concerning what insurance coverage they really need and what risks can be dealt with more economically by other means. The website also quotes high financial strength ratings by such agencies as Standard & Poors and Moodys. There are also various kinds of reinsurance coverage available within the Great American Group. There are 4 accounting ratios important to the financial health of a company. Unfortunately I was unable to obtain precise figures for Great American, only the reference to their overall “A” rating by agencies indicating that this company is in good standing financially. However I will explain the calculation and the importance of each of the ratios. The first one is the loss ratio which is losses (claims paid) plus adjustment expenses divided by net premiums earned. The adjustment expenses can include independent adjusters’ fees or staff adjusters’ time, the cost of engineering and/or medical assessments, accountants and/or defense lawyers’ fees and any other expense related to the calculation of the claim but not part of the claim itself. The net premium earned are premiums paid by the customer less fees paid to an insurance agent for providing the business and premiums paid by the insurer to a re-insurer to pay part of the claim if re-insurance is involved. Usually loss ratios are calculated for a specific time period such as a year and a specific class of business (for example commercial property) and a specific kind of risk (for example fire). Also it cannot be calculated until the last claim occurring during the policy period involved has been finalized. Of course companies strive to keep the ratio at a fraction less than one. But this is not always possible and is not necessarily fatal to the company’s health because investments made with the premium income can still make the company profitable. Of course, if the investments are flawed, especially packaged investments with hidden toxic ones such as non performing mortgages, this can hurt the company’s bottom line. Expense ratios are underwriting expenses divided by net premiums written. Underwriting expenses can include risk inspection , previous history checks, financial audits and any other expenses involved in deciding whether to insure a risk, and if so to what extent ( for example % participation on a subscription policy with other insurers) divided by net premium written , that is, premium owed by the customer less any insurance agent fees and premiums paid to re-insurers for coverage ceded. Once again the ratio should obviously be less than one to maintain the financial viability of the company. Return on equity equals net income divided by owners’ equity. This ratio is obviously important as it represents the income of the company after all claims and expenses have been paid divided by the amount of money invested in the company by the owners or shareholders. In this case the ratio should be over one with the net income being more than the owners’ equity for the company to be profitable and dividends paid. Finally loss reserves-to-surplus ratio is all loss reserves divided by surplus or owners’ equity or net worth. The loss reserves represent funds required to be set aside for payment and adjustment of projected claims. They are usually an educated guess about what the claims examiner expects will have to be paid out on each reported claim normally based on the adjuster’s recommendations less of course any contribution due by any applicable re-insurer. They are subject to revision as new information surfaces indicating the final claim is likely to be more or less than originally thought. The establishment of reserves is a judgment call and ideally in total should probably slightly exceed the actual claim and adjustment expenses when they are finally known. However, although they must be realistic they should be lower than the surplus or a ratio of less than one to indicate the likelihood of continued profitability of the company.. What I Find Interesting About the Company The company according to its’ website supports organizations that promote education, health and welfare especially of children. This is in keeping with the current notion that with tight government budgets, corporations are not only responsible for making a profit for their shareholders, but also for playing a role in social welfare activities. I suspect that this attitude is not entirely altruistic and there is an element of enlightened self interest since having the corporate name attached to community social programs may bring more public goodwill and business than just product advertising. Company’s Competition Great American has many competitors too numerous to list, both US and foreign based. However, many are not as large and well established as Great American. Future Outlook Although I was unable to find information concerning Great American’s performance on the 4 important accounting ratios, I would predict that the company’s future outlook is good in spite of the competition. I base this on its’ longevity, high ratings by financial rating agencies, generally positive reputation in claims handling and its’ sense of social responsibility in its’ outreach in supporting community programs. Other Relevant Information ( Reviews) I found very few complaints about Great American online. I did find one which I discounted because it was very vitriolic and made no sense. I also found an article by a former insurance agent turned consumer advocate who stated that while there have been several complaints related to its’ health business there have been very few concerning the commercial property and casualty business of Great American Insurance Company (Stauffer) It confirms they company website that its’ strength is in offering property and casualty coverage tailored to a variety of small and mid sized businesses nation wide. Finally it reports that Great American has an A+ rating with the Better Business Bureau. Conclusion Great American Insurance Company is a well established an d respected commercial property and casualty insurer which should continue to prosper if it maintains its’ current policies. Works Cited 1). Stauffer, Eric “Great American Insurance Review” retrieved from http://www.expertinsurancereviews/great-american/insurance-company-reviews/great-american/#complaints. 2) http://finance.yahoo.com/news/great-american-insurance-group-professional-124500406.html. 3)”Great American Insurance Group” retrieved from http://www.greatamericaninsurancegroup.com/Pages/default.aspy 4) http://ir.greatamerican.com/stockquote.htm. . . Read More