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Summary INSURANCE COMPANIES
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Summary study book Financial Management of Insurance Companies of John J. Hampton - ISBN: 9780814477816 (INSURANCE COMPANIES)
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LESSON VIINSURANCE COMPANIES
Insurance companies provide various types of insurance for their customers, including life
insurance, property and liability insurance, and health insurance. They periodically receive
payments (premiums) from their policyholders, pool the payments, and invest the proceeds
until these funds are needed to pay off claims of policyholders. They commonly use the
funds to invest in debt securities issued by firms or by government agencies. They also invest
heavily in stocks issued by firms. Therefore, they help finance corporate expansion.
Insurance companies employ portfolio managers who invest the funds that result from
pooling the premiums of their customers. An insurance company may have one or more bond
portfolio managers to determine which bonds to purchase, and one or more stock portfolio
managers to determine which stocks to purchase. The objective of the portfolio managers is
to earn a relatively high return on the portfolios for a given level of risk. In this way, the
return on the investments not only should cover future insurance payments to policyholders
but also should generate a sufficient profit, which provides a return to the owners of
insurance companies. The performance of insurance companies depends on the performance
of their bond and stock portfolios. Like mutual funds, insurance companies tend to purchase
securities in large blocks, and they typically have a large stake in several firms. Therefore,
they closely monitor the performance of these firms. They may attempt to influence the
management of a firm to improve the firm’s performance and therefore enhance the
performance of the securities in which they have invested.
Roles played by insurance companies in development of Kenya
i. Provide cover for business risks.
ii. Accumulate large sums of money from premium and this act as long term source of
finance both to policy holders and other parties such as company selling shares.
iii. Facilitates exchange of securities by linking policy holders to the insurance company.
iv. To provide Security and Safety
The Life Insurance provides security against premature
death and payment in old age to lead the comfortable
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