August 14, 2017

How Auto Insurers Make Money

Every business entity must make profits to remain in business. The most successful businesses plan their profits by optimizing purchases, payables and cash flows. Imagine you are an auto insurance company and go through a basic analysis below of how to operate your auto insurance company for maximum profits

What is Profit?

Auto insurers make profits only when revenues exceed expenses. If profits need to be increased, the insurer has one of three options:

Increase Revenue – Revenues may be increased by selling additional policies or increasing rates on current car insurance policies.

Reduce Expenses Every expense should be examined to determine what cuts can be made without diminishing efficiency.

Combination of the Preceding – Since rates provide the competitive advantage, you should determine how much you can reduce expenses before you raise rates.

Determining the Need for Change

Although it is impossible to know when claims will be filed, auto insurance companies analyze records to determine when most claims are paid. At the most basic level, it comes down to the monthly car insurance premiums minus the monthly claims paid after netting out the cost of operations. Look for patterns to determine when cash surpluses are available. Try to find short term investments for those funds. Observe the months that the most claims are paid to see if the premium revenue is greater or less than claim payments. If you determine that a change is needed, select one of the preceding options.

The Importance of Cash Flows

The only time cash is needed is when the business makes a cash purchase or pays a debt. For that reason, cash flows should be planned for the entire year.

Use an Excel spreadsheet to plan cash flow for the year. List the account titles in column A. List the months in cells B4 through M4. January is in B4, Record the January bank balance in B5, and the projected auto insurance premiums in B6. Adding B5 and B6 gives the expected cash income for January. Write “Total Income” in column A6.

In cell B7, begin listing your expenses. Do not include claim payments or non-cash expenditures. Use as many cells as needed. In the cell beneath the last listed expense, total the expenses. Write “Total Expenses” in column A. On the next row, column A, write, “Projected Cash Balance.” In column B, subtract total expenses from cell B6. Fill in the sheet for the entire year.

Projected cash balances are analyzed for surpluses or shortages. Careful planning provides cash for payments so that minimum borrowing is possible. The purpose of planning cash flow is to recognize surplus cash for investments, and prepare for short-term borrowing when necessary.

Wise use of business credit cards aids cash flows. They provide cash back and defer payments when auto insurance premiums are inactive.